BHP spin-off South32 has cautious debut, valued at $9 billion

By Byron Kaye and Sonali Paul

SYDNEY (Reuters) - BHP Billiton's (BLT.L) (BHP.AX) spin-off South32 (S32.L) (S32.AX) began trading with a market value of about $9 billion (6 billion pounds) on Monday, a third below the highest forecasts and underlining investor nerves about the outlook for the battered mining sector.

The cautious response to mining's biggest listing since Glencore Plc (GLEN.L) in 2011 suggests the newly independent firm will need to do more to convince the market it can grow the assets that have long been neglected within BHP.

"It's trading below sell-side expectations, but I don't think it's an unfair valuation. It's in some commodities that I would argue are structurally challenged," said analyst Richard Knights at Liberum in London.

Australia's largest listing since 1998 houses BHP Billiton's former alumina, aluminium, manganese, nickel, silver and some coal assets.

Heavy Chinese exports of semi-fabricated aluminium have pressured that sector. Manganese demand growth has been driven by the Chinese steel industry, where output is expected to fall this year, Knights added.

Some analysts had valued South32 at nearly $13 billion, but most were expecting early trading to be around $10 billion.

TAKEOVER TARGET?While some investors see the company as a potential takeover target, some analysts and fund managers say that is unlikely, given its size.

"They're fairly large for most guys. There are not too many people who have that kind of cash," said Rohan Walsh, a portfolio manager at Karara Capital.

Mick Davis, the ex-boss of Xstrata, previously made an offer for most of South32's assets but was turned down.

His firm, X2, which has raised $5.6 billion in capital, may now be in a prime position to swoop if South32's shares slide.

But he would have to borrow around $10 billion to be able to snare South32, including a premium.

"That's a big, risky bet," said Walsh.

South32, named after the line of latitude joining its main assets in Australia and South Africa, fills a gap between the mega-miners and minnows, and offers a diverse suite of assets, from aluminium to silver.

Graham Kerr, South32’s chief executive, said in a statement: "We believe that our regional model will enable us to improve our productivity and performance in a sustainable way."

The shares began trading in Australia at A$2.13 (1 pound), compared to the A$2.00 to A$3.00 range forecast by analysts, and ended their first day at A$2.09.

In London, South32 shares opened at 104 pence and had risen to 108.75 pence in the afternoon

"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.

South32 also trades on the Johannesburg Stock Exchange (S32J.J).

(Reporting by Sonali Paul and Byron Kaye; additional reporting by Eric Onstad in London; Editing by Richard Pullin, Ed Davies and Keith Weir)