The ratings agency Standard & Poor’s likes BHP’s plan to spinoff a new mining company a lot more than the initial reaction of investors, who marked the global mining company down in trading.
Standard & Poor’s has affirmed BHP Billiton’s ‘A+/A-1’ corporate credit and issue ratings, saying that the risk profile of a leaner company was favourable. Moody’s Investors Service also affirmed the BHP Billiton ratings including the The A1 issuer rating.
Following the demerger, BHP will focus on iron ore, copper, petroleum, coal (mainly metallurgical coal in Queensland and thermal coal in New South Wales) and potash.
The new company will hold the aluminum and manganese businesses, nickel in Cerro Matoso, energy coal in South Africa, metallurgical coal in Illawara, Australia, and silver-lead-zinc mines in Cannington.
The proposal is subject to final board approval and shareholder votes.
BHP Billiton is the largest mining company in the world with revenues of US $66 billion in the year ended June 30, a position it will still hold post a successful demerger.
BHP’s shares traded down overnight and in Australia were about 4% down to $38.11.
Standard & Poor’s says BHP Billiton’s business risk profile will remain strong with a demerger.
“The core assets generated much higher profit margins and returns on capital for the past 10 years, compared with the demerged assets under the proposal,” said Standard & Poor’s credit analyst May Zhong.
“More importantly from a credit perspective, we expect the new, leaner BHP Billiton will experience cash flow volatility that will not be materially different from the current portfolio, notwithstanding the moderate reduction in commodity and asset diversity.”
Standard & Poor’s says the new BHP Billiton’s product mix would still compare favourably with its mining peers due to its superior profit margin and the presence of sizable petroleum assets in its portfolio.
Petroleum provides good product diversity to the group as it is less correlated to movements in steel demand, compared to iron ore, coking coal, and manganese.
However, if petroleum revenue were to decline significantly, or the company further narrowed its product mix, it could weaken the company’s strong business risk profile.
Standard & Poor’s believes the demerger should have minimal impact on BHP Billiton’s financial risk profile, given the fact that the core assets generate the majority of the group’s earnings and cash flows.
Nevertheless, the spin-off will modestly reduce BHP Billiton’s earnings or cash flows, which would be offset by the transfer of associated liabilities (debt including finance leases, operating leases, and asset retirement obligations) to the new company.
Standard & Poor’s says:
“More importantly, we expect the company’s financial policy and commitment to a solid ‘A’ rating to remain unchanged. In addition, we consider the company will continue to have significant financial flexibility.”
Ms Zhong says the stable outlook reflects expectations that BHP Billiton can maintain a free operating cash flow and adjusted funds from operations (FFO) to net debt at more than 60% in the near-to-medium term.
“We believe the company’s continued productivity gains through lower costs and increased production volumes, and a cut in capital expenditure should partly offset the impact of the recent decline in commodity prices (iron ore and coking coal),” she says.
“In addition, given the group’s significant financial flexibility and commitment to a solid ‘A’ rating, we expect the company to pull more financial levers if the operating environments are weaker than expected. If the demerger proceeds, we expect minimal execution risk.”
BHP’s share price today on the ASX:
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