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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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This Mining Giant Is Cutting Itself In Half

Big news this week from one of the world's premier mining firms. Suggesting that the sector is coming under pressure to reduce costs by all means possible.

The company is BHP Billiton. Which said that it will split its cross-commodity project portfolio into two distinct groups.

This division will be accomplished by spinning out certain commodities into a new company. Including aluminum, coal, manganese, nickel and silver.

BHP itself will retain control of assets in petroleum, iron ore, copper and potash.

The stated rationale for the de-merger is to "simplify" operations, reduce costs and improve productivity. An interesting angle for the miner to be taking in the current industry environment.

Such asset splits are often carried out in order to create "pure plays". With the theory being investors are more likely to embrace straight-up bets on commodities of interest, such as gold or copper.

But given the stated portfolio division here, it's clear neither of the new entities qualify as pure plays. Leading to the conclusion that the arrangement must be primarily aimed at cost savings and operational efficiency.

It will be interesting to see if either end can be achieved. Given that the resulting two portfolios are both still fairly large and diverse.

One distinction that may help in this regard is asset size. With BHP specifying that the company-proper will retain large, long-life mines.

This may indicate the operational division is likely to be between "steady and reliable" big mines and "other" projects, going forward.

The move may thus actually be a vote on where BHP feels its core value lies. With all other "afterthought" projects being stripped away as distractions.

Here's to making it purer,

Dave Forest




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