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Back To The Chopping Block For Top Miners, BHP And Rio Tinto

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Asset sales and capital returns made the world’s top two mining companies, BHP and Rio Tinto, investment stars until mid-year when trade-war tensions turned them into losers, but a six-month downturn could be ending with a possible re-start of the asset selling process.

Until June, both companies had delivered impressive, and almost mirror image share price performances, up 175% over the preceding three-and-a-half years.

Credit for the price rises was shared by strong profits in iron ore, the major business units of both BHP and Rio Tinto, along with heavy-duty asset disposals that included BHP selling its onshore U.S. oil and gas interests and Rio Tinto exiting the thermal (electricity generating) coal business.

$31 billion In Asset Sales

Between them, the two big Anglo-Australian miners, disposed of an estimated $31 billion in surplus assets and returned $89 billion in capital to shareholders between 2004 and 2018.

Not much has been sold this year but, if a fresh research report by Jefferies Research Services is correct, the sales process could resume in 2020 as the two companies clean up their smaller operations.

In theory, according to Jefferies, there could be another $20 to $25 billion to be generated from disposing of assets no longer regarded as core with potential capital returns enhancing total shareholder returns (TSR).

“After five years of consolidation non-core assets remain in BHP’s and Rio Tinto’s portfolios,” Jefferies said in a report headed: “Focus to shift back to divestment tail.”

More Sales To Boost TSR

Jefferies said with balance sheets re-based, operating cashflow elevated, proceeds from divestment will continue to support near-term (financial) multiples and TSR via capital returns.

Because there have been few asset sales this year investors have tended to overlook the potential for capital returns from a fresh wave of disposals.

“Understandably, the market’s focus on asset sales has diminished,” Jefferies said.

“However, with an expected improvement in macro conditions in 2020 and easing of trade tensions (our base case) we anticipate a tail of divestments will come into focus.”

High on the next wave of disposals are BHP’s thermal coal business which would bring it into line with Rio Tinto with both companies under pressure from fund managers and climate change activists to quit mining the most polluting of fossil fuels.

Rio Tinto’s next move in cleaning up its asset base could be the disposal of non-core aluminum assets which are battling high energy costs and a low metal price, as well as the sale of an iron ore business in Canada which is a fraction the size of its giant Australian mines.

But there could be a lot more offered, or which might attract an inquisitive buyer.

BHP has a number of relatively small oil and gas assets which could easily find a buyer, including a 25% stake in the Scarborough liquefied natural gas project in the north-west of Australia which could fetch $1.27 billion, 45% of an oil and gas project in Trinidad and Tobago which could sell for $1.1 billion, and a half share in the troubled Samarco iron ore mine in Brazil which could be sold for $1.2 billion.

Nickel And Potash Could Be Sold

Other assets mentioned by Jefferies for possible, but unlikely sales, included the Nickel West business in Australia for $950 million, a stake in the controversial Jansen potash project in Canada for $762 million, and a 25% stake in the Olympic Dam copper mine in Australia for $585 million.

Though some potential asset disposals are described as unlikely, Jefferies sees the potential for BHP to generate $12.3 billion in the sale of surplus assets, enabling it to concentrate on its core businesses of iron ore, copper, steel-making coal and oil.

Rio Tinto has a longer list of sales in three categories, likely possible and unlikely, totaling $11.6 billion. Top of the list is a 59% interest in the Iron Ore Company of Canada which Jefferies values at $3.2 billion with a sale rated as likely.

A string of aluminum smelters and alumina refineries are listed, along with the company’s California borates business, two diamond mines and an industrial salt business in Australia.

“We expect the divestments could improve the return on capital employed (ROCE) by 1% to 3%,” Jefferies said.

The bank rates Rio Tinto a buy and BHP a hold.