Investors eye battered miners as BHP spin-off trades

As BHP Billiton's spin-off begins trading on three different exchanges, investors are eyeing the battered mining sector for longer-term opportunities, following a major cost-cutting drive across some of the industry's biggest names.

BHP Billiton's aluminium, nickel, manganese and silver mining businesses have been spun-off to form a new, independent mining company called South32. It started trading on the Johannesburg stock exchange, London's FTSE and the Australian stock exchange (ASX) Monday.

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It comes at a tough time for miners, which are battling slower economic growth in China and oversupply of several commodities, both of which have dented demand and weighed on prices.

Shares in BHP,the world's largest miner by market capitalization, slumped in Australia after South32 -- named after the new company's latitude location – started trading at a market value of around $9 billion, below market expectations of between $10 and $13 billion, according to Reuters.

BHP stocks also tumbled as much as 5 percent in early London trading, but reversed losses later in the morning and close around 2.4 percent higher.

'Bottom-up change'

But while shorter-term disruption and under performance is likely for the sector, investors are now saying they see value in some of the largest miners -- particularly at current valuations -- following major streamlining and restructuring.

"This has got nothing to do with economic forecasting, emerging market growth or China – it is about bottom-up change," Clive Beagles, fund manager at JO Hambro Capital Management, said at an investment conference in London. He has recently been adding to his positions in mining stocks, which now make up close to 10 percent of his $4.2 billion fund.

"In the short-term there will be some disruption for commodity prices, because there is some excess supply that has to work its way through the system, but the lower cost producers like Rio Tinto and BHP Billiton will be able to accommodate that period," Beagles said, speaking at an investment conference in London.

Here's why South32 is a potential buy
Here's why South32 is a potential buy   

Simon McGarry, senior equity analyst at Canaccord Wealth Management, was also bullish on Rio.

He highlighted that CEO Sam Walsh, who took over in 2013, had focused on larger assets, while "zealously" pursuing better spending decisions and cost cutting, with several projects that had previously been approved now shelved.

"The combination of economies of scale, falling production costs and stronger balance sheet should allow Rio to weather any slump in prices until the supply and demand imbalance is resolved which may take two years according to S&P," he said in a note.

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And while volatile trading for BHP and its spin-off were likely for the rest of the week , Credit Suisse analyst Paul McTaggart said that things would like stabilize in the longer term.

By the end of 2016, BHP's debt is set to be trimmed to flat, he said, meaning that the group's dividend should be safe. He also highlighted that although the newly formed group is not a "production growth" story, its plans to be a low-cost, high-return and low-capital-expenditure miner mean he expects a strong recovery in underlying earnings.

Autos to drive sector

As well as a positive outlook for earnings, there's another long-term growth driver on the horizon for the sector, which could boost demand for metals such as aluminium.

New technology developments in the autos sector are likely to be a major growth driver for the mining sector in general, according to Citi Monday.

As stricter gas mileage regulations come into force, auto manufacturers are re-examining the materials used in their vehicles, with a combination of steel with lighter carbon fiber and aluminium set to be the future.

Automakers are already talking about "composite material solutions as the key to progress," Itay Michaeli, Citi auto analyst, said.

Equity analysts at the bank also highlighted that on a valuation basis, only six industries were currently trading below historical averages, with energy and materials among the cheapest sectors.

"Our strategists argue that patient investors who are wary of being sucked into bubbles should probably stick with these out-of-favour sectors," they said.