Heavyweight BHP reveals diet plan

Mining goliath BHP Billiton is shedding weight. A plan to simplify the business was flagged in April, and after months of head-scratching, the company has decided to spin off non-core assets, possibly worth as much as $12 billion (£7.2 billion). Confirmation could come as early as next week.

It's clearly a strategy welcomed by the City. BHP shares have risen 10% to 2,070p since the original April Fool's Day announcement, easily outperforming Rio Tinto and Anglo American. Then, BHP said it would "actively study the next phase of simplification, including structural options."

The company, now worth a staggering £110 billion, repeated the mantra Friday. "We believe that a portfolio focused on our major iron ore, copper, coal and petroleum assets would retain the benefits of diversification, generate stronger growth in cash flow and a superior return on investment," it said.

"By increasing our focus on these four pillars, with potash as a potential fifth, we will be able to more quickly improve the productivity and performance of our largest businesses."

Key here is the line "A demerger of a selection of assets is our preferred option." Over $5 billion of assets have already been sold, but few have deep enough pockets to keep buying BHP's cast-offs, especially with rivals pursuing similar strategies. Among the unwanted assets, mostly inherited from the merger with Billiton in 2001, are nickel, manganese and aluminium projects - 14% revenue in 2013 and less than 1% of operating income.

There are reports that only Australian and South African shareholders will get shares in the new company. London-listed shareholders would receive a cash return.

According to Numis Securities, BHP trades on 13 times forward earnings, an enterprise value-to-cash profits ratio of less than 7 and, perhaps most crucially, a price-to-operating cash flow per share (P/CFPS) multiple of 7.7. Recent production data was positive, too, and growth in earnings is attractive. This spin-out is just another tailwind for BHP.

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