Materials

South32 raises FY cost guidance

Tue 26 Apr 22, 11:15am (AEST)
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Key Points

  • Production costs will be higher-than-expected at several of South32's mines
  • March quarter update revealed that output had lifted across a number of key assets in the first nine months
  • Goldman Sachs likes South32’s free cash flow, mostly due to its base metal exposure

Due to strong currencies in resource-rich countries plus increased royalties and raw materials expenses – namely fuel costs - South32 (ASX: S32) has advised the market that production costs will be higher-than-expected at several of its mines.

To the initiated,  South32 is a diversified metals and mining company operating in Australia, Southern Africa, North America, and South America.

The market took greater note of the bad news within this morning’s mixed-bag announcement, with the share price down -6.82% 30 minutes out from the open.

First some good news

Today’s March quarter update revealed that output had lifted across a number of key assets in the first nine months of the financial year, these include:

  • Production up 6% at its Cannington base metals mine in Queensland

  • Nickel output up 33% at its Cerro Matoso mine.

  • Illawarra metallurgical coal mines production up 42% in the March quarter

Rising costs

Overall, South32 expects rising costs across its operations, plus a weaker US$, to increase costs between 3% to 15% compared to its previous guidance.

Management notes higher received prices are also flowing through to royalties paid to the governments of the countries in which South32 operates.

Looking across its various operations, management noted the following cost increases:

  • Worsley alumina operations to come in at an average $US265 a tonne, compared to earlier guidance of $US257 a tonne, but annual output likely to come it ahead of nameplate capacity.

  • Costs at its Brazilian aluminium operations to rise 5% compared to the previous financial year.

  • Costs in South Africa and Mozambique likely to rise 10 to 15%.

  • Likely cost increases at Cannington, Illawarra and South African manganese operations.

Supply chain issues

Echoing the sentiments experienced by many of its contemporaries, South32 noted that supply chain issues and tight freight markets, were forcing the company to explore new ways to ensure delivery of its products to customers.

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South32 share price: A 3-month snapshot.

What brokers think

Based on the brokers that cover South32 (As reported in by FN Arena), the stock is trading with 24.1% upside to the target price of $6.00.

Consensus on South32 is strong buy, with price targets ranging from $4.90 to $7.00.

Goldman Sachs likes South32’s free cash flow (FCF), mostly due to its base metal exposure (Buy) and has a target price of $5.80.

Ord Minnett (Buy) has raised the target price on South32 to $6.30 from $5.00 after raising its price forecast for iron ore by 22% to US$139/t in 2022 and by 14% to US$115/t in 2023. 

The broker also notes higher prices for base metals and coal from supply disruptions from the Russia/Ukraine conflict.

Macquarie expects elevated spot pricing on coking coal, alumina and nickel to support earnings upgrades for South32 in the coming year and retains an Outperform rating and target price of $7.00.

Based on Morningstar’s value of $5.04, the stock appears to be fairly valued.

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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