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COLUMN-BHP's "unloved" assets may be better long-term bet: Clyde Russell

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, April 14 (Reuters) - "Unloved" was a word that popped up several times in relation to BHP Billiton's mooted plans to spin-off its non-core aluminium, nickel and manganese businesses.

It's worth looking at the language used to describe and frame corporate plans as this is more often revealing that the bland statements companies tend to issue.

BHP Billiton didn't use the word "unloved" itself, that was the description applied by news outlets, among them Reuters, the Sydney Morning Herald and the Wall Street Journal.

What BHP Chief Executive Andrew Mackenzie did say was the world's largest mining company was looking at a range of options in the "next phase of simplification," but would only pursue those that enhanced shareholder value.

BHP has identified four key pillars of its business - iron ore, copper, coal and petroleum - with potash a potential fifth.

This leaves the so-called unloved assets as aluminium, alumina, bauxite, nickel and manganese.

These businesses could be spun out of BHP into a separate entity, just as the company did with its Australian steel assets more than a decade ago, according to news reports.

The theory would appear to be that this would allow BHP to focus on the large profit generators while cutting loose assets that act as a drag on the balance sheet and share price.

BHP's Australian-listed shares have fallen almost 1 percent since the start of the year to the close of A$37.62 ($35.36) on April 11.

Meanwhile, the S&P GSCI index of commodities, a good proxy for BHP as it contains both energy and minerals, has gained 3.2 percent so far this year.

If you go back to the middle of 2012, around the time BHP changed direction by committing to curtailing capital spending and return more to shareholders, the picture is different.

Since the 2012 low reached on July 18, BHP shares have gained 24.6 percent while the S&P GSCI has managed 16.7 percent since its 2012 low, reached on June 21.

But BHP has significantly underperformed more general equities, with the Australian benchmark ASX 200 index gaining 36 percent since its 2012 low, reached in June of that year.

What these comparisons show is that there is still pressure on Mackenzie to deliver more shareholder value, hence the speculation that the underperforming assets will be sold or spun off.

UNLOVED ASSETS MAKE MINIMAL CONTRIBUTION

Using the latest BHP financials for the six months ended December, aluminium has earnings before interest, taxes, depreciation and amortisation (EBITDA) of $234 million, manganese $293 million and nickel a loss of $51 million.

Total group EBITDA was $17.06 billion, which shows that the so-called unloved businesses are small fry in the greater scheme of things, contributing only 2.8 percent of EBITDA.

That said, if they are spun out of BHP, the new business could be worth as much as $20 billion, equivalent to about 11 percent of the company's current market cap of about $181.4 billion.

This is why the equity market has given a thumbs up to the reports that a spin-off of non-core assets is being considered by BHP.

The advantages seem obvious to BHP, and even the new company may be able to benefit from having a dedicated management team, presumably to "love" the assets and invest in improving their returns.

However, spinning off the underperforming assets does reduce BHP's status as diversified miner and makes it all the more reliant on its big four commodities.

While BHP has had success in cutting costs and extracting value from its existing assets, there are probably just as many question marks over the outlook for the big four as there are for the commodities produced by the unloved assets.

Iron ore is biased downwards as Chinese demand growth slows and new supply comes closer to hitting the market.

Coking coal also suffers from a softer outlook for steel-making and thermal coal markets remain globally in surplus, with any rally likely to be choked off as U.S. exports will ramp up with higher prices.

Copper is also hampered by the question marks surrounding Chinese growth, as well as the potential for increasing mine supply.

Even crude oil may struggle to rally, given increasing supply from the Middle East and the United States and muted demand growth.

In contrast, the nickel market is benefiting from the ban on ore exports from Indonesia, with London prices up 25 percent so far this year.

The outlook for manganese is perhaps not so bright given its primary use is in steel-making, but BHP's Groote Eylandt mine in Australia is ranked as one of the top producers and may enjoy cost advantages over competitors.

Aluminium is still in global oversupply, but BHP's South African smelters are likely to be on the lower side of the cost scale, and the bauxite and alumina operations in Australia may also get a leg up from Indonesia's ban on exporting unprocessed ores.

The unloved assets just may have a better medium- to long-term outlook than BHP's core assets. Perhaps giving them some attention would be a better idea than hiving them off at a time when commodity assets are going cheap.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton as an investor in a fund.

(Editing by Ed Davies)