by Chris Becker
From the FT:
BHP Billiton, the mining group formed by one of the industry’s landmark mergers, is considering the sale of almost all of the businesses that Billiton brought to that deal – refocusing the Anglo-Australian company on BHP’s core operations from before the 2001 tie up.
Andrew Mackenzie, who took over as chief executive last year, last month said the case for continued simplification of BHP’s vast portfolio was ‘compelling’
Along with petroleum, coal and iron ore, copper has been identified as a ‘key pillar’ by Mr Mackenzie.
For BHP Billiton, less is more. Diamonds from the edge of the Arctic, copper from Arizona’s desert and titanium from dunes by the Indian Ocean: all are assets that the world’s most valuable resources group accumulated and subsequently decided it could perfectly well live without.
To that list of assets, sold by the miner since 2012, can be added facilities from nickel plants in Australia to South African manganese mines. An array of BHP Billiton’s assets are up for potential divestment in what Andrew Mackenzie, chief executive, says is a retreat from complexity.
One of the longer term strengths of BHP, in stark contrast to its competitors, like Vale, RIO and other mineral extractors, is its diversification. Whilst the share market derivation of the theory remains on shaky ground, in the real world, having lots of eggs in different baskets has been a robust way of dealing with the vagaries of the business, and hence the commodity cycle.
What BHP is proposing – a “simplification” – by divesting non-core, underperforming assets, almost all of which are those absorbed in the Billiton merger, seems more like simplifying its risk profile, from moderate to high.
At first glance this seems like a way to boost the share price by goosing the laggard parts of the business – something that makes sell-side analysts jump with joy:
“The case for continued simplification of our portfolio is compelling,” Mackenzie told investors last month. This could go beyond piecemeal sell-offs, with the miner looking at “structural options” – an allusion to a possible spin-off of assets into a separate vehicle.
But is this the right time to do it?
Glyn Lawcock, head of resources research at UBS in Sydney, says this earnings imbalance is probably now less stark. “Some of those assets – nickel, aluminium – were at the bottom of the cycle last year. Now they will be making a lot more money, while some of the other commodities such as iron ore will be making less,” he says.
Commodity analysts have had it relatively easy since the rise of Chinese demand. But before this boom, even BHP had little idea of what was coming. What makes them so sure that concentrating the currently strong margined commodities that China demands – copper, coal and iron ore – will pay off as in the past?
Can corporates be guilty of being unable to pick winners, or is that still the purview of government?
Arguably, with commodities, forecasting the future is the hardest and riskiest venture in the business world, save maybe IT. That is why prudent risk management dictates having some backups for the unexpected and not placing complete emphasis on your key assets. Of course that seems the Australian tradition – she’ll be right.
BHP’s strategy is a “big” she’ll be right.