BHP Billiton Spinoff to Outperform Parent
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BHP Billiton Spinoff to Outperform Parent
By Tim Maverick, Commodities Correspondent
In this era of austerity in mining, it wasn’t surprising to see BHP Billiton (BHP) announce several months ago that it was spinning off unwanted assets, including aluminum, nickel, and manganese.
In effect, it seems BHP is unwinding most of its 2001 merger with Billiton.
The company plans to repurpose all of its underperforming assets into a new company called South32 by June 2015.
Because these commodities were performing so poorly at the time BHP made its announcement, pundits were quick to pounce and label the yet-to-be-born company “Dudco” and “Crapco.”
But now, the worm has turned and these assets are performing better than BHP’s main assets! The outlook for the commodities themselves is better, too.
How things have changed for Crapco in the span of a few short months . . .
BHP’s Latest Report
The latest set of results from BHP says it all.
The assets that the company is keeping in iron ore, copper, coal, and oil are suffering thanks to steep falls in prices for these commodities, which are hovering near six-year lows.
Meanwhile, the unwanted assets it’s putting into South32 – manganese, aluminum, and nickel – were its top performers. Earnings from these divisions rose five-fold to $716 million!
In addition to the aforementioned assets, South32 will also own a few coal assets, lead and zinc mines, as well as the Carrington silver mine. Carrington happens to be the world’s largest silver-producing mine.
Overall, the assets in South32 generated $5 billion of revenue and $887 million of earnings in the six months prior to December 31, 2014.
Its expected market capitalization at the time of the spinoff should be in the $13- to $15-billion range. Not bad for Crapco.
Glencore Eyeing up a Bid?
These assets are so juicy, there’s already been speculation that resources giant Glencore PLC (GLNCY) is preparing for a bid on the company after the spinoff is complete.
A move like this would make sense because Glencore already owns similar assets, and it would be buying at a time when commodity prices and resources are cheap.
Glencore’s CEO Ivan Glasenberg is no fool, either. He understands that China’s move toward a more consumer-led economy will lead to more growth for the assets South32 has, like aluminum, rather than the mining assets BHP has.
It’s also rumored that the renowned mining company builder Mick Davis (former CFO of Billiton), and his investment vehicle X2 Resources, is also sizing up a bid for at least some of South32’s assets.
These are two of the sharpest and shrewdest investors in mining – a testament to the quality of the assets South32 holds.
Even if Glencore or X2 don’t go after South32, the future looks brighter for the company than it does for its parent company.
South32’s soon-to-be CEO Graham Kerr told the Financial Times that his company would deliver returns to shareholders that would outstrip BHP.
“I will be brash enough to say that. . . South32 can deliver leading-sector shareholder returns,” said Kerr.
I wouldn’t be surprised if Kerr is able to deliver on his brash statement. That is, if he can keep his company safe from the sharks already circling it.
And the chase continues,
Tim Maverick
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By Tim Maverick