South32 cracked it in the year to end-June more than doubling operating profit from continuing operations and declaring a 5.4 US cents final dividend which boosted the total payout for the year by 55% to 9.3 US cents a share.
That performance justifies the run-up in the South32 share price which has doubled from R29 last September to current record levels around R60.
Not too shabby for a company created in 2015 from the discarded assets that parent BHP decided it no longer wanted to own, and so unbundled to be run by former BHP group CFO Graham Kerr.
Kerr has now retired to be replaced by Matt Daley who takes over a group which is very different in structure to the original set of assets which have been radically reshaped by Kerr during his tenure.
The latest divestment was of the group’s aluminium and alumina operations sold to Alcoa for $4.1bn in cash and shares, except for the now mothballed Mozal smelter in Mozambique. According to Daley the divestment of Mozal “remains under active consideration”.
Out have gone South32’s coal operations in South Africa and Australia and its nickel assets in Colombia, replaced by investment in Chile’s Sierra Gorda copper mine.
Once the aluminium assets are gone copper will be the main contributor to South32’s earnings accounting for around 55%. South32 is currently building the $2bn Hermosa zinc and manganese project in Arizona which is due to start production in 2028.
According to Daley, the sale of its aluminium value chain assets to Alcoa will simplify and strengthen the portfolio, positioning South32 as a leading base metals-focussed company with high-margin assets and a pipeline of compelling growth options in copper, zinc and silver.
“The outlook for our business is positive as we focus on safe and stable operations and growing our production of base metals into structurally attractive markets,” he commented.
The group’s remaining exposure in South Africa will be through its manganese mines which produced 2 million tons in the year to end-June and are expected to maintain that output for the next two financial years “subject to our continued use of higher cost trucking”.
That does pose a question over the future of South32’s manganese business in both South Africa and Australia given the group’s stated priority to focus on investing in copper and zinc and also in Tier One mining destinations of which South Africa is not one.
“Our focus is on running those assets to their full capability,” Daley said.
“Our preferred commodities are copper and zinc but our manganese assets have a really strong position and we like the long-term fundamentals of the commodity.
“There are challenges at the moment with our manganese business in both Australia and South Africa but our focus into this year is to operate them to full capability to generate cash flow.”
Asked whether South32 was considering disposing of its manganese business in the medium or longer term Daley replied: “if someone offered you more than you thought they were worth that’s always a discussion you would be looking to have but that’s a hypothetical situation at the moment which we don’t have sitting in front of us.”
Underlying EBITDA (earnings before interest, tax, depreciation and amortisation) for the SA manganese operations dropped by $16m to $30m in the year to end-June because “higher sales volumes were more than offset by a stronger South African rand, higher trucking costs and diesel prices.”
