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South32 set to hit ground running after 98% BHP 'yes' vote

Graham Kerr

Flashback to 24 November 2014 video: South32 top brass tell Mining Weekly Online’s Martin Creamer of the new liquid aluminium deal with a black-controlled consortium. Photographs: Duane Daws. Video and Video Editing: Nicholas Boyd.

Graham Kerr

Photo by Duane Daws

6th May 2015

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – The demerging South32 mining company, which is set to hit the ground running after receiving an overwhelming 98.05% yes vote from BHP Billiton shareholders on Wednesday, is at an advanced stage of planning a global shared service centre in South Africa, which will create 200 new quality jobs.

The centre, which will mimic BHP Billiton’s large global service focal point in Kuala Lumpur, is now destined to be located in Johannesburg and no longer in Cape Town, as originally planned.

Simultaneous shareholder general meetings took place in Perth and London to approve the demerger of South32 from BHP Billiton, which chairperson Jac Nasser said would create two successful companies out of one.

BHP Billiton would cease trading with an entitlement to South32 shares from the end of May 15 on the Australian, London and Johannesburg stock exchanges.

South32 shares would commence trading on a deferred settlement basis on the ASX, normal settlement basis on the JSE and on a when-issued basis on the LSE, on May 18.

Meanwhile, the South32 South African jobs sweetener would involve the recruitment of 200 skilled employees, who would be tasked with the job of delivering information technology, payroll, invoice processing and payment-run services to the proposed 12-asset, five-country, 24 000-employee South32 group.

BHP Billiton’s service centre in Kuala Lumpur provides services to the 40-asset, 50 000-employee BHP Billiton group, which is expected to benefit from $4-billion in cost reductions with the cutting free of South32.

“We’re well progressed on setting up the shared service centre,” South32 CEO-designate Graham Kerr, 44, told Creamer Media’s Mining Weekly Online in a global media conference call.

BHP Billiton CEO Andrew Mackenzie added to Mining Weekly Online that the large shared service centre that the world’s biggest mining company operated in Kuala Lumpur was functioning very well.

“We’re going to make more use of centres like it as another way of continuing to drive down our unit costs,” Mackenzie added.

Also progressing was South32’s black economic-empowerment (BEE) transaction involving a R10-billion, five-year liquid metal supply contract with a black-controlled consortium.

“This is being targeted for around June/July and is basically on track,” Kerr said of the BEE deal involving the sale of the company’s Bayside value-added-product casthouse in Richards Bay, KwaZulu-Natal, to Isizinda Aluminium, a majority-owned broad-based black consortium. (Also see attached flashback video).

Isizinda Aluminium, headed by CEO Sizwe Khumalo, a 47-year-old chemical engineer, has, in turn, concluded a slab supply agreement with the JSE-listed Hulamin, South Africa’s leading aluminium semis fabricator, which has a strategic partnership with Bingelela Capital, which owns 60% of Isizinda and Hulamin the other 40%.

With aluminium, manganese and coal forming the bulk of the South African assets in South32, Kerr said the businesses in Africa were poised to benefit as much as those in Australia as a result of being run according to a regional management model.

For the first time, South Africa would have one senior person - South32 president and COO-designate Mike Fraser - running the African division from Johannesburg, with his Australian counterpart, Ricus Grimbeek, running the Australian division of the newly formed company.

South32 would also be supplying the coal  Eskom, which provides coal-fired electricity to the spin-off company’s Hillside aluminium smelter in KwaZulu-Natal.

By aggregating and consolidating regionally in aluminium, manganese and coal, South32 would be able to focus on productivity, safety, value, costs and the licence to operate, Kerr commented to Mining Weekly Online.

He said that there were a number of coal products in the pipeline, which would have to win their right to investment.

Exactly what proportion of the $738-million demerging cost must be borne by South32 and how much by BHP Billiton is no clear, but Mackenzie noted that both companies would benefit by being able to pursue trajectories of increased efficiency and productivity at a faster rate than would be the case had the two remained together.

In the last ten years, the commodities in South32 enjoyed an earnings margin – in earnings before interest, taxes, depreciation and amortisation (Ebitda) terms – of 34%, through the cycle.

Average Ebitda was $3.3-billion and in 2013, a tough year, its Ebitda was $1.8-billion.

After getting South32 up and running from May 25, Kerr said leadership would have to demonstrate capital-allocation discipline, financial performance and an ability to manage the company optimally.

Thereafter, low-risk brownfield expansion possibilities could come into play, two being in energy coal and manganese and a third involving a 20-year life-of-mine expansion, possibility at Cannington in Australia, which has been operating at Ebita of up to $1-billion for the last 15 years, without demanding significant investment.

The ability to make a difference, move the needle and be more entrepreneurial, was something that the new company would build into its DNA.

Kerr, who was instrumental in the building of the Ekati diamond mine in Canada and who laid the foundation for BHP Billiton’s entry into potash mining in Saskatchewan, sees considerable upside for South32, from which he is promising more directness than would be possible from within BHP Billiton, which retains its 9% shareholder base in South Africa, where it is continuing to explore for oil and gas off South Africa’s West Coast.

Hotazel mines in South Africa and Gemco in Australia, plus smelters at Temco, in Australia, and Metalloys, in South Africa, form South32’s manganese portfolio.

With those assets, South32 stands to be one of the largest low-cost producers of manganese ore and a top global producer of manganese alloy.

In aluminium, it takes in the Worsley alumina refinery in Australia and the Hillside and Mozal smelters in Southern Africa.

Also in the company are Cerro Matoso Nickel of Colombia and Illawarra Metallurgical Coal of Australia, which operates three underground mines that produce nine-million tons of coking coal a year, close to major port infrastructure for easy access to global markets.

South32 inherits mines that are South Africa’s third-largest exporter of energy coal, with export sales of 13.3-million tons in the 2014 financial year and potential for growth.

The Worsley refinery in Australia has a capacity of 5.2-million tons of alumina a year and the Southern African aluminium smelters a combined capacity of 1.3-million tons a year.

Cerro Matoso in Colombia produces more than 40 000 t of contained nickel a year at a 49% return.

In the last ten years, South32’s portfolio has generated about half of its Ebitda in Australia and a third in Southern Africa.

South32, which also has lead and zinc operations, will leave BHP Billiton to focus on iron-ore, oil, copper, coal and potash.

South32 is targeting a return of 40% of underlying earnings to shareholders in the form of dividends, with Deutsche Bank estimating that South32 will be the third-largest mining company on the ASX.

Nasser began Wednesday’s presentation to shareholders in Perth and London by acknowledging the Whadjuk people of the Nyoongar nation, who were the traditional custodians of Australia.

He also extended respect to the other Aboriginal people attending in Perth.

Although the demerger proposal did not require a shareholder vote, the BHP Billiton board decided voluntarily to put it to shareholders, who were 70% for in proxy votes.

After being criticised by London shareholders, Australian Shareholders Association member Len Roy defended BHP Billiton, which he said had communicated its South32 proposal comprehensively in an information memorandum of 1 355 pages, a shareholder circular of 192 pages, a news release summary of ten pages and a roadshow presentation of 85 slides.

Nasser assured Roy that the proposal’s $738-million budgeted cost, made up of $339-million in stamp duty and tax, South32 set-up and separation costs of $254-million and execution costs of $145-million, would be diligently managed.

Nasser said that South32 was being demerged to simplify BHP Billiton, which had already completed more than $6.5-billion worth of targeted simplification divestments.

He believed the demerger of South32 was another meaningful step in the direction of simplification of BHP Billiton into a commodities 'manufacturer' rather than a miner.

In terms of the demerger, BHP Billiton shareholders would keep existing shares in BHP Billiton and receive a share in South32 for every BHP Billiton share held.

Edited by Creamer Media Reporter

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