Cashflow carries the quarter for South32

South32 booked a strong increase in cashflow yesterday despite struggling to match production forecasts.

South32 chief executive Graham Kerr in his Melbourne office.

BHP spin-off South32 booked a strong increase in cashflow yesterday despite struggling to match production forecasts of analysts in the March quarter.

The group also slashed projected output from its giant Cannington mine after a recent underground fire.

For the three months to March 31, alumina output came in at 1.29 million tonnes as against market estimates for 1.33mt, according to Bloomberg numbers.

The group’s energy coal output of 6.86mt was well shy of forecasts for 8.1mt after wet weather in South Africa, while its metallurgical coal production also fell well short of expectations due to “challenging ground conditions” in the Illawarra.

Manganese alloy output was also short of market projections, but manganese ore just edged expectations and aluminium output matched forecasts.

The group was seen to benefit from much stronger commodity prices as against the same period last year. “Despite several operational challenges during the quarter, we increased our net cash balance by $US645 million ($860m) to $US1.5 billion,” chief executive Graham Kerr said.

South32 was required to trim guidance at the Cannington mine to 16 million ounces of silver, 135 kilotonnes of lead and 70kt of zinc after a recent underground fire interrupted operations.

The new production forecasts compare unfavourably to initial expectations for 19.05 million ounces of silver, 163kt of lead and 80kt of zinc. Challenges at Cannington ensured silver output was down 12 per cent in the March quarter, while lead output was also off 12 per cent and zinc production skidded 38 per cent.

RBC Capital Markets analyst Paul Hissey said the overall report appeared weaker than expected, but did not alter the medium-term view for the group.

“Although we would argue production was generally softer across the entire product group, we don’t see material implications going forward, but rather accept the March quarter as the one most likely to be impacted by seasonality,’’ he said. “Production risks were effectively provisioned at the last quarterly although the root cause for the downgrade were slightly different.’’

Mr Hissey said the cash position was of “greater interest” for the group’s valuation. “We believe balance sheet strength is the most likely mechanism to entice shareholder interest and is therefore the key driver of our outperform rating.”