Rationale for demerger: Status quo considered. Assets sales considered. IPO considered. Demerger considered. The board think the demerger will create the most value. It will allow greater focus of S32 assets and allow uniformity in the BHP portfolio i.e. lower costs. Will this call deliver: Management must be given the benefit of the doubt for their performance over the last few years. Operational and cost targets have been met and exceeded. Why the demerger?

What is South 32? South 32 is a portfolio of BHP’s shorter life assets that don’t fit their vision of creating uniformity across their 5 pillars (iron ore, coal, copper, petroleum, potash) These assets are attractive on a stand-alone basis but not within BHP as they are relatively small contributors to the bottom line. South 32 will be more agile and focussed on maximising the cash flows from these assets that don’t move the needle within a larger BHP.

What are you getting? Geographically diverse portfolio

What are you getting? Assets well-placed on their respective cost curves

What are you getting?

What are you getting? A cash generative miner

What will it cost? $60m a year additional operating costs for South 32 as well as:

How will these costs be offset? BHP’s cost saving plan was to save $4bn between FY14-FY17. With the demerger, they claim to be able to increase these savings post the demerger. The likelihood of this is high in my view. South 32 also claims to be able to cut costs from these assets that were previously overlooked. We will have to see this come through in the financial statements.

How big an impact will the demerger have on BHP? Not much

Value of South 32 NPV’s on the underlying assets with conservative assumptions: R19-R25 The low end of the range represents high discount rates and low commodity prices (bear case). The higher end of the range provides some upside to commodity prices and uses mid- range discount rates.

South 32 Balance Sheet & Dividend Policy Ned debt of $674m implying gearing of 5% South 32 will target an investment grade rating through the cycle. South 32 will distribute 40% of underlying earnings at each half year. Based on previous years earnings the divi yield should be comfortably over 5%. This could go up to ~9%.

Biggest Risks Hillside smelter uses electricity at a rate below the cost of generation. These are legacy contracts and will be renegotiated with Eskom. As energy makes up ~22% of input costs and looking at proposed tariff increases from Eskom, this could be detrimental to the business. Hillside makes up ~15% of the NPV.

Index Implications This is only a short term driver: It is unlikely that that South 32 will be included in the JSE ALSI due classification as a foreign listing. The available free float in SA will be less than the average net market cap thus it wont be eligible. It is anticipated that South 32 wont be indexed on the FTSE but will be on the ASX. From a pure index perspective there is likely to be an oversupply of South 32 in the short term.

Timeline

thank you