Miners seek spin offs to boost value, cut debtLONDON – Diversified mining companies are increasingly likely to favour spinning off undervalued non-core operations via individual listings to achieve better overall ratings amid concerns about high debt levels.
Market talk that Russian miner Petropavlovsk is planning a Hong Kong listing for its iron ore operations follows close on the heels of Barrick Gold Corp's decision to spin off its African operations in March.
Barrick, the world's largest gold producer, used part of the IPO proceeds to repay loans of about $575-million.
Analysts say that companies are anxious to get their finances in better shape due to uncertainty about an economic recovery underscored by sovereign debt problems in Europe.
"Companies are looking to reduce their debt exposure so this is creating some substantial spinouts," said John Meyer, analyst at Fairfax.
Last year, accountancy firm Ernst and Young said heavy borrowing by the mining industry in 2007 and 2008 had left many miners with concerns about repayment levels and the impact on capital investments. It estimated total net debt for 60 of the world's biggest miners grew to $182-billion at the end of 2008.
Separating non-core assets and selling off a minority stake on the market is often a good route to unlocking value.
"There is definitely an argument that if you can provide the market with more specific valuations for single commodity businesses, the market will be able to better value those individual constituent parts than it would when they are part of a conglomerate," said Matt Howell, a partner in accountancy firm Deloitte's capital markets team.
"That's certainly a trend that we are likely to see more of in the coming months and years," he said.
UNDERVALUED
Analysts have put a value on Petropavlovsk's iron ore operations at between $1,5-billion and $3,2-billion, compared to the group's overall value of $3,4-billion.
"If we assume that around half the company's market capitalisation is in the iron ore business and the other half is attributable to the gold business then effectively puts Petropavlovsk shares on a significantly lower rating than previously considered," Fairfax said in a note.
"Gold miners tend to trade at two times net present value whereas iron ore miners don't so you are going to get a better rating as a gold miner than as a hybrid gold-iron ore mining group," said Investec's Jonathan Guy, estimating the net present value multiple for iron ore players at one times.
Unlike an outright disposal, spinning off an operation via an initial public offering (IPO) can give the parent company a share in the potential upside or revaluation of the non-core asset, Meyer said.
"This is a very powerful argument to persuade mining companies to sell undervalued and unrecognised assets in the market place in order to achieve better overall ratings."
Barrick retained a controlling stake in African Barrick Gold as did Mexico's Penoles when it listed silver and gold producer Fresnillo in London in 2008.
Investec's Guy expects to see more spin-offs over the coming months as the larger miners struggle to increase value via acquisitions.
"There are very few things for mining companies to buy," he said. "There is no mid-tier in the mining space anymore so the logical thing for people to do is look for ways of spinning out assets that are either undervalued or non-core and try to monetise them in that way."
He noted that gold miners are likely to carry out spin-offs by country and diversified companies by commodity.
A number of miners, including Brazil's biggest diversified steelmaking group CSN, are planning to spin off operations while others, such as South Africa's Anglogold Ashanti, said they would consider such a move if they continue to be undervalued.
The owners of diamond group De Beers, including miner Anglo American Plc, are mulling a possible re-listing for the firm but feel the time is not yet right.
Some miners have been forced to postpone separate listings or scrap them altogether if they get insufficient support.
Rio Tinto delayed an IPO for its US coal operation Cloud Peak in 2008 amid difficult market conditions before listing it last November and Cape Lambert Resources sold its Lady Annie copper project to a trade buyer after pulling a planned IPO.
"The key is going to be what happens to the stock market," said Charles Kernot, analyst at Evolution Securities. "If people aren't going to get the price that they want then they are not going to proceed with the sale."