Big dividends in BHP spin-off

By Bloomberg Time of article published Mar 18, 2015

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Brett Foley

THE MINING company that BHP Billiton plans to spin off will pay 40 percent of its underlying earnings as dividends and will cost the world’s biggest mineral producer $738 million (R9.1 billion) in one-time charges.

South32, which will house about a third of BHP Billiton’s current operations including coal mining in South Africa and silver in Australia, had pro forma net debt of $674m at the end of 2014, Melbourne-based company said.

“The debt level is less than most people expected,” said Tim Schroeder, a portfolio manager at Pengana Capital. “It will also help South32 management in terms of their ability to grow the business.”

Separating BHP Billiton’s assets would allow both firms to better chase additional productivity savings as the world’s largest miners seek to bolster margins with cost cutting as commodity prices slump, BHP Billiton chief executive Andrew Mackenzie said yesterday.

BHP Billiton and Rio Tinto Group are reducing capital expenditure to the lowest level since 2010 as iron ore, their biggest earner, trades near six-year lows.

With 12 assets or joint ventures in five countries and producing seven commodities, South32 would include Australia’s Cannington mine, the world’s largest silver and lead operation. It would also be the dominant global manganese ore player, the seventh-biggest alumina producer and the number nine nickel company, according to Macquarie estimates.

Cash returns

“We are building a new company from the ground up. We will have competitive assets, significant reserve lives and financial strength,” chief executive-elect Graham Kerr said. “We will manage our business with a view to generating strong cash returns.”

The new company would be based in Perth and have about 24 000 employees and contractors, about 9 000 of whom will be in South Africa compared with BHP Billiton’s current total of about 128 000.

BHP BHP Billitonshareholders, who will receive one South32 share for each stock, will vote on the proposed demerger on May 6.

If approved, the company will start trading on May 18. BHP Billiton gained 1.4 percent to A$29.80 (R283.00) at 10.05am in Sydney.

South32 had gross assets of $26.7bn at the end of December and contributed net profit after tax of $738m in the six months to December, the firm said yesterday.

It will assume about $1.54bn of BHP Billiton ’s closure and rehabilitation provisions and BHP Billiton will save about $100m a year in costs, 90 percent of which will be achieved by the end of the 2017 financial year.

With limited options for growth among current assets and an average mine life of about 13 years, the new firm would need to consider acquisitions, according to Sydney-based Deutsche Bank analyst Paul Young.

“It has to be a different strategy to BHP Billiton because it is a different investment proposition,” Pengana’s Schroeder said.

“Part of that strategy will eventually be growing the business through acquisitions. Having relatively low debt and a reasonable payout ratio of 40 percent will help with that.” – Bloomberg

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