BHP's South32 risks tough market debut

BHP Billiton's shareholders are expected to approve the biggest ever spin-off in the mining industry on Wednesday, seeking to wring more value out of a string of long-neglected aluminium, manganese, silver and nickel assets.

But the new company, South32, risks a tough May 18 debut on the Australian bourse, with investors nervous about weak commodity prices, short mine life spans and declining ore grades.

Reflecting this uncertainty, analyst valuations vary widely, with Morgan Stanley predicting it may start with a market worth of A$8.5 billion (£4.43 billion) and Investec around $12 billion.

"I think a focused management team will be able to extract the best value for those assets over time. But if commodity prices are weak, it's going to be a bit more problematic," said Paul Xiradis, chief executive of Ausbil Investment Management, a BHP Billiton Ltd shareholder.

Named after the 32nd parallel south line of latitude that links its main 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 generated underlying earnings of $446 million on revenue of $8.3 billion last year.

"A lot of people who own BHP own it for the yield and for some exposure to the sector, and will not want to hold South32," said Nik Stanjevic, an analyst at British wealth manager Brewin Dolphin.

South32 will be most sensitive to aluminium and alumina prices, with all-in aluminium prices, which include London Metal Exchange prices plus a premium for delivery, having slumped this year due to a near 50 percent plunge in premiums.

Selling pressure is also likely from UK investors who cannot hold the stock because it will not be included in the FTSE 100 index. However, that is likely to be offset by passive funds in Australia buying South32 shares as they will be included in the major S&P/ASX indexes.