South32: Eats a tasty little Mozal

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
01 October 2021, 8:00 AM
Sectors Covered:
Mining, Energy

  • South32 (ASX:S32) triggered its pre-emptive right to acquire an 25% interest in the Mozal operations from JV partner Mitsubishi, taking S32’s stake to 72.1%.
  • Consideration of US$250m, close to our valuation, implies 3.5x FY21 EBITDA.
  • If IDC triggers its own pre-emptive then S32’s Mozal interest will be pro-rata lower. Mozal’s profitability has been transformed by rising aluminium prices, which are at the highest levels seen since 2008.
  • Having risen 27% since we upgraded our rating to Add in mid-August, we now pull our rating back to Hold, viewing S32 as trading near fair value.
  • We view aluminium, coking coal, and thermal coal prices as trading ahead of long-term prices.


S32 announced it has triggered its pre-emptive right to acquire an 25% interest in Mozal, aluminium smelter in Mozambique, for US$250m.

The US$250m consideration was based on 3.5x FY21 EBITDA, which puts it close to our Mozal valuation.

The acquisition will take S32’s interest from 47% to 72.1%, unless the Industrial Development Corporation of South Africa (IDC) triggers its own pre-emptive, at which point S32’s interest would be pro rata lower.

Along with the Mozal acquisition, S32 flagged that it is also exploring a possible restart of Alumar’s smelter in Brazil supported by renewable energy.

Part of a clear push from S32 to increase its exposure to base metals.


A reasonable price paid, with potential upside possible if strong aluminium prices are sustained in the medium term.

We continue to see further room in S32’s portfolio post SAEC divestment for further base metal investments, and expect S32 to remain active on this front.

Forecasts and valuation update

We have upgraded our FY22 aluminium forecast to US$1.14/lb (from US$0.99/lb).

While also increasing hard coking coal (HCC) to US$191/t (from US$150/t), and thermal coal to US$126/t (from US$92/t).

We have included the 25% Mozal acquisition in our numbers, increasing S32’s interest to 72%, while lowering pro rata net cash for the acquisition.

Net of these changes our valuation has increased to (login to view).

Investment view 

We upgraded our rating on S32 in mid-August on the view that it had reached an attractive entry point. Since this time S32’s share price has risen 27%, mostly benefitting from increasing aluminium and coal prices.

Given the majority of gains have been delivered from rising metal prices it has been difficult to add further conviction, with S32 now appearing to trade close to our upgraded target price of (login to view).

Price Catalysts

Upcoming September quarterly, which we expect to show a continuing good performance from Cannington and Worsley.

Progress at key zinc development project Hermosa.


COVID risk given potential impact on key demand drivers for metals.

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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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