South32 Limited

S32 Details

Key Business Updates: South32 Limited (ASX: S32) is a diversified mining and metal production group, which include alumina, aluminium, bauxite, energy coal, metallurgical coal, manganese ore, manganese alloy, nickel, silver, lead and zinc.

• As announced on 15 December 2021, the company has refinanced a multicurrency revolving syndicated credit facility and secured US$1.4 billion of commitments from lenders for a five-year term to 2026. The said facility comes with an option to extend for up to a further two years by mutual agreement.
• In the month of November 2021, S32 that KGHM Polska Miedz had not exercised its pre-emptive rights to increase its stake in the Sierra Gorda copper mine. In addition, S32 is likely to complete the acquisition of 45% interest in Sierra Gorda in the early CY22, which was announced on 14 October 2021.

Q1FY22 Financial and Operational Highlights:

• During the quarter, the company recorded a rise of 7% in manganese production to 1,565 kwmt, with a quarterly record at South Africa Manganese.
• The company recorded a rise of US$254 million in its net cash position to US$660 million, supported by a higher commodity price.
• S32 has initiated a process to investigate the potential divestment of its interest in the Eagle Downs Metallurgical Coal development option.

Manganese Production (Source: Analysis by Kalkine Group)

Key Risks:

• Commodity Price Risk: The company’s financial and operational health could be impacted by any adverse movement in the prices of commodities.
• Forex Headwind: S32 is exposed to a risk arising from the unfavourable movement in the foreign currency.

Outlook:

• The company is aiming to halve its operational carbon emissions by 2035 from its 2021 baseline.
• S32 is also optimistic about strong volumes at its base metals’ operations - Mozal Aluminium, Cerro Matoso and Cannington in future.
• For FY22, the company is expecting Alumina production at Worsley Alumina of 3,965 kt.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company is trading at par to its 52-week high level of $4.130. The stock has provided returns of ~12.70% and ~40.56% in the past three and six months, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation and arrived at a correction of high-single-digit (in % terms). The company can trade at a slight discount to its peers’ median P/E multiple, considering the COVID-19 uncertainties and lower business margins. For the purpose of valuation, peers such as Rio Tinto Ltd (ASX: RIO), Sandfire Resources Ltd (ASX: SFR), and BHP Group Ltd (ASX: BHP) have been considered. Considering the expected correction, solid rally in the past few months, current trading levels, and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $4.130, as on 04 January 2022, 12:45 PM (GMT+10), Sydney, Eastern Australia.

S32 Daily Technical Chart, Data Source: REFINITIV 

Note: The purple colour line in the chart depicts RSI (14-period).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.