BHP $13 bln spin-off South32 plans cautious approach to growth

By Sonali Paul

MELBOURNE (Reuters) - BHP Billiton has put far less debt than expected into its $13 billion South32 spin-off, positioning the company formed from its unloved assets to weather tough markets and still pay a dividend.

The world's biggest miner released documents on Tuesday detailing the performance of South32's mines and refineries, long overshadowed by BHP's core iron ore, petroleum, copper and coal businesses, ahead of a planned listing in May.

The new mid-sized miner aims to focus on cutting costs and completing the projects in its aluminium, manganese, silver and coal businesses before weighing new investments, despite a strong balance sheet and a market full of assets for sale.

"We do believe in the concept of crawl, walk and run," South32 CEO elect Graham Kerr told reporters.

Kerr said the company has untapped potential within its fold, as BHP had starved the businesses of capital while it focused on its core arms, and played down the chances of chasing acquisitions in the near term.

"We have some great opportunities left in the portfolio," he said.

Named for the line of latitude linking its two main centres, Australia and South Africa, South32 had proforma revenue of $8.3 billion in the year to June 2014, making up about 12 percent of BHP Billiton's total revenues.

CEO Andrew Mackenzie said it made sense to have two separate companies with different strategies, one focusing on huge assets with hundred-year lives, and the other with shorter-lived assets, processing plants and challenges in South Africa.

The simpler asset base would allow BHP to speed up efforts to cut costs and help it beat its target of $4 billion in savings by June 2017, he said, but declined to spell out by how much.

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South32 will emerge from BHP with $674 million in net debt, which is less than half the level analysts had expected.

"They're just trying to be prudent. This company's in some pretty volatile markets, so they just didn't want to over-leverage it," said Brenton Saunders, an analyst at BT Investment Management.

Analysts have valued South32 at around $13 billion, or lower if using current weak commodity prices, in line with what the company said was the historical book value of the assets.

"I don't think investors or the media understand just how attractive they are," Kerr told reporters, without giving any estimate of their market value.

South32 plans to pay out at least 40 percent of its underlying earnings in dividends each half-year, as expected by analysts. BHP reiterated it would not rebase its own dividend, effectively boosting distributions to shareholders who hold both companies.

BHP said the South32 assets contributed net profit after tax of $738 million for the half year to December 2014, which was more than 50 percent higher than some analysts had forecast for the full year to June 2015.

Shareholders are set to vote on the spin-off on May 6, with South32 shares expected to list on the Australian, Johannesburg and London stock exchanges on May 18.

(Reporting by Sonali Paul; Editing by Richard Pullin)