BHP Billiton plc Rises On Demerger News

BHP Billiton (LSE: BLT) announced this morning that it is recommending that shareholders should approve the demerger of South32. BHP’s share price rose over 2% in early trading this morning, but has since fallen back to 1.3% up.

At present, BHP Billiton has interests in 41 assets across 13 countries and six continents. The demerger will, the board says, be a “significant step” towards achieving a core portfolio of 19 assets across 8 countries and 3 continents. This will comprise long-life petroleum, copper, iron ore, coal and potash assets, which collectively generated 96 per cent of the BHP’s underlying EBIT in the 2014 financial year.

The demerger of assets to South32 will create a diversified metals and mining company with what’s described as “a significant presence” in each of its major commodities, which include alumina, aluminium, coal, nickel, manganese, silver, lead and zinc.

The majority of South32’s assets will be located in the southern hemisphere, in two regional centres: Australia and South Africa.  The new company’s name reflects the thirty-second parallel line of latitude, which will link its operations.

Commenting on the announcement, BHP Billiton Chairman Jac Nasser said

“The demerger will simplify BHP Billiton and has the potential to unlock shareholder value, while creating a new global diversified metals and mining company with a significant industry presence in each of its major commodities.“

CEO Andrew Mackenzie added:

“We remain confident that the diversification and quality of the core portfolio and our strong balance sheet will continue to support our solid A credit rating. We will maintain our progressive dividend policy and do not plan to rebase the dividend as a result of the demerger, thus implying a higher payout ratio. In addition, and subject to its cash flow priorities, South32 plans to distribute a minimum of 40 per cent of Underlying Earnings to shareholders from the next financial year.” 

At 1,435p, BHP’s share price is down 20% on this time last year, compared with a 4% rise in the FTSE 100 index. And things are even worse over the longer term with BHP’s share price having plummeted 34% over the past five years, during which time the FTSE 100 has gained 21%.