Mining behemoths BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have been urged by the world's largest mining investor, BlackRock (NYSE: BLK), to accept lower offers from bidders for purchases of its assets currently up for sale.
With both Rio and BHP under new management this year, the major theme emerging has been cost-cutting, as well as ensuring the more efficient running of operations. To enable this, a number of non-core mines and other underperforming assets are being sold, in order to reduce debts and increase returns to shareholders.
Whilst BlackRock's chief investment officer of natural resources Evy Hambro supports this method, he has also advised the companies that they do not necessarily need to sell the assets at full value, but could take a more pragmatic approach and accept lower offers, which would be "exactly the right thing to do".
Earlier this month, Commonwealth Bank (ASX: CBA) analysts estimated that Rio Tinto could realise up to $US13.5 billion from sales of these assets. Meanwhile, the Deutsche Bank (NYSE: DB) has stated that BHP's sale of around one dozen assets could raise up to $US25 billion.
Hambro told The Australian Financial Review: "You might end up selling something that is worth $1 for 90c but if your shares are trading at only 70c on the dollar, then you can use proceeds you are getting at 90c on the dollar to buy back your own shares", which would, in turn, create more value for shareholders. Furthermore, the proceeds could also be put towards increasing the dividend, as part of the companies' progressive dividend policies.
It is currently believed that BHP's Gregory Crinum coking complex will be amongst the assets put up for sale, whilst Rio's Pacific Aluminium division is also on the chopping block.
Foolish takeaway
This year, the mining industry has largely moved against the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), with Rio and BHP down 17% and 15%, respectively. Other mining companies such as Fortescue Metals Group (ASX: FMG) and Newcrest Mining (ASX: NCM) have also tumbled since January. As the industry remains vulnerable, cost-cutting is a necessity and the divestment of underperforming assets is certainly a move in the right direction.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
