How will BHP Billiton Limited dispose of its non-core assets?

There have been suggestions of a demerger, but would selling them individually be a better option?

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There are mixed views amongst BHP Billiton Limited (ASX: BHP) shareholders regarding what the company should do with its non-core assets. While the miner is reportedly in discussions to bundle them together and spin them off into a separate entity, others are suggesting that selling them individually would be the better alternative.

As part of its “four pillar” strategy, BHP will focus on iron ore, copper, coal and petroleum operations, while it will look to divest other assets that don’t fit its long-term plans. For instance, likely divestments would include its aluminium, manganese and nickel assets, as well as its energy coalmines located in South Africa. Potash, a key fertiliser ingredient, would remain in BHP’s hands given the company’s forecasts for strong demand for decades to come.

While the miner has already sold off a number of assets in recent years, reports have emerged that it is now considering a demerger which could create a separate entity worth between $20 and $22 billion and would likely be gifted to shareholders. This option would be fantastic for shareholders in that demerged companies often perform well against the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), with management of both entities able to apply a greater focus to improving their own divisions’ costs and productivity.

However, other shareholders have argued that they would prefer the assets be sold individually or as part of a bundle, whereby they could charge a decent price in a rather depressed stage of the market’s cycle. The Australian Financial Review reported that some of the miner’s assets have attracted the interest of Mick Davis, the former head of mining giant Xstrata, who could pay as much as US$15 billion ($16.1 billion) for some of the company’s assets. It is believed that his motivations are to: “Buy a suite of assets that are good quality but out of favour at this low point in the cycle.”

Selling the assets would also allow the miner to pay down some of its debt which would see it fall below the US$25 billion mark. The company has indicated that once its debt falls below this level it will explore its capital management options which would likely involve a share buyback program.

With the market down 49 points or 0.9% today, BHP’s shares have fallen 1% while major rivals Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have dropped 1.8% and 2.9% respectively.

Foolish Takeaway

Provided that BHP could attract a decent bid for its assets, it would likely sell them instantly. For instance, although aluminium, nickel and bauxite generate around 14% of the miner’s revenues, they only account for around 1% of earnings before interest and tax (EBIT). The miner would much prefer to focus on its core operations which would also fare well for shareholders.

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

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