■ Imminent vote on South32 spin-off
■ Project deferral at Port Hedland export terminal
■ Third-quarter production update
Next week, shareholders in BHP Billiton (BLT) will vote on whether to approve the planned spin-off of South32, an entity comprised of the group's non-core aluminium, coal, nickel, and zinc assets. If approved, shareholders will receive one South32 share for each group share currently held, with holders of 10,000 shares or fewer entitled to a cash option. All very straightforward, but there are mixed views as to whether the deal will unlock value for shareholders.
Assessing the merits of the South32 deal was never going to be easy due to volatile commodity markets. And now analysts may be forced to reassess their projections on iron ore prices following BHP's decision to defer planned work to reduce bottlenecks at the Port Hedland export terminal. The decision will retard capacity growth, but it may not be enough in itself to prop up iron ore prices. A recent report from Goldman Sachs suggests that half of industry 'Tier 2' production (ex BHP, Rio Tinto and Vale) could be imperilled due to weak pricing.
Meanwhile, BHP's recently published third-quarter update shows that management responded to ongoing price weakness in another key commodity by canning 35 per cent of the group's onshore US oil rigs during the first quarter of 2015. These obviously weren't the best performing rigs within the group's energy division, so the group has maintained its June year-end production guidance at 255m barrels.
Investec says…
Sell. The divestment process has been progressing steadily into an increasingly bearish commodity price market. Our blended valuation for South32 now indicates a value of around $12bn (down 35 per cent from the original estimate). This decline is not out of context with the general fall in BHP Billiton's share price over the same period, which is down 29 per cent in US dollar terms. Our target price for BHP Billiton of 1,329p (incorporating South32) is based on an equal blend of net present value and relative price/earnings valuation (compared with the FTSE 100 as a whole).
Killik & Co says…
Buy. BHP announced strong production numbers for the nine months – all commodities showed growth compared with the same period last year, except aluminium and nickel. Iron Ore production increased 20 per cent year on year due to strong performance in Western Australia, underpinned by a more integrated supply chain. The commitment to iron ore production at less than $20 per tonne was maintained. As a result, the Inner Harbour project has been deferred, leading to slower capacity growth to 290m tonnes a year, albeit at lower capital cost. The target price is 1,476p.
