Cyclone Megan wreaks havoc on South32 manganese port
https://www.afr.com/markets/equity-markets/cyclone-megan-wreaks-havoc-on-south32-manganese-port-20240318-p5fd8v
South32’s manganese export operations face severe disruption after the bulk carrier MV Anikitos struck and damaged a loading wharf during high winds and swell stoked by Cyclone Megan in the Northern Territory.
South32’s co-owned Groote Eylandt manganese mine, located 630 kilometres east of Darwin, is the world’s largest single producer of the metal and exported 5.9 million tonnes worth $1.53 billion in financial 2023.
Damage from Cyclone Megan to Milner Bay Groote Eylandt Wharf, one of the world’s most important manganese ports.
“There will not be a ship loading at the port for a long time, if ever, depending on the cost to rebuild and the limited life of mine,” claimed a source close to the manganese exporter’s operations.
South32 up 5% on the news to $3.14. Costanza trade alive and well here.
SOTP (sum of parts) valuation from JP Morgan. Aussie Manganese valued at 0.33 according to JP Morgan.
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Price targets looking at my US Morgan Stanley account (which I just unlocked again today thanks to the support person on the phone in America!)
Morningstar:
We retain our fair value estimate for no-moat South32 of AUD 4.10 per share. Elevated metallurgical prices saw the division comprise around one-third of fiscal 2023 EBITDA, but we forecast metallurgical coal to be less than 10% of EBITDA at the end of our forecast period in fiscal 2028. This is driven by our view that metallurgical coal prices will revert to our assumed midcycle price of roughly USD 150 per metric ton from 2027 based on our estimate of the marginal cost of production, down from spot of roughly USD 260 per metric ton. Lower metallurgical coal production of around 4.7 metric tons in fiscal 2028, down from 5.4 million in fiscal 2023, also provides an assist. This is consistent with South32’s strategy to transition its portfolio to more metals such as aluminum, alumina, copper, and zinc, that are more likely to benefit from decarbonization and electrification. We forecast alumina and aluminum to comprise roughly 30% of fiscal 2028 EBITDA, followed by nickel (17%), manganese (14%), and silver (13%). Copper and zinc comprise the remainder, with the latter driven by the company developing its Taylor zinc-lead-silver project in Arizona, which we think is likely
Morgan Stanley:
Financial results in-line, but FY24 cost guidance showing inflation pressures: S32's financial result were broadly in-line with MSe/consensus while the full year dividend was slightly weaker against both MSe/consensus (see here). Upon updating our model we see little change (~1.5%) to our FY23 EPS. FY24 production guidance was largely maintained except for a slight downgrade (5,000kt vs prev: 5,300kt, met + thermal) at Illawarra coal driven by four planned longwall moves for FY24. S32 also provided FY24 cost guidance and upon adjusting for currencies shows the majority of assets continue to face inflationary pressures. We see these factors driving a ~33% cut to our FY24e EPS (from 16cps to 11cps) and a ~10% cut to our FY25e EPS (from 20cps to 18cps).
Sierra Gorda a key upcoming catalyst for S32: With the fourth grinding line expansion expecting an FID in 2HFY24 and S32 today confirming a large scale (1.89bt @ 0.41% CuEq) copper deposit at Sierra Gorda, we have now incorporated the expanded throughput of 57-58Mtpa (~15-20%) into our estimates. We see the project costing S32 ~US$550m over 3 years from FY25-27 and see the additional grinding circuit ramping up in FY28 to for the site to reach a total milling rate of ~57Mtpa by FY30. The expansion as a result drives a higher base case (and Bull and Bear) valuation of A$3.70/sh (prev: A$3.65/sh).
Why are we OW? Despite cost inflation in FY24, we see FY25 remaining largely consistent vs. our previous forecasts and also in-line with management's updated FY25 guidance. In coming months (2QFY24) we are expecting an FID for the Taylor deposit and with the recent write-down of the asset, we are currently valuing Hermosa at book value (~US$1b), and see the market having captured the potential upside risks to capex, leaving room for potential upside. In addition, we await the FID on the fourth grinding line at Sierra Gorda, where in our opinion, we have been conservative in our estimates as upside potential could come from higher recoveries, operating cost efficiencies, better grades and a faster build. While the stock trades close to our base case, we see the potential for a positive surprise sustaining our OW rating and as such shows ~13% potential upside to our new PT of A$4.15/sh (prev: A$3.90/sh), which benefits from a higher Bull Case.
There's lots to digest from these reports. Above is just a summary.
There's not much on the overall Aluminium supply/demand dynamics. Ignoring the news about closure of some European smelters, China is still flooding the market with Aluminium and showing they are in control of pricing like lots of other commodities. I'm using the below tweet as a reference:
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For those seeing the drop in share price on Monday, South32 results came out and was all below expectations with guidance being downgraded. Looks like no one anticipated the numbers being so bad
Source: Factset (Capital IQ pro did not have the latest report which is pretty bad considering the cost)
Share price seemed to have recovered today but it is a bit disappointing that Cannington had been impacted by flooding and South32 did not inform the market until now. Unlike nearby neighbour Capricorn, operated by 29Metals which got totally flooded, mining is continuing at Cannington but guidance reduced.
Other negative surprises include reduced production at Sierra Gorda again due to weather events and falls in Nickel production.
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Base metals valuation template sheet of Cannington and Sierra Gorda using the FY22 Annual report.
Think the valuation of Sierra Gorda might be a bit on the high side as I probably need to subtract the acquisition costs and contingent payments somewhere, will need to check the numbers again. So it is all preliminary and shouldn't be used as a real valuation. Cannington seems "right".
I don't have enough data yet on Sierra Gorda other than the fact that it has a 20+ year reserve and copper equivalent which is why the Mt cell is blank. So I'm taking an average of the South32 estimate production numbers in Cu eq from the qtr report and previous production of 29.5kt.
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You learn new things when you take time to go through Annual reports!
The bottom row is the Open Cut resource estimate.
In other words, South32 still is unsure about starting an Open Cut operation as there is no reserve established. Only an underground reserve specified as shown below:
While this is viewed as a negative, it does show South32 is extra cautious on deploying their capital and their management know what they are doing.
I think all those silver miners such as MKR and maybe retail favourite SVL should take a leaf out of South32 and find out why they went underground first.
Just like Elders, I now remember South32 is another one I averaged down during Covid. My accountant also warned me against South32 as some of her clients booked losses when it dropped below $3 in 2019 and cut dividends. Of course I didn't know much about South32 back then other than they had a strategy to turn around their business and cut their loss making operations and they had one of the largest producing silver mines in Oz.
Obviously not financial advice.
FYI: I'm still working on doing an NPV valuation for S32, it will take time though.
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From the South32 Dec Qtr update
I can't help but think that Devlop Global mining services has something to do with the labour shortages experienced at Golden Grove (29metals) and now Cannington (South32).
Maybe Kerr should give Beament a call?
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Received a big fat dividend check, although not as much as Fortescue
Dividend has literally earned a bag or two since the covid pandemic lows (from marketindex)
But given recession fears and aluminium prices coming back to earth, this could be as good as it gets.
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Adding to the last straw, one risk no one has highlighted yet is the missing operational guidance on Aluminium for Brazil and South Africa.
I would have thought switching to non-coal power sources for Brazil, Hillside and Mozal would make the operations less sensitive to energy costs and make operations more predictable.
Also the dividend was smaller than I expected (I was estimating about 20c with the sale of all those royalties)
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