Highlights of the Potential BHP Billiton-South32 Demerger (Part 1 of 10)

BHP Billiton’s (BHP) board recommended voting in favor of the South32 demerger. The shareholder approval vote on the demerger will be held on Wednesday, May 6, 2015. If the demerger is approved, BHP Billiton shares will stop trading with an entitlement to South32 shares at the end of May 15, 2015.

South32 shares are expected to start trading on the ASX (Australian Securities Exchange) on June 2, the JSE (Johannesburg Stock Exchange) on May 18, and the LSE (London Stock Exchange) on May 26, 2015.

BHP Billiton is planning to demerge its South32 entity. The company will hold assets that are non-core to BHP’s strategy. The demerger is expected to simplify BHP and unlock shareholder value. As a result, BHP will be able to focus on its core portfolio of petroleum, copper, iron ore, coal, and potash assets. These assets collectively contributed 96% of BHP’s EBIT (or earnings before interest and tax) in fiscal 2014.

BHP intends to streamline its organizational structure further and increase its utilization of global shared centers. In the long term, BHP expects this simplification to lead to additional productivity benefits and portfolio enhancements.

In this series, we’ll discuss the demerger and the demerged entity in detail. We’ll also discuss the capital structure, South32’s businesses, and the advantages and disadvantages of the demerger.

BHP and other companies in the industry—including Rio Tinto (RIO) and Anglo American (AAUKY)—were on an expansion spree for a decade or so. However, for two years they have been in a cost-cutting and productivity-enhancing mode because of the depressed commodity price environment.

As part of returning higher value to the shareholders, these companies have been looking for prospective buyers for their non-core and lower quality assets. Iron ore players like Vale SA (VALE) and Cliffs Natural Resources (CLF) are also on a cost-cutting spree.

Investors can consider ETFs, like the SPDR S&P Metals & Mining ETF (XME), to gain exposure to the metals and mining sector. Cliffs Natural Resourcse forms 3.7% of XME’s holdings.

Continue to Part 2

Browse this series on Market Realist:

• Part 2 - What Would South32 Look Like after the Demerger?
• Part 3 - Aluminum: A Key Commodity for South32 after the Demerger
• Part 4 - Weak Coal Performance: South32 Might Need to Cut Costs