Forum Topics S32 S32 S32 valuation

Pinned valuation:

Added 2 months ago
Justification

Early Feb 2020: 12-month PT, so aiming for $3.77 by end of Feb 2021, based on higher prices for alumina, aluminium, nickel, silver, met coal (S32 are selling off their energy/thermal coal assets), manganese, lead and zinc prices. By then, S32 will likely also have announced the divestment of their higher cost South African manganese smelters as well, but hopefully they'll keep GEMCO (NT) and TEMCO (Tasmania) which together have the lowest costs of any manganese producer globally. S32 are firmly in the lowest quartile of the global cost curve with the majority of their assets, and their management is focused on improving the quality of their assets even further, and also with increasing shareholder returns. An example of that is their HUGE on-market share buy-back which has already bought back around one billion (yes - billion - with a "B") dollars worth of S32 shares on-market and cancelled them. That's massive for a company with a market cap of between $13 and $14 billion. They've also been paying special dividends in addition to their normal dividends to return even more cash to shareholders. With their commodity prices down now on global growth concerns (which has a fair bit to do with the new Covid-19 coronavirus and fears of its eventual global impact) and coming off a comparatively poor H1 result (compared to the PCP), S32 remain at attractive levels to accumulate (in my opinion) for the patient investor. I like their mix of commodities. If you hold S32 and a good copper stock (SFR or OZL) (and possibly a good mineral sands stock like ILU), plus one or more decent gold producers, I reckon you've got most of the base and precious metals covered. Obviously that doesn't include iron ore, but I'm not particularly bullish on iron ore, and if I was, I'd be looking at either RIO, BHP or FMG (which I'm not). But back to S32 - excellent exposure to the Aluminium supply chain (bauxite to alumina to aluminium) plus nickel, zinc, lead, silver, manganese and metallurgical coal via a large company with good, shareholder-returns-focused management.

20-Aug-2020: And then we all got coronered. S32's FY20 full year report shows that the resulting lower commodity prices hurt them a lot in the second half of FY20, and that they are also booking some costs (including a reduced tax asset in South Africa - and other costs - associated with the progression of their divestment of their thermal/energy cola assets there). One of the things that attracted me to S32 (over BHP) was their commodity mix and also that S32 were more serious - and more advanced - in divesting their thermal coal assets than BHP. However, that does come with some financial costs. You rarely sell thermal coal assets at a profit these days. I remain bullish on S32 and that they are well positioned to benefit when the prices of the various commodities that they produce rise, however, realistically my earlier $3.77 PT is not now going to be achieved within the timeframe I was targeting. I am therefore reducing it to $2.77 and maintaining that February 2021 time horizon - so it's a new 6-month PT. I continue to hold S32.

18-Feb-2021: My $2.77 valuation from 6 months' ago has been marked as stale. It probably is. I'm raising it to $2.97 on the back of increasing commodity prices and S32 beng in such good shape with net cash and continuing to buy back shares and pay dividends. Nickel prices hit a 6-year high earlier this week. I think the outlooks for Silver and Alumina/Aluminium are both positive. I don't mind the Zinc and Manganese exposure. I like that S32 said today in their results presentation that they expect to have completed the divestment of their South African Energy Coal (their thermal coal assets) by the end of March (next month). That's another positive - they will then only have exposure to Met Coal, with no exposure to thermal/energy coal. They are also exiting a range of lower margin businesses, including the sale of their 60% of TEMCO - the manganese smelter in Tasmania. They have however kept their 60% of GEMCO, the Groote Eylandt Mining Company operation off the NT coast that is the largest and lowest-cost manganese ore producer in the world (Anglo America plc own the other 40%). They've put their 60%-owned Metalloys Alloy smelter in South Africa on care and maintenance and sold their Precious Metals Royalty Portfolio to Elemental Royalties Corp. for US$40M in cash & US$15M in Elemental shares. Finally, they have placed their Eagle Downs Metallurgical Coal Project (50%-owned) on hold while they assess their options. I've said before - while I'm happy that they are getting out of energy coal, I'd be even happier if they exited coal altogether, i.e. sold their met coal assets as well. Coal has plenty of headwinds, and most of their other commodities have tailwinds, which is want you want. My new 12-month PT (price target) for South32 (S32) is $2.97, so by Feb, 2022, but there is scope to increase that target if the prices of their main commodities produced continue to rise.

19-Aug-2021: Update: Still happy with $2.97. The S32 SP keeps bouncing off $3 but doesn't want to push through yet. They no longer look cheap - when they are up there near $3 - I reckon they're getting close to being fully valued at around $2.95 to $3. I hold S32 in my super fund, and they're also in my SM portfolio here. Still the best diversified miner on the ASX for exposure to nickel, silver, lead, zinc, manganese, alumina, and metallurgical coal. They have divested (sold) all of their thermal(/energy) coal assets now, which I'm happy about.

I spent the best part of a decade working at their Worsley Alumina refinery in WA (near the coal mining town of Collie in the SW of WA), mostly working on their overland conveyors between their Boddington bauxite mine and their Worsley refinery, but they weren't called South32 back then, they were still BHP, and it was a JV and the other owners changed a fair bit but BHP and then S32 were always the senior/major partners/owners of Worsley. South32 currently own 86% of Worsley Alumina with 10% owned by Japan Alumina Associates Australia Pty Ltd and the remaining 4% owned by Sojitz Alumina Pty Ltd.

I also worked for BHP's heavy flexible steel wire rope (FSWR) splicing team, Bullivants, also known as BHP Lifting Products at one point, for short periods when Worsley's overland conveyors had their ropes replaced, which usually took between 1 and 2 weeks per side (2 conveyors, two drive ropes each, longest conveyor was 32 km, so the rope on each side of that one was over 65km of continuous 57mm diametre FSWR, including the rope tensioning area at the drive end), working 12.5 hour shifts, days and nights, I usually did nights, 7 days a week until it was done. The other main company I worked for was called JLV Industries, who still have the maintenance contract for those conveyors today. My two brothers occasionally work there for JLV.

After Worsley stopped buying their ropes from BHP's Australian Wire Industries (AWI) in Newcastle, which had been AWI's largest contract by a fair margin, AWI shut down. That was all around 20 years ago. Now Worsley import their wire rope from overseas because someone somewhere makes it cheaper.

To explain, the rope was required to drive the conveyors and support conveyor belts to get the bauxite ore from the Boddington Bauxite mine to the Worsley Alumina refinery. The two sites are about 57km apart. The refinery was built so far away from the mine because the refinery needed a large fresh water supply, access to cheap coal to burn to create power (which was trained in from nearby Collie, named after its collieries (coal mines and associated infrastructure), and a downhill train run to the Bunbury port was an added bonus. It was considered better to build the refinery at Worsley and to spend hundreds of millions on an overland conveyor system to get the ore from the mine to the refinery. I became involved with the conveyor maintenance and rope replacements when I was back in my early twenties and I kept doing it up until my wife and I moved to Adelaide in 1997, and then BHP flew me back one more time in 1999 to do their very last re-rope. I took two weeks' annual leave from my job at FH Faulding (now Mayne Pharma) to go and work with the boys one last time. Stayed in the Harvey Hotel, as we always did, ate too much, drank too much, and probably earned too much, the wages were pretty good back then for short-term shutdown work. Those were the days...

Further Reading: South32's Worsley Alumina: https://www.south32.net/docs/default-source/worsley/publications/s32_a5-brochure-final-email-(1).pdf?sfvrsn=208ed98d_2

History of Bullivants (was part of BHP at one time, now part of Wesfarmers): https://www.bullivants.com/company-profile/our-history

Update: 17-Jan-2022: Time to update this one. My previous PT of $2.97 got tagged repeatedly throughout 2021, from April onwards, and then S32 went into a strong uptrend from late August, and they still seem to be firmly in that uptrend. There are always days like today when commodity stocks (miners) get sold down as a group, but the overall trend is still north east (i.e. onwards and upwards).

I still hold S32 in my super, and in one other RL portfolio, although I have taken some profits around the $4/share level. My brother now works at S32's Worsley Alumina Refinery fulltime as a plant mechanic. He works for another company who provide additional labour to miners like S32 however my brother now only works at Worsley and has regular hours. Worsley, one of the largest alumina refineries in the world, is still ticking along nicely and as one of Australia's lowest cost alumina producers, they are making plenty of dollars for S32 also. They do not smelt any of that alumina here in Australia; it is all shipped overseas as alumina powder and smelted (into aluminium) in other countries as directed by the JV partners - S32 being the largest shareholder in the Worsley JV (with 86%) export their share of the alumina from Bunbury Port to aluminium smelters worldwide, including South32’s Hillside and Mozal aluminium smelters in Southern Africa.

Aluminium is strong, flexible, light-weight, durable, and 100% recyclable. It plays a crucial role in producing lighter vehicles and other forms of transport due to its high strength-to-weight ratio. Because aluminium is resistant to corrosion and is recyclable, it is becoming an increasingly popular choice in modern sustainable buildings. It is also widely used in machinery, packaging and electronics.

And that's just one of their commodity chains (bauxite to alumina to aluminium). They also currently produce metallurgical coal (used to make steel), manganese, nickel, silver, lead and zinc.

Superb management, no net debt, plenty of net cash, great track record of total shareholder returns via a three-pronged approach of capital (SP) growth, dividends and share buybacks. They have also proven to be excellent capital allocators, which means they are investing for growth in long-life, low-cost assets within their own existing competencies while also returning profits to shareholders.

Lots to like. Raising my PT to $4.44.

Disclosure: I do hold S32 in RL, however I sold my S32 here on SM in October and November 2021 at prices ranging from $3.50 to $3.60/share on the basis that I wanted to invest in something with more upside potential. Probably a mistake. Not as much upside up here at over $4/share as there was in 2020 at sub-$2/share, but if you want exposure to the commodities that S32 produce, they are a solid company with good management that own low-cost mines in each of those commodities.

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Cannington


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Worsley (above and below)

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The following are images of Worsley's Overland Conveyors (OLC1 and OLC2) which transport the bauxite ore almost 60 km from their Boddington Bauxite mine to their Worsley Alumina Refinery. I spent around 9 years working on those conveyors (for JLV and BHP) and also doing some truck driving inside and around the refinery for Worsley (was still majority owned by BHP at that time, before the South32 spin-out). I have mentioned this work above in my 19-Aug-2021 update.

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Boddington Bauxite Mine


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16-May-2023: Update: Marked as stale. Reviewed. All good. They closed at $4.06, today, up +2 cents (or +0.5%) on their S32-Strategy-and-Business-Update-16-May-2023.PDF announcement.

$4.44 is fine. Should get there either this year or next year. No problem. Investment Thesis remains firmly on track. I hold this one in my two largest real life portfolios.

29-Feb-2024: Update: Marked as stale. S32's SP has spent the last year dropping from over $4.50/share to now (today) closing below $3/share. They also announced today the Sale-of-Illawarra-Metallurgical-Coal.PDF. They had previously sold all of their thermal(/energy) coal assets, so this exit from Met Coal as well is interesting - and welcome. I posted a straw about that this morning - but if I provide a link to it you'll have to scroll back through all of this "valuation" to get to it, so I'll just copy in the important quotes below:

South32 Chief Executive Officer, Graham Kerr said: “This Transaction will realise significant value for our shareholders and is consistent with our strategy to reshape our portfolio toward commodities critical in the transition to a low-carbon future.“

"It will streamline our portfolio, strengthen our balance sheet and unlock capital to invest in our high-quality development projects in copper and zinc."

“The Transaction will also simplify our business and reduce our capital intensity."

---end of excerpt ---

I still hold S32 in my larger real money portfolios. I do not hold BHP or RIO, just S32 and FMG out of the 4 big Aussie Mining Companies. Many of the commodities that S32 produce are out of favour at this point in time, but metals prices tend to be cyclical and the time to buy solid miners like this is during low points in the cycle when very few people are interested in owning them - like now, so I'm thinking about topping up below $3.

I see no need to change my $4.44 PT - they were above it 12 months ago, and they'll be back above it sooner or later. Quality mines. Quality management. Quality company, IMO. Holding.

edgescape
a month ago

Saw the writing on the wall and sold out when they pulled out of the tender for Khoemacau which I believe is a quality asset.

Cannington on the last legs and justifying Hermosa decision with a higher Zinc price.

Selling Illawarra Coal.

Seem to be almost in survival mode now.

Also given that the mix of metals is Silver and Manganese, could most of the silver in Clark deposit be refractory? Just to add, I need to go back and study the grading of the deposit a bit more

Almost back to the price I bought S32 at.

Quite tempting to buy if the Chinese can pull out a decent stimulus package which would make Aluminum rocket again. Or if the US eventually impose a ban on Russian Nickel or Aluminium

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