BHP spin-off South32 makes cautious market debut amid mining sector doubts

BHP Billiton's South32 spin-off started trading with a market value of nearly US$9 billion yesterday, a third below the top end of forecasts and underlining investor nerves about the outlook for the battered mining sector.

The cautious response to mining's biggest listing since Glencore in 2011 suggests the newly independent firm will need to do more to convince the market it can grow assets that were long neglected within BHP.

"Investors feel that they can be patient as they wait to learn a little more about the strategy, the assets and the potential for growth," CLSA analyst Andrew Driscoll said ahead of the market debut.

Australia's largest listing since 1998 includes BHP Billiton's former alumina, aluminium, manganese, nickel and silver assets and some coal assets.

Some analysts had valued South32 at nearly US$13 billion, but most were expecting early trading to value it at about US$10 billion.

While some investors see the company as a potential takeover target, some analysts and fund managers say that is unlikely, given its size.

"They're fairly large for most guys," said Rohan Walsh, a portfolio manager at Karara Capital. "There are not too many people who have that kind of cash."

Mick Davis, the ex-boss of Xstrata, previously made an offer for most of South32's assets but was turned down.

His company, X2, which has raised US$5.6 billion in capital, may now be in a prime position to swoop if South32's shares slide. But he would have to borrow about US$10 billion to be able to snare South32, including a premium.

"That's a big, risky bet," Walsh said.

South32, named after the line of latitude joining its main assets in Australia and South Africa, fills a gap between the mega-miners and minnows, and offers a diverse suite of assets, from aluminium to silver.

The shares began trading at A$2.13 (HK$12.25), compared with the A$2 to A$3 range forecast by analysts, and ended its first day at A$2.09.

BHP Billiton shares fell 7.3 per cent, the biggest loser on the Australian share market, which was lower overall, with miners leading the drop due to a firm Australian dollar.

"There is appetite for that real good size, mid-tier, just below the BHPs and Rios," said Matthew Keane, a resources analyst at Argonaut Securities, referring to BHP's main rival Rio Tinto. "For that reason it'll attract interest."

South32 will also trade on the London and Johannesburg markets.

Trading could be volatile in the first few days because British institutions, unable to hold the stock because it will not be included in FTSE indices, might be forced to sell.

"London shareholders have been talking to Australian brokers about facilitating sales," said one analyst, who puts South32's worth at A$2.30 a share.