Things are definitely stirring in the mining sector.
We’ve had an approach from Glencore towards some sort of merger with Rio Tinto, which the board at Rio rejected in August, and today we have more developments in plans at BHP Billiton (LSE: BLT) (NYSE: BBL.US) for the spin-off of some of its Australian assets.
The new company, which as yet has no name though commentators have imaginatively dubbed it “NewCo”, will retain ownership of BHP’s metallurgical coal interest in Illawarra and its lead-silver mine in Queensland, together with some other high-quality assets.
London, too
Initially, BHP had decided not to seek a London listing for NewCo. But following protests, the company has retreated on that plan and today has told us it intends to go for a listing on the London Stock Exchange after all, in addition to listings in Australia and South Africa.
The lack of a London listing would have caused problems for shareholders in the UK and Europe, and would have forced managers of UK-only and Europe-only funds to sell off their NewCo allotment — with Barclays Capital having estimated that as many as 17% of the company’s total shareholders could be forced sellers.
That would have incurred costs for shareholders, not to mention making them sell something they would otherwise want to keep — but a sale of that amount could also significantly depress the share price of NewCo once it’s independently floated. It’s really quite surprising that BHP apparently couldn’t predict the size of the backlash against their no-London plans.
What does it all mean?
I’ve felt the whole mining sector has been undervalued for some time. The recession is well over, fears of a crisis in China are abating, and though commodities prices are still at lows, record shipments of key products like iron ore are being maintained in the face of fears of oversupply.
And I’m not surprised to see restructuring moves aimed at maximizing value as we hopefully head into a new period of economic growth. Glencore clearly saw value in Rio Tinto, and BHP is looking for ways to unlock shareholder value too.
Looking undervalued
After a slide since July, BHP shares are now down more than 10% over 12 months, and they dropped 21.5p (1.3%) today to 1,626p. At that price, we’re looking at a forward P/E of 12 for the existing company. That’s maybe not especially low for a cyclical stock like a miner, but with expected dividend yields exceeding 4.5%, it looks too low to me at this stage in the cycle.
And if you do buy now, at least you won’t have to sell off part of your investment when the demerger is completed, expected in the first half of 2015.