Brett Foley, Firat Kayakiran and James Paton
THE PLUNGING value of BHP Billiton’s planned mining spin-off could hardly be better timed for the man who is thinking of buying it.
Weeks from listing, the valuation of the new company, called South32, has plunged by almost half to as little as $7 billion (R84bn), based on current prices for its products including alumina, manganese and nickel, Deutsche Bank estimated this month.
That’s a gift for Mick Davis and his X2 Resources fund, which is weighing an eventual bid for South32, according to people familiar with his plans.
Davis, the former head of mining giant Xstrata, has an untapped $5.6bn fund that could be bolstered with debt to swallow a larger business.
Amid the worst commodity slump in half a decade, South32 is still a target, with some analysts expecting its earnings to rebound when prices recover.
“They are good assets in challenged industries,” Paul Phillips, a Melbourne-based analyst with Perennial Investment Partners, said.
“They have a lot of attractive features,” he said.
BHP is carving off the business to focus on a smaller group of commodities and South32 is set to start trading on May 18 in Australia, South Africa and the UK. The newly formed company will include an Australian mine that is the world’s largest silver and lead operation, a nickel mine in Colombia and aluminium assets in three countries.
Buying opportunity
Davis had offered BHP about $10bn for most of the South32 assets last year, people familiar with the matter said, declining to be named because that approach was not made public.
Now he was considering making a bid after South32 lists, as long as the company’s valuation was less than $12bn, the people said.
BHP declined 0.5 percent to A$29.82 (R279) at the close in Sydney, valuing the world’s largest mining company at A$155.3bn. A spokeswoman for BHP in Melbourne declined to comment, as did a representative for London-based X2.
As chief executive of Xstrata, Davis built a mining behemoth through dozens of deals, turning a coal producer with a $500 million market value to one valued at $50bn. He sold Xstrata to major shareholder Glencore in 2013.
Davis had a knack for buying and selling commodity assets at the right moments, James Santo, a special situations salesperson at Aviate Global in Sydney, said.
“Mick Davis is very shrewd,” Santo said. “Being in a trough is not great timing for South32’s valuation. They are spinning off the most cyclically-leveraged assets at the bottom of the cycle.”
Slowing growth in demand from China, the largest buyer of metals, has combined with rising supplies of resources to eat into mining valuations.
Investec values South32 at $12bn, 35 percent lower than the bank’s September estimate.
Deutsche Bank analysts cut their South32 valuation on April 1 to $11.2bn, using the bank’s own commodity price forecasts, compared with a February estimate of $13bn. Based on prices at the time the report was published, South32 was worth only $7bn, the bank said.
The drop in commodities prices might lead South32 to pursue bargains of its own. The new company could spend as much as $3bn on acquisitions, Deutsche Bank analysts wrote in their April 1 report.
They may target Anglo American’s 40 percent stake in the Samancor manganese asset valued at about $1.4bn, according to Deutsche Bank.
They might also seek to buy Australian coal mines, as well as nickel and copper projects in South America, it said.
“Investors are going to be willing to give management the benefit of the doubt in terms of their ability to manage these assets and position them competitively outside of a BHP environment,” Phillips said.
X2, meantime, has yet to make any acquisitions more than 18 months after it was formed. And analysts and investors have named Glencore as a potential rival suitor for South32. Glencore chief executive Ivan Glasenberg has said he is hunting for undervalued acquisition targets in the turmoil.
All the same, X2 had financing available that could double or even triple the $5.6bn the fund had raised from investors, the people familiar with the matter said.
Earlier this month, two people familiar with Davis’s plans said he was considering buying smaller producers listed in Canada as a prelude for a larger deal. With suitors potentially circling, the challenge for South32 management would be to maximise value for shareholders while the spin-off remained an independent company, Santo said.
“It is a good management team they have assembled, but I think some shareholders would rather see Davis or Glasenberg in charge of these assets.
“These guys are a cut above in their ability to pick the commodity cycle and utilise it to their advantage.” – Bloomberg