South32 has an­a­lysts’ lips smack­ing

Finweek English Edition - - COVER - BY DAVID MCKAY

sec­ondary list­ing of South32 on the JSE has shed rare light on the trou­bled min­ing sec­tor, which has lost so many in­vestors in the last 18 months that only three min­ing f irms take their place among the top 20 shares.

Make that four min­ing f irms; well, nearly. At a mar­ket cap­i­tal­i­sa­tion of about R107bn, South32 is the 21st largest stock on the bourse, but it is most likely to move higher based on the as­sess­ments of an­a­lysts who think the com­pany is worth buy­ing.

“We love the idea of South32 and see this as a great op­por­tu­nity for its man­age­ment to prove the un­re­alised value in th­ese non-core as­sets,” purred SP An­gel, a UK stock­bro­ker­age on the day of the firm’s list­ing.

South32 is the cre­ation of BHP Bil­li­ton, which de­cided to de­merge its non-core as­sets – in­clud­ing coal, man­ganese and alu­minium in SA; and nickel and coal in Australia – rather than sell them piece­meal in trade sales. The the­ory is that it was bet­ter to let the mar­ket, rather than in­di­vid­ual buy­ers bust­ing for a bar­gain, set the price for the as­sets.

Apart from the logic of the de­merger, South32 is also part of BHP Bil­li­ton’s strat­egy to re­ward its share­hold­ers: each share­holder in BHP re­ceived one South32 share for ev­ery BHP share owned. The com­pany was ini­tially meant to trade in Perth and Jo­han­nes­burg only, but UK share­hold­ers also asked for an op­por­tu­nity to trade the share, hence its list­ing there.

Whether BHP Bil­li­ton will con­tinue on the JSE in­def­i­nitely is a moot point, but for the time be­ing there’s a lot to look for­ward to in South32, ac­cord­ing to an­a­lysts.

The div­i­dend pol­icy is a min­i­mum pay­out of 40% of earn­ings, but Mac­quarie Re­search thinks that could be much higher in the first year, while Gra­ham Kerr, South32’s CEO, sets about cost-cut­ting.

“We be­lieve re­turns to share­hold­ers could be closer to 70% in the first year as S32 re­wards in­vestors for pa­tience while the cost-out pro­gramme is im­ple­mented,” said Kieran Daly, an an­a­lyst for Mac­quarie. Cost sav­ings have been cal­cu­lated at about $300m (R3.5bn) and there will be fur­ther op­ti­mi­sa­tion as the firm ex­e­cutes its re­gional ap­proach to man­age­ment.

“The r e g i o n a l model is an op­por­tu­nity to get more out of ex­ist­ing as­sets,” said Kerr. “We will take out some of the com­plex­ity of the as­sets and lev­els of man­age­ment and in­crease their value,” he said.

Asked by Finweek if this was per­haps an­other way of say­ing re­trench­ments, Kerr re­sponded: “No doubt South32 has some le­gacy is­sues from BHP. No doubt we will run the as­sets dif­fer­ently from day one and in how we struc­turally set our­selves up. We will look to be an or­gan­i­sa­tion that is more lean, ag­ile and en­tre­pre­neur­ial.” There are, how­ever, some things worth think­ing about in re­spect of South32. One is its ap­proach to the SA busi­ness en­vi­ron­ment. In BHP Bil­li­ton’s hands, its coal as­sets strug­gled to com­pete for ex­pan­sion or growth cap­i­tal such that Khutala and Klip­spruit – im­por­tant sup­pli­ers to Eskom – have fewer than six years of op­er­at­ing life at cur­rent rates of pro­duc­tion.

That means that de­ci­sions on in­vest­ing in them will have to be made soon, but how likely is that in the cur­rent en­vi­ron­ment where re­la­tions be­tween the sec­tor and gov­ern­ment have plumbed new depths, and the reach and mean­ing of em­pow­er­ment is hard to de­ci­pher?

“At South32, we be­lieve in what gov­ern­ment is try­ing to do. We are ab­so­lutely be­hind that in ev­ery sin­gle way,” said Kerr. “Clearly, though, if we are go­ing to in­vest large cap­i­tal, we need cer­tainty around pol­icy.”

Said Kerr: “Klip­spruit and Khutala are go­ing along neck and neck on which is go­ing to get an ex­ten­sion ap­proval first. It will be the FY17 to FY18 be­fore we have to make de­ci­sion on the process. But those are the as­sets we are fo­cus­ing on now.”


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