Billiton's Big 4

BHP Billiton is one of our core holdings and is our best entry point into the world of commodities. As you may have heard they are demerging a whole lot of assets and separately listing the business in Australia and South Africa. Before we go into the details of the demerger lets have a bit of a History lesson (in the office we received a refresher from Paul our resident walking, talking Wikipedia equivalent).

During the apartheid regime Gencore was formed to try and compete against Anglo in the South African mining industry. Some of their bigger assets included coal mines in Middleburg which supplied Eskom, a stake in Impala Platinum and some aluminium and manganese assets. Basically much of BHP Billitons South African assets today. To cut a long story short the business grew and went after assets offshore. Under Brian Gilbertson's watch they bought a dutch mining business called Billiton which which was involved in tin smelting in Holland and Indonesia.

Gilbertson was not done there and managed to negotiate a merger with Broken Hill Proprietary Company (BHP) an Australian business with big offshore copper assets as well as Iron ore operations. This is how BHP Billiton was formed and why we are fortunate enough to have the company listed on the JSE.

Since 2000 the company has made some massive shifts. It has taken huge advantage of the Chinese industrial revolution supplying millions of tons of Iron ore from Western Australia, making a whopping amount of money in the process. The Iron ore price sky rocketed and the relatively easy mining process allowed for great margins. They also got involved in the Petroleum industry which is now their second biggest profit driver. They have assets in the Gulf of Mexico, offshore of Australia and made a recent shale gas acquisition in the US.

That is the BHP Billiton we know today. But that is changing and has been changing for the last few years. In fact over the last 10 years they have been divesting from non-core assets. Here is what they had to say.

"BHP Billiton today said it plans to create an independent global metals and mining company based on a selection of its high-quality aluminium, coal, manganese, nickel and silver assets. Separating these businesses via a demerger has the potential to unlock shareholder value by significantly simplifying the BHP Billiton Group ('Group') and creating two portfolios of complementary assets.
Once simplified, BHP Billiton will be almost exclusively focused on its exceptionally large, long-life iron ore, copper, coal, petroleum and potash basins. With fewer assets and a greater upstream focus, the Group will be able to reduce costs and improve the productivity of its largest businesses more quickly. As a result, its portfolio is expected to generate stronger growth in free cash flow and a superior return on investment."

The separate listing will be called NewCo and will be primarily listed in Australia with a secondary listing in South Africa. UK shareholders who are not allowed to hold foreign listings will have to sell immediately. This may add some downward pressure on the NewCo share price along with other potential sellers who do not want these assets in their portfolios.

All the South African assets will be spun off within the NewCo business. Basically going full circle from the original BHP - Billiton merger. I don't blame them, mining in South Africa is a tough business and the underlying commodities do not fall within their core focus.

As BHP Billiton shareholders I wouldn't be concerned at all, the assets being spun off are not significant to the group. The drop in the share price yesterday was mostly to do with a pullback in the share buyback programme. A slimmer, meaner BHP Billiton with a strong focus in what we agree to be the best commodities means better returns for shareholders.

We will evaluate NewCo closer to the time (shareholders still need to approve the deal) and will advise clients on what to do in due course but at this stage I would lean towards selling the new entity. For a great read check out David Mckay's piece in mimingmx titled BHP unveils $10bn big bang demerger. There are some nice quotes from management on the rationale behind the deal as well as their ideas for NewCo going forward as far as South Africa is concerned.