Materials

South32 hits guidance

Mon 25 Jul 22, 11:16am (AEST)
Diversified Mining
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Key Points

  • South32 expects to report underlying depreciation and amortisation of US$790m for the 12-month period
  • The company also spent US$128m buying back 46m shares at an average price of $3.89
  • The company delivered record annual production at its Worsley Alumina operations in WA

After being heavily sold-off in June, South32 (ASX: S32) opened 1.98% higher this morning after the diversified mining and metals company advised the market it had all but reached its revised annual output guidance target, despite the impact of covid on staffing and global supply chain issues.

Overall, South32 expects to report underlying depreciation and amortisation of US$790m for the 12-month period including US$110m at its manganese business.

The company also spent US$128m buying back 46m shares at an average price of $3.89.

Worsley & South Africa manganese

Despite production falls across the bulk of the operations, record annual production at its Worsley Alumina operations in WA and all-time high quarterly production at its South Africa manganese business saw the company deliver a result 1% shy of its revised guidance on a copper equivalent basis.

South32 also benefited from depreciating currency movements in its producer countries allowing it to report FY22 operating costs in line with previously updated guidance.

Highlights of the June quarter production report:

  • Total alumina production down -1% to 5.29m tonnes.

  • Aluminium output was up to 992,000 tonnes, from 982,000 tonnes the previous financial year.

  • Nickel production was up 22% to 41,700 tonnes.

  • Lead, silver and zinc were all down.

  • Alumina and aluminium up 1% to a record 3.99m tonnes through the year

  • South Africa Manganese delivered record output in the June 2022 quarter after increasing manganese production by 22%.

Pivot towards low carbon metals

Commenting on today’s announcement, CEO Graham Kerr notes the company had achieved further significant milestones as its reshaped its portfolio towards the metals critical for a low carbon future.

Kerr also noted that stable operating performance had allowed the company to capitalise on record conditions for a number of its commodities, with strong sales in the June 2022 quarter capturing the benefit of high prices.

“Our strong financial position and capital management framework, which is designed to reward our shareholders as our financial performance improves, supported further returns across the year via our on-market share buy-back, bringing total returns under our capital management program to $US1.9 billion since its inception,” he noted.

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South32 share price over 12 months.

 

What brokers think

Even after a shocker of a month in June, South32 is still up 19.66% over one year.

Consensus on South32 is Moderate Buy.

Based on Morningstar’s fair value of $4.91 the stock appears to be undervalued.

Based on the seven brokers that cover South32 (as reported on by FN Arena) the stock is trading with 58.6% upside to the target price of $5.60.

Goldman Sachs is Buy rated on South32 with a target price of $5, and notes the share is trading at 2.4 times FY23 earnings (EBITDA) with a robust free cash flow (FCF) outlook. (13/07/22).

South32 is Ord Minnett’s most preferred mining stock for the remainder of 2022, and the broker expects the stock to regain investor interest on the back of renewed confidence about the economic trajectory ahead. (20/07/22)

The broker retains a Buy rating and target price of $4.80.

Morgan Stanley expects additional cashflow from the sale of a package of four non-core base metals royalties to Anglo Pacific Group to lend support to the company's capital returns program.

The broker’s Overweight rating and $5.10 target price are unchanged. (13/07/22).

While lower copper and coking coal prices have reversed earnings upgrade momentum for the company in the short term, Macquarie believes commodity prices continue to drive earnings upgrade momentum over the longer term.

The broker retains an Outperform rating and $6.00 target price. (13/07/22) and forecasts a full year FY22 dividend of 34.49 cents and EPS of 74.79 cents.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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