Shareholders seal BHP's transformational South32 demerger

May 6, 2015 11:31 AM

By Silvia Antonioli and Morag MacKinnon

Ships waiting to be loaded are seen near piles of iron ore and bucket-wheel reclaimers at the Fortescue loading dock located at Port Hedland in the Pilbara region of Western Australia, in a file photo. REUTERS/David Gray

LONDON/PERTH (Reuters) - BHP shareholders overwhelmingly approved the spin-off of new mining and metals group South32, clearing the way for a listing this month that will test investor sentiment towards the battered mining sector.

The demerger, one of the most significant shake-ups seen in the sector since commodity prices started to plunge at the beginning of this decade, undoes much of BHP's 2001 merger with South Africa's Billiton.

More than 98 percent of votes cast at meetings in Perth and London on Wednesday were in favour of the split.

Some analysts warned however that the newly formed mid-sized company, which includes some of the global miner's smaller assets, could have a tough debut on the stock market and risks becoming a takeover target.

Valuation forecasts for South32 have dropped to between $5 billion and $10 billion since the spin-off was first announced last year, as prices for its main products, including aluminium and manganese, have slumped.

Shares will be listed in Australia, South Africa and London on May 18.

In reply to shareholders questioning of the timing of the demerger, Chairman Jac Nasser said it was a better option than a sale of assets.

"It does not crystallise value for shareholders at a particular point in the cycle and generally gives

shareholders an ownership choice," he said.

BHP believes it will achieve better results by focusing on its large, core assets. It believes the smaller assets that form South32 are likely to do better with dedicated management and capital.

32ND PARALLEL

Named after the 32nd parallel south line of latitude that links its business centres in Perth and Johannesburg, South32 will produce alumina, aluminium, coal, manganese, nickel, silver, lead and zinc from mines and smelters in Australia, Brazil, Colombia, South Africa and Mozambique.

Those assets, long overshadowed by BHP's much larger iron ore, petroleum, copper and coal businesses, generated underlying earnings of $446 million on revenue of $8.3 billion last year.

Credit rating agency Standard & Poors downgraded the outlook on BHP from stable to negative this week on the back of a lower price assumption for its key product, iron ore. It confirmed however its A plus long term rating saying the demerger is neutral to the rating.

"We (are) very pleased... At a time when some of our peers have actually faced downgrades we are by far, in balance sheet terms, the strongest in the mining sector and we retain that," BHP Chief Executive Andrew Mackenzie said.

After the split from BHP Billiton, South32 will consider acquisitions of any commodity, other than gold, CEO-elect Graham Kerr said.

"If you compare them across to Anglo, Glencore, I think you'd find our assets absolutely stack up beautifully," he said, referring to bigger rivals Anglo American Plc and Glencore Plc.

The new company will have $674 million in net debt.

"We're not over-geared, we're not over-leveraged. We don't have that problem that a lot of our peers will in the industry," Kerr told reporters. "If we do go into the M&A space it will be opportunistic and it will be only where we see value, and we'd have to sell that story very strongly to our shareholders."

The boss of BHP Billiton on the other hand said its "plan A" remained to pursue organic growth but it would not dismiss any outstanding buying opportunities.

Aberdeen Asset Management, a large shareholder in BHP and other mining majors, was quoted in a press article this week as demanding that mining giants do not rule out deals at the current low point in the cycle.

"We are all ears and all eyes but it has to be one hell of a deal," Mackenzie said.