BHP Billiton has to overcome separation anxiety.
The Anglo-Australian miner on Monday started trading without South32, a collection of nickel, aluminum, coal and manganese assets spun out as a separately listed company.
The initial result was a tie. South32 fell on its debut to close with a market value of about 10.9 billion Australian dollars ($8.7 billion). BHP Billiton’s dual-listed shares fell over 7% in Australia and 4% in London: together those falls wiped about A$10.3 billion from the company’s value.
On the face of it, then, this looks like an exercise in deckchair arrangement. The market put virtually the same value on the South32 assets as it did when they were buried, unloved, inside BHP. And the miner’s shares proved less resilient than some hoped: one argument ran that BHP, which had pledged to maintain its dividend, would receive support from yield-seeking investors after the split.
In fairness, BHP’s shares have fared better than rivals this year, in anticipation of the split. And there will be some shakeout of ownership as BHP investors decide what to do with their South32 shares. But the miner remains vulnerable to the charge it has shelled out some $740 million in fees, without realizing clear value.
Financial engineering is rarely a clear route to spontaneous value creation. And while a takeover offer for South32 would be the clearest boon for investors, it doesn’t seem wise to bank on a bid. Instead, the two companies must show they are better apart in terms of the continuing management of their assets.
For South32, that means showing it can grow free cash flow and keep spending low. That is despite production that is forecast to fall, according to Jefferies, and the need to address its average mine life of only 15 years. This probably relies on a recovery in commodities prices.
BHP, meanwhile, will have to squeeze costs to compensate for the loss of about 15% of its operating cash flow. The miner will be left with a higher-margin business with fewer, bigger assets with longer lives: that, in theory, should command a better valuation over time.
Given the stock’s recent gains, however, those hoping for a swift rebound may again be disappointed.
By Helen Thomas
