BHP Models Leaner Look for Mining
Shareholders in the world’s biggest mining company, BHP Billiton, could set a tone for the industry this week when they vote on whether to support a plan to make the company smaller.
Spurning the bigger-is-better mantra that has characterized the mining sector’s long boom since the turn of the century, executives are now favoring leaner, more narrowly focused outfits.
Many have looked to sell inessential pits to improve efficiency and shore up finances as China’s slowing economy and an oversupply of many raw materials damp formerly frenzied commodity markets.
BHP’s plan goes further. It is setting up a company, South32, to house unwanted operations including coal mines and alumina refineries. In the process, it would halve the number of assets it runs and the number of continents on which it operates, leaving BHP focused on a handful of commodities including iron ore, copper and oil.
The move, expected to gain support at shareholder meetings held simultaneously in London and Perth, Australia, on Wednesday, would partly reverse BHP’s takeover of Billiton PLC of Britain in 2001. The surge in metals prices that followed that deal has faltered in recent years.
The measure could be one of the biggest breakups in mining history–and could prompt other large mining companies to follow suit, analysts say.
“This is going to set the benchmark for future spinoffs,” said Jim Osman, chief executive of the Edge Consulting Group, which specializes in research on corporate breakups.
Mr. Osman said the backdrop was well-suited to such listings. “BHP and other companies are talking about a ‘perfect environment’ because investors these days are looking much closer at the fundamentals, and good companies are rewarded with a higher share price,” he said.
Part of BHP’s reasoning is that the value of some of its assets remains hidden within the $130 billion company it has become. In a smaller company, run by a dedicated management team, those assets are expected to have room to shine.
“For South32, the separation gives it the freedom to pursue its own tailored strategy…without having to compete with BHP Billiton’s larger assets and operations,” BHP Chief Executive Andrew Mackenzie said in March.
Companies in other sectors, including Hewlett-Packard Co. and eBay Inc., have cited similar reasons for breakup proposals over the past year.
“Big is not always better,” said Mr. Mackenzie.
The question now is whether other mining companies will take a cue from BHP. Despite enjoying the long run-up in commodities prices, many of them have made missteps in the past decade that have frustrated shareholders and destroyed value.
Rio Tinto’s $38 billion acquisition of aluminum producer Alcan at the top of the market in 2007 has become a byword for the industry’s spending practices. A large chunk of that value has since been written off as aluminum prices have languished and production costs have risen.
Anglo American PLC has also incurred billions in write-downs on its long-delayed Minas-Rio iron-ore mine in Brazil. BHP made ill-timed bets on U.S. shale-gas assets that also resulted in heavy write-downs.
Big mining companies’ return on equity, a commonly cited measure of profitability, has been in steady decline since peaking around the middle of the previous decade, according to data from FactSet. BHP, for example, generated a 50% return on equity in 2006, but that has dropped to about 12%.
Such figures are fueling calls for mining companies to prioritize profitability over growth. Previously, the likes of BHP argued that investing in a variety of commodities helps to hedge mining companies’ profits when the price of a particular commodity drops. That stance has fallen from favor.
Glencore PLC intends to spin off its 23.9% stake in Lonmin, the world’s third-largest platinum producer. As it doesn’t trade platinum, Glencore says the stake will be more valuable to other investors.
In December, iron-ore-focused Brazilian mining company Vale SA said it was considering carving off a stake in its base-metals division to “unlock value.” That unit includes copper and nickel mines in Brazil, Canada and Indonesia. Management said Thursday that it aimed to present a recommendation to the board by the end of this year, for a possible listing in 2016.
Bankers and analysts have long considered other deals that could gain support if the BHP spinoff is successful. Rio Tinto, the majority of whose earnings come from selling iron ore, could jettison its Alcan aluminum business, analysts say.
Rio Tinto declined to comment.
Anglo American could be readying its Rustenburg platinum mines to be listed toward the end of the year, according to analysts at Investec. But some shareholders have long said Anglo should spin off all its South African assets, including iron-ore and coal mines, saying the political risk associated with that country overshadows the company’s overall valuation. Others say Anglo should spin off its diamond-mining subsidiary De Beers because it sells mostly to retail consumers, a different market from the industrial buyers of most bulk commodities.
At its annual general meeting last month, Anglo said it was preparing for a potential listing for Rustenburg, but signaled commitment to its diamonds unit. It also said it was reviewing options to “reconfigure” its South African domestic coal business. A spokeswoman declined to comment further.
Some proposals haven’t gained traction. South African gold-mining company AngloGold Ashanti Ltd. in September discussed plans to separate off its overseas assets, which include large gold mines in Colombia and Ghana, into a new company. That idea was dumped after shareholders balked at an accompanying large rights issue.
Not all mining companies are looking only to shrink. Glencore last year approached Rio Tinto about a tie-up that would in theory have created a roughly $150 billion company. Rio Tinto rejected the proposal.
Meanwhile, some say deals for individual mines could become more attractive if acquirers come to believe metals prices have reached their nadir. Gold-mining company Newcrest Mining Ltd. has, for example, chosen to continue to court buyers for mines separately rather than spin them off.
“If the market turns and people start to form a view we have reached a bottom on asset pricing, then there may be less of a need for spinouts at that point in time,” said Mike Elliott, global leader for mining and metals at consultants EY.