At the risk of joining the dots and forming the wrong picture it now seems likely that a deal involving BHP Billiton BHP Billiton, the world’s biggest mining company, and Mick Davis, one of the mining world’s most successful managers, and a man looking for his next deal, might be brewing.
In one corner is a company trying to slim down after a decade of hectic growth which has left many shareholders jaded by the lack of financial returns on their capital.
In another corner is a man who flew high when running the London-listed Xstrata Xstrata mining house only to be discarded by a one-time close ally when money came between them.
Twin Developments
Two separate events make it possible to link BHP Billiton with Davis.
Firstly came news that the former Xstrata boss has assembled a pot of capital totaling $3.75 billion from five well-heeled investors, including Hong Kong-based Noble Group Noble Group and private equity specialist, TPG. The money has been pooled in a vehicle dubbed X2, a name deliberately chosen to create the impression that Davis is creating “the son of Xstrata”.
Then came today’s development which was confirmation from BHP Billiton that it is working on a “demerger” of non-core assets into a separate stock-exchange listed vehicle, or string of assets sales which could raise as much as $20 billion.
High on the list of assets in BHP Billiton’s equivalent to an airport departure lounge are the poorly performing nickel and aluminum operations and the sometimes highly-profitable manganese business.
By quitting those units BHP Billiton’s chief executive, Andrew Mackenzie, reckons his management team will be able to focus on “four pillars”, as he calls them; petroleum, iron ore, copper and metallurgical (steel-making) coal. A fifth pillar might emerge from the company’s embryonic potash operations in Canada.
The plan to dump assets regarded as surplus to requirements is a classic management strategy of eliminating low-margin (or loss making) operations which have become a distraction to the main game.
Project River
Work on the streamlining of BHP Billiton has been underway for more than 12-months with the investment bank, Goldman Sachs, reported to be leading the project under the code-name of Project River.
In a statement to the Australian and London stock exchanges earlier today Mackenzie acknowledged the demerger or asset sales plan, describing it as a simplification strategy.
“We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in free cash flow and superior returns on investment,” he said.
“By increasing our focus on these four pillars, with potash a potential fifth, we will be able to more quickly improve the productivity and performance of our largest businesses.”
In early interview, Mackenzie described the process as: “more from the same, and the same for less”.
Gunning For Moose
It is into the BHP Billiton asset disposal plan that Davis has emerged with a war chest substantially bigger the previously reported with the last estimate of his cash horde put at $2 billion.
The lift to $3.75 billion indicates that his backers have tipped fresh funds into the kitty and that Davis is no longer hunting deer, he’s gunning for moose, and probably a moose with the BHP Billiton brand on its side.