Slimming down

By S.W.

“DE-DIVERSIFICATION” is an ugly word, but the concept has become an attractive strategy among big miners. BHP Billiton, the world’s largest and once the leading exponent of diversification, looks like it has finally succumbed to the trend. On August 15th the Anglo-Australian company confirmed rumours that it was considering getting shot of some of its less glittering assets to concentrate its efforts on a few commodities. The firm is expected to make a more detailed announcement in a few days when it will report its annual results. (Update: The divestment was officially announced on August 19th.)

The world’s giant miners long wanted to have it both ways. On the one hand, they bet on gigantic low-cost mines that could be easily expanded and guaranteed profitability through the price cycles that typify commodity markets. On the other, diversification was supposed to insulate the mining firms from the cyclicality of any single commodity. But the emergence of resource-gulping China in the mid-2000s and a commodity boom that saw prices rise across the board meant that big trumped broad.

BHP Billiton looks set to unwind the 2001 merger between Australia’s Broken Hill Proprietary and Billiton, based in London, that set the combined firm on course to become the world’s biggest mining company (and one of the world’s biggest listed companies). Although the final details are unclear, it seem that the firm will spin off its smaller and barely profitable operations in aluminium, nickel, manganese and perhaps some coal mines into an entity that could be worth around $15 billion. This would leave BHP free to concentrate on its far more profitable businesses of mining iron ore, copper, coal and drilling for oil as well as accelerating its efforts to become a global leader in mining potash.

Spending the cash on giant mines that generate returns looks like a sensible move. BHP always had the reputation as the foremost exponent of diversification—potash and oil are both commodities largely untouched by its rivals. But Rio Tinto, whose efforts at diversification led to the disastrously pricey 2007 acquisition of Alcan, has already rejigged its assets and now derives the vast majority of its profits from iron ore. Other big miners have been shedding less significant parts of their businesses for a few years. Brazil’s Vale got out of aluminium in 2010. Only Glencore, which took full control of Xstrata in 2013, has moved in the other direction. But mining its own ores fits neatly with its lucrative trading business.

The spin-off will allow BHP to resettle in its Australian heartland if a delisting in London goes ahead. Bundling up its underperforming businesses is also a way to deal with the hangover from the mining “supercycle” as China enters a less commodity-intensive phase of growth. In short, mining firms are slashing costs and slimming down as commodity prices fall after a prolonged investment splurge in sometimes questionable assets.