Just in case you thought the world's largest mining company didn't have enough problems from the commodity slump, two brokers have poured cold water on the value of its proposed spin-off of South32.
UK broker Liberum released a note overnight stating that BHP Billiton Limited's (ASX: BHP) divestment of South32 is worth considerably less than the $US13 billion to $US15 billion that the market expects.
Liberum values South32 at $US10.5 billion and it's not alone in giving a dour assessment of the company that BHP is trying to float as a separate entity.
Deutsche Bank cut its valuation on South32 yesterday to $US11.2 billion from $US13 billion. More alarmingly, the new miner would be only worth $US7 billion if spot prices were used in its valuation.
But it's not all bad news. Expectations of an interest rate cut in Australia next week and a further rate cut in the following month or two will depress the local dollar, and South32 is better placed to benefit from this than most in the mining sector.
Liberum noted that more of South32's earnings before interest and tax (EBIT) are exposed to the Australian dollar than compared to its global peers.
Further, takeover interest in the spin-off could also put a floor under the price. UBS believes the miner's conservative balance sheet and the absence of a poison pill (provision that prevents a takeover of the company) will make South32 an enticing target.
If that comes to pass, the irony shouldn't be lost on you. BHP couldn't attract buyers for its unwanted assets (at least not at a price it was willing to accept) and that is why they went for "plan B" – to vent the assets into a separately listed entity called South32.
It would be interesting if a bidder did come along after the float and UBS thinks that private mining venture X2 Resources (which has $US5.6 billion to spend on acquisitions over the next year or two) would be keen on South32's diversified mining assets that range from nickel and aluminium to manganese and silver.
Another potential bidder highlighted by the broker is Anglo-Swiss mining giant Glencore Xstrata with a market cap of £36.7 billion ($71.5 billion).
You can read more about the South32 divestment and why I am bullish on the longer term prospects of the stock by clicking here.
