Kerr unfazed by South32 one-fifth value loss

[miningmx.com] – Graham Kerr, CEO of South32, said the weakness in the company’s share price was predominantly down to commodity prices, sluggish rate of growth in China, and “a slight re-balancing of the [shareholder] register”.

“If anything, it is a timely reminder of the need to show the market that our regional strategy will be different. I think the market will see that over time,” he said.

South32 was born of the de-merger of BHP Billiton’s non-core assets which included coal and base metal operations in Mozambique, Colombia, South Africa and Australia. Kerr, who was formerly CFO of BHP Billiton, has set down plans to give greater in-country operational focus to the assets as they report to local managers.

Shares in the company have fallen nearly a fifth since taking a secondary listing in Johannesburg on May 18 and peaking two days later at R21,75/share. The company’s shares are currently trading at R16,39/share valuing it at R87bn.

Although a much larger company, shares in the R244bn Anglo American were also just under a fifth lower over the same time frame. Shares in BHP Billiton and Glencore were 14% and 6% lower respectively.

“It’s not unusual that it takes time for a management team to be understood and strategy to be understood by the market. But the bigger impact [on the share price] is commodity prices,” said Kerr.

South32 also announced on June 9 that it may write-down the value of its 60% stake in its Samancor manganese joint venture shared with Anglo American. This followed a delay in the restart of three of four high carbon ferromanganese furnaces at South32’s Metalloys manganense alloy operation in South Africa.

South32 said its decision was prompted by the one fifth decline in the price of ferromanganese “… and is aligned with South32’s commitment to maximise per share financial performance, rather than volume”.

Said Kerr today: “There have been manganese and aluminium downgrades, as well as a downgrade in alumina,” he said. “Specific commodities people were bullish about six months ago … well, they are not so bullish about now,” he said.
Uncertainty around whether Greece will exit the Euro was also playing on the minds of investors.

“It’s important to have diversification which we have by country and by geography. On a pound for pound basis, we also have high quality assets that were built to Billiton standards. So I think we will surprise people,” he said.

Analysts have suggested that South32 will announce a dividend closer to 70% of earnings rather than the 40% dividend policy set down by the company at formation.
“We will only be reporting on six weeks of operational control when we announce results, but we are still on track to generate cash,” said Kerr.

“We have spoken very clearly about capital management priorities. We want to establish predictable and reliable operations, maintain our investor grade credit rating, and then we have spoken about returning a minimum of 40% back to shareholders as part of the payout ratio,” he said.

“Any cash left over has to compete between further returns to shareholders, either through a dividend or a buyback, or to develop projects in the portfolio, or for opportunistic merger and acquisition activity,” he said.

“Mergers and acquisitions are not a strategy for us; they will be opportunistic,” said Kerr.