South32, an underdog ahead of the pack

In sum, this amounts to perception more than operational capability. The latter is sometimes overlooked, and numbers for the 12 months to June provided another reminder that South32 is as adept as any of its peers. Despite inflationary and currency pressures in both South Africa and Australia, higher input costs and a decline in volumes equivalent to $607m (£473m) of last year’s top line, the underlying operating margin held firm at 26.2 per cent.

But where South32 did increase its output in the period, the related commodity prices also invariably rose. A 10 per cent bump in manganese ore production coincided with a surge in ore and alloy prices to add $309m to underlying operating profits, while stronger margins and better prices at the aluminium and alumina division’s Worsley and Brazilian operations more than offset declines at Cannington and losses at Illawarra.

The combined result was a forecast-beating statutory profit of $1.33bn, which was given an assist by a 280-basis point drop in the group tax rate. The return on invested capital also ticked higher, from 11.4 to 13.5 per cent, which wasn’t far short of BHP’s own return on capital for the same period.

Such comparisons are only so helpful. Since it listed in 2015, South32 has been less encumbered by the legacy frustrations with (and expectations for) its peers, and remains ahead of the deleveraging-buyback-invest curve. Post-period, the group committed $1.4bn of its year-end net cash position to the acquisitions of Arizona Mining, and a 50 per cent interest in the Eagle Downs metallurgical coal project.

On average, analysts expect adjusted pre-tax profits of $1.72bn and EPS of 25.2¢ in the 12 months to June 2019, up from estimates of $1.6bn and 24.9¢ last year.