Bil­li­ton: We’re not pulling out

Min­ing gi­ant’s de­ci­sion to ‘de­merge’ should in­crease the South African and Aus­tralian own­er­ship of the mines

CityPress - - Business - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

The still-to-be-named “Newco”, which will be spun out of min­ing gi­ant BHP Bil­li­ton next year, will change more than the logo on the min­ing gi­ant’s of­fices in down­town Jo­han­nes­burg, down the road from An­glo Amer­i­can’s. “I strug­gle to see the bad news here,” says the CEO des­ig­nate of Newco and cur­rent BHP Bil­li­ton fi­nan­cial head Gra­ham Kerr.

Early next year, BHP Bil­li­ton will “de­merge” its smaller as­sets into a new com­pany and dis­trib­ute the shares between its share­hold­ers. The as­sets in­clude the com­pany’s three South African units, Bil­li­ton En­ergy Coal SA (Becsa), its 60% share in the ma­jor man­ganese group Sa­man­cor, as well as the con­tro­ver­sial alu­minium smelters in Richards Bay and Ma­puto.

The re­sponse to the deal in South Africa has been rel­a­tively muted, Kerr told City Press this week, adding that it is not a di­vest­ment – and is over­whelm­ingly pos­i­tive for South Africa.

There is noth­ing “ge­o­graphic” about the choice of as­sets to hive off, said Kerr.

Its most prof­itable as­set is the Can­ning­ton sil­ver mine in Aus­tralia, fol­lowed by the man­ganese di­vi­sion split between Aus­tralia’s Gem­cor and South Africa’s Sa­man­cor.

There have been sug­ges­tions that Bil­li­ton is now try­ing to undo the enor­mous merger between the old BHP and Bil­li­ton in 2001.

Af­ter 13 years, the BHP side of that merger has been the ba­sis of the com­pany’s abil­ity to be­come, by far, the largest min­ing com­pany in the world. It’s worth al­most R2 tril­lion.

Ac­cord­ing to Kerr, that’s not fair be­cause a num­ber of the as­sets be­ing kept by Newco orig­i­nated in the old BHP – and vice versa.

Among its as­sets will be ev­ery­thing that re­mains of the port­fo­lio that the for­mer South African con­glom­er­ate Gen­cor con­trib­uted to Bil­li­ton in the 1990s be­fore the merger with BHP in 2001 ( see box).

If any­thing, the de­merger should in­crease the South African and Aus­tralian own­er­ship of the mines in th­ese coun­tries be­cause, un­like BHP Bil­li­ton, it will not be listed in Lon­don.

In­stead, it will have a pri­mary list­ing in Aus­tralia and a sec­ondary one in Jo­han­nes­burg. The ex­pec­ta­tion is that a fair amount of UK shares make their way down to th­ese two south­ern stock ex­changes.

The as­sets Bil­li­ton is get­ting rid of “are not bad, they’re just not on the same scale”.

While that is true, the Newco mines are also sig­nif­i­cantly less prof­itable than the megamines that BHP Bil­li­ton is keep­ing.

BHP Bil­li­ton has an­nounced its re­sults for the year to June. Earn­ings be­fore fi­nance costs, tax­a­tion and ex­cep­tional items came in at $23.4 bil­lion (R250 bil­lion) ver­sus rev­enue of $67.2 bil­lion.

The parts of Bil­li­ton that were get­ting de­merged into Newco con­trib­uted about $10 bil­lion of the rev­enue and $1.8 bil­lion of the earn­ings, Kerr said. Th­ese as­sets had been starved of cap­i­tal, he said. They have ex­pan­sion po­ten­tial that BHP Bil­li­ton just hasn’t pur­sued be­cause, frankly, it had bet­ter as­sets to fo­cus on. Newco will be able to at­tract its own cap­i­tal. The South African as­sets make up a mi­nus­cule 4% of BHP Bil­li­ton’s cur­rent net present value.

In Newco, how­ever, the South African as­sets will make up about 33% of the com­pany, guar­an­tee­ing more at­ten­tion.

Cur­rently, the three South African units re­port to Aus­tralia, but un­der Newco they would get a South Africabased boss for the first time in a decade, said Kerr.

An­a­lysts are putting Newco’s value at between $15 bil­lion and $20 bil­lion, mak­ing it at least half as valu­able as An­glo Amer­i­can, which has a mar­ket value of about $30 bil­lion.

“It is not a small com­pany. It’s only re­ally dwarfed by BHP Bil­li­ton,” said Kerr.

Newco is not bank­ing on a bright future for the alu­minium smelters it will in­herit in South Africa.

“The op­por­tu­nity for the new com­pany [in South Africa] is in coal and man­ganese,” said Kerr.

There is lit­tle chance of ex­pand­ing the alu­minium smelt­ing op­er­a­tions, given the elec­tric­ity sit­u­a­tion, while the two re­main­ing smelters could be­come un­vi­able de­pend­ing on alu­minium prices.

The alu­minium smelters re­main a bone of con­tention be­cause they pay mas­sively dis­counted tar­iffs set in a se­cre­tive con­tract signed with Eskom in the 1990s. That con­tract has been re­ferred to the Na­tional En­ergy

The ex­pec­ta­tion is that a fair amount of UK shares make their way down to th­ese two south­ern stock ex­changes

Reg­u­la­tor of SA (Nersa) by Eskom in the hopes that it could be al­tered or scrapped to stem losses.

The Bay­side smelter was closed this year, leav­ing Bil­li­ton, and soon Newco, with the Hill­side smelter in Richards Bay and the Mozal smelter in Ma­puto.

“The rev­enue to Eskom cov­ers their costs,” said Kerr. “We don’t un­der­stand the le­gal ba­sis of re­fer­ring it to Nersa. A con­tract is a con­tract.”

He sug­gests that if Eskom had fin­ished build­ing the Medupi power sta­tion on time, the smelters would not have be­come such an is­sue.

That said, the chal­lenges in South Africa were not es­pe­cially daunt­ing, he said.

“Peo­ple talk about South African risk, but Aus­tralia has the MRRT [min­eral re­source rent tax], a car­bon tax that just got over­turned, in­fra­struc­ture and union prob­lems.”

In Chile, you had the world’s best cop­per de­posits, but were ham­strung by the short­age of elec­tric­ity and wa­ter, he said.

In Canada, the gov­ern­ment blocked BHP Bil­li­ton from buy­ing Po­tash Corp a few years ago by plead­ing its strate­gic value. “Its all over the world,” said Kerr. The prob­lems at the main South African as­sets of Newco, Becsa and Sa­man­cor, are the rail and port bot­tle­necks. Becsa ex­ports half of its coal pro­duc­tion and, ac­cord­ing to Kerr, there are grow­ing op­por­tu­ni­ties on that front, de­spite rail ca­pac­ity prob­lems.

At Sa­man­cor, there is a sim­i­lar prob­lem with the rail ca­pac­ity to ex­port man­ganese ore through the Port of Ngqura in the East­ern Cape.

Some newer mines were ex­port­ing their ore with trucks and there were dis­cus­sions go­ing on about sharing the iron ore ex­port line that goes through Sal­danha in the Western Cape, said Kerr.

BUOY­ANT CEO Gra­ham Kerr says Newco will have op­por­tu­ni­ties in coal and man­ganese in SA

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