The BHP Billitonspin-off company South32, with large South African energycoal resources, would be keen to help State power utilityEskom solve some of its primary energy issues, South32 CEO-elect Graham Kerr said on Tuesday.
Kerr was speaking to the media in a London teleconference call in which Creamer Media’s Mining Weekly Online took part, shortly after the BHP Billitonboard gave its unanimous approval to the demerging of $26-billion worth of the company’s aluminium, coal, manganese, nickel and silver assets, a third of them by value hosted by South Africa.
BHP Billiton CEO Andrew Mackenzie simultaneously urged all shareholders to vote in favour of South32 going it alone at a net debt of $674-million and $1.5-billion worth of statutory rehabilitation and closure provisions, together with a $1.5-billion revolving credit facility.
Investec Securities mining analysts commented in a note that this would provide the demerged South32 with sufficient firepower to overcome short mine lives and lack of organic growth.
Alternatively, the listing would allow the market to establish a valuation for private equity and prospective buyer response.
Total post-tax demerger costs are estimated at $64-million with South32incurring additional costs of $60-million a year as a standalone entity.
South32 has three projects in execution, including one at the central block of the Wessels manganese mine in South Africa, plus several potential coalextensions, also in South Africa.
But Kerr made it clear that the company was focused on share value rather than tonnage volume and would only pursue extension opportunities if their values stacked up.
“We’re fixated on value per share and cash flow,” he reiterated, adding thatSouth32 would now have the business focus that had been denied in the last five years because of BHP Billiton’s other major priorities.
Kerr made it clear that South Africa’s power and water issues were not unique; for example, copper in Chile was also being inhibited by a lack of power andwater.
While more load-shedding had occurred at the Hillside aluminium smelter recently than historically, early warning of power outage was enabling the company to manage its aluminium processing.
BHP Billiton Energy Coal South Africa’s (Becsa’s) large Khutala coal resources, which South32 would acquire, supplied one of Eskom’s large power stations on a cost-plus contract and would require investment from Eskom to develop the next stage.
“As time goes by, we’ll continue to talk to Eskom about the most economic way to plan the extension. I think it’s not all one-way traffic,” he said, adding that the company was certainly willing to invest for the right returns and would also be happy to stay cost-plus for the right returns.
What was clear was that Eskom had a shortage of coal and South32 had one of the largest coal resource bases to solve some of their power issues.
Quizzed on South Africa’s current investment climate, Kerr said that BHP Billiton’s long-standing presence in South Africa had resulted in ongoing engagement with the South African government over decades.
“We see opportunity,” he said, outlining that for the first time instead of separate commodity heads in South Africa reporting to Australia, South African COO-elect Mike Fraser would be Johannesburg-based and able to reinforce the company’s engagement with the South African government.
On the one hand, in South Africa, the Hillside aluminium smelter was a large consumer of power and on the other Becsa was a large provider of power-generation coal to State power utility Eskom.
“So, we have an opportunity to leverage those relationships for better outcomes,” he added.
While transformation, black economic empowerment (BEE) and downstream beneficiation were challenges that came with South Africa, South32 believed in the spirit of all of them, was currently fully BEE compliant and had already taken both aluminium and manganese downstream at Hillside and Metalloys.
South32 would apply a dividend payout ratio rather than a BHP Billiton-like progressive dividend policy.
Liberum mining analysts from London said they had not yet formed a strong view on valuation of the South32 assets, but saw some headwinds from keyaluminium, coal and manganese earnings drivers.
Investec said BHP Billiton has structured the demerged entity well and that it should appeal to shareholders.
It calculated that South32 has gross assets of $26.7-billion.
Mackenzie said the simplification of BHP Billiton’s portfolio was the logical strategy to maximise the value of the company’s tier-one assets with the demerger creating a more focused portfolio of large-scale operated assets with a smaller geographic spread and a higher proportion of common characteristics.
With a simplified portfolio, the company intended to streamline its organisational model, further standardise common systems and better leverage technicalexpertise across all remaining operations, which had become factory-like.
South32 would become a 12-asset, five-country, 24 000-employee group and locate a service centre in South Africa similar to the one that delivers servicesto the 41-asset, 13-country and 50 000-employee BHP Billiton group on six continents.
After getting South32 up and running, leadership would have to demonstrate capital-allocation discipline, financial performance and an ability to run the company well.
Thereafter, low-risk brownfield expansion possibilities could come into play, also at the 20-year life-of-mine expansion possibility at Cannington silver operation, which has been operating at earnings of up to $1-billion for the last 15 years, without demanding significant investment.
In the last ten years, the commodities of South32 enjoyed an earnings margin of 34%, through the cycle.
Its average earnings were $3.3-billion and in 2013, a tough year in many of its commodities, it was $1.8-billion.
A R10-billion, five-year liquid metal supply contract South32 has struck with a black-controlled consortium, Isizinda Aluminium, will also give the South Africanaluminium industry a shot in the arm.
It has reached a definitive agreement to sell its Bayside value-added-productcasthouse in Richards Bay, KwaZulu-Natal, to Isizinda Aluminium, a majority owned, broad-based BEE consortium.
Isizinda Aluminium, headed by CEO Sizwe Khumalo, had, in turn, concluded a slab supply agreement with JSE-listed Hulamin, South Africa’s leadingaluminium semis fabricator, which has a strategic partnership with Bingelela Capital, which owns 60% of Isizinda and Hulamin the other 40%.
“We’re well placed to further develop the aluminium beneficiation in South Africa,” Khumalo, a 47-year-old chemical engineer, told Creamer Media’s MiningWeekly Online in a recent interview.
Isizinda is evaluating further phases of development to expand the casthouse beyond the current 96 000 t of aluminium slab a year with other value-addedproducts that could include extrusion billet, rods, wires, rim alloys, slugs and a dross plant.
The 100%-black-owned Bingelela Capital comprises four empowerment groupings with a 52% female shareholding.
The transaction, which must still secure a regulatory nod, is expected to be completed before June.
Following BHP Billiton’s closure of the Bayside smelter, the casthouse continued to operate with the supply of liquid metal from the nearby Hillside smelter.
Expansion of the casthouse beyond its current capacity is being studied to create a larger downstream aluminium industry within South Africa.
If progressed, such projects are expected to come into fruition over the next few years and would be beneficial for the downstream aluminium industry and the Richards Bay economy.
Hulamin, which is headquartered in Pietermaritzburg, is currently the casthouse’s biggest customer.