|BHP Billliton’s Cannington Au-Pb-Zn mine in Queensland, Australia (Photos courtesy of BHP Billiton)|
BHP Billiton’s board of directors recommended in mid-March that its shareholders vote in favor of a demerger of a number of its assets into a new company to be called South32. Shareholder meetings to vote on the demerger were scheduled for May 6.
BHP Billiton first announced its plans for the demerger in August 2014. At that time, the company had interests in 41 producing assets across 13 countries and six continents. Assuming shareholders approve the demerger, BHP Billiton will retain 19 large, long-life iron ore, copper, coal, petroleum and potash assets, which collectively generated 96% of its underlying EBIT in its financial year to 2014. This portfolio will provide the company with a smaller geographic spread, and these core assets will have a higher proportion of common characteristics, the company stated.
|Worsley aluminum operation in Western Australia|
Assets devolving to South32 will include the Worsley alumina refinery in Western Australia: the Hillside, South Africa, and Mozal, Mozambique, aluminum smelters; Illawarra Coal in New South Wales, Australia; manganese mines in Australia’s Northern Territory and South Africa; manganese alloy producers in Tasmania, Australia, and South Africa; the Cannington silver-lead-zinc mine in Queensland, Australia; and the Cerro Matoso laterite nickel mine and ferro-nickel smelter in Colombia.
In documents relating to the demerger, BHP Billiton focused on the productivity benefits it expects to derive from a simplified corporate structure based on its large core assets. At the same time, South32 will offer investors a substantial company with a diversified portfolio of high-quality, cash-generative assets and a strong balance sheet. Positioned in the demerged company, these assets will no longer have to compete with BHP Billiton’s core assets for capital, according to the announcement.
|Illawarra coal mine in New South Wales (right) are among the assets it proposes to spin off in its demerger to a new company called South32.|
The company does not plan to rebase its dividend following the demerger, implying a higher payout ratio. South32 intends to distribute a minimum of 40% of underlying earnings to its shareholders.
BHP Billiton Chairman Jac Nasser said, “We believe that South32’s portfolio of high-quality assets will benefit from the focus of a dedicated board and management team. South32 will begin with a strong balance sheet, will be able to adopt an independent business strategy, and will have the opportunity to pursue growth and investment opportunities that may not otherwise be pursued if its assets remain within BHP Billiton.”
The majority of South32’s assets are located in the southern hemisphere, with its two regional centers, Australia and South Africa, linked by the 32nd parallel line of latitude. The new company’s name represents this geographic footprint.
Most of the South32 assets are positioned in the first or second quartile of their respective industry cost curves; have meaningful reserve lives to support future production without the immediate need for material incremental capital expenditure; and have been cash generative over the last three years despite falling commodity prices, BHP Billiton said.