South32 boosts shareholder returns on positive pricing

It’s been seven years since South32 (S32) was spun-out of BHP Billiton, a move which didn’t receive universal approval at the time. The reason behind the original BHP Billiton merger was that it would create an entity with a portfolio of assets which could enable it to ride out the cyclical downturns in the industry. But bosses eventually came to the conclusion that BHP would be better served concentrating on iron ore, copper, and metallurgical coal production. South32 had to make do with less profitable lines like thermal coal, aluminium, and zinc.

However, South32’s mining complex has done rather better than many expected. The MSCI World Commodity producers index has risen by a quarter in the intervening period, although obviously not in a linear fashion, and prices for many of the group's commodities have strengthened.

The miner, in keeping with an upbeat third-quarter trading update in July, has delivered underlying full-year earnings of $2.6bn (£2.2bn) complete with matching free cash flow. As a result, the board has decided to pay a $648mn final dividend, meaning that record shareholder returns through the year were equivalent to around 10 per cent of the group’s market cap.

Underlying price increases across the asset portfolio boosted the financial performance, but that shouldn’t detract from the operational progress. Record output was recorded at Worsley Alumina, while production guidance was exceeded at the Cannington site. Management took action to mitigate freight and logistics challenges, enabling the group to “deliver volumes into favourable markets, capturing the benefit of higher prices”.

With one eye on the future, management has also increased South32’s exposure to “the metals critical to a low-carbon future”. Production guidance points to increases across the lion’s share of the group’s mining complex, but prices could soften further in the near term as the global economy stutters. With the shares trading in line with the consensus target, we stick to hold.

Last IC View: Hold, 242p, 17 Feb 2022