BHP Billiton has demerged South32, which is now a new diversified metals and mining company having a huge high quality assets base. Both the companies want to focus on their core assets and improve operating model, to enhance productivity at reduced costs. BHP Billiton shareholders got the opportunity to capitalize the profit from both the companies as each eligible BHP Billiton shareholder will get a share in South32.
South32 wants to maximize returns from its assets base at lower costs and also implementing a regional operating model. With this move, the company expects to deliver a cost savings which covers its extra costs of $60 million per annum which will be incurred by South32 as a standalone company. South32 has operations in Australia, Southern Africa and Colombia, as well as non-operated joint venture interests at Brazil.
Company’s performance by region and type (Source: Company Reports)
Meanwhile, the firm reported a 6% year over year decrease to $5,040 million for its first half of 2015 revenues, due to decrease in business from its major assets-Cannington and Australia Manganese (GEMCO). The firm was successful to reduce its operating cash costs by US$638 million. Underlying EBIT rose by $290 million to US$800 million, as compared to the corresponding period of last year, due to rise in depreciation and amortization and lower revenues. The firm posted a 45% increase of Underlying Earnings to $534 million, as compared to $369 million first half of 2014.
South32 Overview (Source: Company Reports)
Competitive cost curves
Gemco, a major manganese ore producer; Cannington, a silver producing mine and Worsley alumina, largest alumina refineries- are the major quality assets of South32 which are competitively positioned in their respective cost curves. Meanwhile, Hillside, Mozal Aluminium, Illawarra Metallurgical Coal, Cerro Matoso, Alumar Refinery and South Africa Energy Coal are also well positioned in their particular industry cost/margin curves. For the first half of 2015, 90% of underlying EBITDA was generated by first and second quartile assets.
South 32 assets contribution (Source: Company Reports)
On the other hand South32 is also making efforts to cut costs on the back of commodity price fluctuations. Recently, the firm decided to delay the restarting of three of the four high carbon ferromanganese furnaces for its Samancor Manganese joint venture at Metalloys manganese alloy operation in South Africa.
Australia Manganese (South32 holds 60% of Share)-GEMCO & TEMCO
GEMCO is the largest as well as among the lowest-cost manganese ore producers located in the Northern Territory, Australia. TEMCO is a wholly-owned subsidiary of GEMCO, situated in Tasmania, Australia. As per the project’s first half of 2015 highlights, Manganese ore production rose by 3% in year over year terms to 2,499 kt. Meanwhile, Manganese alloy production surged 12% to 139 kt as compared to 123 kt in corresponding period of 2014. However, revenue fell by US$111 million to US$566 million due to decrease in sales volumes for ore as well as falling average realized prices of manganese ore and alloy. Consequently, Underlying EBITDA fell by US$37 million to US$215 million during the period. Non-cash


activity of $18 million was registered during the period as a part of the GEMCO Expansion Project
Australia Manganese Performance (Source: Company Reports)
Cannington (South32 holds 100% interest)
Cannington is situated in northwest Queensland, Australia having an operations including an underground mine and concentrator. The project delivers silver, lead and zinc concentrates, and as per the present mine plan, Cannington has a reserve life of nine years. With regards to the first half of 2015 highlights, lead and zinc production rose by 5% to 99 kt and 16% to 37 kt, respectively. However, Silver production fell by 3% to 12,235 koz as compared to 12,667 koz in H1 FY2014. Overall revenues plunged 20% to $486 million, as compared to the corresponding period in 2014 due to fall in average realized prices of lead and silver by 19% and 15% respectively, on an year over year basis. Underlying EBITDA decreased to $183 million from US$272 million in first half of 2014.
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Cannington
Performance (Source: Company Reports)
Worsley Alumina (South 32 holds 86% share)


Worsley Alumina comprises integrated bauxite mine and alumina refinery having a capacity of 4.6 Mtpa on a 100% basis. The low impurity bauxite1 of the project has a reserve life of 17 years and resource life of 63 years. During first half of 2015, revenues at Worsley Alumina rose 15% on year over year terms to $651 million, driven by higher realized aluminum prices. The average Alumina realized prices surged 10% to US$335 per tonne. Meanwhile, Underlying EBITDA was reported at US$143 million, while EBIT stood at US$67 million during the period.
Worsley Alumina operating performance and Alumia realized prices (Source: Company Reports)
Conclusion
South32 Ltd started its public trading on May 18
th in ASX under the symbol S32. The shares surged over 15.6% from May 19thn to May 21
st, despite opening in a lower end. However, the hype of the stock waned slowly, with the stock posting a negative returns of 18.2% over the last four weeks. However, we believe this to be a buying opportunity to investors looking for a long term investment in the stock, as the company’s management is striving to improve the efficiencies of its assets going forward.
S32 Daily chart (Source - Company Reports)
Meanwhile, Moody’s gave a Baa1 issuer rating as well as a P-2 rating to the company and gave a stable outlook to the company during May. Moreover Moody’s states that the firm’s reducing cost operations, lower capital expenditure and expects South32 to maintain a lower financial leverage and debt levels in the coming months. Meanwhile, the investors also need to bear the risks associated with commodity price fluctuations, to benefit from the stock.
Based on the foregoing we give a “BUY” recommendation to the stock at the current price of $1.895.