South32: Pulling the trigger on better entry

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
20 August 2021, 6:00 PM
Sectors Covered:
Mining, Energy

  • Our conviction on S32 was boosted when it completed its SAEC divestment, but at the time this was already priced in. We upgrade our rating to ADD now on what we consider to be a better entry point given the recent share price weakness.
  • FY21 was solid, ahead of our estimates, also leading to a stronger dividend.
  • Cost pressures across its alumina smelters look like a key challenge heading into FY22, while this still looks well covered by strength in metal prices.
  • FY22 guidance was mixed, leading to higher production assumptions across some operations while bringing higher costs with it.
  • A strong balance sheet, healthy FCF, growth from Hermosa and room for extra M&A.

Solid FY21 result

South32 (ASX:S32) posted strong FY21 underlying NPAT of US$489m, +153% yoy, which was in line with Vuma consensus of US$488m (consensus estimates ranged from US$299m to US$598m), and above our estimate of US$460m.

Underlying EBITDA of US$1,564m, +32% yoy, was also in line with consensus. 

FY22 guidance update, Worsley production guidance 5% above our estimate, but so is unit cost guidance. Alumar volume guidance was 4% below after a cut. An impressive 10% upgrade to Cannington production guidance, with throughput and grades set to be above our previous estimates at the aging mine. Other cost guidance was roughly close, outside of Cerro Matoso, which was 7% below our estimate. 

The solid earnings also supported a lift in dividend, with S32 announcing a final dividend of USD 5.5cps (which included a special dividend of USD 2.0cps), while S32 also boosted its share buyback by another US$120m (US$252m remaining).

Finishing the year with US$406m net cash and having divested its troubled SAEC business, we see S32 as well placed to chase new growth, likely base metals.

Forecast and valuation update

We have made a large number of adjustments to our FY22 and FY23 production and unit cost forecasts based on updated guidance provided by S32.

In particular we have lifted FY22/23 output from Worsley by circa 5%, while also increasing unit costs by 6%. Other notable changes include cutting unit cost estimate at Cerro Matoso 10% in line with FY22 guidance, and lifting production from Cannington (5% higher throughput and increased grades).

Investment view

Riding metal prices, investor sentiment in S32 was strong leading into finalising the divestment of its South African Energy Coal (SAEC) business. With S32’s share price drifting back on broader weakness, we see the current share price as offering a better entry point.

We view S32 as an attractive ex-iron ore diversified mining exposure, that in our view offers value upside and well positioned to pursue new growth.

Following changes to our estimates, we have increased our value-derived target price to (login to view). And as a result upgrade our rating to ADD (from HOLD).

Price catalysts

Update on Illawarra operations (study due in short term which could disappoint).

Progress on Hermosa.


COVID risks to metal demand drivers.

Update on Illawarra.

Execution risk on Hermosa.

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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