South32 forecast low-end of output guidance for SA coal, reinstates $1.43bn share buy-back

SOUTH32 forecast thermal coal production from its South African assets at the lower-end of its previously guided 10.5 to 12.5 million tons (Mt) for the 2020 financial year.

This was owing to steps to “… maximise margins and suspend production from loss-making pits,” it said. The firm has previously stated that a contract to supply Eskom’s Duvha power station from its Wolverkrans Middleburg Complex (WMC) in Mpumalanga province was loss-making.

Discussions with Eskom to restructure the contract ahead of the sale of its South African Energy Coal (SAEC) to Seriti Resources – which it expected to completed in December – were on-going, the company said. Eskom, which is owned by the South African government, is being asked to agree to a new coal supply agreement between WMC and Duvha in order for Seriti’s purchase to be sustainable.

Saleable coal production from SAEC increased a fifth, or a million tons, to 6.3Mt in the first quarter. Production guidance from other operations, which include the Mozal and Hillside aluminium smelters in Mozambique and South Africa respectively, were unchanged. The company also mines metallurgical coal from Illawarra in Australia as well as manganese in South Africa and Australia, and nickel from the Cerro Matoso mine in Colombia.

South32’s first quarter numbers demonstrated a focus on capital allocation amid expectations of downside pressure on its key commodities.

The group outlined plans to cut numbers at its Singapore and London offices as part of a $50m annual savings initiative. It also reinstated its $1.43bn share buy-back programme to September 2021. The programme is 92% complete with $121m in shares outstanding.

“At the current share price of R24.88, it still offers value to buy back shares considering our fair value of the company is R39/share,” said Noah Capital in a note.

Net cash at the end of the period increased $70m to $368m. Subsequent to the quarter end, a $48m dividend in respect to the 2020 financial year was paid.

“South32 delivered a strong start to FY21 and the company has kept production guidance unchanged for all operations,” said Macquarie Bank in a note to clients. “The cash result was also better than expected,” it added, but forecast a 17% earnings decrease for the current financial year and a further 7% fall in 2022.

Shares in South32 gained 1.62% in mid-morning trade on the Johannesburg Stock Exchange. The stock is 5.1% weaker on a year-to-date basis.