BHP Billiton Shares Surge on News of $20bn Spin-off

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Wednesday, April 2nd, 2014
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Shares in BHP Billiton leaped higher immediately following news of the potential spin-off of its aluminium, manganese and nickel divisions.

BHP Billiton shares surged by $1 dollar within minutes of the publication of a Fairfax Media report claiming that the mining giant was mulling a $20 billion divestment of its non-core commodities divisions.

According to the report Goldman Sachs had been assisting BHP with the review of strategic options for its non-core businesses for more than a year now, with a final decision still yet to be made.

An official statement subsequently issued by the company said it was currently in the process of “actively [studying]” options for making its operations leaner, in order to renew its focus on mainstay metal and fossil fuel commodities.

“We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in free cash flow and a superior return on investment,” BHP said. “By increasing our focus on these four pillars, with potash as a potential fifth, we will be able to more quickly improve the productivity and performance of our largest businesses.”

BHP further indicated that “simplification of our portfolio” would continue to be a priority for the company following several years of continuous paring.

“In the last two years alone the group has announced or completed divestments in Australia, the United States, Canada, South Africa and the United Kingdom, including petroleum, copper, coal, mineral sands, uranium and diamonds assets.”

A spin-off is likely to see the company offload its aluminium, manganese and nickel units, resulting in the formation of a new resources entity which would continue to be owned by BHP shareholders.

While such an arrangement would cast negative retrospective shade on the 2001 merger between BHP and Biliton, leading to the creation of a listed company bearing marked similarities to Biliton in its original form, the move is expected to be of pronounced benefit to shareholders at present.

In addition to the market’s endorsement in the form of the sudden price spike, investors and analysts have emerged to give their explicit support to the de-merger.

Tim Schroeders, a resources fund manager with Pengana Capital, said that the work should “quite rightly be done,” given that the majority of the world’s large-scale diversified miners are now busy divesting themselves of assets.

 

 

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