BHP Models Leaner Look for Mining

Shareholders to vote Wednesday on plan spurning sectors

bigger-is-better approach

ENLARGE
BHP Billiton maintains iron-ore operations in Port Hedland, Australia. A slimmed-down BHP
would focus on a handful of commodities, including iron ore and copper. Photo: Tim
Wimborne/REUTERS
By

Rhiannon Hoyle
Updated May 3, 2015 7:05 p.m. ET
1 COMMENTS
SYDNEYShareholders in the worlds 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 sectors 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 Chinas
slowing economy and an oversupply of many raw materials damp formerly frenzied commodity
markets.
ADVERTISING
inRead invented by Teads
BHPs 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 BHPs 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 historyand 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 BHPs 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 strategywithout
having to compete with BHP Billitons 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 Tintos $38 billion acquisition of aluminum producer Alcan at the top of the market in 2007
has become a byword for the industrys 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 worlds third-largest platinum
producer. As it doesnt 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.

ENLARGE
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 companys 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 havent 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

BHP, Billiton to Merge Operations To Create

a Global Mining Giant
By
Anita Raghavan, staff reporter
S. Karene Witcher, and
Andrew Trounson of
Dow Jones Newswires .
Updated March 19, 2001 12:01 a.m. ET
London-based mining group Billiton PLC agreed to merge with Australia's BHP Ltd., a deal that
would create a mining giant with a market capitalization of about $28 billion (31.20 billion
euros), the companies said.
The tie-up, announced Monday morning in Australia, combines two of the world's biggest
producers of iron ore, coal, aluminum, copper, nickel, oil and minerals such as manganese and
chrome.
The deal, the latest in a consolidating mining industry, would catapult the combined concern into
the top four global mining and metals producers. Driven by the mantra that bigger is better,
metals and mining companies are scrambling to merge in a bid to achieve economies of scale and
put themselves in a better position with individual customers that are also growing through
consolidation. The frenzied match-making comes as institutional investors clamor for mining
stocks that can be traded more easily.
But the tie-up could be bad for the steel industry, analysts say. Iron-ore prices have already
soared 18% since September, when Rio Tinto took over North Ltd., a key Australian producer.
Further consolidation implies even higher prices, says Frank Lucas, managing director of Loeb
Aron & Co., a mining-finance boutique.
Under the transaction, BHP and Billiton will merge their operations, equalize their earnings, and
agree to be run by a unified board. The new company, which would be based in Melbourne and
have a big management center in London, would be called BHP-Billiton. Under the deal, one
Billiton share will equal 0.4842 BHP shares. In order to ensure that the interests of each BHP
and Billiton shareholder are equivalent, BHP will issue free stock to its shareholders at a ratio of
1.0651 additional share for each share already held.
ADVERTISING
inRead invented by Teads
BHP chief financial officer Chip Goodyear, who will become head of finance for BHP-Billiton,
said the merger agreement represents a "slight premium" for Billiton. The exact size of that
premium will depend on what formulation is agreed upon. But based on Friday's closing share
prices of BHP and Billiton, and the foreign-exchange rates on that day, the relative share ratios

upon which the transaction is based suggest that BHP is paying an effective 20% premium to
Billiton.
The structure of the proposed entity will resemble other so-called dual-listed companies, such as
Unilever PLC and Unilever NV, the Anglo-Dutch consumer-products giant listed on both the
Amsterdam and London stock exchanges. Neither BHP nor Billiton will exchange or tender
shares. However, after completion of the merger and the spinoff of the remainder of BHP's steel
operations to existing BHP shareholders, BHP will wind up controlling 58% of the combined
entity and Billiton 42%, the companies said.
The merger is expected to yield pretax savings of $270 million in 2003, the companies said, and
is conditional on the approval of both BHP and Billiton shareholders and clearance of certain
regulatory hurdles. BHP, formerly known as Broken Hill Proprietary Co., has a market
capitalization of nearly $19 billion and is listed on the Australian Stock Exchange. Billiton's
premerger capitalization was $9.7 billion.
BHP Chief Executive Paul Anderson, who is known for turning around BHP, will be CEO of the
combined concern until the end of 2002, the companies said. Brian Gilbertson, chairman and
chief executive of Billiton, will be deputy chief executive and is pegged to succeed Mr.
Anderson when he returns to Texas, as he has indicated he will. BHP Chairman Don Argus will
be nonexecutive chairman of the combined group, the companies said.
"This is a perfectly balanced merger with considerable synergy," says Mr. Lucas of Loeb Aron.
With the merger, he says, the two companies are aiming to control a major slice of the highly
profitable $20 billion global iron-ore business.
The merger discussions, under way for several months, nearly came to fruition about a month
ago but fell apart at the eleventh hour, the people familiar with the situation say. Indeed, the
latest talks hit a pothole late Friday night over whether Billiton would be allowed to continue
trading on the London Stock Exchange during the transaction, these people say. Most companies
are permitted to stay listed on the London exchange during such transactions but the structure of
this deal raises issues, people familiar with the situation say. Besides its London listing, Billiton
also has a secondary stock-market listing in Johannesburg and has major operations in South
Africa. Billiton will keep its London listing and BHP will remain on Australia's stock exchange,
and its American depositary receipts will continue trading in New York.
BHP, one of Australia's biggest companies, is the world's largest nongovernment producer of
copper and one of the largest iron-ore and coking-coal miners. It also produces steel and
diamonds, and has an oil-and-gas division. Billiton would give BHP exposure to metals it doesn't
produce, such as aluminum and nickel, as well as thermal coal. BHP-Billiton would also match
archrival Rio Tinto's product diversity. And it could make BHP more aggressive about cutting its
big oil-and-gas operations, which it has considered hiving off, possibly by listing them on the
stock market.
Paul Barnes, who tracks natural-resources stocks for Macquarie Equities in Sydney, said the
merger "would make a lot of sense" because it would give BHP the "critical mass" to compete in

a global investment environment and a stock-market listing in London. Several Australian

companies are trying to follow the lead set by Rio Tinto, which in recent years pioneered a
much-hailed dual-listing with its Australian unit, then known as CRA Ltd.
For Billiton, which produces chrome and manganese as well as aluminum, thermal coal and
nickel, an alliance with BHP would bring not only product diversification but greater
geographical spread. Billiton has some operations in Australia, but several of its operations are in
South Africa and other countries that carry higher political risk than Australia, where many of
BHP's operations are located. Just this month, Billiton warned that it may have to close its South
African manganese operations and switch production to Australia because of high transport
costs.
Others are cautious on the proposed merger. Tim Barker, a resources analyst at Rothschild
Australia Asset Management in Sydney, said he worries about the quality of some of the assets
that Billiton acquired last year through its takeover of Canada-based Rio Algom Ltd. And some
industry watchers say the deal could still be derailed by Anglo American PLC, which last year
acquired 7% of Billiton and could counter BHP's offer.
Completion of the BHP-Billiton deal would be the culmination of a storied career for BHP's Mr.
Anderson, who has turned the company around since joining in late 1998. For the fiscal year
ended in July, BHP posted profit of $1.63 billion Australian dollars (US$803 million), ending
two years of losses. Analysts forecast this year's profit at upward of A$2.5 billion.
After the merger announcement, credit-rating agency Standard & Poor's said it had placed BHP's
short-term and long-term ratings and guaranteed debt issues on credit watch with positive
implications.
UBS Warburg advised BHP; J.P. Morgan Chase & Co. and Gresham Advisory Partners Ltd.
advised Billiton; Dresdner Kleinwort Wasserstein acted as corporate broker to Billiton and
provided financial advice to the company.
-- Neil Behrmann contributed to this article.
Write to Anita Raghavan at anita.raghavan@wsj.com , S. Karene Witcher at
skwitcher@awsj.com and Andrew Trounson at andrew.trounson@dowjones.com