South32: Rewarded for its success
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 October 2021, 8:00 AM
- Sectors Covered:
- Mining, Energy
- We see S32 remaining in a strong position with solid earnings momentum and progressing towards completion of the Sierra Gorda acquisition.
- A good 1Q22 result from S32, with solid performances from GEMCO, South African manganese, Cannington and its ali business.
- We remain within the 30-day pre-emptive period for Sierra Gorda operator KGHM, along with also needing other typical approvals.
- Strong metal prices give S32 a chance to keep reshaping its portfolio as it continues to work around the assets it inherited (Illawarra sale?).
- We have a positive view on S32, but in terms of investment view the appeal has been lowered by the re-rating its share price has already experienced. We maintain our Hold rating.
Few surprises in the 1Q22 operational result.
The standout performances were from S32’s manganese ore operations in Australia (GEMCO) and South Africa (Mamatwan), for a total 1,565kt +7% yoy (vs MorgE 1,416kt).
Illawarra’s performance was mixed, with steady met coal production of 1,575kt (vs MorgE 1,569kt) on better longwall productivity. Thermal coal sales meanwhile disappointed at 218kt (vs MorgE 250kt) with S32 flagging it was unviable to sell lower grade material given soaring freight costs.
Cannington was good on balance, with better-than-expected silver production of 4.2moz (vs MorgE 3.5moz), and lead output of 31.9kt (vs MorgE 31.5kt), while zinc volumes were below our estimate at 15.4kt (vs MorgE 16.4kt).
Alumina 1,278kt (vs MorgE 1,290kt) and aluminium 248kt (vs MorgE 248kt) were both in line with our forecasts.
Sierra Gorda transaction is progressing through the 30-day pre-emptive period held by operator KGHM and typical approvals.
The strong environment across metal prices has created supportive earnings momentum for S32. For a miner like S32 which has been transitioning the portfolio it inherited, this cycle creates a window where it can move some otherwise disappointing assets.
We see Illawarra firmly in this category, and we expect there will be no greater opportunity to divest these difficult coal operations than right now.
S32 is trading on 4.8x FY22F EBITDA, which does appear fair value given the strength of some metal prices which will likely moderate in time.
Forecast and valuation update
We have only made minor adjustments to our estimates factoring in the 1Q22 operational result.
Small change in valuation as a result to (login to view target price).
S32 is in good shape having made a number of good moves in recent years (most notably divesting SAEC, acquiring Hermosa and acquiring its Sierra Gorda interest). While net debt post acquisitions will remain a very manageable 0.55x ND/EBITDA.
Trading close to our valuation we maintain a Hold recommendation.
Completion of Sierra Gorda transaction.
Coal/metal price volatility given current earnings momentum.
COVID-related risks to metal demand and S32 operations.
Risk Sierra Gorda transaction is not completed.
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