New Era Beckons For South32

Australia | May 25 2021

What lies ahead for South32 now South Africa Energy Coal has finally been divested?

-Focus turns to base metals now SAEC has been divested
-South32 now more attractive from an ESG perspective
-Heightened potential in the capital management program


By Eva Brocklehurst

As South32 ((S32)) finally shakes off its coal shackles what lies ahead? The divestment of South Africa Energy Coal (SAEC) is expected to close on June 1 and the company's ESG (environment, social and government) credentials improve markedly as a result.

The final condition for the deal was receipt of approvals from the South African Treasury following recommendation by the electricity company, Eskom. The deal was amended from the original structure in order to ensure sustainable operations under the new owner.

Morgans is one broker relieved that SAEC is no longer on the books as the business will be reduced to 11 operating sites amid a -34% reduction in the global workforce. Emissions will be almost halved and capital intensity reduced by -24%.

An impairment of -US$125-175m will be recorded on completion of the sale and -US$180m in cash is committed to rehabilitation, which will be prepaid. Macquarie notes the drain from coal was approaching -US$580m as since the transaction with Seriti Resources was announced in 2019, SAEC has recorded a cumulative cash loss of -US$334m and negative operating earnings of -US$197m.

Bring it on! Shaw and Partners expects a near-term review of the current program of work, noting there are at least two pre-feasibility studies and a scoping study due over the next 6-7 months. The broker likes the transformation and the fact the valuation becomes relatively cheaper than some peers, while a top-up to capital management adds a tactical rationale.

Base Metals

Macquarie downgrades to Neutral from Outperform as a key catalyst of the sale of SAEC has now passed and there are limited positive catalysts for the short term. The broker assesses declines in some of the company's key commodities have eroded upgrade momentum and the spot price scenario is generating -6% and -2% lower earnings, respectively, compared with its base case for FY21 and FY22.

Credit Suisse has downgraded recently, also to Neutral, as without outperformance on commodity prices the current share price looks full. The stock has rallied more than 25% over the year to date amid strengthening demand for materials, although the underlying commodities to which South32 is exposed largely offset each other.

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