After demerging from mining giant BHP Billiton (ASX:BHP), South32 (S32) had a shaky day in its ASX debut on Monday. Shares of the new mining company opened at $2.13 per share, but ended the day 3.8 per cent lower at $2.05 per share. However, S32 has jumped sharply in the opening hours of trading on Tuesday, up 24c, or 11.71 per cent, at $2.29 per share around 11:20am. Analysts had projected volatility for shares of the new mining company as investors and fund managers continue to recalibrate their portfolios.
Shareholders of the mining giant voted to demerge South32 so both companies could focus on their own prospects. The newly formed company will focus on aluminium, silver, coal, manganese and nickel rather than big-ticket commodities such as iron ore, petroleum and copper. After demerging from BHP, South32 is now Australia’s fourth largest mining company. BHP initially valued the demerged company somewhere between $9bn and $10bn. The company is currently sitting around a $10.91bn in market capitalisation.
Analysts had mixed reviews concerning South32’s valuation following the demerger announcement. CMC Markets chief market strategist Michael McCarthy said it was unlikely the new company would see success in the short term. “Given the mix of commodities in the South32 vehicle we're not expecting it to catch fire anytime soon,” he said. On the other hand, BHP believes it has set up South32 in an advantageous position for future growth. The demerger left the new company with low levels of debt, access to a US$1.5bn credit facility and will simplify the portfolios of both companies. Shares of BHP, the former parent company, fell more than 7 per cent on Monday following the distribution of the demerger dividend and general market volatility.
Author: Simon Herrmann
May 19, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.