By and large, the spin-off of BHP Billiton Limited's (ASX: BHP) non-core assets into South32 Limited is seen as a great way to unlock shareholder value, but there are some concerns surrounding the new business' exposure to South Africa.
The new entity was branded as 'South32' due to its major operations being in Australia and South Africa, which are connected by the 32nd parallel southerly line of latitude. Operations in South Africa will account for roughly 30% of South32's underlying EBITDA (earnings before interest, tax, depreciation and amortisation) which makes it vulnerable to some of the risks in the region.
As reported by the Fairfax press, some of the concerns facing investors right now include the costs and reliability of power supplies to South32's aluminium smelters, as well as possible ownership concessions due to the Black Economic Empowerment (BEE) programme.
The BEE was launched by the South African government to redress the inequalities of Apartheid by giving previously disadvantaged groups certain economic privileges that were previously unavailable to them. Under the mining charter, the government's target was 26% ownership of companies by this group in 2014, although that target could certainly be raised in the future.
However, as noted by BHP Billiton's management, these issues are not new and the decision to spinoff South32 in its current form was "a vote of confidence in the country", as quoted by Fairfax.
Should you buy?
Provided that it receives the necessary shareholder approval (which it should, considering the advantages to be realised from the demerger), South32 should list on the ASX sometime in June with a market value of around US$13 billion.
Buying shares in South32 could be an excellent way for investors to realise value from BHP's underappreciated assets while it will also limit their exposure to China, with a larger portion of South32's earnings to be generated in Europe.
