Aussie Asset Sales

By Ari Charney • March 13, 2013 • Pacific Digest

With the global economy in slowdown mode, two resource giants that binged on acquisitions during boom times are now hoping to raise cash by paring non-core assets from their portfolios. Analysts at Deutsche Bank estimate that BHP Billiton Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO, NYSE: RIO) have USD35 billion in potential asset sales, with as much as USD25 billion for the former and USD10 billion for the latter.

Though investors have speculated about such a possibility for some time, both companies have new management teams in place with a mandate to pursue greater efficiencies and simplify their portfolios. The CEOs of both firms recently stepped down in the wake of significant writedowns taken for acquisitions during their tenure.

For its full-year 2012 results, Rio Tinto booked a total of USD14.4 billion in post-tax impairment charges for its recent aluminum and coal acquisitions. Meanwhile, the company reported a USD3 billion loss, compared to the prior year’s USD5.8 billion in profits.

That dismal performance prompted former CEO Tom Albanese to step down in mid-January. The board then appointed Sam Walsh, who headed the company’s Iron Ore segment, as the new CEO.

At BHP, profits fell 43 percent to USD5.7 billion for the first half of fiscal-year 2013 (ended Dec. 31), though that period faced a tough comparison to last year’s record profits, as prices for commodities were peaking. The company booked a total of USD2.4 billion in post-tax impairment charges for nickel and aluminum assets. These followed similar charges for its fiscal-year 2012 (ended June 30) of USD3.3 billion for nickel and US shale gas assets.

Following the more recent numbers, CEO Marius Kloppers opted to step down, effective May 10, with Andrew Mackenzie, who currently heads the company’s Non-Ferrous division, assuming the helm.

BHP has already been pursuing a targeted divestment program, with asset sales totaling USD4.3 billion during the second half of 2012. And last week, CFO Graham Kerr held a closed meeting with a group of sell-side analysts during which he revealed that the company plans to sell 10 non-core assets over the next several years.

According to JP Morgan’s summary of the meeting, Kerr said that divestments will be opportunistic, with management hoping to time each sale to maximize value. He noted that petroleum assets would likely be the easiest to sell, and that there were no buyers at present for some of the more challenged assets. And he said that it’s likely the first divestments will take place during the second half of the year.

Management had previously confirmed that it plans to sell the Gregory-Crinum coal mine, located in Australia’s Queensland state. Now Wall Street analysts are speculating about what other assets may be up for sale. Deutsche Bank’s analysts believe eventual divestments could include aluminum assets in Australia and Brazil, nickel and thermal coal mines in Australia, manganese projects in South Africa, a copper mine in Arizona, and oil fields in Pakistan, Algeria and the Caribbean.

For Rio Tinto, Deutsche Bank identified Eagle Nickel and Pacific Aluminum as two likely divestments. Additionally, the following undeveloped projects are also possible candidates for sale: diamond operations in India, a lithium-borate development project in Serbia, uranium deposits in Canada, and Australian coal assets.

The company is currently pursuing the sale of its 59 percent stake in Iron Ore Company of Canada, while it had already begun a strategic review of its diamond segment early last year, with an eye toward eventual sale.

All of this activity is also taking place amid pressure from credit-rating agencies. Yesterday, Standard & Poor’s announced that both companies’ “A” ratings could be in jeopardy if they don’t reduce costs and cut debt. In particular, S&P said that BHP’s buffer against falling commodity prices is getting weaker.

So what does all this activity mean for shareholders? For one, it should help both firms shore up their balance sheets by eliminating debt. That, in turn, should help ensure the sustainability of their dividends until commodities rebound.

BHP’s long-term borrowings ballooned to USD31.8 billion at the end of December, up 70 percent from a year ago. During that same period, Rio Tinto’s long-term debt jumped almost 21 percent, to USD24.6 billion.

Deutsche Bank believes these asset sales should help each company pare debt by about 12 percent to 20 percent over the next several years. And that could also lead to an eventual bump in the dividend, with payout ratios possibly rising by at least 10 percent in 2014.

The Roundup

For the latest information on our Portfolio Holdings, please see the forthcoming issue of Australian Edge, which should be posted to the website on the evening of Friday, March 15.

Here’s where to find discussion of earnings for AE Portfolio companies, most of which just reported fiscal 2013 first-half results. Some posted results for 2012, while others report on completely different schedules. We’ve included the next reporting dates for those companies. Please consult the Portfolio tables at www.AussieEdge.com for current advice.

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