Having defied its critics, what’s the next chapter for South 32?

When Graham Kerr sat down for his first live interview as chief executive of South32, he was asked how it felt to be the head of a mining company that analysts and commentators were variously calling “CrapCo” or “DudCo”. South32 was, after all, a basket of smaller, second-tier assets that mining giant BHP had deemed non-core and decided to spin out into a new publicly traded entity.

“We certainly had a set of assets, if you want to characterise them, that were probably things that BHP didn’t want,” Kerr recalls.

South32 chief executive Graham Kerr.Credit: Trevor Collens

Upon its conception in 2015, the new company could indeed have been seen to be something of a “mixed bag” of mines. Named after the 32nd line of latitude joining two of its key regional centres in Western Australia and South Africa, South32 inherited 12 businesses producing alumina, aluminium, manganese, coal, nickel, lead and zinc, at operations spanning Australia, Africa, Brazil and Columbia.

Perhaps understandably, there were doubts about its prospects. But as Kerr and his former colleagues at BHP saw it, the demerger presented a compelling opportunity for both companies to be “better than what they were together”. The smaller assets that would come to comprise South32 were likely to fare better with dedicated management and capital than they would within BHP, where they would struggle to compete for capital – or so the thinking went.

Several years later, they might have reason to feel vindicated in that view.

Kerr and his team have been working to optimise the composition of their portfolio of products, and many of South32’s key commodity prices are today trading strongly. It already boasted broad exposure to metals that the world urgently needs more of as raw materials for building renewable energy and electric cars.

Meanwhile, other commodities, such as coal, have faced supply crunches because of the war in Ukraine, sending prices to record levels. South32’s portfolio has recently been expanded to add copper, the key ingredient in electric wiring, and it is targeting further plans to boost supplies of base metals as demand continues to grow from global efforts to combat climate change.

As Kerr explained in a speech to the Melbourne Mining Club last month, metals like copper, nickel and zinc have suddenly become “far more attractive” in a world striving to restrain global temperature rises to the 2015 Paris Agreement’s target of 1.5 degrees.

Now in its ninth year, the company has seen huge ups and downs in commodity prices and, like all miners, is confronting varying forecasts on what lies ahead for the global economy and demand for its products. How is South32 positioned for its next chapter?

Industry: Mining.

Main products: Alumina, aluminium, bauxite, copper, nickel, manganese, zinc, silver, lead, metallurgical coal

Key figures: Chief executive and managing director Graham Kerr, chair Karen Wood, chief financial officer Sandy Sibenaler, chief commercial officer Katie Tovich.

How it started: In a long-running bid to simplify its portfolio, BHP in 2014 announced its intention to demerge its “non-core” assets and focus its business on its four pillars: iron ore, copper, coal and petroleum. On May 6, 2015, BHP shareholders approved the demerger.

South32 was officially listed on the Australian Securities Exchange on May 18, 2015, with secondary listings in London and Johannesburg, and headquartered in Perth. Graham Kerr, BHP’s former chief financial officer, was installed as CEO.

How it’s going: South32 has embarked on a series of significant moves to reshape its portfolio. Foremost, it has exited thermal coal – the type of coal burned to create electricity – with the sale of its South African Energy Coal (SAEC) business to Johannesburg-based Seriti Resources, and has struck a deal to buy a 45 per cent stake in the Sierra Gorda copper mine in Chile. It also expanded its exposure to low-carbon aluminium through an increased shareholding in the hydro-powered Mozal aluminium smelter in Mozambique.

At an investor roundtable earlier this year, Kerr said the company remained in the process of actively reviewing and steering its portfolio towards more of what the industry terms “future-facing” metals – those standing to benefit as materials in renewable energy, batteries and other infrastructure that will be needed to decarbonise the global economy. Based on analysts’ commodity price assumptions, the company’s valuation split moved from 50:50 between bulk commodities and base metals to 25:75 post the Sierra Gorda acquisition.

The bull case: Although rarely in the spotlight like global heavyweights BHP and Rio Tinto, South32 is arguably one of the most diversified miners on the ASX. Benefitting from a strong balance sheet, South32 proved it was able to ride through a deep commodity price downturn during its early years, and another during the early stages of the COVID-19 crisis.

As China, the world’s biggest consumer of industrial metals, continues its economic recovery from its long-running zero-COVID restrictions, South32 could be well-placed to benefit from the possibility of an uplift in construction and manufacturing, which could require lots of aluminium, manganese, copper and nickel, without being exposed to iron ore.

Goldman Sachs, which has a “buy rating” on South32, forecasts a strong recovery in free cash flow by 2014 thanks to higher production and prices, and sees “potential upside” from growth projects including a Sierra Gorda copper expansion, plans to produce battery-grade manganese in Arizona and the possibility of developing a jointly owned copper deposit in Alaska.

The bear case: South32’s shares slumped earlier this year after it downgraded its full-year production forecasts for five mine sites and posted weaker-than-expected output of most commodities following operational events such as flooding, access or geological issues.

Looking ahead, there are also worries that an economic slowdown could hurt demand for commodities. Investment bank Barrenjoey points out that China accounts for more than 50 per cent of demand for much of South32’s product. “If growth does not recover in 2023, then there is risk to our commodity prices forecasts and returns,” it says.

Responding to mounting investor pressure for mining companies to do more to cut their carbon footprints, South32 has set targets to halve its emissions by 2035. Failure to achieve these goals could result in a de-rating of the company by investors, says Barrenjoey, due to higher borrowing costs and a higher cost of capital.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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