South32 boss Graham Kerr says he still wants to buy a couple of new assets
South32 has spent the last five years slimming down, but CEO Graham Kerr wants to find at least one more operating mine for its portfolio.
South32 boss Graham Kerr says the company is still on the hunt for a couple of new base metals assets to round out the mining major’s portfolio, as rising commodity prices lift the company’s bottom line.
Speaking after South32 delivered record $US1bn ($1.4bn) underlying half year earnings, Mr Kerr said the company was now reaping the rewards of reshaping its portfolio over the last few years.
While South32 now has significant growth options in its development portfolio – a sharp contrast to its situation when it was spun out of BHP in 2015 – Mr Kerr said he still wants to broaden the company’s base metals exposure.
“In the perfect world – if I look at our cash flow, if I look at our growth profile – we can probably do with one more operating asset, and one more project, both in the base metals space,” he said on Thursday.
Mr Kerr pointed to zinc as a key commodity he believes remains undervalued by market analysts, and said he believed aluminium produced outside of China will also enjoy a strong growth story over the next decade.
But soaring metallurgical coal prices have not moved South32’s Eagle Downs coking coal project back onto the company’s agenda, although Mr Kerr said the company was in no immediate hurry to hasten a sale of its half of the Queensland project.
Mr Kerr said South32 had received a “small number” of offers for the partly-developed coking coal mine in December but said that, while South32 was reaping strong earnings from its existing coking coal operations, the company was unlikely to return to Eagle Downs as a development option.
“There’s not a huge buyer of metallurgical coal businesses out there, so we’re testing the market,” he said.
“Eagle Downs had an attractive enough return that if it had been a base metals project we probably would have done it. But even when you get a return, if your shareholders don’t want exposure to metallurgical coal, they don’t want you to invest in any more of it.”
South32 is still trying to extend the life of its Dendrobium coking coal mine in the Illawarra region, and Mr Kerr said he hoped to have a final decision on the mine’s future from the NSW government by the end of 2022.
Rising base metals and coking coal prices boosted South32’s bottom line in the first half of the financial year, with the company declaring a US8.7c a share interim dividend after posting a $US1.03bn profit for the period.
The company also boosted its share buyback program by $US110m, with the company left with $US302m remaining in its $US2.1bn buyback program.
Its net profit was up almost $US1bn from the $US53m net result in the first half of the previous year, on the back of strong operational performances at the majority of South32’s major mines and the broad recovery in commodity prices across its portfolio.
“We achieved a record operating margin of 44 per cent and a significant improvement in our underlying earnings to $US1bn in the half, following a broad recovery in commodity prices, while also making substantial progress reshaping our portfolio,” Mr Kerr said.
The price surge in key commodities – including coking coal, aluminium and base metals – was the major factor in the turnaround, adding $US1.5bn to revenue.
The extraordinary price rise for metallurgical coal boosted sales revenue by $US562m, with aluminium prices adding an extra $US494m to South32’s takings for the period.
But Mr Kerr said he did not believe current coking coal prices – still close to record highs at just under $US440 a tonne on Thursday – would last for much longer.
“Within 12 months we would probably expect the met coal price to be around $US200 per tonne and our view around the long term met coal price probably hasn’t really shifted to be perfectly honest,” he said.
South32’s underlying revenue grew 32 per cent to $US4.6bn in the first half of the year, with underlying EBITDA up 138 per cent to $US1.87bn.
South32 shares closed up 5c, or 1.1 per cent on Thursday at $4.50.