- Industrial action constrained port activity in South Africa
- Management has kept a lid on operating costs
When South32 (S32) was spun out of BHP Billiton midway through 2015, the then chairman, Jac Nasser, said that the demerger would not only simplify the group structure, but that it had “the potential to unlock shareholder value”. In the event, shareholders in the demerged entity, essentially comprised of the assets from the Billiton rump, have fared nearly as well as their counterparts in its more illustrious cousin.
Broadly speaking, underlying pricing has been favourable for both miners over the past five years, reflected by the marked step-up in free cash flow margins. It was thought at the time of the split that S32 had been essentially lumbered with non-core, sub-scale assets. That view may now seem a tad simplistic, although it’s true that it subsequently sold some business units that do not fit with its long-term minerals strategy. Around 18 months ago, for instance, it offloaded its stake in South Africa Energy Coal, thereby ending its exposure to an unfancied corner of the market. The remaining suite of mining products – bauxite, alumina, aluminium, copper, silver, lead, zinc, nickel, metallurgical coal and manganese – not only offer superior diversification benefits to BHP, but they have been tailored to support the global roll-out of electric vehicles and the ongoing energy transition.
The miner’s latest quarterly update was well received by the market, although it noted that shipping delays – an industry-wide problem in 2022 – resulted in excess inventory (principally aluminium) and a consequent drag on working capital. A wage strike at South Africa’s port and rail operator severely constrained bulk minerals exports to global customers, a problem exacerbated by a lack of alternative routes. Investors should be aware that wage disputes and the threat of industrial action increase during prolonged inflationary periods – and we’re not out of the woods yet on that score.
Of those issues within its control, S32 has performed creditably. It met with production estimates for its metallurgical coal, copper and aluminium output, while exceeding those for manganese ore – up by 24.4 per cent over the second quarter.
On the negative side of the register, management cut guidance at the Cannington silver-zinc mine by 11 per cent, while delayed ramp-up to a smelter's nameplate capacity at S32’s aluminium operations in Brazil will weigh on full-year production growth.
Nonetheless, management and mine operators appear to be earning their keep. Despite inflationary pressures, operating unit costs for the first half of fiscal 2023 are expected to be in line or below current forecasts at most of its operations.
