Company Snapshot - South32

Company Overview

• South32 (S32) is a globally diversified mining company which specialises in the exploration, development and extraction of natural resources.
• It is headquartered in Perth, Western Australia and was spun-out of BHP Billiton in 2015.
• The company produces bauxite, alumina, aluminium, metallurgical coal, manganese, nickel, silver, lead, and zinc.
• Following the completion of South32’s divestment out of the South Africa Energy Coal business in June 2021, the company now runs nine operations, namely Worsley Alumina, Brazil Alumina, Hillside Aluminium, Mozal Aluminium, Illawarra Metallurgical Coal, Australia Manganese Ore, South Africa Manganese Ore, Cerro Matoso (nickel), and Cannington (silver, zinc and lead).
• South32’s operations are in Australia, Southern Africa, and South America. It also has two development options in North America and several partnerships with junior explorers around the world with a bias to base metals.
• It has a primary listing on the Australian Securities Exchange (ASX) and secondary listings on the Johannesburg Stock Exchange (JSE) as well as the London Stock Exchange (LSE).

Key Investment Drivers

1. Commodity Diversification: South32’s commodity mix is skewed to base metals which places it competitively in the market. In its 2020 financial year, the segmental contributions to group EBITDA were 30% Manganese, 23% Alumina, 15% Metallurgical Coal, 12% Nickel, 11% Aluminium and 10% Silver and Lead.
2. ESG in Focus: Companies are under scrutiny to dispose of thermal coal mines for the purposes of decarbonising the world into a cleaner, fossil-free future. As such, South32’s divestment of its 100% shareholding in South Africa Energy Coal (SAEC) to Seriti Resources should improve the company’s ESG credentials.
3. Exposure to Preferred Commodities: In terms of commodity price performance in 2021, aluminium, metallurgical coal, nickel and manganese have been some of the most defensive metals in the metals space. We believe S32’s exposure to preferred commodities offers resilience for the company.
4. Balance Sheet Strength and Shareholder Returns: South32 has maintained a net cash position since FY16 despite having returned to shareholders in dividends and share buybacks.
5. Low-Cost Assets: The majority of S32’s assets are positioned in the 1st and 2nd quartiles of the global cost curve, allowing it to exploit healthy EBITDA margins.
6. Quality Asset Portfolio: S32’s manganese and alumina assets account for approximately 14% of global supply combined, with manganese accounting for approximately 10% and alumina approximately 4%.
7. Emission Reduction Target: In its FY21 annual report, South32 announced a new emissions target which aims to reduce its FY35 scope 1 and 2 carbon emissions by 50% from its FY21 base using some new technologies. We view this as innovative, progressive, and attractive to investors.
8. Share Buyback Longevity: South32 has had uninterrupted share buybacks since the second half of its FY17. Since then, the total cash returns via buyback represent approximately 41% of the company’s total cash returns.

Key Risks

• Weaker commodity prices.
• Appreciation of the USD.
• Uncertainties around the COVID-19 pandemic and its impact on the commodities markets.
• Loss-making coal assets: At FY21, S32’s Illawarra Metallurgical Coal division was the only division that reported an EBIT loss of US$103m. A continuation of losses from the division is a risk to the company’s future earnings.
• Production and cost guidance downgrades.
• S32 not delivering on exploration projects.