BLUECHIP: Test of mettle for Billiton

The recently-listed metals giant Billiton has done little to excite since it listed on the London Stock Exchange last Monday. At 223.5p, the shares are up a tad from the placing price of 220p.

Yet the South African-styled business has given institutional investors plenty to think about. Billiton gains automatic entry to the FT-SE 100 index of leading companies, courtesy of its pounds 4.6bn market capitalisation, which makes it the 56th largest company in the UK. In the metals field it joins Rio Tinto, the venerable mining finance house which has dominated British efforts in the area for decades.

Billiton has some UK roots; a large part of it was acquired by its South African owner Gencor from Royal Dutch Shell in 1994. The company holds all Gencor's non-gold and non-platinum interests, stretching from coal to titanium, ferroalloys, aluminium and base metals.

Despite its stodgy start Billiton has several attractions. It has some plum assets in South Africa, notably the manganese and chrome operations, among the best of their kind in the world. It has strong trading operations in Holland, while it has become one of the largest players in the world aluminium market.

Billiton has eschewed the once fashionable belief among aluminium producers that one had to be vertically integrated, owning factories to turn aluminium into finished products for end users. Instead, it will concentrate solely on the aluminium process itself: mining bauxite ore and converting it into alumina before finally smelting it into refined aluminium.

Much of its operations - and therefore costs - are in countries like Brazil, South Africa, and Colombia, where the local currency is soft. Because the vast majority of its production is exported, denominated mainly in dollars, soft currencies are a good thing - as long as they continue to depreciate.

The group is, however, open to translation costs from currency swings hitting profits. Other risks include the political uncertainty of many of its base countries. And every big metals and mining group is vulnerable to operational disaster: flooded mines, smelters that pack up, striking workers.

Investors are also faced with some complex subsidiary ownership arrangements, although there could well be some hidden value. On balance, however, Rio Tinto looks the better bet.

Copyright: IOS & Bloomberg

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