South32: Sale for SAEC’s sake

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
22 January 2021, 1:00 PM
Sectors Covered:
Mining, Energy

  • A mixed operational result from South32 (ASX:S32), although generally ahead of our estimates.
  • Gradual progress is being made on the key SAEC divestment, which will shrink S32’s global workforce by a third, boost group earnings, free up management time and improve S32’s risk and ESG profile.
  • Good performance from Cannington, with strong sales from the ageing mine leading to a 5% increase in FY21 guidance.
  • S32 shelved Eagle Downs (met coal), while giving the go ahead to the bolt-on development of the Q&P project at Cerro Matoso (nickel).
  • Now trading in line with our target price we lower our rating on S32 to Hold (from Add), with a revised target price (login to view).

Mixed 2Q21 result

A mixed 2Q21 result overall, with metallurgical coal (1,399kt -25% QoQ) and nickel (6.1kt -39% QoQ) down on the previous quarter, while Cannington (zinc +45%, lead +18% and silver +9% QoQ) and alumina (+7% QoQ) saw gains.

The ageing Cannington mine saw a nice bump from an acceleration of mining of higher grade zones, with S32 announcing a 5% upgrade to FY21 guidance. S32 also increased FY21/22 guidance at Cerro Matoso by 3% and 13% respectively.

While Illawarra’s met coal volumes were lower in 2Q21, they remained healthy with the operation benefiting from the three longwalls. A consistent performance from alumina (+7% QoQ) and aluminium (flat).

Offloading SAEC a value catalyst

Divestment of S32’s South African Energy Coal (SAEC) business is progressing, even if at a glacial pace. S32 is now targeting sale completion by 31 March 2021. We take confidence from the recent progress towards finalising the sale.

Offloading SAEC will cut S32’s global workforce by approximately a third, boost group earnings, free up management time and boost S32’s risk and ESG profile. Some material conditions still remain to deal completion, with an agreement with national utility (and captive customer Eskom) still an important hurdle.

Moving in the right direction

S32 continues to make sound portfolio moves, progressing SAEC divestment, shelving Eagle Downs (met coal) and sanctioning a bolt-on development at Cerro Matoso (nickel) in the Q&S Project (17mt resource to add 6 years of feed at higher average grades), in addition to progressing its Hermosa zinc, lead and silver project.

We continue to see room for further growth, particularly post SAEC exit.

Lowering recommendation to Hold

Post the recent share price increase we view S32 as now trading at fair value and have reduced our rating to Hold (from Add). Updating our estimates for the result has seen a small net change in our target price from A$2.65 (login to view target price).

We see further upside potential from a continuing commodity cycle, with coal markets in our view likely to recover, while we see less upside potential from aluminium and manganese. The key risk to our call is global macro (metal demand driven).

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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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