South32: Mixed Q2 carried by prices

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
27 January 2022, 11:00 AM
Sectors Covered:
Mining, Energy

  • A mixed quarter from S32 with strong Cannington volumes helping to offset weaker coal and manganese volumes.
  • S32 has upgraded FY22 guidance for Cannington while reducing manganese.
  • Exceptional strength in metal prices remain a major support for S32, more than offsetting a softer performance from some operations.
  • Inflationary pressures remain a key near-term risk, with S32’s ability to defend only limited.
  • We maintain our Add rating, with a (login to view) target price.

Mixed 2Q22 operational performance

On balance 2Q22 was on the weaker side, with S32’s Illawarra and manganese operations trailing. Somewhat offset by a strong performance from Cannington. 

S32 lifted FY22 guidance for Cannington 5%, after 2Q22 silver production of 3.2moz (vs Visible Alpha consensus 2.84moz), lead production of 28.3kt (vs consensus 27.6kt) and zinc production of 17.3kt (vs consensus 15.3kt). Better underground productivity and higher grades drove the increase in confidence. 

Illawarra’s soft 2Q22 was attributed to an extended longwall move which hampered coal production during the quarter (met coal actual 1.19mt vs consensus 1.45mt and thermal of 65kt vs consensus 244kt). Leading to a cut to FY22 guidance. 

In manganese, GEMCO disappointed with a weather-impacted quarter leaving ore production -8% vs consensus, with S32 then cutting FY22 guidance by -9%. While South African manganese production came in below consensus (-10%) albeit with a higher proportion of premium product. 

Alumina/aluminium were roughly in line, with another good performance from Worsley the highlight in S32’s ali business. 

Nickel was roughly in line from Cerro Matoso at 10.7kt (vs consensus 11kt).


With S32 more sensitive to metal prices than production, the mixed 2Q22 production was more than offset by continuing strength in the price environment.

While some aspects are likely to drag on S32, such as its limited ability to defend against cost pressures despite vertical integration in its ali business, we see near-peak earnings and FCF generation as holding potential to be sustained into FY23.

Forecast and valuation update

We have adjusted our forecasts in line with the changes to FY22 guidance and rolled our model forward an additional quarter.

Investment view

S32 is trading at a discount to its iron ore peers, in terms of both valuation and earnings multiples. While offering a diversified exposure to a collection of attractive commodities. We see potential for S32’s to re-rate relative to its larger iron ore peers as commodity cycles progress and iron ore further moderates. 

We maintain an Add rating on S32 with an unchanged (login to view) price target.

Price catalysts

1H22 earnings result.

Sierra Gorda acquisition completion and guidance updates.


COVID related risks to operations and 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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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