BHP gets leaner

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The miners’ push to become more lean is gaining pace. BHP Billiton has sold its 37% stake in Richards Bay Minerals (RBM) in South Africa to JV partner Rio Tinto for US$1.91 billion. Deutsche describes the price as “impressive”. With China’s economy appearing to weaken and the boom in commodity prices looking shaky, the strategy is clearly to focus on core assets and low gearing. The asset is considered non-core to BHP because Rio Tinto holds the intellectual property rights to the proprietary ilmenite smelting technology. Deutsche outlines the managerial focus:

“The intention to divest non-core assets was made very clear over 12 months ago when the company stated it will “streamline the portfolio” and focus on “5 commodities in 6 basins”. With the focus on majority owned, upstream, large, low cost scalable assets in the right commodities, we expect further divestments over the next 2-3 years. We can identify at least US$10-15bn of possible divestments including; Ekati diamonds, El Cerrajon, Navajo South, South Africa thermal coal, Indonesian met coal (Murawai), aluminium (including Mozal), Alumar, small oil (Pakistan, Algeria, UK, “Other Americas” in the GoM, Trinidad & Tobago), Nickel West, Gabon and South African manganese, Liberia iron ore, and Guinea bauxite. The proceeds could then be invested into high returning growth projects such as tight oil (Eagle Ford and Permian), Escondida and Spence, the GoM and Pilbara de-bottlenecking.”

The positioning is not hard to unravel. Keep debt low to reduce risk, focus on high margin businesses, use market share to develop options against adverse price movements. And try to avoid mistakes like the shale gas investments:

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“The sale of non-core assets will help partially bridge the FY13 funding gap. With capex increasing to US$22bn in FY13 due to higher shale gas spend (US$4bn) and the completion of projects in execution (US$11bn), total outflows for FY13 will be c. US$28bn when including the US$6bn dividend. This compares to our operating cash flow forecast of c. US$24bn, implying that BHPB will need to borrow c.US$4bn to fund growth. This gap increases to over US$8bn at spot prices. The balance sheet can absorb the difference; however, the US$2.4bn sale of RBM and Yeelirrie will reduce the gap.”

One has to say that the market got it pretty right with the two big miners; the pessimism was warranted. Deutsche has a buy and a price target of $43.30. Its estimated prospective earnings multiple is 11 times, the prospective yield 3.5%. Pretty much mid-range fundamentals.

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