Company Reports

Commodity prices generally fell in the September-ending quarter, except for gold. Concerns about weak China end-user steel demand affected iron ore and other steelmaking commodities, while base metals prices fell on worries over slower economic growth in China and elsewhere.

South32 is a diversified midtier global mining company spun out from BHP in 2015. It has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

No-moat South32’s fiscal 2024 result was materially below our expectations. Adjusted EBITDA fell by 29% to about USD 1.8 billion, driven by lower sales volumes (mainly metallurgical coal and manganese) and prices (driven by the aluminum business and manganese). Its 60%-owned GEMCO manganese operations in the Northern Territory, Australia, temporarily ceased operations in March 2024 due to flooding in the mine pits and damage to infrastructure from Cyclone Megan. Mining has since recommenced. Adjusted NPAT of USD 380 million—USD 8.4 cents per share or AUD 12.4 cps—was 58% lower than last year and 24% less than our estimate. The main difference to our forecast was lower earnings in its aluminum business.

South32 is a diversified midtier global mining company spun out from BHP in 2015. It has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

No-moat South32 will appeal the conditions proposed by Western Australia’s Environmental Protection Authority, or EPA, in recommending approval of its proposed expansion of bauxite mining operations to supply its Worsley Alumina refinery. The EPA’s conditions restrict access to certain higher-grade areas and also increase operating costs, threatening the continued operation of the refinery should the Western Australian government agree with the EPA’s recommendations. This risk is likely the main driver of the 13% fall in the shares July 22, along with modestly disappointing fourth-quarter and fiscal 2024 sales, and lowered fiscal 2025 production guidance for Worsley alumina, Sierra Gorda copper, and its Cannington silver, lead, and zinc mine.

South32 is a diversified midtier global mining company spun out from BHP in 2015. South32 has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

Shares of most of our global mining coverage fell during the quarter, and the average price/fair value estimate has fallen modestly to 1.05 at July 8, 2024 from 1.07 last quarter. While our coverage is close to fairly valued on average, there is a wide dispersion, with no-moat mineral sands miner Iluka the cheapest, trading 30% below fair value at that date. Mineral sands prices are lower, on reduced demand from China’s property sector. Rising interest rates and slowing housing markets in the West are also a near-term headwind. However, longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices. Its proposed rare earths refinery in Eneabba is an option, on elevated rare earths prices and potential Western tariffs on Chinese production.

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

South32 is a diversified midtier global mining company spun out from BHP in 2015. South32 has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

We modestly reduced our fair value estimate for no-moat South32 by 3% to AUD 3.50 per share after the company agreed to sell its Illawarra metallurgical coal business. Likely effective first half fiscal 2025, total sales proceeds are up to USD 1.65 billion in cash. USD 1.05 billion is receivable upfront. Additional deferred consideration of USD 250 million is receivable in 2030 and contingent consideration of up to USD 350 million, depending on metallurgical coal prices over the five years after the deal closes. Roughly USD 250 million in rehabilitation and other liabilities are also transferable to the purchaser. We think this is a modestly better deal for the purchaser than South32. We dislike the lengthy time before the deferred consideration is receivable, and under our current metallurgical coal price assumptions, only approximately half of the deferred consideration will be paid.

South32 is a diversified midtier global mining company spun out from BHP in 2015. South32 has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

South32 is a diversified midtier global mining company spun out from BHP in 2015. South32 has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

No-moat South32’s first-half fiscal 2024 result was materially weaker than we expected. Adjusted net profit after tax of USD 40 million—USD 0.9 cents or AUD 1.4 cents per share—is down 93% on last year. Adjusted EBITDA roughly halved to about USD 710 million, driven by lower aluminum, nickel, and manganese prices and metallurgical coal sales volumes. While net debt of about USD 1.1 billion more than doubled in the half, at 0.6 times trailing 12 months EBITDA, it is manageable, and the balance sheet is sound. Around 75% of the increase reflected unfavorable working capital moves, mostly temporary, and the fiscal 2023 final dividend and first-half share repurchases. The company has canceled its buybacks to maximize its balance sheet flexibility given lower near-term commodity prices, which we think is sensible despite the shares being materially undervalued. While the USD 0.4 cent, about AUD 0.6 cents per share, fully franked interim dividend reflects materially lower earnings.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

South32 is a diversified midtier global mining company spun out from BHP in 2015. South32 has commodity diversification and its operations are generally in the bottom half of their industry cost curves. However, they generally lack maintainable competitive advantage given relatively high capital intensity, a lack of barriers to entry, and in some cases, relatively short reserve life.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.