Billiton spin-off aims to cut costs

South32 profit exceeds expectations ahead of listing in Joburg, Australia and London

BHP Billiton has put far less debt than expected into its $13billion (R161-billion) South32 spin-off‚ positioning the company formed from its unloved assets to weather tough markets and still pay a dividend.

The world’s biggest miner released documents yesterday detailing the performance of South32’s mines and refineries‚ long overshadowed by BHP’s core iron ore‚ petroleum‚ copper and coal businesses‚ ahead of a planned listing in May.

The new mid-sized miner aims to focus on cutting costs and completing the projects in its aluminium‚ manganese‚ silver and coal businesses before weighing new investments‚ despite a strong balance sheet and a market full of assets for sale.

“We do believe in the concept of crawl‚ walk and run‚” South32 CEO elect Graham Kerr said.

Kerr said the company had untapped potential within its fold as BHP had starved the businesses of capital while it focused on its core arms‚ and played down the chances of chasing acquisitions in the near term.

“We have some great opportunities left in the portfolio‚” he said.

Named for the line of latitude linking its two main centres‚ Australia and South Africa‚ South32 had pro forma revenue of $8.3-billion in the year to June last year‚ making up about 12% of BHP Billiton’s total revenues.

CEO Andrew Mackenzie said it made sense to have two separate companies with different strategies‚ one focusing on huge assets with 100-year lives‚ and the other with shorter-lived assets‚ processing plants and challenges in South Africa.

The simpler asset base would allow BHP to speed up efforts to cut costs and help it beat its target of $4-billion in savings by June 2017‚ he said‚ but declined to spell out by how much.

South32 will emerge from BHP with $674-million in net debt‚ which is less than half the level analysts had expected. “They’re just trying to be prudent. This company’s in some pretty volatile markets‚ so they just didn’t want to over-leverage it‚” BT Investment Management analyst Brenton Saunders said.

Analysts have valued South32 at about $13-billion‚ or lower if using current weak commodity prices‚ in line with what the company said was the historical book value of the assets.

“I don’t think investors or the media understand just how attractive they are‚” Kerr said‚ without giving any estimate of their market value.

South32 plans to pay out at least 40% of its underlying earnings in dividends each half-year. BHP reiterated it would not rebase its own dividend‚ effectively boosting distributions to shareholders who hold both companies.

BHP said the South32 assets contributed net profit after tax of $738million for the half year to December 2014‚ which was more than 50% higher than some analysts had forecast for the full year to June 2015. Shareholders are set to vote on the spin-off on May 6‚ with South32 shares expected to list on the Australian‚ Johannesburg and London exchanges on May 18. — Reuters