BHP Announcees Spin-Off but No Buyback, Shares Fall

Top global miner BHP Billiton will spin off a roughly $16 billion company to shareholders, mostly offloading assets acquired in its 2001 merger with Billiton, as it looks to focus on its strongest businesses.

Chief Executive Andrew Mackenzie, in the top job for just over a year, said the move to simplify BHP to its "four pillars" of iron ore, copper, coal and petroleum would rev up growth in cash flow and boost returns.

"By concentrating on what we do best, the development and operation of major basins, we can improve our productivity further, faster and with greater certainty," Mackenzie said in a statement.

The plans were unveiled as BHP reported an 8 percent rise in second-half underlying attributable profit to $5.69 billion, according to Reuters calculations off the full year result. That was just below forecasts for a second-half profit of $5.94 billion, according to Thomson Reuters Starmine's SmartEstimate.

However, the miner held off announcing a highly anticipated buyback, disappointing investors who had been hoping for a buyback of around $5 billion. BHP's London-listed shares sank 4 percent, which some analysts and investors called an over-reaction.

"Some people may be disappointed because nothing was announced on a special dividend or buyback," said Albert Minassian, an analyst with Investec in London.

"But if you already have big news about a spin-off there is no point announcing the two together. You keep something for the next time. The money is still there," he added.

BHP had previously said it was targeting net debt of around $25 billion before it would consider returning extra capital to shareholders, but even after reaching that target, it said it would only go ahead when it could return capital in a predictable and sustainable way. Net debt at June 30 stood at $25.8 billion.

"We are planning ahead prudently, but we will not be excessively conservative. We will continue to look at ways of shifting excess cash in a timely way to our shareholders," Mackenzie told reporters.

BHP said it cuts costs in the 2014 financial year by $2.9 billion and flagged that it expects to achieve a further $3.5 billion in cost savings over the next three years.

NEWCO INTEREST

The spin-off company, dubbed NewCo for now, will bundle together BHP's aluminium, manganese, Cerro Matoso nickel in Colombia, South African energy coal and some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine.

"It's probably a better asset mix than we thought it would be beforehand. BHP has added Cerro Matoso, which is a better nickel asset than its Nickel West division, and Illawara Coal," said David Radclyffe, an analyst with CLSA in Sydney.

The new company would be headquartered in Perth and listed in Australia, with a secondary listing in South Africa. Shareholders in BHP Billiton Ltd and BHP Billiton Plc would receive shares in the new company on a pro-rata basis.

BHP did not give any details of the value of the new company, but three analysts estimated it could be worth between $15 billion and $17 billion.

BHP said only that NewCo's businesses had achieved an earnings margin of 21 percent in the 2014 financial year and would carry "minimal debt", targeting an investment grade credit rating.

"It looks like quite an interesting company, and given the size and diversification it'll be pretty well received," said Brenton Saunders, a Sydney-based portfolio manager at BT Investment Management, which owns shares in BHP.

The company would be headed up by BHP Billiton chief financial officer Graham Kerr, while Brendan Harris, head of investor relations, would be chief financial officer.

BHP's Australian Nickel West operations were not included in the new company, and a separate sale process was continuing, Mackenzie said. The company was in talks with several potential buyers.