South32 takes shape
BASE METALS: BUT NO IRON DEPOSITS
South32 could be said to be taking the scraps from BHP, but it is lining up to be a heavyweight miner.
So BHP Billiton shareholders have approved the spin-out of the much anticipated South32. The split-up of BHP assets is expected in late May and it begs the question: What will it look like? Clearly South32 is getting BHP’s trimmings, by and large the stuff it doesn’t want. But that said, South32 will still be a heavyweight miner.
It will be fairly diversified with a multi-billion market cap. Its mines, smelters and other facilities will largely cluster in Australia and South Africa.
From a commodities point of view, South32 will noticeably lack strong production in base metals and iron ore. It won’t have copper or iron ore mines in the fold. BHP keeps those.
But in-house, it won’t be obviously weighted to any particular commodity it mines. It will derive profits from alumina and aluminium (29% of profits); silver, lead and zinc (26%); manganese (21%); nickel (5%) and coal (19%).
A few of its mines and operations will do more of the heavy lifting, at least given recent history and metal prices. Indeed, broadly speaking, the operations in Australia are its lowest cost and most profitable. The mines in South Africa, though still fairly profitable, will be a bigger drag.
In Australia, three operations, out of a group of 10, should account for nearly 40% of South32’s profits, if recent quarters are a guide. Gemco (60% owned) is a large manganese producer and drove 14.4% of profits in H1 2015 among the group of mines South32 (and thus BHP shareholders) is destined to own. Cannington is a large silver-lead-zinc mine and it accounted for 13.6% of profits. Thereafter Worsley, an alumina operation, gave 10.6% of profits in H1 2015.
They are generally the lowest-cost producers. Indeed, all three of the aforementioned operations fall in the first quartile.
However, moving down the list the mines and operations fall farther down the cost curve. Generally, these are the mines in South Africa. They still make important contributions (29% of turnover), but they tend to be somewhat higher cost. Most fall in the second quartile. And that pinches profits.
Still the South Africa operations will be part of South32’s core. In particular the Hillside smelter, using feed from Australia, makes a large contribution to profits, about 14.9%.
Beyond South Africa and Australia, South32 will have nickel and aluminium/ alumina assets in South America. But their importance to the miner’s profits, at least initially, will be small (12%).
If South32 expands, it wouldn’t surprise if it beefs up operations in South America as it lacks copper deposits found in abundance in South America.