South32 to Pay First Dividend, Monitoring M&A Opportunities

South32 CEO on Commodities Slump, Silver, M&A
  • Producer announces inaugural dividend of 1 cent a share
  • Company reduces costs, has net cash of $312m at end of June

South32 Ltd., the world’s biggest manganese producer, will pay its inaugural dividend and said it’s monitoring two potential investment opportunities after reporting full-year earnings that beat analysts’ estimates.

A decline in commodity prices saw underlying earnings fall 76 percent to $138 million in the year ended June 30, down from a pro-forma $575 million a year earlier, the Perth-based company said in a statement on Thursday. That exceeded the $111 million average of 18 estimates compiled by Bloomberg. It will pay a final dividend of 1 cent a share.

South32 said its production guidance for fiscal 2017 was unchanged for most of its upstream operations, though it cut forecasts for silver and lead from the Cannington mine in Australia. The company has reduced costs and trimmed output across its alumina, metallurgical coal, nickel and manganese units in response to the lower prices and said it’s on track to meet operation cost targets.

The company is closely monitoring two investment opportunities including purchasing Anglo American Plc’s stake in their manganese joint venture, Chief Executive Officer Graham Kerr said on a media call. He declined to disclose the second, saying it wouldn’t be a big investment.

“If Anglo makes a decision to sell those assets, we’d only be interested in actually acting if we saw value in it,” Kerr said. “We’re not going to pay a control premium for something we already have control of.”

M&A Buffer

The company generated free cash flow of $597 million and ended the fiscal year with net cash of $312 million, compared with a debt of $402 million a year ago. It reduced capital expenditure by $306 million and said it had controllable cost savings of $386 million.

South32’s “balance sheet is very strong in an environment where balance sheet concerns in the industry are paramount,” Sanford C. Bernstein & Co. analysts including Paul Gait wrote in a note. “This gives a buffer for the company going into any potential M&A transaction.”

By reducing silver and lead production estimates at Cannington, the company is seeking to increase extraction of the metals across the remaining years of the operation. An investment decision to extend the mine’s life won’t be needed before the end of this decade, it said. 

The company had a net loss of $1.6 billion, compared with net income of $28 million a year earlier, while revenue fell 25 percent to $5.8 billion. The producer cited the decline in commodity markets for the drop, with weaker aluminum and alumina prices having the greatest impact on its sales, followed by manganese, coal and nickel.

South32, which was spun out of BHP Billiton Ltd., closed 2 percent lower at A$2.01 in Sydney. The stock has almost doubled in value this year.

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