Company Overview - South32 Limited is an Australia-based metals and mining company. The Company operates through segments, which include Worsley Alumina segment has a bauxite mine and alumina refinery in Western Australia; South Africa Aluminum segment has two aluminum smelters at Richards Bay; Mozal Aluminium segment has Aluminum smelter in Mozambique; Brazil Aluminium segment has Alumina refinery and aluminum smelter in Brazil; South Africa Energy Coal segment has energy coal mines and processing operations in South Africa; Illawarra Metallurgical Coal segment has metallurgical coal mines in southern New South Wales; Australia Manganese segment, a producer of manganese ore in the Northern Territory and manganese alloys in Tasmania; South Africa Manganese segment is a producer of manganese ore and alloy in South Africa; Cerro Matoso segment has laterite ferronickel mining and smelting complex in northern Colombia, and Cannington segment is a silver, lead and zinc mine located in northwest Queensland.


S32 Details

Controlling costs to offset commodity turmoil: South32 Ltd (ASX: S32) is on track to deliver its controllable cost savings of US$300 million while enhancing its cash generating capacity by restructuring the mines at Worsley Alumina, South Africa Manganese through stretching operational performance and sustaining the refinery in the lowest cost quartile. In addition, restructuring at Cerro Matoso and Illawarra Metallurgical Coal is expected to be completed by June 30, 2016. Cerro Matoso would be reducing all-in cost by FY17 in which La Esmeralda would improve nickel head grade between FY18 while South Africa Energy Coal would lower the production volumes by FY16 and FY17. However, Klipspruit feasibility and Khutala pre-feasibility studies are going on.
 

Cost savings for FY16 (Source: Company Reports)
 
Developing pipeline: S32 has finished 33% of US$565 million Appin Area 9 Project ahead of schedule while PC02 and Wessels Central Block projects worth US$139M and $US30M also remain under budget and are nearing completion. The Premium Concentrate Ore (PC02) project would start in the June 2016 quarter and would increase GEMCO production capacity by 500ktpa to 5.3Mtpa. In addition, the projects Klipspruit Life Extension, La Esmeralda, Cannington Life Extension are under feasibility and concept phase, and accordingly need future capital. Meanwhile, the exploration activity in GEMCO Southern Areas and Cannington regional exploration would create additional opportunities for early stage joint venture agreements.
 

Potential pipeline projects for S32 (Source: Company Reports)
 
Strong core assets’ March quarter performance: Worsley Alumina project reported a 4% increase in the saleable production to 3.0Mt in the nine months ended March 2016. This increase is driven by hydrate production which exceeded the expanded capacity of 4.6Mtpa (100% basis). South Africa Aluminum, Mozal Aluminum and Brazil Alumina saleable production remain unchanged in both the nine months and quarter ended March 2016. However, the production was suspended in 22 pots in September 2015 for planned pot relining activity in South Africa Aluminum while Brazil Alumina production is expected to be in line with previous guidance of 1.32Mt. Meanwhile, South Africa Energy Coal saleable production has declined by 7% (or 1.7Mt) to 24.1Mt in the nine months ended on March 2016 due to the planned closure of the opencast mine at Khutala. A reduction in contractor activity was witnessed at the Wolvekrans Middelburg Complex. As per Illawarra Metallurgical Coal division highlights, total saleable production has decreased by 11% (or 701kt) to 5.8Mt in the nine months ended March 2016 due to challenging geological conditions encountered in the first half of FY16 at the Appin and Dendrobium mines. But, there was a 35% increase in metallurgical coal production in the March 2016 quarter by the recommencement of longwall mining at Dendrobium and the ramp-up of the new Appin Area 9 longwall where project is completing ahead of schedule and is below budget.
 
Decline in saleable manganese alloy production: With regards to Australia Manganese saleable ore highlights, production has increased by 7% (or 151kt) to 2.33Mt in the nine months ended on March 2016 due to optimization of concentrator performance benefited from drier weather conditions. This rise was mainly due to the improvement in market conditions which enabled a managed reduction of inventory to normalized levels. In addition, FY16 ore production guidance remained unchanged at 3.05Mt while higher strip ratio and planned maintenance are expected to impact performance in the June 2016 quarter. However, the saleable manganese alloy production decreased by 10% (or 13kt) to 111kt in the nine months ended on March 2016 due to the temporary suspension of two of four furnaces in response to power shortages in Tasmania and the two remaining furnaces are currently operating at a reduced electricity load. All four furnaces are expected to return to full production at the end of June 2016. For South Africa Manganese, saleable ore production has decreased by 32% to 1.22Mt in the nine months ended on March 2016 due to the extended suspension of operations at Wessels and Mamatwan in November 2015 in response to challenging market conditions. The mining activity at South Africa Manganese recommenced in the March 2016 quarter leading to a ramped-up production to an optimized 2.9Mtpa. Meanwhile, South Africa Manganese saleable alloy production decreased by 67% (or 140kt) to 68kt in the nine months ended March 2016 due to the suspension of three of the four high-carbon ferromanganese furnaces at Metalloys in May 2015. In addition, Cerro Matoso payable nickel production has decreased by 14% (or 4.6kt) to 27.2kt in the nine months ended March 2016 due to the average ore grade decline. Contained nickel production has increased in the recent quarter as processing rates and recoveries rebounded after the completion of maintenance in the December 2015 quarter. But at Cannington there is a 13% increase in zinc production to 60.3kt in the nine months ended in March 2016, consistent with the mine plan while payable silver production decreased by 6% (or 1.01Moz) to 16.36Moz in the same period. However, a reduction in mill availability, associated with an outage in January, resulted in lower sequential production at Cannington in the March 2016 quarter.
 

Production highlights as of March (Source: Company Reports)
 
Guidance: The group reported that its saleable alumina production at Worsley Alumina for fiscal year of 2016 is expected to remain unchanged at 3.95Mt while the next major calciner outage is scheduled for the December 2016 quarter. In addition, metal production at South Africa Aluminum is expected to be unchanged in FY16 as the number of load-shedding events in the March 2016 quarter was lower than expected while aluminum production at Mozal Aluminum is also expected to remain largely unchanged in FY16. Moreover, Brazil Alumina have forward sold power until the end of CY17 and has terminated the contract with Eletronorte in which a minor provision would be booked in the June 2016 financial year statements, reflecting anticipated cash outflow related with the contract across the remaining 18-month period. The unhedged power sales are expected to contribute around BRL235 million to underlying EBIT in FY16 and would be skewed to the first half (BRL188M in H1 FY16). FY16 saleable production at South Africa Energy is expected to remain unchanged at 31.95Mt. On the other side, Illawarra Metallurgical Coal FY16 coal production is expected to be 8.25Mt while FY16 production at Cerro Matoso is forecasted at 36.5kt. Meanwhile, planned mill outages at Cannington are scheduled to occur in May and August 2016. Overall, at Cannington the FY16 production guidance comprises payable silver of 21.65Moz, payable lead of 175kt and payable zinc of 80kt.
 

Strong production while maintaining cost competitiveness (Source: Company Reports)
 
Stock performance: The shares of S32 have recovered over 45.79% during this year to date (as of June 28, 2016) after falling last year post BHP demerger. The group’s further focus on enhancing its core assets coupled with the recovering commodity prices contributed to this stock rise. Moreover, most of the group’s assets are placed well with regard to cost curve position, indicating its competitive edge on cost against its peers. S32 reported a strong balance sheet as of March 2016 and has a net cash position of US$18 million. The group intends to further deliver costs savings by cutting its capital expenditure to US$218 million by FY16. We remain bullish on the stock and expect S32 would be able to deliver further returns in the coming months. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of  $1.55
 

S32 Daily Chart (Source: Thomson Reuters)

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