BHP Billiton Limited Spin-Off Plans Fail To Enthuse Investors

Natural resources giant BHP Billiton Limited (ADR) (NYSE:BHP) said today it is splitting off its nickel, aluminum and other assets into a new company dubbed Newco. It’s valued at over $20 billion and would be one of the biggest divestments of assets in mining history.

The mining giant’s 2014 earnings of $13.4 billion was below the $13.58 billion predicted by consensus, though it was over 10% better than last year’s result.

BHP Billiton’s much-awaited demerger plan

The long-awaited restructuring plan will have Newco to house most of BHP Billiton Limited (ADR) (NYSE:BHP)’s existing aluminum, manganese and nickel assets. BHP’s chief financial officer Graham Kerr will be the chief executive of the spun-out entity, which will be based in Perth. The location has been chosen because it is geographically central to many of the assets in the new company.

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The following exhibit captures the details of the demerger announcement:

The demerger created such a strong interest that the company’s website crashed around the time the result was due to be published.

The new company will house BHP Billiton Limited (ADR) (NYSE:BHP)’s Columbian nickel assets, but not the Nickel West assets that are based in Western Australia. Kerr said the new entity would have averaged an EBITDA of about $3.3 billion had it existed over the past decade.

Andrew Mackenzie, chief executive of BHP Billiton Limited (ADR) (NYSE:BHP), said that after the demerger, BHP Billiton will become a simpler, more productive company. By being freed from its least productive businesses, BHP will be able to improve productivity faster at its best assets.

He further added: “With a simpler portfolio, we’re targeting at least another $3.5 billion in productivity-related gains by the end of the 2017 financial year.”

Buyback hope dashed

As reported earlier, the world’s largest mining company indicated that it was considering structural options as part of the simplification of its portfolio. There were some reports indicating that the company could spin off non-core operations into a new A$20 billion company.

However, following today’s announcement, shares of BHP Billiton Limited (ADR) (NYSE:BHP) dropped 4.7% to £19.70 in morning trading in London, as the company didn’t announce a buyback of its shares. The mining giant, however, said: “We will return excess cash to shareholders in the most efficient way. By ensuring that we start from a position of strength, we will be well placed to implement an enduring program that can be managed in a more consistent and predictable manner.”