JOHANNESBURG (miningweekly.com) – Mining giant BHP Billiton, which pulled a free cash flow rabbit out of the thrashed commodity price hat in the six months to December 31, intends the spinoff of South32 to be the catalyst for the new wave of productivity gains in the period ahead “because if you keep doing the same thing, you eventually run out of options”, the company said on Tuesday.

In South32, BHP Billiton intends demerging some of its aluminium, coal, manganese, nickel and silver assets, worth an estimated $16-billion, into the company that will be listed in Australia, UK and South Africa.

In a global media conference call in which Creamer Media’s Mining Weekly Online took part, new CFO Peter Beaven outlined how the company had extended its productivity gains faster than initially anticipated with $2.4-billion achieved in the period and the expectation of doing $4-billion by the end of the 2017 financial year.

“But it gets hard and we’re realistic about this. The important thing is that we’ve got to find every lever to give ourselves the best chance to continue to be able to offset pressure from lower prices. That’s where the South32 demerger comes in,” Beaven explained.

Simplifying materially through the South32 restructure would be the catalyst for the next wave of productivity management.

Despite being thrashed by decimated iron-ore, oil and copper prices, the diversified major managed to check the lower prices and translate the result into increased free cash flow.

The company, headed by CEO Andrew Mackenzie, lifted free cash flow by a high 23% to $4.1-billion to keep its A+ credit rating as well as maintain its progressive dividend policy with a payout of $3.2-billion.

By having free cash flow higher than the dividend, the world’s largest mining company managed to reduce net debt to $24.9-billion and reduce its gearing to 22%.

“If you keep doing the same thing, you eventually run out of options and, of course, the pressure from prices isn’t going to abate. So South32 becomes really important,” Beaven said, adding that nobody was going to give the company any free kicks on prices.

South32 would have its own dividend policy and, in the event of South32 declaring a dividend, that dividend would be on top of the progressive dividend that BHP Billiton was itself committed to continue paying out.

The majority of South32’s selected assets are located in the southern hemisphere, with its two regional centres of Australia and South Africa linked by the thirty-second parallel south line of latitude, the company’s name representing this footprint and regional approach to managing its operations.

The simplified BHP Billiton would itself retain a 9% shareholder base in South Africa where it would continue to explore for oil and gas off South Africa’s West Coast, while South32 CEO-designate Graham Kerr has outlined to Creamer Media’s Mining Weekly Online that the new, demerged entity would set up a global shared service centre in South Africa that would create 200 new South African jobs.

South32’s new board and the leadership would have strong South African representation with the African business being run out of Johannesburg, with more power devolved under the regional model.

A R10-billion, five-year liquid metal supply contract South32 has struck with a black-controlled consortium, Isizinda Aluminium, will also give the South African aluminium industry a shot in the arm.

Meanwhile, BHP Billiton’s interim dividend increased by 5% to $0.62 a share, representing an underlying payout ratio of 62%.

Obviously, the mining giant’s underlying earnings before interest tax depreciation and amortisation (Ebitda) of $14.5-billion was down 12.3% year-on-year with attributable profit falling to $4.27-billion from $8.12-billion the year before on the basis of the Brent crude price ending the period down 47% from the price it started, iron-ore ending 28% down and copper ending 12% down – but that was quite well offset by volume, cost and capital productivity gains.

But its performance was not enough to win the support of London mining analyst Liberum Capital, which reiterated a sell rating on BHP Billiton plc shares, and Investec Securities said it would need a “miracle” to replicate this half-year performance in the six months to June 30.

“A very good result from the company,” said Investec in a note, “but it will be challenging (a miracle) to replicate its first-half earnings in the second half.”