BHP Should Spin Off Units on Slump, JPMorgan Says

March 13 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, should spin off its underperforming aluminum and nickel assets to boost returns during a forecast prolonged slump in metal prices, said JPMorgan Chase & Co. “The good times are over for some time we think and BHP Billiton should not carry underperformers in its portfolio,” JPMorgan analysts led by Melbourne-based David George said yesterday in a report. The assets, as well as some silver and copper mines, “are potentially a noose around the company’s neck during the weak times” and may “retard returns in the next upswing,” they said. BHP’s stainless steel materials unit, containing nickel mines and plants, swung to an underlying first-half loss of $752 million and earnings at its aluminum unit fell 58 percent as prices for the metals plummeted. The world’s worst recession since World War II has slashed demand for metals and prompted BHP last year to abandon a $66 billion bid for rival Rio Tinto Group. BHP should study issuing shares in a new company housing the underperforming assets to existing shareholders, similar to the 2002 spin off of its steel assets to create BlueScope Steel Ltd. and OneSteel Ltd., JPMorgan said. The larger company would retain iron ore, coal, petroleum and some metals assets, it said. “Shareholders win, in our view, because they get awarded shares in a new company, which contains assets that are highly leveraged to London Metal Exchange-traded commodities and the shares should perform well in the next metals upswing,” the report said. “At the same time, the BHP shareholders retain their holdings in a much improved core BHP.” Melbourne-based BHP rose 3.4 percent to A$31.38 at 2:13 p.m. Sydney time on the Australian stock exchange. “We expect the LME metals related assets would struggle to earn their way through 2009 to 2011, and consequently they would be a drag on overall BHP return on invested capital,” JPMorgan said. The company’s aluminum unit contributed 6 percent of earnings before interest and tax in fiscal 2008 and the nickel unit 5 percent, the report said. To contact the reporters on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net;