South32 Ltd

Acquisition of the remaining 83 per cent of issued and outstanding shares of Arizona Mining: South32 Ltd.’s (ASX: S32) stock fell 1.3% on June 18, 2018 despite announcing about a big deal for the company. S32 has agreed to acquire the remaining 83 per cent of issued and outstanding shares of Arizona Mining through a plan of arrangement, which represents a fully funded, all cash offer of US$1.3 billion (C$1.8 billion). The offer price of C$6.20 per share is 50 per cent premium to the closing price on June 15, 2018 and reflects a total equity value for Arizona Mining of US$1.6 billion (C$2.1 billion). Meanwhile, the acquisition of Arizona Mining will allow S32 to optimise the design and development of one of the most exciting base metal projects in the industry. S32 has been a major shareholder in Arizona Mining since May 2017 and an active participant in the Hermosa Project. Hermosa Project contains high grade base metals Taylor deposit, the Central zinc, manganese and silver oxide resource and an extensive, highly prospective land package with potential for discovery of polymetallic and copper mineralisation. Moreover, as part of the transaction, S32 will provide Arizona Mining with a C$70 million working capital facility at commercial rates. The Facility includes an initial tranche of C$40 million available after signing and subsequent tranches up to a total of C$30 million, and is subject to S32’s consent.
 
South32’s quarterly report for March 2018, had indicated that group’s net cash increased by US$477 million to US$1.9 billion benefitting from higher commodity prices and its working capital; and the recent move may be based on this capital position. Further, S32 had received net distributions totalling US$158 million from its manganese equity accounted investments. The group has maintained its capital expenditure guidance of US$525 million for FY18 with the rate of spend expected to increase in the June 2018 quarter given long lead time items purchased for the Klipspruit Life Extension project.
 
S32 stock has risen 21.88% in three months as on June 15, 2018 and is trading at a reasonable P/E of 14.21x. Based on the foregoing, we give a “Hold” recommendation on the stock at the current price of $ 3.85, while costs remain one area to be looked at.

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