South32 increases shareholder returns through positive pricing
- Increased exposure to “transition” metals
- Measures taken to mitigate logistical challenges
It’s been seven years since South32 (S32) was split from BHP Billiton, a move that did not receive universal approval at the time. The reason for BHP Billiton’s original merger was that it would create an entity with a portfolio of assets that could enable it to ride out cyclical downturns in the industry. But the bosses eventually came to the conclusion that BHP would be best served by concentrating on the production of iron ore, copper and metallurgical coal. South32 had to settle for less profitable lines such as thermal coal, aluminum and zinc.
However, the South32 mining complex performed better than expected. The MSCI World Commodity Producers Index rose by a quarter in the meantime, though obviously not linearly, and prices for many of the group’s commodities firmed.
The miner, in line with an upbeat Q3 trading update in July, generated underlying annual profit of $2.6bn (£2.2bn) with free cash flow to match. As a result, the board decided to pay a final dividend of $648 million, meaning record shareholder returns throughout the year were equivalent to approximately 10% of the group’s market capitalization.
Underlying price increases across the asset portfolio have boosted financial performance, but this should not detract from operational progress. Record production was recorded at Worsley Alumina, while production forecasts were exceeded at the Cannington site. Management has taken steps to alleviate freight and logistics issues, allowing the group to “deliver volumes in favorable markets, taking advantage of higher prices.”
With an eye to the future, management has increased South32’s exposure to “metals critical to a low-carbon future.” Production forecasts point to increases for the lion’s share of the group’s mining complex, but prices could fall further in the near term as the global economy stutters. With stocks trading in line with the consensus objective, we will stick to it.
Last seen IC: Hold, 242p, Feb 17, 2022
|ORDER PRICE:||255p||MARKET VALUE:||£11.8 billion|
|TO TOUCH:||254-255p||TOP OF 12 MONTHS:||307p||LOW: 150p|
|DIVIDEND YIELD:||7.6%||P/E RATIO:||5|
|NET ASSET VALUE:||233ȼ||NET CASH :||$453 million|
|Year to June 30||Revenue (in billions of dollars)||Profit before tax (in billions of dollars)||Earnings per share (ȼ)||Dividend per share (ȼ)|
|Ex div:||15 Sep|
|£1 = $1.18. NB: Dividend and DY figures do not include special dividends of 3¢ for FY2018, 1.7¢ for FY2019, 1.1¢ for FY2020, 2p for FY 2021 and 3¢ for fiscal year 2022|