South32: Promising entrant into the mid-cap mining space
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.