South32: Digging the cycle

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 February 2022, 12:00 PM
Sectors Covered:
Mining, Energy

  • The diversified miner is enjoying robust prices across its basket of metals, allowing it to increase its dividend, upsize its buyback and strengthen its balance sheet.
  • 1H22 FCF of US$840m for a healthy FCF yield of 11%.
  • South32’s (ASX:S32) well timed copper acquisition in Sierra Gorda is due to complete this month.
  • Working capital jumped US$333m on rising prices and supply chain issues.
  • Guidance tweaks with Illawarra/GEMCO cut and Cannington upgraded.
  • We see S32 as a key ex-iron ore / ex-WA mining exposure in Australia, offering investors diversified base metals exposure at an attractive multiple.

Bumper cash flow put to good use

1H22 revenue of US$4,602m (vs consensus US$4,458m vs MorgE US$4,411m) was +32% pcp. Underlying EBITDA was similarly ahead at US$1,872m (vs consensus US$1,816m vs MorgE US$1,807m) was +138%.

While underlying NPAT of US$1,004m was close to expectations (vs consensus US$988m vs MorgE US$1,074m) +638% pcp. Consensus data sourced from Vuma. S32 generated US$840m of FCF in 1H22, for a FCF yield of 11%. 

Strong earnings allowed S32 to ease its payout ratio to 40% but still announce a record interim dividend of USD 8.7c (vs consensus USD 9.6c vs MorgE USD 9.3c). While S32 also upsized its share buyback by a further US$110m. 

A negative in the result was the US$333m jump in working capital, which S32 attributed to rising prices and supply chain issues (especially at Hillside).

Mine schedule continues to hamper Illawarra productivity, with S32 cutting FY22/23 guidance by -7%/-1%. While also reducing GEMCO production guidance by -9% on weather impact. While Cannington’s outperformance has led to a 5% increase in FY22 guidance. 

S32’s acquisition of a 49% interest in Sierra Gorda (copper mine in Chile) is expected to settle this month. A well-timed acquisition marking S32’s entry into the popular metal.


Illawarra’s continuing operational underperformance remains overshadowed by bumper coal prices. While the aging Cannington has genuinely impressed. S32’s operational performance of its mid-tier assets remains mixed, but overall well managed with a group EBITDA margin of 41% in 1H22.

We expect S32 to rapidly deleverage post Sierra Gorda acquisition. With capital management clearly a priority.

S32 will need to ‘digest’ the cash/debt acquisition of Sierra Gorda, and timing is not ideal (given strong metal prices), but we see room in S32’s portfolio for further acquisitions.

Forecast and valuation update

We have adjusted our forecasts for guidance revisions, including increasing FY22 capex. Our valuation-based target price is now (login to view).

Investment view

S32’s share price has vastly outperformed the iron ore miners over the last 12 months (S32 +66%, BHP -1%, RIO -6%, FMG -16%).

But despite the increase this share price rise has only matched S32’s earnings growth. S32 is still trading on just 4x EBITDA and with a FCF yield of 11% (vs iron ore peers above 6x and pure base metal producers +10x EBITDA).

While ‘late to the party’, we expect S32’s share price to continue to re-rate as it completes its accretive copper acquisition and continues to enjoy cycle high FCF. We maintain our Add rating with S32 a preferred exposure in the mining sector.

Price catalysts

  • Sierra Gorda deal completion. 
  • Capital management.


COVID related risks to S32 operations and commodity demand.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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