David Stringer Melbourne
THE mining industry’s biggest spin-off in almost a decade will offer investors a once unthinkable big plus. China is not its biggest customer.
The world’s biggest buyer of metals will account for about 11 percent of sales for South32, while parent BHP Billiton and its biggest competitor Rio Tinto Group rely on China to generate more than a third of their revenue.
With less dependence on China and no iron ore mines, the new Perth-based company offers a different proposition to producers that have focused on feeding the Asian nation’s hunger for steelmaking, according to Aberdeen Asset Management.
The China story has changed since the start of the decade. Growth slowed last year to the weakest pace since 1990, while steel consumption will probably decline this year, according to the China Iron and Steel Association.
“If you’ve got a softening of growth in China, or a move to a more sustainable path, do you want all your eggs in that one basket?” said Andrew Preston, a Melbourne-based senior investment manager at Aberdeen.
South32 “gives you a bit of diversification, and it’s something that people will be factoring in to their models”, he said.
The creation of South32, which will be the biggest producer of manganese ore and have the world’s largest silver mine, is scheduled to be approved in a vote of BHP shareholders today.
Five nations
The company will begin trading on May 18 in Australia, the UK and South Africa and have market value of about $12 billion (R144.5bn), according to Investec.
With 11 operated assets and one joint venture in five countries, South32 will also include thermal coal mines in South Africa and a nickel operation in Colombia.
“The mix of commodities is less exposed to the Chinese economic cycle,” said Michael McCarthy, a chief strategist at CMC Markets in Sydney.
“That will be seen as a positive by some investors.”
The other big potential plus for South32 is India.
“Over time, China may become less of the driver for marginal demand for various commodities,” Paul Bloxham, HSBC’s chief Australia economist, said. “An important thing for the sector is to keep in mind that there are other markets to be looking to.”
India, where Prime Minister Narendra Modi is seeking to add 20 million homes to replace the nation’s slums, can offer potential demand growth, according to Bloxham.
“Growth is lifting, the government has a reform agenda,” he said.
“There’s a great deal of infrastructure that needs investment in the coming years, which requires hard commodities.” – Bloomberg