Nickel sale failure driving BHP demerger course

BHP’S declared preference for a demerger follows its failure to find a buyer for its Nickel West operation for the asking price of up to $1bn.

BHP’S declared preference for a demerger of its unwanted nickel, manganese and aluminium assets -- valued by the market at $14 billion -- follows its failure to find a buyer for its Nickel West operation for the asking price of up to $1bn.

The asking price was twice market valuations for the business which operates mines, smelters and refineries in Western Australia, with BHP pinning its hopes on the recent surge in nickel prices in response to Indonesia’s bans on unprocessed ores to pump up potential offers.

It is another feature of the demerger that BHP will be able to push some of its $US25bn in debt off to the new company. That would help BHP meet its previous guidance that capital management initiatives such as buybacks would be considered on the $25bn debt level being reached.

Getting there has proved harder than originally expected despite the cost-cutting and productivity improvements being achieved under chief executive Andrew Mackenzie’s laser-like focus.

The need for more cost-cutting and productivity improvements has grown with the sharp retreat in iron ore prices from $US135 a tonne at the start of the year to $US94 a tonne. BHP’s iron ore business remains immensely profitable at current prices but the price fall nevertheless squeezes free cash flow.

Mr Mackenzie has made clear previously that he sees BHP’s long-term future involving the “four pillars’’ of iron ore, copper, coal and petroleum assets. Potash in Canada is a potential fifth column, although doubts about BHP’s speed in taking up the growth option in the food nutrient are emerging.

Apart from the nickel operations, the other key assets to be included in the demerger include South African aluminium smelting assets, WA alumina production, Northern Territory manganese operations and possibly, the Cannington base-metals mine in Queensland.

If completed, the demerger will remove many of the assets brought by the Anglo-African miner Billiton to the still controversial 2001 merger with BHP.

While the assets expected to be included in the demerged company might be valued by analysts at $14bn on a discounted cash flow basis, the new company — expected to based in Perth and listed on the Australian Securities Exchange — is expected to have a market capitalisation of about $10bn, based on its earnings profile.

Analysts have suggested the demerger would be way of an in-specie distribution to shareholders on a basis of one share in the new company for every five held.

Because the assets being demerged are not big earners, the earnings impact on BHP will be negligible at around 3 per cent.

The renewed airing of the demerger option comes as BHP prepares to report its June year profit on Tuesday.

Consensus is for an improvement from $US10.8bn to $US13.8bn, with cost-cutting and production increases from new and existing operations underpinning the improvement.

This story originally appeared in The Australian

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