South32 turns bearish as tax inquiry, iron-ore put ‘sell’ skids under BHP
Johannesburg (miningweekly.com) – With the shareholder vote just over three weeks away, the planned spin-off of South32 from BHP Billiton has turned bearish and BHP Billiton has itself fallen victim to an unprecedented number of analyst sell recommendations owing to the plummeting iron-ore price, worsened by the reputational damage that the world’s biggest mining company is suffering at a Senate tax inquiry into its Singapore marketing hub, where it is raising hackles by refusing to answer basic questions.
The South32 demerging process is moving into an increasingly bearish commodity price market, Investec Securities cautioned on Monday, as Australia’s Treasurer, Joe Hockey, revealed that he was contemplating budgeting on an iron-ore price of $35/t.
A third of South32’s assets, including aluminium, coal and manganese, are in South Africa and the simplified BHP Billiton would itself retain a 9% shareholder base in South Africa, where South32 also plans to set up a 200-employee global shared service centre, similar to the now controversial Singapore marketing centre.
For BHP Billiton, the iron-ore price has been on a worrying downward spiral for the last 12 months, with the spot price at $48/t at the time of going to press.
To add to the woes of iron-ore giants, Australia’s Senate inquiry into tax avoidance reprimanded BHP Billiton for stonewalling and also has Rio Tinto and iron-ore-light Glencore under scrutiny.
At the Senate inquiry set up to investigate alleged widespread profit shifting to low-tax regimes by large multinational corporations, inquiry chairperson Sam Dastyari denounced the reluctance of BHP Billiton to divulge how much tax it paid on its Singaporean profits and gave the company two weeks to come up with the basic financial information about its own operations.
BHP Billiton, Rio Tinto and Glencore have each denied they are engaged in tax avoidance strategies but Glencore is the only one of the three so far to assure the Senate tax inquiry that it will stop funnelling sales from its Australian coal operations through Singapore and would trade from Australia instead.
Investec has, meanwhile, spelt out that South32’s fortunes were being eroded by the unexpected fall of aluminium and nickel prices, which had lopped 26% off expected earnings.
The mining analysts also put a sell recommendation on BHP Billiton itself as part of a revision, which saw iron-ore-heavy companies like BHP Billiton suffer from a 25% reduction in medium-term iron-ore price forecasts.
While South32 does not have exposure to iron-ore, its earnings outlook has also been impacted by a 15% reduction in medium-term aluminium price forecasts, with nickel down 10% in medium-term projections.
In his budgeting exercise, Hockey has estimated that, if iron-ore prices fell to the $35/t the Australian government was contemplating as a budgeting level, BHP Billiton and Rio Tinto would make only $1 on every tonne of iron-ore sold.
UBS mining analysts have reportedly estimated that BHP Billiton and Rio Tinto would break even at $34/t and that all other iron-ore miners would be running at a loss at $35/t.
The alacrity of Glencore in deciding to close its trading office in Singapore and relocate it to Australia may put pressure on Hockey to retract his reported intention to block a Glencore merger with Rio Tinto over tax concerns, Creamer Media’s Mining Weekly Online can report.
The quick response of the London-, Hong Kong- and Johannesburg-listed company, headed by CEO Ivan Glasenberg, takes place at a time of concern in Australia about the impact of alleged tax avoidance by multinational mining companies on the country’s tax take.
While BHP Billiton pulled a free cash flow rabbit out of the thrashed commodity price hat in the six months to December 31, it made no bones about the spin-off of South32 being the catalyst for the new wave of productivity gains in the period ahead “because if you keep doing the same thing, you eventually run out of options”, the company confided.
In South32, BHP Billiton intends to demerge aluminium, coal, manganese, nickel and silver assets – originally said to be worth an estimated $16-billion but now down at $12-billion – into the company that will be listed in Australia, the UK and South Africa.
Despite the low commodity prices, BHP Billiton, under CEO Andrew Mackenzie, managed to lift free cash flow by a high 23% to $4.1-billion to keep its A+ credit rating as well as maintain its progressive dividend policy with a 2014 payout of $3.2-billion in the six months to December 31.
By having free cash flow higher than the dividend, the world’s largest mining company also managed to reduce net debt to $24.9-billion and reduce its gearing to 22%.
But it made clear that it would need the South32 spin-off to get it through the six months to June 30.
But a question mark now hovers over the entire South32 exercise and even BHP Billiton’s generation of free cash flow and its interim dividend payout has been insufficient to win the support of mining analysts.
London mining analyst Liberum Capital has had a sell rating on BHP Billiton plc shares for some time and Investec said earlier this year that BHP Billiton would need a “miracle” to replicate this half-year performance in the six months to June 30.
