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 JSE 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, taxes, depreciation and amortisation (ebitda) of $32.4-billion and a 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 share-holders – 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 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 over 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 flexi- bility and BHP Billiton itself would not be leaving South Africa.

In answer to analysts’ questions, 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 more sense for the ASX to host the primary listing, which was the highest value-creating process for all shareholders, and for the JSE 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 poorer-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, also 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 under-ground 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 20% of last year’s underlying ebitda.

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

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

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

With no immediate plans for major invest-ments, as margins expand, shareholders could be rewarded.

Over time, as Newco developed a proven record as a strong operator, it would have the choice of a broader set of options, including low-risk brownfield 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 priorit-ised.

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.