Mick Davis set to swoop on bargain-priced BHP spinoff South32

Mick Davis was CEO of Xstrata from October 2001, joining ahead of its listing on the London Stock Exchange in 2002. Prior to Xstrata, Mick was CFO of Billiton Plc and Executive Chairman of Billiton Coal, and before joining Billiton, was an Executive Director of South Africa’s electricity utility Eskom. Mick has raised over US$35 billion from global capital markets and successfully completed over US$120 billion of corporate transactions, including the creation of the Ingwe Coal Corporation in South Africa; the listing of Billiton on the LSE; the merger of BHP and Billiton; as well as numerous transactions at Xstrata culminating in the merger with Glencore.
According to his new company X2’s website, Mick Davis has raised over US$35 billion from global capital markets and successfully completed over US$120 billion of corporate transactions.

South African Mick Davis, who lost his creation Xstrata to fellow SA-raised mining entrepreneur and one-time friend Ivan Glasenberg, is planning a spectacular comeback. Davis’s new creation X2 Resources, has the cash and funding to buy South32, the sizeable business being spun out of BHP Billiton. As Davis was the Financial Director of Billiton ahead of its merger with BHP, he has intimate knowledge of the South32 assets. Investment managers are valuing South32 at just $7bn – less than half what BHP estimated in September when announcing the spin-off of mostly SA assets. Investing in the country is of little concern to Port Elizabeth-raised Davis whose spectacular career included a spell, while still in his 20s, as Eskom’s Finance Director. – Alec Hogg       

By Brett Foley, Firat Kayakiran and James Paton

(Bloomberg) — The plunging value of BHP Billiton Ltd.’s planned mining spinoff could hardly be better timed for the man who’s thinking of buying it.

Weeks from listing, the valuation of the new company, called South32, has plunged by almost half to as little as $7 billion, based on current prices for its products including alumina, manganese and nickel, Deutsche Bank AG estimated this month. That’s a gift for Mick Davis and his X2 Resources fund, which is weighing an eventual bid for South32, according to people familiar with his plans.

Davis, the former head of mining giant Xstrata Plc, has an untapped $5.6 billion fund that could be bolstered with debt to swallow a larger business. Amid the worst commodity slump in half a decade, South32 is still a target, with some analysts expecting its earnings to rebound when prices recover.

“They are good assets in challenged industries,” said Paul Phillips, a Melbourne-based analyst with Perennial Investment Partners Ltd., which manages about A$18.5 billion ($14 billion) of assets. “They have a lot of attractive features.”

BHP is carving off the business to focus on a smaller group of commodities and South32 is set to start trading May 18 in Australia, South Africa and the U.K. The newly formed company will include an Australian mine that’s the world’s largest silver and lead operation, a nickel mine in Colombia and aluminum assets in three countries.

Buying Opportunity

Davis offered BHP about $10 billion for most of the South32 assets last year, people familiar with the matter said, declining to be named because that approach wasn’t made public. Now he is considering making a bid after South32 lists, as long as the company’s valuation is less than $12 billion, the people said.

A spokeswoman for BHP in Melbourne declined to comment, as did a representative for London-based X2.

As chief executive officer of Xstrata, Davis built a mining behemoth through dozens of deals, turning a coal producer with a $500 million market value to one valued at $50 billion. He sold Xstrata to major shareholder Glencore Plc in 2013.

Davis has a knack for buying and selling commodity assets at the right moments, said James Santo, a special situations salesperson at Aviate Global LLP in Sydney.

“Mick Davis is very shrewd,” said Santo. “Being in a trough is not great timing for South32’s valuation. They are spinning off the most cyclically-leveraged assets at the bottom of the cycle.”

Slumping Valuation

Slowing growth in demand from China, the world’s largest buyer of metals, has combined with rising supplies of resources to eat into mining valuations.

Investec values South32 at $12 billion, 35 percent lower than the bank’s September estimate.

Deutsche Bank analysts cut their South32 valuation on April 1 to $11.2 billion, using the bank’s own commodity price forecasts, compared with a February estimate of $13 billion. Based on prices at the time the report was published, South32 was worth only $7 billion, the bank said.

The drop in commodities prices may lead South32 to pursue bargains of its own. The new company could spend as much as $3 billion on acquisitions, Deutsche Bank analysts wrote in their April 1 report. They may target Anglo American Plc’s 40 percent stake in the Samancor manganese asset valued at about $1.4 billion, according to Deutsche Bank. They may also seek to buy Australian coal mines as well as nickel and copper projects in South America, the analysts wrote.

“Investors are going to be willing to give management the benefit of the doubt in terms of their ability to manage these assets and position them competitively outside of a BHP environment,” Perennial’s Phillips said.

Target Hunt

X2, meantime, has yet to make any acquisitions more than 18 months after it was formed. And analysts and investors have named Glencore as a potential rival suitor for South32. Glencore CEO Ivan Glasenberg has said he’s hunting for undervalued acquisition targets in the turmoil.

All the same, X2 has financing available that could double or even triple the $5.6 billion the fund has raised from investors, said the people familiar with the matter.

Earlier this month, two people familiar with Davis’s plans said he’s considering buying smaller miners listed in Canada as a prelude for a larger deal.

With suitors potentially circling, the challenge for South32 management will be to maximize value for shareholders while the spinoff remains an independent company, said Aviate Global’s Santo.

“It is a good management team they have assembled, but I think some shareholders would rather see Mick Davis or Ivan Glasenberg in charge of these assets,” Santo said. “These guys are a cut above in their ability to pick the commodity cycle and utilize it to their advantage.”

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