BHP Billiton Looks to Clean House

Nickel West Australia. Source: BHP Billiton

BHP Billiton (NYSE: BHP  ) wants to do some spring cleaning. Instead of having mining and energy assets stacked up around the world, BHP believes sorting them out into just five neat piles -- iron ore, copper, coal, petroleum, and potash -- will increase shareholder value. But just as the task of cleaning out my garage becomes an enormously complicated task because of my odd collection of interests that make it difficult to sift through the morass, investors may find simplifying BHP's portfolio is not a simple weekend project, either.

Left on the discard pile would be assets such as nickel, manganese, and aluminum, whose underperformance has undermined the strength of the whole. After reporting $7.8 billion in net profits over the second half of 2013, as iron ore production advanced at a record clip and both it and metallurgical coal are expected to hit the miner's ambitious full-year guidance, it's clear the unloved assets are dragging the rest down.

Operating profits by commodity. Source: BHP Billiton.

Spinning off the assets, which some analysts suggest could be worth as much as $20 billion Australian, gives BHP the chance to shave off those less profitable businesses that it might otherwise have a difficult time selling into a depressed market for those commodities. Rival Rio Tinto (NYSE: RIO  ) has pulled several businesses off the market after hanging out a shingle saying it was willing to sell them, because of a lack of buyers wanting to pay up for what the miner thought they were worth.

Not that BHP isn't willing to sell assets if necessary. It already sold its diamond business along with some coal, copper, petroleum, and uranium assets in recent years, including $6.5 billion worth announced or completed in the past year.

But the remaining non-core assets that would be available for disposition have largely been depressed, meaning they wouldn't command as high a price on the market. The miner has attempted to create shareholder value by pursuing several large takeovers, such as its failed bids for both Rio Tinto iron ore assets in 2010 and PotashCorp (NYSE: POT  ) , both of which ran into governmental opposition. It was the failure to merge with the latter that led to BHP's acquiring the massive Jansen deposit in Saskatchewan that created the miner's potential fifth pillar.

Some analysts see a dilemma in BHP's choice for divesting the unwanted assets. If it spins them off, investors might not realize value since the markets for the minerals, other than nickel, which has benefited from India's export ban, is still depressed. An IPO might similarly not fare well, as it's uncertain whether there would be an appetite for new mining shares. And as I discussed, selling the assets might not garner the valuation anticipated and would take longer to achieve, meaning performance would still be dragged down as if it kept operating them.

Cleaning house is usually a worthwhile endeavor, but when you're standing hip deep in the detritus created from sorting out the piles from your efforts, it can seem an overwhelming task with no perfect solution. BHP Billiton has been signaling that it wants to straighten things up, and investors would be likely to benefit from the fresh start.

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