South32: Sale for SAEC’s sake
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 January 2021, 1:00 PM
- Sectors Covered:
- Mining, Energy
- A mixed operational result from South32 (ASX:S32), although generally ahead of our estimates.
- Gradual progress is being made on the key SAEC divestment, which will shrink S32’s global workforce by a third, boost group earnings, free up management time and improve S32’s risk and ESG profile.
- Good performance from Cannington, with strong sales from the ageing mine leading to a 5% increase in FY21 guidance.
- S32 shelved Eagle Downs (met coal), while giving the go ahead to the bolt-on development of the Q&P project at Cerro Matoso (nickel).
- Now trading in line with our target price we lower our rating on S32 to Hold (from Add), with a revised target price (login to view).
Mixed 2Q21 result
A mixed 2Q21 result overall, with metallurgical coal (1,399kt -25% QoQ) and nickel (6.1kt -39% QoQ) down on the previous quarter, while Cannington (zinc +45%, lead +18% and silver +9% QoQ) and alumina (+7% QoQ) saw gains.
The ageing Cannington mine saw a nice bump from an acceleration of mining of higher grade zones, with S32 announcing a 5% upgrade to FY21 guidance. S32 also increased FY21/22 guidance at Cerro Matoso by 3% and 13% respectively.
While Illawarra’s met coal volumes were lower in 2Q21, they remained healthy with the operation benefiting from the three longwalls. A consistent performance from alumina (+7% QoQ) and aluminium (flat).
Offloading SAEC a value catalyst
Divestment of S32’s South African Energy Coal (SAEC) business is progressing, even if at a glacial pace. S32 is now targeting sale completion by 31 March 2021. We take confidence from the recent progress towards finalising the sale.
Offloading SAEC will cut S32’s global workforce by approximately a third, boost group earnings, free up management time and boost S32’s risk and ESG profile. Some material conditions still remain to deal completion, with an agreement with national utility (and captive customer Eskom) still an important hurdle.
Moving in the right direction
S32 continues to make sound portfolio moves, progressing SAEC divestment, shelving Eagle Downs (met coal) and sanctioning a bolt-on development at Cerro Matoso (nickel) in the Q&S Project (17mt resource to add 6 years of feed at higher average grades), in addition to progressing its Hermosa zinc, lead and silver project.
We continue to see room for further growth, particularly post SAEC exit.
Lowering recommendation to Hold
Post the recent share price increase we view S32 as now trading at fair value and have reduced our rating to Hold (from Add). Updating our estimates for the result has seen a small net change in our target price from A$2.65 (login to view target price).
We see further upside potential from a continuing commodity cycle, with coal markets in our view likely to recover, while we see less upside potential from aluminium and manganese. The key risk to our call is global macro (metal demand driven).
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