[miningmx.com] – SOUTH32 turned to a more aggressive cost reduction programme promising to take out $300m by the end of the 2016 financial year instead of the $350m target over three years.
The group, which reported underlying earnings of $26m in the six months ended December 31 (2014: pro forma $460m), also passed the dividend – a call analysts said they expected, but which still represents a far cry from the high-yield counter South32 promised to be following its demerger of BHP Billiton in 2014.
Including non-cash impairments of $1.7bn during the financial year related to its South African coal ($518m) and Australian manganese ($916m) assets, the company reported a $1.75bn loss for the half year compared to a $339m profit in the corresponding period of the previous financial year.
Graham Kerr, CEO of South32, said the group was interested in buying assets deemed non-core by other mining companies, but the focus was on retaining its credit rating and surviving sustained low metal prices.
“Our low financial gearing and operational leverage is a powerful combination and the decisive action we are taking across our portfolio will strengthen short term cash flow,” he said in a statement to the group’s financial results.
Costs would be more aggressively cut at its South African manganese assets as well as Worsley alumina operations, Illawarra metallurgical coal facilities and its Australian manganese as well as Cerro Matoso operations in Brazil.
Goldman Sachs acknowledged the more aggressive cost-cutting saying that the $350m target that had existed to end 2018 could now be increased to between $500m and $600m. “South32 has gotten more aggressive on their cost out trajectory,” it said.
“The cost out is good, but what is more reflective for us is it is a sign that management are starting to work harder and harder and sweat the assets more,” the bank said.
“Given the whole industry is in a cost out phase, those who run harder quicker will be in a significantly better relative position,” it added.
“The announcement of further cost reductions was largely anticipated and while S32 [South32] looks on track to comfortably beat its $350m cost out target by FY18, we had hoped that a much larger cost out target would be announced,” said Macquarie Bank in a research note today.
Investec Securities said a stronger-than-expected performance in the South African coal division saw South32 produce a result above forecasts. But it was disappointed that a dividend had been passed as net debt was low.
“In our analyst’s opinion, the commodity mix of South32 remains challenged in the near term.” it added.
In a report by Reuters, Kerr was quoted as saying the company was interested in buying assets in either copper or so-called second or third generation minerals with speciality applications such as lithium or graphite.
“Lithium and graphite have attractions but they can be quite unique in terms of they are the flavour of the month,” said Kerr.
“We will look across the whole commodity spectrum, but more toward the second and third generation of commodities,” said Kerr.
Kerr said earlier this month that he would be interested in buying the shares it didn’t already own in South African manganese producer, Samancor, from Anglo American, its joint venture partner.
“We operate the joint venture and market 100% of the product, so we obviously know the business well,” Kerr said.
