Billiton: We’re not pulling out of SA

2014-08-24 15:00

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Mining giant’s decision to ‘demerge’ should increase the South African and Australian ownership of the mines

The still-to-be-named “Newco”, which will be spun out of mining giant BHP Billiton next year, will change more than the logo on the mining giant’s offices in downtown Johannesburg, down the road from Anglo American’s.

“I struggle to see the bad news here,” says the CEO designate of Newco and current BHP Billiton financial head Graham Kerr.

Early next year, BHP Billiton will “demerge” its smaller assets into a new company and distribute the shares between its shareholders.

The assets include the company’s three South African units, Billiton Energy Coal SA (Becsa), its 60% share in the major manganese group Samancor, as well as the controversial aluminium smelters in Richards Bay and Maputo.

The response to the deal in South Africa has been relatively muted, Kerr told City Press this week, adding that it is not a divestment – and is overwhelmingly positive for South Africa.

There is nothing “geographic” about the choice of assets to hive off, said Kerr.

Its most profitable asset is the Cannington silver mine in Australia, followed by the manganese division split between Australia’s Gemcor and South Africa’s Samancor.

There have been suggestions that Billiton is now trying to undo the enormous merger between the old BHP and Billiton in 2001.

After 13 years, the BHP side of that merger has been the basis of the company’s ability to become, by far, the largest mining company in the world. It’s worth almost R2?trillion.

According to Kerr, that’s not fair because a number of the assets being kept by Newco originated in the old BHP – and vice versa.

Among its assets will be everything that remains of the portfolio that the former South African conglomerate Gencor contributed to Billiton in the 1990s before the merger with BHP in 2001 (see box).

If anything, the demerger should increase the South African and Australian ownership of the mines in these countries because, unlike BHP Billiton, it will not be listed in London.

Instead, it will have a primary listing in Australia and a secondary one in Johannesburg. The expectation is that a fair amount of UK shares make their way down to these two southern stock exchanges.

The assets Billiton is getting rid of “are not bad, they’re just not on the same scale”.

While that is true, the Newco mines are also significantly less profitable than the megamines that BHP Billiton is keeping.

BHP Billiton has announced its results for the year to June. Earnings before finance costs, taxation and exceptional items came in at $23.4?billion (R250?billion) versus revenue of $67.2?billion.

The parts of Billiton that were getting demerged into Newco contributed about $10?billion of the revenue and $1.8?billion of the earnings, Kerr said.

These assets had been starved of capital, he said.

They have expansion potential that BHP Billiton just hasn’t pursued because, frankly, it had better assets to focus on.

Newco will be able to attract its own capital.

The South African assets make up a minuscule 4% of BHP Billiton’s current net present value.

In Newco, however, the South African assets will make up about 33% of the company, guaranteeing more attention.

Currently, the three South African units report to Australia, but under Newco they would get a South Africa-based boss for the first time in a decade, said Kerr.

Analysts are putting Newco’s value at between $15?billion and $20?billion, making it at least half as valuable as Anglo American, which has a market value of about $30?billion.

“It is not a small company. It’s only really dwarfed by BHP Billiton,” said Kerr.

Newco is not banking on a bright future for the aluminium smelters it will inherit in South Africa.

“The opportunity for the new company [in South Africa] is in coal and manganese,” said Kerr.

There is little chance of expanding the aluminium smelting operations, given the electricity situation, while the two remaining smelters could become unviable depending on aluminium prices.

The aluminium smelters remain a bone of contention because they pay massively discounted tariffs set in a secretive contract signed with Eskom in the 1990s. That contract has been referred to the National Energy Regulator of SA (Nersa) by Eskom in the hopes that it could be altered or scrapped to stem losses.

The Bayside smelter was closed this year, leaving Billiton, and soon Newco, with the Hillside smelter in Richards Bay and the Mozal smelter in Maputo.

“The revenue to Eskom covers their costs,” said Kerr. “We don’t understand the legal basis of referring it to Nersa. A contract is a contract.”

He suggests that if Eskom had finished building the Medupi power station on time, the smelters would not have become such an issue.

That said, the challenges in South Africa were not especially daunting, he said.

“People talk about South African risk, but Australia

has the MRRT [mineral resource rent tax], a carbon tax that just got overturned, infrastructure and union problems.”

In Chile, you had the world’s best copper deposits, but were hamstrung by the shortage of electricity and water, he said.

In Canada, the government blocked BHP Billiton from buying PotashCorp a few years ago by pleading its strategic value.

“Its all over the world,” said Kerr.

The problems at the main South African assets of Newco, Becsa and Samancor, are the rail and port bottlenecks. Becsa exports half of its coal production and, according to Kerr, there are growing opportunities on that front, despite rail capacity problems.

At Samancor, there is a similar problem with the rail capacity to export manganese ore through the Port of Ngqura in the Eastern Cape.

Some newer mines were exporting their ore with trucks and there were discussions going on about sharing the iron ore export line that goes through Saldanha in the Western Cape, said Kerr.

Déjà vu

BHP Billiton, and now Newco, are heirs to South Africa’s Gencor, one of the corporations that arose in the apartheid era based on mining, but owning various industrial concerns.

The Billiton in BHP Billiton was born from the first major “emigration” of a mining company as apartheid ended.

In 1994, Gencor bought Billiton, which was then the mining subsidiary of international oil company Royal Dutch Shell, for $2?billion.

In 1997, Gencor proceeded to sell all its best assets, excluding its gold and platinum mines, to Billiton for shares, then listed Billiton in London.

This preceded the better-known move of Anglo American to London in 1998.

The assets that ended up in Billiton included Alusaf, the aluminium company originally set up by the International Data Corporation in the 1960s, which built the Bayside, Hillside and Mozal smelters.

It also included Ingwe Coal, which is today known as Billiton Energy Coal SA.

Added to that were Richards Bay Minerals (which mines titanium dioxide and has since been sold) as well as the majority stake in Samancor.

The Gencor gold mines ended up in Gold Fields and its platinum subsidiary, Impala Platinum, got unbundled in 2002.

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