BHP hopes South32 spinoff will help it to shine in low-price markets

By Sonali Paul and Silvia Antonioli

MELBOURNE/LONDON (Reuters) - BHP Billiton said a proposed $13 billion spinoff of South32 would give the world's biggest miner a strong chance to ride out tough conditions in commodity markets and was a more attractive option than an asset sale.

BHP released documents on Tuesday setting out the conditions for the split of its core iron ore, petroleum, copper and coal businesses from its unloved assets which will form South32, ahead of a planned listing in May.

The plan is part of BHP's efforts to reduce costs and simplify its business in response to the commodity price downturn that has hit big mining and energy companies.

BHP has put far less debt than expected into South32, trying to ensure the company can weather the tough markets and still pay a dividend.

"I do think the timing of it is perfect," chief executive Andrew Mackenzie told journalists talking about the split.

Mackenzie said the large diversified model that worked so well during the boom years was not fit for the current down cycle, in which sharpening the focus on productivity was a must. Tougher times call for smaller companies, BHP said.

"It would be very difficult at this stage to conduct this simplification through a trade sale, which would expose shareholders to price risk because potentially (we are) at quite a low point in the cycle."

CAUTION REIGNS

South32, the new mid-sized miner, aims to focus on cutting costs and completing projects in its aluminium, manganese, silver and coal businesses before weighing up any new investments, despite a strong balance sheet and a market full of assets for sale.

"We do believe in the concept of crawl, walk and run," South32 CEO elect Graham Kerr told reporters.

Kerr said the company had untapped potential within its fold, as BHP had starved the businesses of capital while it focussed on its main businesses. He played down the chances of chasing acquisitions in the near term.

South32 will emerge from BHP with $674 million in net debt, which is less than half the level analysts had expected.

"They're just trying to be prudent. This company's in some pretty volatile markets, so they just didn't want to over-leverage it," Brenton Saunders, an analyst at BT Investment Management, said.

Many in the industry think South 32 could be a takeover target for rivals or private funds such as X2, run by former Xstrata boss Mick Davis.

Mackenzie said the final outcome was out of BHP's control but it had done its best to give South32 real control of its own destiny in having a balance sheet that protects the value of South32 shares from day one.

Named after the line of latitude linking its two main centres, Australia and South Africa, South32 made up about 12 percent of BHP Billiton's total revenues in the year to June 2014.

Mackenzie said it made sense to have two separate companies with different strategies, one focussing on huge assets with hundred-year lives, and the other with shorter-lived assets, processing plants and challenges in South Africa.

He said the simpler asset base would allow BHP to speed up efforts to cut costs and help it beat its target of $4 billion in savings by June 2017, but declined to spell out by how much.

Analysts have valued South32 at around $13 billion, or lower if using current weak commodity prices, in line with what the company said was the historical book value of the assets.

"I don't think investors or the media understand just how attractive they are," Kerr told reporters, without giving any estimate of their market value.

South32 plans to pay out at least 40 percent of its underlying earnings in dividends each half-year, as expected by analysts. BHP reiterated it would not rebase its own dividend, effectively boosting distributions to shareholders who hold both companies.

South32 assets contributed net profit after tax of $738 million for the half year to Dec. 2014, more than 50 percent higher than some analysts had forecast for the full year to June 2015.

Shareholders are to vote on the spinoff on May 6, with South32 shares expected to list on the Australian, Johannesburg and London stock exchanges on May 18.

(Reporting by Sonali Paul; Editing by Richard Pullin and Jane Merriman)