Diversified Mining Giants Becoming Less So
Confirmation that BHP Billiton is planning to demerge what it considers its non-core assets into a new company continues the trend for the world’s biggest miners to simplify their structures.
The big post 2008 fallout in the global mining sector has been a major influence on corporate policy since. It has already seen the culling of the chief executives who had the misfortune to be in place as metal prices slumped and profits collapsed. They had previously been exhorted by their institutional shareholders to go for growth almost at any cost. But once it became apparent that some of the huge capital programmes involved were actually having a negative impact on the bottom line, helped by the fact that the concentration on growth had led to management’s eyes being taken off controlling costs at existing operations, then institutional pressures changed and heads started to roll. CEOs became an endangered species
Now it looks as though there is something of a different tack coming into play. For the single commodity players – e.g. those in the precious metals sector there has also been a move to demerge, or just sell what are considered to be non-core assets - those that had appeared to be taking up too much management time and effort, but without complementary returns. A typical example of this has been Barrick Gold’s floating off of African Barrick which now at least seems to be turning itself around, but still probably falls short of its parent’s return requirements. Others have been divesting of so-called non-core projects piecemeal.
But while the gold miners were relatively quick to act – the big diversified miners perhaps took a little more time over their moves to do likewise. True some individual projects were being divested but now, with the announcement of a big demerger within the biggest miner of all, BHP Billiton, it looks like the big boys could be getting into this process in a major way.
BHP has now set a course to concentrate on it big bulk mining potential metals and minerals – iron ore, coal and potentially potash, along with oil and gas and copper – the latter being the hugely dominant base metal in terms of production. Rather than sell off its non-core assets piecemeal though, it has decided to lump them together to form a new less diversified offshoot concentrating on its aluminium, coal, manganese, nickel and silver assets. This new offshoot will have to make its own way but without the support of the big bulk mined materials where BHP’s true profits have come from over the past few years. It will also rid the core BHP business of the South African assets (mostly aluminium and coal) which BHP took on with the merger with Billiton in 2001. South Africa is not proving an easy country to work in for miners with labour unrest, calls for mine nationalisation and an economy which appears to be wavering.
Commenting on the proposals, BHP CEO, Andrew Mackenzie said: "As a result of the extensive investment we have made in recent years, and the transformational growth of our major businesses, we now have two great companies embedded within our portfolio. This plan would enable both to achieve their full potential and create new opportunities for our people and communities. In a single step, we will significantly increase BHP Billiton's focus on the exceptionally large resource basins that underpin its competitive advantage. As we move towards a simpler portfolio, comprised of our pillars of iron ore, copper, coal, petroleum and potentially potash, we will become a higher-margin, higher-return business.”
He went on to add: "By concentrating on what we do best, the development and operation of major basins, we can improve our productivity further, faster and with greater certainty. With a simpler portfolio, we are targeting sustainable, productivity-led gains of at least US$3.5 billion per annum by the end of the 2017 financial year."
BHP notes that many of the assets selected for the new company, reckoned to be likely to be worth some $15 billion by analysts, are among the most competitive in their industries. Specifically quoted by BHP in a statement, these include the aluminium and manganese businesses and the Cerro Matoso Nickel, Energy Coal South Africa, Illawarra Metallurgical Coal and Cannington silver-lead-zinc mines. Together, BHP says, they would form a global metals and mining company with assets in five countries and a dedicated board, management team, corporate structure and strategy specifically designed to enhance their performance.
BHP Billiton shareholders would be entitled to 100 per cent of the shares in the new company through a pro-rata in-specie distribution. It is intended that the company would be listed in Australia with a secondary listing on the Johannesburg Stock Exchange. London, where BHP Billiton has a joint listing with it Australian quote, has seemingly been left out in the cold which might be seen to be a bit of a blow for U.K. based investors.
Of the other big diversified miners, Rio Tinto is moving in much the same direction. It would dearly like to find a buyer for its aluminium division after its ill-fated white knight move to take over Alcan – a decision which was ultimately to prove the downfall of its then CEO Tom Albanese who was at the helm when this took place, although this decision was almost certainly well under way before he took the reins. It is also selling off other assets it now sees as non-core to concentrate also on iron ore, coal, copper and perhaps potash. It too sees the most profitable future as being in the bulk commodities. It had tried to sell its considerable diamond mining assets a couple of years ago, but could not find anyone prepared to offer what it considered a reasonable price for these so changed its mind last year to hang on to them. But if there is a good improvement in the diamond market and Rio feels a reasonable deal might be done these could find themselves on the block again.
Vale, the mining industry’s other giant diversified miner, has also been focusing on its core iron ore business. It is less diverse than its counterparts but has a major nickel division with which it has not had an easy ride. However it is following a slightly different route through selling off stakes in its coal and potash divisions, but is still looking to simplify its management structure.
But what all this means overall is that there is a developing focus from these mega miners to simplify structures and concentrate on the core assets which have provided the vast bulk of their earnings – and of these iron ore has been by far the most significant. True iron ore prices have slumped on a fall-off in China demand, but all three top miners still can make huge profits in this sector as their mining costs for their high grade mines are very low, and although margins have been falling these are being countered in overall revenue terms by major expansions.
So any moves to diversify further will, for the time being at least, be brought to an end as the existing mining assets that are seen as non-core are disposed of – either gradually or in a big mega deal as BHP Billiton is proposing. Diversified miners may just not be going to be quite so diverse any more!
Source: http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=250580&sn=Detail
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