South32’s $378m return takes payout pledge to fresh levels

Graham Kerr, CEO, South32

SOUTH32 has taken its pledge to return cash to shareholders to a new level announcing an interim and special dividend worth a combined $378m and increasing its share buy-back programme by another $250m to $1bn since it was first unveiled in March 2017.

Shareholders will receive an interim dividend of 4.3 US cents per share and a special dividend of three cents a share. In terms of the buy-back programme, the group has some $540m in shares to purchase following the extension of the programme. It bought $305m worth of shares – some 143 million – in the interim period but had slowed the programme lately as it was focused on buying shares for value.

“We thought it would be better to distribute cash through the special dividend,” said Graham Kerr, CEO of South32 in an interview with Miningmx following the announcement of the interim results. He acknowledged the share had become expensive.

The group had a net cash balance of $1.4bn as of December 31. Its capital structure is positioned so that it pays 40% of underlying earnings in dividends and then deploys excess cash above its $500m buffer – a sum it keeps on the balance sheet to fund growth opportunities. Kerr said opportunities would largely be through bolt-on or organic growth, and through exploration joint ventures.

Potential acquisitions would require a target to be “… on its knees …” which was unlikely in the current market,” said Kerr of possible merger/acquisition activity. “We are also looking at growth through exploration and we continue to sign new agreements; we think that is the most value accretive. But we are not fixated on growth for growth’s sake,” he added.

South32 reported headline interim share earnings of 9.9 US cents/share compared to 11.6c/share for the corresponding period of the previous financial year. On an underlying earnings basis, which excludes items such as certain tax expenses, currency exchange changes and fair value changes, there was a 14% increase in interim earnings to $544m.

“With a net cash balance of $1.4bn, working capital expected to partially unwind and group volumes expected to increase marginally in the second half, we are well positioned despite a reduction in future Cannington processing rates and metal production,” said Kerr in notes to the firm’s published results.

Cannington is South32’s Queensland sited silver and lead mine. The group’s only other major production headache was at Illawarra, a predominantly metallurgical coal mine where full production rates might only be resumed in South32’s 2019 financial year following safety-related shut-downs during 2017.

“Guidance hasn’t changed on Illawarra,” said Kerr. Total coal production would be 4.5 million tonnes (Mt) for the year down from just over seven million tonnes in the 2017 financial year. Guidance has not been provided for the 2019 financial year.

Macquarie took a dim view of the numbers, however. “Rising cost pressures across a number of S32’s operations overshadowed an in line earnings result and special dividend,” it said in a note. “Strengthening exchange rates and a forecast decline in key commodity prices could see S32’s margins come under pressure over the next 12-18 months.”

SOUTH AFRICA

The process of establishing South32’s thermal coal business in South Africa as an independent entity was underway. Kerr said the mechanism for sale – perhaps either a cash sale or vendor-financed transaction – would only be contemplated in the second half of calendar 2018. But he was upbeat on political changes in the country.

“If some of the mining charter uncertainty was sorted out it would make South Africa more investible,” he said. “The issue is not about South Africa, however; it’s more about its politics and policies. We hope the ANC will come to see that foreign investment is a good thing,” he said.

Jacob Zuma, South Africa’s president, announced last night he would resign following a recall by his party. He is likely to be replaced by Cyril Ramaphosa, president of the ANC since mid-December. The transition of leadership has seen the rand strengthen 2.5% to 11.67 against the dollar and taking gains since December to nearly 20%.

Kerr said currencies presented “a mixed bag” for the group in terms of how it affected its operating margins. “Take Hillside [aluminium smelter in KwaZulu-Natal province]. I think about 56% of our spend is US dollar denominated; 20% is rand-based and 15% is tied to royalties and the aluminium price. Alternatively, about 91% of the energy coal business is rand based,” he said.

“I would expect that if political change continues in South Africa, you could expect a further strengthening of the rand, especially if the US dollar continues to weaken owing to things like further interest rate rises,” he said. South32 did not hedge the currency: its geographic diversity had an evening out effect on margins, he said.