South32 Says Work to Do on Growth as Debut Misses Estimates

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South32 Sees Growth Options in Coal, Manganese, Silver

South32 Ltd., the miner spun off from BHP Billiton Ltd., missed analyst estimates on its Sydney trading debut with investors valuing it at about $9.1 billion amid concern for its growth potential.

South32’s market value was below the $11.2 billion median estimate from among seven forecasts compiled by Bloomberg. It’s the world’s biggest manganese ore producer and operator of the largest silver mine.

South32 Debut Misses Estimates With $9B Valuation

“We have to do some work to work out how we take the assets forward in terms of growth potential,” Chief Executive Officer Graham Kerr said today in an interview with “Trending Business” on Bloomberg Television. “From day one, they sit very comfortably in the cost curve and they’ve been cash generative through the cycle.”

Perth-based South32 is examining expansion options at its South African thermal coal unit and its manganese and silver operations, Kerr said. Jefferies Group LLC has said the company has limited organic growth potential and needs to consider expansion projects and acquisitions.

BHP, the world’s biggest miner, separated 12 assets into South32 as it seeks to focus on its most profitable iron ore, coal, copper and petroleum operations.

Investors are seeking clarity on South32’s future and have concerns over the impact of weaker Chinese growth on the outlook for industrial metals, according to Evan Lucas, a markets strategist at IG Ltd. “It’s about the risk inside it. Where do you find the next asset, what’s the strategic direction for South32 once some of those assets expire?”

Largest Miners

The debut valuation confirmed the Perth-based company as mining’s biggest spinoff in almost a decade. It began trading Monday at A$2.13 a share, giving it a market valuation of A$11.3 billion. South32 closed at A$2.05 in Sydney, or A$10.9 billion. BHP fell 0.8 percent to A$30.13 after an adjustment to reflect the South32 spinoff.

The largest miners are reviewing their portfolios and attempting to cut costs after a tumble in commodity prices sparked by rising output.

While South32 has “some world class assets, most of its mines are mature with short lives,” meaning it should capitalize on current ideal conditions for acquisitions, Jefferies analysts led by Christoper LaFemina said in a May 15 note.

No Deals

South32 will focus on lowering costs and converting resources at its existing operations into new reserves rather than hunting for deals, Kerr said in the interview. “The opportunity to go back and look at the resource base and convert that into reserves is probably the most value accretive thing we can do.”

The company isn’t seeking to acquire stakes in its manganese units in Australia and South Africa held by Anglo American Plc, Kerr said. “If they made their own decision not to stay in that business, then we’re in a great position,” he said.

X2 Resources, led by former Xstrata Plc Chief Executive Officer Mick Davis, is weighing an eventual bid for South32 and offered BHP about $10 billion for most of the assets last year, people familiar with the fund’s plans said last month.

Investors received one South32 share for each held in Melbourne-based BHP. The shares are scheduled to begin trading Monday on the Johannesburg Stock Exchange and the London Stock Exchange, the company said.

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