Uninspiring share market start for South32

South32 listed on the ASX on May 18th at $2.13.

The de-merged entity contains assets that don’t fall within BHP Billiton’s four pillars of iron ore, Queensland coking coal, copper and oil & gas.

Instead, South32 assembles a raft of assets across sectors such as bauxite, alumina, aluminium, thermal and metallurgical coal, manganese, nickel, silver, lead and zinc.

Turnover in the new stock has been high as some institutions exit the register and others amass positions.

However, since climbing to a high of $2.37 in the week of listing, South32 has traded gently downwards, falling to $2.09 yesterday and inching downwards in early trade on Wednesday.

South32, with a capitalisation of $11.3bn, and net debt of just $674m, has been identified as a potential takeover target by some market watchers. Mooted suitors include acquisitive major Glencore and cashed-up private equity fund X2.

X2, run by ex-Xstrata CEO Mick Davis, has amassed $5.6bn in commitments, with much more likely on tap. Davis grew Xstrata from a coal producer worth $500m to a diversified mining house worth $50bn which was swallowed in 2013 by its chief shareholder, Glencore.

However, the AFR’s StreetTalk column of June 4th poured cold water on any takeover hopes for South32 shareholders.

According to “London sources”, Davis is “distinctly cool” on South32’s assets, which include the Cannington silver and lead mine, Worsley Alumina, Illawarra met coal, Cerro Matoso nickel mine and smelter, GEMCO and TEMCO manganese, and Hillside aluminium smelter.

According to StreetTalk, Davis doesn’t favour the alumina and aluminium sectors which make up 40% of South32’s earnings. In addition, he is “keen to avoid” the Illawarra met coal assets.

More bad news for South32 came on Tuesday when the company said that poor manganese prices had prompted it to undertake a review of the fair value of its 60% owned Samancor joint venture with Anglo American. A write-down in value could be the result.

The decline in manganese prices of 20% since the start of the 2015 financial year also means that South32 will delay the restart of three of the four manganese furnaces at its Metalloys manganese alloy operation in South Africa.

Still, many investment houses have given South32 a tick. Morningstar has an accumulate call on the stock with a fair value estimate of $3. It says that “with a focus on driving operations to full potential, we think value in the neglected assets hidden in BHP Billiton can be liberated.”