It’s amazing what an improvement a new owner can bring to a business, which is why the proposed break-up of Australia’s biggest company, BHP Billiton, is excellent news for Western Australia, particularly the Goldfields and South West.
In the same way that a corner store benefits from a coat of paint, an ‘under new management’ sign, and new workers who welcome rather than repel customers, so too will new owners of Nickel West and Worsley Alumina smarten up two tired mining operations.
If in doubt about the benefits of a new owner, take a look at the share price of Cassini Resources, which earlier today confirmed its purchase of an unloved BHP Billiton asset, the West Musgrave nickel and copper project – a deal that boosted Cassini’s share price by more than 400 per cent in a few hours.
The deal will allow Cassini to raise fresh capital and pick up where BHP Billiton left off 18 months ago at West Musgrave, a remote but potentially valuable exploration project that could kick-start development in a part of WA where there has been very little investment in the past.
Details of how BHP Billiton will undertake its split into two separate stock-exchange listed companies, or sell big mines regarded as non-core, have not been released but the aim of quitting nickel, alumina, manganese and some coal operations has been confirmed.
In either case – the creation of spin-off already dubbed ‘Son of BHP’, or through a clean sale to a new owner – the effect on WA’s economy will be positive.
Nickel West, for example, is one of BHP Billiton’s least-loved operations. For the past three years, and possibly a lot longer, BHP Billiton’s head office management has been trying to orchestrate an exit from the nickel business, largely because it doesn’t understand the metal and dislikes the extreme price swings it has always suffered.
This animosity towards nickel was confirmed with the failure of the Ravensthorpe nickel project and its complex acid-leach technology, a flop which cost around $3 billion in accumulated losses and asset-value write-downs – self-inflicted by BHP Billiton’s poor understanding of how to process lateritic nickel ore.
Ravensthorpe today, complete with its ‘under new management’ sign, is profitably producing nickel, admittedly thanks in part to the new owner snapping up the asset at a bargain basement price.
The same is likely to happen at Nickel West, which has been dogged by low nickel prices, hamstrung by entrenched and inefficient management practices, and starved of fresh capital to make essential improvements, let alone try and grow to achieve enhanced productivity.
If sold as a going concern, a new owner could quickly improve the efficiency of Nickel West, build on its world-scale 100,000 tonnes-a-year of nickel production, and consider opening new ore bodies discovered by exploration crews but not seen as fitting BHP Billiton’s preferred investment profile.
The disposal price, either as an outright sale or as part of an impaired-asset spin off, will determine how much capital a new owner has to invest in Nickel West; but it is a classic case of a business crying out for a new owner.
Worsley has less to gain by being cut free, having just enjoyed a $3 billion expansion that added 1.1 million tonnes of alumina capacity, lifting the project to 4.6mtpa.
A new owner will have less to spend on Worsley than is required at Nickel West but would breathe fresh life into a business regarded as non-core by its current proprietor.
Of the potential surplus-assets disposal routes being considered by BHP Billiton, the most likely is a spin-off, creating a new company in the same way the once-important steel business of BHP Billiton was floated out as two separate entities – OneSteel (now called Arrium) and BlueScope.
While a new business might at first appear to be packed with underperforming mines and processing facilities, it will have the advantage of management focus, a revalued balance sheet that better reflects reduced asset values, and sufficient capital to grow rather than continue shrinking as unwanted business units lost in the shadow of BHP Billiton’s preferred interests in iron ore, copper, oil, metallurgical coal and potash.
By revealing the planned spin-off of non-core assets BHP Billiton has started the clock, and applied pressure to potential buyers, especially to X2, the comeback corporate vehicle of former Xstrata boss Mick Davis, who has raised $US3.75 billion from five private backers in his attempt to recreate history.
Mr Davis, and other tyre-kickers who have been scrutinising what BHP Billiton wants to sell, must move soon or the spin-off proceeds.
For WA, either a clean sale to a new owner of Nickel West and Worsley Alumina or their inclusion in a spin-off is a positive development, as is always the case when a tired owner quits a business and a new owner jazzes up the shop.
