Mining giant BHP Billiton has confirmed speculations that it was planning to dispose of assets which have not generated the required rates of return for the group, as it reported weaker than expected underlying earnings of $US13.4 billion for the 2014 financial year.
According to the Sydney Morning Herald, the company’s planned $15 billion spin off of its non-core businesses – inducing most of its assets in SA – will result in the creation of a new company with flexibility to seek growth opportunities in Southern Africa and elsewhere.
The demerger of assets that don’t fit BHP’s focus on large, long-life resources in iron ore, copper, coking coal, petroleum and potash follows recent sales of South African assets by other global miners such as Rio Tinto and Anglo American, who pulled out of SA as a result of electricity shortages, labour unrest, a weakening currency and uncertainty over how coal will be regulated as a “strategic mineral”.
The demerged vehicle will include BHP’s llawarra metallurgical coal business in NSW, as well as its energy, coal and aluminium assets in South Africa, and bauxite, manganese and alumina in Australia.
The announcement of the spin off, coupled with the lower than expected profit, has disappointed shareholders, with many of the company’s UK investors said to be ready to jump ship and sell quickly after the demerger.
Investors were also disappointed with the lack of a widely expected buyback of up to $US3 billion from the mining giant, as well as the fact that they will receive shares in a vehicle that will be listed in Australia and South Africa.
All this has resulted in a 5.4% drop in Billiton’s share price on the JSE to R347.50, according to BD live.
“We think the shares had moved up on capital-management expectations that were not delivered,” Credit Suisse analyst Paul McTaggart told The Australian.
“With no buyback to maintain interest levels, and a full valuation in both absolute and relative terms, we move to underperform. Without additional initiatives we do not see this as a time for mining companies to be trading above core valuation.”
The demerged company, to be based in Perth, will be led by BHP Chief Financial Officer Graham Kerr.
“I’m very confident it will perform competitively from inception,” he said.
