BHP announces spin-off plan, no share buyback yet

Written by Reuters | Melbourne | Updated: Aug 20 2014, 07:46am hrs
The worlds biggest mining company, BHP Billiton, announced plans to spin off businesses worth an estimated $16 billion, most of them acquired in its 2001 merger with Billiton, to focus on its most profitable activities.

But it held off on a share buyback, disappointing investors who had hoped to receive around $5 billion.

Chief executive Andrew Mackenzie said the widely expected move to simplify BHP around the four pillars of iron ore, copper, coal and petroleum would spur cash flow growth and boost returns. By concentrating on what we do best, the development and operation of major basins, we can improve our productivity faster and with greater certainty, Mackenzie said.

The spin-off company, dubbed NewCo for now, will bundle BHPs aluminium, manganese, Cerro Matoso nickel in Colombia, South African energy coal and some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine.

Its probably a better asset mix than we thought it would be beforehand. BHP has added Cerro Matoso, which is a better nickel asset than its Nickel West division, and Illawara Coal, said David Radclyffe, an analyst with CLSA.

BHP confirmed the spin-off as it reported an 8% rise in second-half underlying attributable profit to $5.69 billion, just below a consensus analyst forecast of $5.94 billion, according to Thomson Reuters Starmines SmartEstimate. Analysts and investors said the fall in BHP shares on Tuesday was an over-reaction.

BHP had been targeting net debt of around $25 billion before it would consider returning capital to shareholders. But on reaching that goal, it said it would only go ahead when it could return capital in a predictable and sustainable way. We are planning ahead prudently, but we will not be excessively conservative. We will continue to look at ways of shifting excess cash in a timely way to our shareholders, Mackenzie told reporters.

BHP said it had cuts costs in the 2014 financial year by $2.9 billion and flagged that it expected to achieve a further $3.5 billion in cost savings over the next three years.

The new company will be headquartered in Perth and listed in Australia, with a secondary listing in South Africa. Shareholders in BHP Billiton and BHP Billiton Plc would receive shares in the new company on a pro-rata basis.

BHP did not state the value of the new company, but analysts estimated it worth $15 billion and $17 billion. BHP said only that NewCo's businesses had achieved a profit margin of 21% in the 2014 financial year and would carry minimal debt, targeting an investment grade credit