BHP share price up, recommends South32 spin-off to shareholders

BHP Billiton Ltd said on Tuesday that its board has recommended shareholders to vote in favor of the proposed demerger of South32 as the worlds largest miner tries to weather the storm of falling commodity prices.

In August the company announced it would spin-off its nickel, aluminum, coal and other operations into a new company named South 32 as the company tunes down its non-core assets as it believes a smaller BHP would be more efficient and deliver higher profits.

The demerger has already received regulatory approval and shareholders are set to vote on the move on May 6. In line with the spin-off plan, investors will get one share in South32 for each BHP share they hold.

However, the company faces taxes of $339 million if the move gets shareholder approval. The figure would contribute to the total demerger-related costs and bring them to $738 million.

Although the spin-off expenses are higher than expected, they still represent a fraction to BHPs market capitalization. Additionally, the company projected to generate an annual $100 million in cost savings thanks to the demerger.

The new stand-alone entity would have a net debt of $674 million, substantially lower than analysts projection of between $1 billion and $1.5 billion. BHP would cover the closure and rehabilitation provisions, which the company projected at $1.5 billion.

At the end of last December South32 had gross asset of $26.7 billion and contributed $738 million to BHPs net profit during the six months ended December 31, the company said.

Despite the spin-off, BHP said it would stick to its progressive dividend policy, while also not lowering its dividend in line with the lost assets. The company also said that South32 would distribute at least 40% of its underlying earnings every six months, meaning that current shareholders will receive significantly more returns in the future.

After the merger BHP said it would work towards achieving its desired core portfolio of 19 assets across 8 countries as opposed to its current 41 assets in 13 countries. The company said it would focus on four commodities, including oil, iron ore, copper and coal, which generated 96% of the companys earnings before interest and taxes in financial 2014.

“The demerger will create a more focused portfolio of large-scale operated assets with a smaller geographic spread and a higher proportion of common characteristics,” said Chief Executive Andrew Mackenzie. “More challenging markets demand a sharper focus on the businesses that drive the majority of our earnings and the push for productivity must continue,” he added.

BHP gained 1.91% on Monday and closed at GBX 1 416 in London. On Tuesday the stock edged up 2.01% to GBX 1 445 at 10:01 GMT, marking a one-year decrease of 20.18%. The company is valued at £78.34 billion.