Why Vale doesn’t want BHP Billiton Limited’s scraps

Australia’s mining giant BHP Billiton Limited (ASX: BHP) will continue to explore ways in which it could divest from its non-core assets after being told by Brazil’s Vale that it would not be interested in making any acquisitions.

BHP’s Andrew Mackenzie introduced the “four pillar” strategy upon becoming CEO early last year, whereby investments and growth would be primarily restricted to iron ore, copper, coal and petroleum, as well as potash which could well become a fifth pillar. With that in mind, it is aiming to divest from other non-core operations, including nickel, aluminium and manganese.

However, speaking at the Melbourne Mining Club on Thursday, Vale’s CEO Murilo Ferreira informed the audience that his company was now more heavily focused on disciplined capital allocation, much like BHP or Rio Tinto Limited (ASX: RIO). He said that the company currently had no plans for acquisitions and would not “go looking for projects in the third quartile just to increase the portfolio of the company.” He added that “I think this money would much better stay in the hands of our shareholders.

Aiming to reduce debt levels, simplify operations and return more capital to shareholders, BHP has considered various ways to sell the assets it considers to be non-core to its future. While it could continue selling the assets individually, as it has done in recent times, it was recently reported that the company is also considering demerging all of the assets into a separate $20-$22 billion entity.

Some of the units the miner is said to be interested in offloading include its South African and Hunter Valley energy coal assets, as well as its manganese, nickel and zinc assets.

Foolish takeaway

While they once accounted for a large portion of the miner’s earnings, the assets BHP is planning to remove from its portfolio are now acting as a drag on the group’s overall profitability. Divesting from these assets would be in shareholders’ best interests whereby the proceeds could either go towards strengthening the company’s balance sheet, or towards being redistributed amongst investors.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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