June 10, 2014 5:50 pm

BHP Billiton reviews historic merger

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BHP Billiton, the mining group formed by one of the industry’s landmark mergers, is considering the sale of almost all of the businesses that Billiton brought to that deal – refocusing the Anglo-Australian company on BHP’s core operations from before the 2001 tie up.

Since BHP and Billiton combined 13 years ago, the contribution of many of the former Billiton assets to group earnings has fallen: from almost 30 per cent at the time of the merger to about 10 per cent today.

This decline comes after an era of strong demand for commodities that transformed the fortunes of many mining companies, driven by China’s emergence as the sector’s most important customer. But as returns have weakened in the past two years, BHP Billiton – like other miners – has had to become choosier about the assets it invests in.

Andrew Mackenzie, who took over as chief executive last year, is now narrowing BHP Billiton’s focus to a set of long-life mines and major oil and gasfields, in a few locations. These include the iron ore mines that contributed more than half of group earnings last year, up from just 12 per cent in 2000, on rising Chinese demand.

By contrast, an array of former Billiton assets have become marginal to the Anglo-Australian group. These include African manganese mines and aluminium production facilities, as BHP’s profits from aluminium have been eroded by the growth in China’s own output.

Tim Huff, an analyst at RBC Capital Markets, said: “Merging with Billiton has not been a bad deal. It just happens that some of the assets they bought are now those that they do not view as having potential for the next two to three decades.”

Mr Mackenzie is considering “structural options” to revamp BHP, which could include the spin-off of many assets, as well as sales. Any disposals made by BHP Billiton will generate further fees for advisers including Goldman Sachs – particularly if the group decides on a more complex spin-off of a separately listed vehicle. Since the start of 2012, the group has spent more than $19m on advisory fees, according to Thomson Reuters / Freeman Consulting, on about $1.7bn of deals.

Glyn Lawcock, head of resources research at UBS in Sydney, said: “Only time will tell whether and how they are able to exit. But, right now, it would appear that the bulk of the Billiton assets are not destined to remain within the group.”

Less than 9 per cent of the group’s capital expenditure was directed towards former Billiton assets in the first half of the company’s financial year, according to BHP’s most recent results.

BHP has been simplifying its portfolio for more than a decade, after the merger with Billiton set it on the way to becoming the world’s most valuable mining company, with a market capitalisation more than six times greater than when the companies first merged.

BHP’s willingness to sell former Billiton businesses may offer a way into the sector for some of the privately funded investment vehicles that have been set up to capitalise on low valuations for mining assets.

In particular, X2 Resources – the vehicle founded by Mick Davis – is expected to look at BHP’s portfolio. Mr Davis used to work at Billiton before founding Xstrata, which was bought by Glencore last year.

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