Having spread itself far and wide throughout the boom times of the global commodities markets, BHP Billiton built itself into the world's biggest mining company on revenues. But then, markets across the board began to slide and the view was taken that rather than being too big to fail, the $69.5bn behemoth was, in fact, too big to succeed.
That take, revealed in August 2014, prompted the board to split the company in two. BHP Billiton, formed2001 in a $28bn merger between London's Billiton and Australia's Broken Hill Properties, would narrow its focus to operate its prized assets in iron ore, copper, coal, potash and petroleum, and retain chief executive officer Andrew Mackenzie at the top. While the non-core assets, largely operations in aluminum, nickel, silver and manganese, would be spun out and listed as a new multibillion dollar outfit named South32, with BHP chief financial officer Graham Kerr bumped up to lead it.
With activity otherwise stagnant in the sector, the announcement was welcomed with open arms by the market and the many standing in line to get involved in the huge fees involved in separating a corporate giant into two. Existing shares in BHP Billiton increased and speculation that the separate entity would be a prime target for the well moneyed, including the likes of the Mick Davis-led X2 Resources, captured investor excitement ahead of its listing.
Listing fails to excite expectations
With acquisition activity sparse throughout the downturn, many looked to the listing of South32 as an opportunity to health check the industry against the market. Confound expectations, and all was well; undersell and big problems were ahead. When the moment actually came, excitement either way appeared misplaced. Assigned an estimated range of AS$2.0 - AS$3.50, the shares closed on the opening day of trading $2.13 in what Kerr put down to the "challenging times" the sector found itself in.
Optimistic about its longer-term prospects, he said: "We believe that our regional model will enable us to improve our productivity and performance in a sustainable way. We will aim to combine strong operational performance with financial discipline as we seek to increase shareholder value."
Tthe state's burgeoning mining sector is a cause for optimism.
From that lackluster start, sentiment continued to decline, with the shares shedding 17.3% of their value in the first six weeks of trading. Diagnosing the poor performance, analysts identified two causes. First of all, the market was yet to be convinced of an optimistic outlook on commodities markets in general and even less so in the areas in which South32 is invested, with manganese and aluminum identified as being particularly exposed to an expected slide in Chinese demand.
Secondly, with each BHP shareholder given South32 shares at a 1:1 ratio, much of the selling was deemed to come from parties that just didn't want to be involved.
This was especially evident when the world's largest investment fund Blackrock dialed down its 'substantial shareholder' status as it dropped below a 5% holding, having held as much as 6.8% through its interest in BHP Billiton. Now though, with the impact of those share sales priced in, the prospects of South32 are being reassessed.
Opinions split on which direction South32 is heading
For those taking a negative or relatively neutral view, opinion is broadly based around the fact that the mining industry as a whole is in a precarious state and that South32 is in markets performing particularly poorly. In the run up to its listing, traders and analysts were reported to jokingly refer to the company as 'Rubbish Co' and 'Detritus PLC' in reference to it possessing all the assets not deemed as valuable by BHP. For those predicting further falls in its valuation, that view appears to have held.
However, there are a number of firms that have looked deeper into the detail and found a number of factors that could work in its favour and enable it to extract significant value. While Blackrock has reduced its holding in the company, Aberdeen Asset Management, another major fund manager, has taken the view that while the assets were non-core to BHP, they are now core to South32, enabling the management team to take a firmer grasp and extract previously unexplored value from its operations.
"Over the short to medium term there are still significant ¬opportunities to strip out costs through delayering the business and processes and systems that were applied to the assets (under BHP)," said Michelle Lopez, a fund manager at the investment firm.
Positivity focused on improving underlying conditions
Also taking an optimistic view on the company, Perennial Investment Partners has argued that while the decline in its commodities has hit its value so far, the bottom of the market may be hit soon, leaving it well placed to capitalize. "The business is attractive as many of these commodities are likely to currently be close to the bottom of their cycles with limited new supply coming on to the market," said a report by the investor.
Beyond those taking either a positive view - Deutsche bank has rated it a buy - or a negative one - Liberum Capital is urging investors to offload - the broad consensus appears to be around uncertainty, with BNP rating it neutral and Barclays giving it an 'equal weight'. In his own recent assessment of its fortunes, Kerr again stressed the broader operating environment as the main thing holding it back but also that it will "take time" for the market to see the value in its approach. Identifying its geographically diverse mix of assets and strong capital controls - the company suggested it will return as much as 40% of any profits back to shareholders - he believes it to be well placed to weather the storm and rise as conditions improve.
When first announced, many had hoped that South32 would kick-start activity in the sector, but that has not happened. But, that does not mean its performance since its listing does not hold broader value in assessing the sector overall. The commodity markets are compressed for now, and may remain so for a considerable period, but those that will rise out of it the fastest will be the ones that extract value from wherever it can be found.