[miningmx.com] – SOUTH32, the company BHP Billiton recommended today be created through a demerger of its non-core assets, would adopt a payout ratio of 40% of underlying earnings and seek to payout excess cash by other means.
“Consistent with South32’s priorities for cash flow and commitment to maximise total shareholder returns, other alternatives including special dividends, share buy-backs and high return investment opportunities will compete for excess capital,” said BHP Billiton in a statement today.
BHP Billiton was commenting following the publication of a demerger prospectus and after an independent study found that the benefits of the proposed demerger out-weighed the disadvantages for BHP Billiton shareholders. Shareholders will vote on the demerger on May 6.
South32 consists of aluminium, coal, nickel and manganese assets, as well as the silver, lead and zinc assets distributed across South Africa, Colombia, Brazil, and Australia with a gross asset value of $26.7bn and taxed interim profit of $738m ended December 31.
Although BHP Billiton proposed South32 would return cash to shareholders, its capital structure was primarily focused on establishing an investment grade rating, preferring a dividend cover approach over the progressive dividend policy BHP Billiton employs.
The dividend policy would also give South32 the flexibility to pursue growth through acquisition. It was “well positioned” to chase down “value accretive investment opportunities,” it said.
In general, analysts were net positive about the demerger details.
“The South32 demerger details were mixed with lower debt and provisions offset by a slightly lower initial dividend payout ratio, although we suspect this leaves the door open for additional capital management,” said Macquarie Research.
“The decision to utilise a payout ratio for South32 rather than a progressive dividend is a positive move in our view,” it said.
“The costs of the demerger to BHP are expected to be offset by reduced corporate costs while the allocation of debt and provisions was broadly in line. The relatively low gearing for South32 should leave it able to secure a strong credit rating,” it said.
Hanre Rossouw, head of resources: frontier and emerging markets for Investec Asset Management, said the company could be valued at between $13bn and $15bn when it listed in Perth and London with a secondary listing in Johannesburg.
“We are building a new company from the ground up. We will have competitive assets, significant reserve lives and financial strength,” said Graham Kerr, CEO-elect of South32.
If approved by BHP Billiton shareholders, Kerr would be joined on a lean looking South32 board of four including chairman, David Crawford, Keith Rumble, as independent non-executive director and non-executive director, Xolani Mkhwanazi, currently president and COO of Aluminium South Africa at BHP Billiton.
