South32: Not necessarily looking for more projects

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 February 2021, 5:00 PM
Sectors Covered:
Mining, Energy

  • South32 (ASX:S32) reported a strong 1H21 earnings result, comfortably ahead of estimates.
  • Management’s top priority remains completing the SAEC divestment.
  • Value over volume remains a key focus, with management outlining that it does not necessarily need to add more assets to its portfolio.
  • Formulating ‘Plan B’ for Dendrobium’s mine design after its application was rejected by NSW’s IPC.
  • Maintain Hold recommendation with a revised target price (login to view). 

1H21 result ahead of estimates

A tough half for South32’s basket of commodities, but the company still managed to come in ahead of estimates. 1H21 revenue of US$2,943m (vs MorgE US$3,110m), EBITDA of US$633m (vs MorgE US$599m), and underlying NPAT of US$136m (vs MorgE US$109m).

South32 also surprised with a large interim dividend, flexing its payout ratio to continue a trend that has proven popular amongst large-cap miners this reporting season. With an interim dividend of 1.4 cents (vs MorgE 1.0 cents) representing a dividend payout ratio of 127%.

S32 maintained balance sheet strength, with a net cash position of US$275m on its balance sheet at the end of December.

SAEC sale still major value catalyst – and worth waiting for

When asked about plans for new growth and other potential portfolio moves, South32 management stressed that nothing was more important than completing the divestment of its South African Energy Coal (SAEC) business.

SAEC represents a third of South32’s total global workforce, is a substantial drain on earnings and management time, and holds material closure liabilities. Already delayed several times, the 1H21 result did not bring any new developments.

Still reliant on gaining approval from South African state-owned (and troubled) utility Eskom, being able to complete the sale is not a given.

In no hurry to fill gap in growth plans

Referencing value over volume, management were also clear that even though they had capacity for another large project, it would not pursue M&A by default. As things currently stand, we do see capacity for South32 to add some new growth, particularly post SAEC sale.

But South32 was clear that it is not building a war chest to pursue acquisitions. In the meantime South32 is devoting its focus to its existing portfolio:

  1. Maintaining elevated production at Cerro Matoso
  2. Building Hermosa
  3. Developing Trillogy
  4. Keep exploring southern area of GEMCO looking for life extension options.

The other key area of focus for South32 remains on Dendrobium at Illawarra, after the mine development was denied by NSW’s IPC. South32 is working on a mine re-design to try and secure approval.

Waiting on SAEC sale to gain conviction

While advanced in the divestment process, there are still notable hurdles to complete the deal. The project continues to have a material drag on South32’s overall fundamentals, which combined with recent share price strength, has lowered our conviction in South32’s upside from here.

We have made minor adjustments to our estimates reflecting updated guidance, with increases to FY21 production guidance for Illawarra, Cerro Matoso and Cannington. Trading up around our target price (login to view), we maintain our Hold rating.

The key risk to our call is macro (metal demand) and completing the SAEC divestment.

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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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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