BBL BHP Group Plc

By Rhiannon Hoyle 

MELBOURNE, Australia--When South32 Ltd. was spun out of BHP Billiton Ltd., it came with a collection of commodities and assets its former parent didn't want and many in the market didn't understand.

One year on, the ugly duckling is growing up.

South32's shares have been rising despite concerns that a broad-based slump in commodity prices may not be over, as investors laud its efforts to drive down business costs and boost cash reserves. Its stock trades up 36% on the start of the year, versus a 2.5% gain in BHP's shares and a 14% rise in an Australian index of metals and mining companies.

In an interview, Chief Executive Graham Kerr said South32 undoubtedly endured a rocky first year as commodity prices slid lower than he would ever have envisaged, but said that spurred management to fast-track plans to cut spending and strengthen the balance sheet.

"We have restructured the business faster than people expected and, as a consequence, in this [difficult price] environment we are still generating cash every month, which I think has surprised a few of the doubters," said Mr. Kerr.

The rationale behind the spinoff in May last year was to unleash the potential of operations including manganese and bauxite mines that had been hidden within BHP and given little attention or cash by the world's No. 1 miner by value, which is focused on expansions in markets such as oil and copper. It was one of the biggest breakups in corporate mining history.

At the time, critics raised concerns about South32's heavy reliance on operations in South Africa, where miners have long grappled with issues including worker strikes and high electricity costs. Its shares ended last year at half of their debut value.

"Six months' worth of results hasn't totally removed some people's doubt from their mind," but perceptions about the company appear to be changing, said Mr. Kerr, adding that he is convinced a split up was the right move.

South32 will release its first full-year financial report in August.

The company reported a net cash balance of US$18 million at the end of March, in stark contrast to competitors who built up billions of dollars in debt in a spending spree during a decadelong commodities boom.

"It is good management, it is a good team, and they are clear on strategy," said George Boubouras, Chief Investment Officer at Contango Asset Management, which sold out of South32 after the spinoff but has since bought back in.

To be sure, the company is likely to face continued harsh headwinds from weak commodity prices, which have capped investor interest in mining stocks in recent years, he said. Even with the recent rally, South32's share price hasn't managed to get back to the 2.45 Australian dollar (US$1.77) peak it reached shortly after debut. On Thursday, the stock closed at A$1.45.

Some other mining companies that had previously been dumped by investors have also enjoyed a bounce in recent times, with mining and trading titan Glencore PLC also up roughly 40% so far in 2016.

Steve Johnson, chief investment officer at Sydney-based Forager Funds Management, took a small stake in South32 last year after it listed, but says he bolstered his investment in the miner when the stock fell to a low around A$0.90 in January.

"It looked crazy at that price, so we decided to take a much bigger position in it," Mr. Johnson said.

He praised management's focus on spending cuts and said he is comforted by Mr. Kerr's insistence the company will target "value over volume."

"It is basic common sense stuff that is badly missing from many management teams' strategy," said Mr. Johnson.

BHP hasn't been alone in splitting up. Companies in industries including technology and biopharmaceuticals have pressed ahead with spinoffs in a bid to squeeze more value from stock holdings.

Global spinoff transactions reached a record US$250.9 billion in 2015, nearly doubling the US$127 billion in deals completed in 2014, according to Dealogic.

With more cash than debt, the company has better fiscal firepower to buy businesses from struggling rivals than most of its competitors.

But Mr. Kerr insisted the market remains too focused on that. "Gone are the days where you have to look through the lens of how do I become the biggest," he said.

The company does remain interested, though, in Anglo American PLC's stakes in manganese ventures the pair jointly own, he said.

Separately, Mr. Kerr said the miner may have to halt output at its struggling Cerro Matoso nickel mine in Colombia, where it faces challenges from high costs and the threat of worker strikes.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

June 02, 2016 05:35 ET (09:35 GMT)

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