Bank of America Merrill Lynch aboard for Telfer mine sale

DataRoom

NEWCREST has hired Bank of America Merrill Lynch for the ­potential sale of its Telfer mine in Western Australia, according to sources.

The US-based bank is already working with Anglo American for the sale of its coal assets in Queensland but is said to have won the role of also overseeing the Telfer sale after working with the Melbourne-based miner in previous years — likely fending off competition from rival groups such as Barclays and Lazard.

The moves by miners to sell down assets comes as part of a global trend, as major resources companies reposition portfolios to shore up cash positions as commodity prices tumble.

Newcrest has not previously offered any insight into the value of the Telfer gold mine — one of Australia’s largest — but one suggestion is it could sell for between $400 million and $500m.

However, some have questioned whether the mine will be ­offered for sale, given no flyer documents about the asset have yet circulated in the market.

Officially, Newcrest has said the asset is up for a review, which would be completed by October. It has offered no further comment.

Earlier this year, Newcrest managing director Sandeep Biswas said a previously announced review of Telfer — once its flagship project — had been expanded because of the fall in the Australian dollar and in oil prices.

Parties might value the asset more highly than Newcrest, he said at the time, although it had not received approaches from other parties.

The miner believes the attractiveness of investment options under review for Telfer has increased given costs at the mine had fallen from $1103 an ounce to $867, and on the back of a stronger gold price.

In the six months to December 31, Newcrest posted a net profit of $200m, a 400 per cent increase on the $40m profit in the previous corresponding period, when it suffered from writedowns against West African-based assets.

Other companies slimming down portfolios are Barrick Gold, with the sale of its NSW gold mines, being offered through adviser Credit Suisse. Barrack is also weighing the selldown of a Chilean copper mine, according to reports from Britain, which could be within the sights of the Mick Davis-backed X2 Resources.

X2 has raised $US5.6 billion ($7.2bn) and is hunting globally for mining acquisitions.

Anglo American is also selling its Queensland assets following a global review that found they were not making a big enough contribution to its business. The process is scheduled to happen before June and will be an interesting test of appetite for acquisitions in the resources sector, where attractive deals are now not easy to come by for investment bankers.

Where to for South32?

WHEN South32 is finally free of parent BHP Billiton, the focus will quickly turn to whether the offshoot — holding a collection of coal and base metal assets — intends to use its relatively strong balance sheet to batten down ­resource assets or focus on consolidating its existing portfolio.

South32, with its aluminium, manganese, nickel and zinc mines, is expected to list in May, with a likely valuation of about $13bn.

It will emerge from BHP with $674m in net debt, about half of what had been previously expected. It will also have a $1.5bn credit facility in place.

This means the company is inheriting a balance sheet with firepower, leading to talk it will give the miner a fighting chance by turning into an acquisitive predator. If history is any guide, the first acquisition could be years away. Of BHP’s previous spin-offs, BlueScope was the quickest — taking some two years as a stand-alone listed company before buying out Butler Manufacturing.

Arrium (previously OneSteel) was a little more patient — waiting about six years before moving on interstate rival Smorgon Steel. (Although before then Arrium had spent about $400m to convert its Whyalla Steelworks into a magnetite iron ore feed. This is more consistent with the line that, like the other spin-offs, South32’s management under Graham Kerr will have its work cut out focusing on improving the operational performance of the existing assets.

Expansions at the South African coal and Mozambique aluminium assets, and efforts to extend the mine life at the Cannington silver, lead and zine mine in Queensland are seen as key investment areas in South32’s books.

Indeed, given BHP’s focus on reducing capital spending on ­underperforming assets in recent years, South32’s mines had been relatively starved of capital. Any spending would be analysed through a prism of options, ­forecast returns and the slump in resource prices.

The timing of the fall in commodity prices could ultimately be a silver lining for South32, as it prompted BHP to act more like a parent before sending the company out on its own. South32 will have far less debt than expected to ensure it can weather the tough commodities markets and still pay a dividend.

Building on cash hopes

BORAL’S unexpected $240m share buyback is laying the foundation for hopes of more cash flowing back to investors from other building materials players.

Continuing growth in free cashflows for companies in the sector is providing headroom for further dividend increases. This is even after key players have sharply increased interim dividends and paid out more in special dividends.

Unloved just a few short years ago, the sector is benefiting from the housing construction boom taking off on Australia’s east coast, which is driving demand for materials. Recent comments by the Reserve Bank of Australia suggest interest rates could be moving lower, further adding to demand.

At the same time, new home construction in the US is also rebounding — benefiting larger players such as Boral that have a presence there, and infrastructure projects planned by the federal and state governments are expected to bolster future earnings.

Boral’s buyback prompted investors to push its shares higher, and analysts backing the move with a slew of upgrades price targets for the stock.

The company, Australia’s largest building products supplier, will hold more than $1bn in cash on its balance sheet by year-end. Despite advanced plans to make an acquisition in the US market, it still leaves enough headroom to return cash to shareholders. Rival Adelaide Brighton, which also raised its dividend payout, has again flagged the possibility of record sales in 2015, which could inflate its cash reserves. Few are talking about an in-market acquisition just yet.

UBS is tipping Adelaide Brighton and Fletcher Building as the strongest candidates in the sector to lift dividends. CSR is also expected to have higher free cashflow in the near term. Others, such as James Hardie, that have high cash flow are also targeting higher debt, so may favour a special dividend over a share buyback.

Additional reporting: Prashant Mehra