On Tuesday it was announced Perth-based South32 would have debt of $674 million and closure and rehabilitation provisions of $1.5 billion.
RBC Capital Markets said the debt was below its expectations and forecasts gearing to be just 5%, or 14% including the provisions, while UBS said the minimal debt got South32 off to a good start.
Macquarie said the net debt was higher than its estimate of $250 million, but provisions were lower than its $2 billion forecast.
The new company plans to distribute a minimum of 40% of underlying earnings as dividends each half-year.
Again, this was lower than Macquarie’s expectations but it noted that the door was left open for further capital management after South32 CEO-elect Graham Kerr noted that buy-backs and special dividends would be considered.
UBS said that based on December half underlying earnings of $442 million, the annual dividend would be around 7c per share.
“Assuming a yield of 5.5% (similar to that of BHP Billiton), implies a valuation of $1.27/share or $A1.66/share, which implies a market capitalisation of around $8.8 billion,” UBS said.
South32 will be an S&P/ASX 200 company and could qualify for the ASX 50 or ASX 20.
While it has been suggested South32 will be a takeover target for the likes of Glencore or Mick Davis’ X2 Resources, RBC expects the lack of major expansion and exploration projects in the portfolio means the new company’s growth will be M&A driven.
“Given the low gearing, substantial undrawn debt facility, and robust cashflow outlook, we believe S32 is well set up for this,” RBC said.
But UBS believes that while South32’s management will be looking, it might be a while before any acquisitions are made.
“With the demerger and new listing yet to be executed, we expect management focus will be firmly on improving operational efficiency within the existing portfolio, we believe it may be some time before South32 management pursues development projects or acquisitions.”
South32 will hold Worsley Alumina in Western Australia, aluminium in South Africa, Brazil and Mozambique, coal in New South Wales and South Africa, manganese in South Africa and Australia, the Cerro Matoso nickel mine in Brazil, and the Cannington silver mine in Queensland.
BHP shareholders will receive one South32 share for each share held if approved at shareholder meetings in Perth and London on May 6.
Numis Securities in London said the demerger appeared to make sense on paper and it expected the proposal to be approved by shareholders.
The early indications are that investors like the plan with BHP shares up 1.3% in Australia yesterday and up 3.3% in London overnight.
And Citi upgraded BHP this morning to buy from neutral.
BHP shares last traded 1.2% higher this morning at $A30.13.
South32 shares will list in Australia on June 2.
