BHP’s South32 Has a Big Plus: China’s Not Its Chief Customer

South32 Ltd. CEO-Elect Graham Kerr
“The South32 portfolio offers compelling diversification by geography, commodity and customer,” Chief Executive Office-elect Graham Kerr said March 17 on a conference call. Photographer: Carla Gottgens/Bloomberg

The mining industry’s biggest spinoff in almost a decade will offer investors a once unthinkable big plus. China’s not its biggest customer.

The world’s biggest buyer of metals will account for about 11 percent of sales for South32 Ltd., while parent BHP Billiton Ltd. 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 Ltd.

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, which oversees about $12 billion in Australia, including BHP shares.

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 on May 6.

Five Nations

The company will begin trading May 18 in Australia, the U.K. and South Africa and have market value of about $12 billion, according to Investec Plc.

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,” 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 Holdings Plc’s chief Australia economist, said by phone from Sydney. “An important thing for the sector is to keep in mind that there are other markets to be looking to.”

Indian Reform

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.”

India would’ve accounted for 7 percent of revenue in fiscal 2014, South32 said.

“The South32 portfolio offers compelling diversification by geography, commodity and customer,” Chief Executive Office-elect Graham Kerr said March 17 on a conference call. “No one country accounts for more than 12 percent of revenue by location of customer.”

Nations in southern Africa will be South32’s biggest source of revenue, accounting for 12 percent, in fiscal 2014.

Australia would’ve accounted for 9 percent of revenue and Japan for 8 percent, the new company said in a March presentation. South32 would’ve had revenue of $8.3 billion over the period, according to the filing.

South32’s “weaker commodity mix” and the price rout for some of its products risks eroding shareholder value, according to Investec, which last month cut its valuation by $2.3 billion from $14.3 billion, on lower commodity prices.

The company’s exposure to southern Africa -- where it has operations and customers -- means it will have greater volatility than BHP, the bank said in a April 28 report.

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