By Rhiannon Hoyle
SYDNEY--Shareholders in the world's biggest mining company, BHP
Billiton, could set a tone for the industry this week when they
vote on whether to support a plan to make the company smaller.
Spurning the bigger-is-better mantra that has characterized the
mining sector's long boom since the turn of the century, executives
are now favoring leaner, more narrowly focused outfits.
Many have looked to sell inessential pits to improve efficiency
and shore up finances as China's slowing economy and an oversupply
of many raw materials damp formerly frenzied commodity markets.
BHP's plan goes further. It is setting up a company, South32, to
house unwanted operations including coal mines and alumina
refineries. In the process, it would halve the number of assets it
runs and the number of continents on which it operates, leaving BHP
focused on a handful of commodities including iron ore, copper and
oil.
The move, expected to gain support at shareholder meetings held
simultaneously in London and Perth, Australia, on Wednesday, would
partly reverse BHP's takeover of Billiton PLC of Britain in 2001.
The surge in metals prices that followed that deal has faltered in
recent years.
The measure could be one of the biggest breakups in mining
history--and could prompt other large mining companies to follow
suit, analysts say.
"This is going to set the benchmark for future spinoffs," said
Jim Osman, chief executive of the Edge Consulting Group, which
specializes in research on corporate breakups.
Mr. Osman said the backdrop was well-suited to such listings.
"BHP and other companies are talking about a 'perfect environment'
because investors these days are looking much closer at the
fundamentals, and good companies are rewarded with a higher share
price," he said.
Part of BHP's reasoning is that the value of some of its assets
remains hidden within the $130 billion company it has become. In a
smaller company, run by a dedicated management team, those assets
are expected to have room to shine.
"For South32, the separation gives it the freedom to pursue its
own tailored strategy...without having to compete with BHP
Billiton's larger assets and operations," BHP Chief Executive
Andrew Mackenzie said in March.
Companies in other sectors, including Hewlett-Packard Co. and
eBay Inc., have cited similar reasons for breakup proposals over
the past year.
"Big is not always better," said Mr. Mackenzie.
The question now is whether other mining companies will take a
cue from BHP. Despite enjoying the long run-up in commodities
prices, many of them have made missteps in the past decade that
have frustrated shareholders and destroyed value.
Rio Tinto's $38 billion acquisition of aluminum producer Alcan
at the top of the market in 2007 has become a byword for the
industry's spending practices. A large chunk of that value has
since been written off as aluminum prices have languished and
production costs have risen.
Anglo American PLC has also incurred billions in write-downs on
its long-delayed Minas-Rio iron-ore mine in Brazil. BHP made
ill-timed bets on U.S. shale-gas assets that also resulted in heavy
write-downs.
Big mining companies' return on equity, a commonly cited measure
of profitability, has been in steady decline since peaking around
the middle of the previous decade, according to data from FactSet.
BHP, for example, generated a 50% return on equity in 2006, but
that has dropped to about 12%.
Such figures are fueling calls for mining companies to
prioritize profitability over growth. Previously, the likes of BHP
argued that investing in a variety of commodities helps to hedge
mining companies' profits when the price of a particular commodity
drops. That stance has fallen from favor.
Glencore PLC intends to spin off its 23.9% stake in Lonmin, the
world's third-largest platinum producer. As it doesn't trade
platinum, Glencore says the stake will be more valuable to other
investors.
In December, iron-ore-focused Brazilian mining company Vale SA
said it was considering carving off a stake in its base-metals
division to "unlock value." That unit includes copper and nickel
mines in Brazil, Canada and Indonesia. Management said Thursday
that it aimed to present a recommendation to the board by the end
of this year, for a possible listing in 2016.
Bankers and analysts have long considered other deals that could
gain support if the BHP spinoff is successful. Rio Tinto, the
majority of whose earnings come from selling iron ore, could
jettison its Alcan aluminum business, analysts say.
Rio Tinto declined to comment.
Anglo American could be readying its Rustenburg platinum mines
to be listed toward the end of the year, according to analysts at
Investec. But some shareholders have long said Anglo should spin
off all its South African assets, including iron-ore and coal
mines, saying the political risk associated with that country
overshadows the company's overall valuation. Others say Anglo
should spin off its diamond-mining subsidiary De Beers because it
sells mostly to retail consumers, a different market from the
industrial buyers of most bulk commodities.
At its annual general meeting last month, Anglo said it was
preparing for a potential listing for Rustenburg, but signaled
commitment to its diamonds unit. It also said it was reviewing
options to "reconfigure" its South African domestic coal business.
A spokeswoman declined to comment further.
Some proposals haven't gained traction. South African
gold-mining company AngloGold Ashanti Ltd. in September discussed
plans to separate off its overseas assets, which include large gold
mines in Colombia and Ghana, into a new company. That idea was
dumped after shareholders balked at an accompanying large rights
issue.
Not all mining companies are looking only to shrink. Glencore
last year approached Rio Tinto about a tie-up that would in theory
have created a roughly $150 billion company. Rio Tinto rejected the
proposal.
Meanwhile, some say deals for individual mines could become more
attractive if acquirers come to believe metals prices have reached
their nadir. Gold-mining company Newcrest Mining Ltd. has, for
example, chosen to continue to court buyers for mines separately
rather than spin them off.
"If the market turns and people start to form a view we have
reached a bottom on asset pricing, then there may be less of a need
for spinouts at that point in time," said Mike Elliott, global
leader for mining and metals at consultants EY.
Shares in South32 would, if the vote is successful, start
trading in London and Johannesburg later in May, and in Sydney on
June 2.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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