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South Africa gets 200-job sweetener as BHP Billiton spins out Newco

Newco CEO-designate Graham Kerr

Photo by Bloomberg

BHP Billiton CFO-elect Peter Beaven

Photo by Duane Daws

19th August 2014

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – The world’s largest diversified mining company has created sweeteners for South Africa as it proposes a demerging of assets and sets out to create a new global metals company that will have a third of its value made up of Southern African aluminium, manganese and energy coal assets.

BHP Billiton CEO Andrew Mackenzie told the media that the simplified BHP Billiton itself would retain a 9% shareholder base in South Africa where it would continue to explore for oil and gas off South Africa’s West Coast, and Newco CEO-designate and current BHP Billiton CFO Graham Kerr said the new entity would list on the Johannesburg Stock Exchange and set up a global shared service centre in South Africa that would create 200 new South African jobs.

BHP Billiton posted 7% higher earnings before interest tax depreciation and amortisation (ebitda) of $32.4-billion and 26% higher net operating cash flow of $25.4-billion in the 12 months to June 30.

“We’re not divesting from South Africa. This is a demerger. BHP Billiton will retain a substantial number of South African shareholders - about 9% of the shareholder base.

“As BHP Billiton we continue to explore for oil and gas in South Africa, but we believe that through the creation of Newco, which has many South African assets in it, we will establish a basis for even more success.

“We believe in South Africa and its future and we think this is a way of supporting South Africa even more strongly,” Mackenzie added in a media conference call in which Mining Weekly Online participated.

Kerr said Newco’s new board and the leadership would have strong South African representation.

Kerr’s position as BHP Billiton CFO is to be taken by Peter Beaven, who formerly headed the company’s manganese business from Johannesburg prior to taking up his current position as president of BHP Billiton’s copper division.

“We’ll also look to run our African business out of our Johannesburg office, led by a South African who has more power devolved under the regional model," Kerr added.

As Newco performed, it would look at a wide set of options to afford South Africa more flexibility and BHP Billiton itself would not be leaving South Africa.

In answer to analysts, Mackenzie said BHP Billiton had chosen Australia and South Africa as the most appropriate Newco listing locations on the basis of about half of the current value of the assets being based in Australia and nearly a third in South Africa.

Newco's listing is expected to take place towards the middle of 2015.

Because of the complexity of approvals, it made most sense for the ASX to host the primary listing, which was the highest value-creating process for all shareholders, and the JSE for the secondary inward listing, which was in many ways recognition that a relationship with South Africa would be critical to Newco's success.

If given the go-ahead by shareholders and regulatory authorities, Newco would hit the ground running as a global metals and mining company with assets able to generate dividends for shareholders.

The selected assets last year generated more than $1.4-billion of net operating cash flow.

Given that BHP Billiton’s main iron-ore, copper, coal and petroleum pillars were demanding full company focus, it made sense to demerge the lesser performing assets which were receiving inadequate management attention.

The manganese business selected for demerging has mines at Hotazel in South Africa and Gemco in Australia, and smelters at Temco in Australia and Metalloys in South Africa.

With those assets, Newco would be one of the largest low-cost producers of manganese ore and a top global producer of manganese alloy.

In aluminium, it would take in the Worsley alumina refinery in Australia and the Hillside and Mozal smelters in Southern Africa.

Also envisaged as part of Newco were Cerro Matoso Nickel of Colombia, Becsa Energy Coal South Africa, Illawarra Metallurgical Coal of Australia and Cannington of Australia, the world’s largest silver mine, which produced 25.2-million ounces in the 2014 financial year, when it generated a return of more than 150% – “ a truly unique asset”.

Illawarra, which operates three underground mines that produce nine-million tons of coking coal a year, is close to major port infrastructure for easy access to global markets.

Becsa is South Africa's third-largest exporter of energy coal, with export sales of 13.3-million tons in the 2014 financial year and potential for growth.

The modern Worsley refinery has a capacity of 5.2-million tons of alumina a year and the Southern African aluminium smelters a combined capacity of 1.3-million tons a year.

Cerro Matoso produces more than 40 000 t of contained nickel a year at a 49% return.

In the last ten years, Newco’s portfolio has generated about half of its ebitda in Australia and a third in Southern Africa.

“If Newco implements a strategy and seeks to reduce costs, there’s significant earnings upside,” Mackenzie said.

A 5% reduction in costs would equate to a 20% of last years underlying ebitda.

With consensus estimates suggesting a recovery in most of its major markets, the outlook for Newco is compelling, Mackenzie said.

A strong balance sheet and minimal net debt before finance leases will allow Newco target an investment-grade credit rating.

While BHP Billiton will continue its dividend policy, Newco would be able to consider a dividend policy that reflected its cash generating capacity.

With no immediate plans for major investments, as margins expand, shareholders could be rewarded.

Over time, as Newco developed a proven track record as a strong operator, it would have the choice of a broader set of options including low-risk brownfields options at Cannington and in energy coal in South Africa.

While these projects had the potential to create significant value for the new company, under BHP Billiton they would not be prioritised.

BHP Billiton was thus at a point where the status quo no longer positioned it to maximise value and fulfil its commitment to grow free cash flow and to be more productive.

“Change is required,” Mackenzie said.

A dedicated board, management team, corporate structure and strategy specifically designed to enhance Newco's performance.

Newco chairperson would be David Crawford, who will retire from the BHP Billiton board in November.

Pressed by analysts for the details, Mackenzie said that the strategy would unfold at a later date.

Shareholders will be entitled to 100% of the shares in Newco through a pro-rata in-specie distribution, while also retaining their shares in BHP Billiton.

BHP Billiton, which has 41 assets now, will have 19 without altering its position as the largest exporter of metallurgical coal, a top three producer of iron-ore, a top four exporter of copper concentrate, the largest overseas investor in US shale and the developer of a potash resource in Saskatchewan, Canada.

BHP Billiton’s minerals portfolio will ultimately be focused on six major operated assets – Western Australia Iron Ore, Queensland Coal Two, New South Wales Energy Coal and Olympic Dam copper in Australia; and the Escondida and Pampa Norte copper mines in Chile.

Its non-operated joint-venture interests Antamina copper in Peru, Cerrejón energy coal in Colombia and Samarco iron-ore in Brazil will be retained.

BHP Billiton's petroleum business will concentrate on assets in the US and Australia, including operated facilities such as Pyrenees and Macedon in Western Australia, Shenzi in the deep water Gulf of Mexico and Angostura offshore Trinidad, as well as shale resources in the US.

This core portfolio on its own would have delivered an average underlying ebitda margin of 42% in the 2014 financial year.

Perth will be Newco's corporate head office and Johannesburg its regional head office.

Newco assets are collectively estimated to be worth $12-billion, within BHP Billiton's own market capitalisation of nearly $190-billion.

BHP Billiton's underlying attributable profit in its 2014 financial year was 10% higher at $13.4-billion and its free cash flow increased by more than $8-billion.

Underlying return on capital of the diversified mining company was 15%.

Edited by Creamer Media Reporter

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