BHP Billiton Limited (ASX: BHP) has reconfirmed its demerger plans for 2015, but certain questions have been raised about the miner's timing.
By spinning off roughly $17 billion worth of unwanted assets into a new entity to be known as "South32", BHP could compromise its ability to meet spending and dividend commitments given the effects of the tumbling iron ore and oil prices – both of which are the miner's two most important markets.
As highlighted by The Australian, RBC analysts have downgraded the miner to "underperform" despite the stock's heavy recent falls. According to RBC analyst Chris Drew, BHP needed to generate US$16 billion to cover capital and maintenance spending as well as dividend payments in the coming years. Should commodity prices continue to fall, this task may prove impossible with just its four pillar divisions, being iron ore, petroleum, copper and coal.
While one of BHP's primary reasons to divest the businesses is to unlock greater shareholder wealth following years of underperformance, the plan may not prove feasible at a time when commodity prices are plummeting with no clear indication of when conditions may improve.
Already, the stock has dropped more than 30% since August and would almost certainly fall further if dividends were reduced.
