Deutsche Bank cuts [BHP Billiton] South32 valuation – by Amanda Saunders (Sydney Morning Herald – April 2, 2015)

South32, the company being created in the demerger of BHP Billiton, will be in a “perfect position” to pursue acquisitions of up to $US3 billion ($3.9 billion) in Australian coal, and offshore in base metals and manganese – but its stock is likely to trade at just about $2 a share, well short of market expectations, according to Deutsche Bank.

Deutsche mining analyst Paul Young cut his valuation of South32 from $US13 billion to $US11.2 billion after reviewing the more than 1500 pages of shareholder documents on the spin-off released by BHP last month. His valuation for the spin-off falls to $US7 billion when based on current spot prices for commodities.

While the new company’s growth and savings opportunities will be limited, parent BHP with its strong balance sheet has put it “in the perfect position to pursue [value enhancing] acquisitions up to $US3 billion”, Mr Young said.

Also playing in its favour is the fact that the largest miners are selling non-core assets following the fall in commodities prices, and have all but ruled out acquisitions.

South32 is expected to first eye greenfield mining assets, rather than entire companies, according to the analyst report. High up on its list would be Anglo American’s 40 per cent stake, valued at $US1.4 billion, in the maganese group Samancor.

South32 chief executive Graham Kerr and his management are also likely to look at Australian coal assets, preferably underground mines given South32 operates four longwall operations at Illawarra, Mr Young said. Anglo American’s Moranbah South open-cut coal mine in Queensland would be another good fit, he said.

Anglo, Peabody and Vale have all said they want to offload coal assets in New South Wales and Queensland.

Nickel and copper assets in Latin America are also likely to be on South32’s radar, with Anglo American’s Barro Alto project a possible target. Early stage greenfield projects in Africa and Latin America were further possible targets, according to the analyst.

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