South Africa woes cast doubt on BHP spin-off success

South32 chief executive-elect Graham Kerr.

Investors are growing wary of South32, the firm BHP Billiton (ASX, NYSE:BHP) will finish branching out by midyear, as the new company will rely heavily for earnings on South Africa, a region with a known record of not making things especially easy for miners.

According to Financial Review, there are a number of challenges South32 is likely to face, including potential Black Economic Empowerment ownership concessions, probable power price increases as they renegotiate contracts at Eskom, and the need to make a decision on reinvestment in South Africa Coal.

But what is keeping analysts awake at night the most, according to the article, is the fact that the South African government is reviewing the mining industry’s compliance with rules under the mining charter, which includes a 2014 target of 26% black ownership of companies. And based on several reports that figure is likely to be increased.

But chief executive officer elect Graham Kerr has noted that the challenges around Eskom and DMR (South Africa’s Department of Minerals) are not new and that BHP has historically had a good relationship with both.

“If you look at the DMR policy today, we are fully compliant with the charter, what is probably more important is that South32 believes in the spirit and the intent of South Africa’s transformation empowerment agenda,” Kerr was quoted as saying.

With a once-off cost of around $738 million before tax, South32’s will be based in Perth, but the new firm is already setting up a regional head office and global shared services centre located in Johannesburg.

Besides a primary listing on the Australian Securities Exchange, South32’s shares will also be traded at the Johannesburg Stock Exchange and London.

All of BHP shareholders will receive shares in South32 if the miner’s board and shareholders approve the demerger at a shareholders meeting scheduled for May 6.