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Flawed vehicle

19 Aug 2014 By Swaha Pattanaik

BHP Billiton plans to spin off unwanted parts of its business into a new company. Aluminium and nickel, whose prices are rising, are among assets which will be parked in the yet-to-be-named organisation. A potentially more focused and nimble mining company might sound like an ideal vehicle for investors who want to follow a rising market. Not so fast.

For one thing, the recent price rallies – nickel up by a third in 2014 and aluminium by 12 percent – might not continue at the same pace, even if global GDP growth picks up. Nickel has been buoyed by Indonesia’s seven-month-old ban on exports of unprocessed ore. Aluminium prices have benefited from the voluntary restraint of producers outside China.

Both the ban and the restraint are unusual, and possibly temporary, arrangements. Indonesia wants to force miners to build refining capacity in the country, but the ban could be softened in return for investment commitments. And aluminium producers’ collective production discipline may not withstand the lure of higher prices.

Of course, some investors may be lured into the new company by a longer-term case. Miners’ capital expenditures are down, so supply of all minerals might eventually be constrained. And as has been true for decades, light-weight aluminium could be on the cusp of a demand explosion from engineering advances.

But even true believers in a multi-year upturn in the commodity cycle may not want to use the newly spun-off company to play the trend. True, the mining giant says the assets are all in the first or second quartile on industry cost curves. Still, equity investors who wish to express a view on either nickel or aluminium will have “purer” plays, such as Alcoa for aluminium or Vale Indonesia for nickel. And those wanting broader exposure could be happier in the larger and more diversified Glencore.

The bundle of spun-off assets is unloved by BHP. It is far from clear that investors will have any more affection.

Metals price performance in 2014


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