BHP spin-off South32 debuts at lower end of expectations

Carla Gottgens | Bloomberg | Getty Images

BHP Billiton's spin-off South32 debuted near the bottom of expectations on Monday as investors awarded only a small premium to the new listing amid concerns about broad weakness in the resources sector.

Shares in the A$11 billion ($8.81 billion) spin-off first traded at A$2.13 at 0215 GMT, at the lower end of the A$2.00 to A$3.00 range forecast by analysts for Australia's biggest new listing in 15 years and the largest mining listing since Glencore in 2011.

However, the stock soon firmed slightly to A$2.18, in a weaker overall market, while BHP Billiton shares fell 7 percent.

Dealers and analysts had said there was strong interest in the shares at the lower end of the range.

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"Looking at the total price of both BHP and South32 it's pretty clear the market's ascribed a small premium to the spinoff," said CMC Markets chief strategist Michael McCarthy.

"Some are viewing this as the unloved part of BHP's portfolio (and) it's also the part where valuations are at multi-year lows, so there are some concerns that there's not much of an outlook for the stock."

South32, which is being hived off by BHP Billiton to allow it to focus on its core businesses, lands just as global miners have been enjoying a small rebound in their shares.

Before Monday, BHP's shares were up 10 percent in the past month, Rio Tinto and Glencore rose about 5 percent and Anglo American was up 13 percent, which could help support the new company's debut, analysts said.

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Interest in the company, named after the line of latitude joining its main assets in Australia and South Africa, is expected to be solid as it fills a gap between the mega-miners and minnows, and offers a diverse suite of assets, from aluminium to silver.

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

Trading in South32 is tipped to be volatile in the first few days as UK institutions who cannot hold the stock because it won't be included in FTSE indexes may be forced to sell.

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