South32: Promis­ing en­trant into the mid-cap min­ing space

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

The pro­posed JSE l ist­ing of South32 l ater t his year is turn­ing into an an­tic­i­pated e v e nt pa r t l y bec a us e it ap­peals to i nvestors i n a way t he sec­ondary list­ing of Glen­core, just over a year ago, did not.

Whereas i n Glen­core’s 2 013 list­ing, South African in­vestors were given an­other op­tion on t he l arge min­ing di­ver­sif ieds of BHP Bil­li­ton and An­glo Amer­i­can, they have in South32 a com­pany that will slot into the scarcely pop­u­lated mid-cap min­ing space cur­rently oc­cu­pied by the likes of Exxaro Re­sources, but few oth­ers.

That’s based on i nterim f ig­ures r eleased by BHP Bil l i t on on 23 Fe­bru­ary, which is the par­ent com­pany from which South32 will be cre­ated, by means of a de­merger of BHP Bil­li­ton’s non-core as­sets, from about May.

Th­ese a s s ets con­sist of South African coal mines and an alu­minium smelter, an­other alu­minium smelter i n Mozam­bique, coa l a nd nickel as­sets in Australia, and coal mines in Colom­bia. The com­bined con­tri­bu­tion of t hese as­sets to BHP Bil l iton’s in­terim earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion was R2bn ver­sus R1.4bn for the whole of the pre­vi­ous f inan­cial year.

Con­se­quently, South32 has been given an es­ti­mated pre-list­ing value of be­tween R13bn to R15bn.

“It’s quite an ex­cit­ing prospect,” said Hanré Ros­souw, head of re­sources: f ron­tier and emerg­ing mar­kets for In­vestec As­set Man­age­ment, who be­lieves t hat South32’s nickel and alu­minium as­sets i n par­tic­u­lar are buck i ng t he down­ward t r end i n com­modi­ties. It was for this rea­son that JP Mor­gan re­cently ques­tioned whether BHP was er r i ng in it s dis­in­vest­ment from its com­mod­ity and geo­graphic di­ver­sity.

Un­per­turbed, BHP Bil l iton i s press­ing ahead with the de­merger, and added that it would not re­base its own div­i­dend de­spite dis­tribut­ing shares in South32 to share­hold­ers, and even with the prospect of that com­pany adopt­ing its own div­i­dend pol­icy.

The s e sha re­hold­ers in­clude UK-based in­vestors who suc­cess­fully per­suaded BHP Bil l i t on t o g i ve South32 a pri­mary list­ing in Lon­don, a re­quest that sug­gests they too see the benefits of hold­ing th­ese as­sets.

There’s a l s o t he prospect t hat Sout h 32 wi l l of f e r merger a nd ac­qui­si­tion po­ten­tial, said Ros­souw. The as­sets were sub­ject to a num­ber of of­fers from other min­ing f irms in the past, but the sides couldn’t agree a price thus send­ing BHP Bil­li­ton to the de­merger op­tion.

That way the mar­ket will set a price for the as­sets and, there­fore, make it eas­ier for pos­si­ble as­sets sales from South32 to take place, or even the ac­qui­si­tion and merger of the en­tire com­pany over time.

Tell that to Gra­ham Kerr, how­ever. South32’s CEO- elect i s i ntent on build­ing a com­pany, and may be loathe to see it snapped up by a ri­val – a ques­tion with which BHP Bil­li­ton will have to de­tail in its de­merger minu­tiae, said Ros­souw.

“They wi l l h a v e t o make it worth­while for Gra­ham Kerr and his se­nior man­age­ment team to work in favour of share­hold­ers should there be an of­fer from a third party for as­sets of the com­pany,” said Ros­souw.

One ques­tion is whether South32 will achieve in­dex­a­tion on the JSE, which re­quires 5% of its share reg­is­ter to be owned by l ocal i nvestors, a nec­es­sary trig­ger event for buy­ing of the stock by tracker funds. Glen­core is still strug­gling to achieve in­dex­a­tion, even a year af­ter list­ing.

One way t o a c h i e v e t h i s f or South32 would be to do a deal that gives a BEE en­tity a per­cent­age stake in South32 eq­uity equiv­a­lent to 26% of t he SA busi­ness, said Ros­souw. “Where Glen­core is still strug­gling to get in­dex­a­tions, this could give them [South32] in­dex­a­tion early, as­sum­ing it could be ne­go­ti­ated with the JSE,” he said.

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