Deutsche Bank has cut the valuation of BHP Billiton’s spin-off company South32 by $US2 billion.
Deutsche mining analyst Paul Young says when South32 lists on the ASX it will be valued at $US11.2 billion instead of the expected $US13 billion.
This amounts to $2 a share, well below investor expectations of $3 a share, SMH reported.
South32 will be made up of BHP’s Illawarra and South African coal mines as well as a number of aluminium, manganese, nickel, silver, lead and zinc operations.
Young said after reviewing the company’s assets, it had reduced the value of them by $US3.5bn to $US13.8bn.
The downgrades come as the bank predicts weaker prices for manganese operations, high costs for aluminium assets, and high capex at the South African coal assets.
But Young said the company was in the perfect position to pursue acquisitions of up to $US3 billion.
"Strategically, we believe South32 will go on the hunt for acquisitions," Young said.
The manganese group Samancor, of which Anglo American owns a 40 per cent stake, was touted as a likely bid.
Young also said coal assets being sold by Vale, Peabody, and Anglo in QLD and NSW could also be an option for South32.
It will cost BHP Billiton $US738 million to spin-off its non-core assets into new company South32, but it assures that shareholders will be better off as a result of the deal.
BHP said the $US738 million would be made up of one-off costs such as stamp duty and cash tax, separation costs, and execution costs.
However the miner said the value of the cost savings from portfolio simplification would more than pay for the demerger costs.
The board has recommended shareholders vote in favour of the demerger plan at a special meeting to take place on May 6.
Eligible shareholders will receive one South32 share for every BHP share and South32 is targeting a return of at least 40 per cent of underlying earnings to shareholders in the form of dividends.