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South32 posts solid $620m net profit for 1H17

Glenn Freeman  |  17 Feb 2017Text size  Decrease  Increase  |  

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The mining and metals company reports a positive first-half result that marks a return to profit, but the spectre of falling Chinese demand continues to hover.


South32 (ASX: S32) has reported US$620 million in net profit after tax for the first half of fiscal 2017 (1H17)--a return to positive territory after a $1.7-billion loss in the same period in 2016.

Revenue for the half was up 8 per cent to $3.2 billion, from $2.9 billion in 1H16. Shareholders will receive an interim unfranked dividend of 3.6 US cents a share.

The result was underpinned by stronger commodity prices during the period, with lifted average realised prices for both coal and manganese ore key contributors. Revenue from these businesses was up US$313 million and US$230 million, respectively, and US$661 million for the overall group.

At the same time, its alumina and aluminium operations benefited from US$47 million in price-linked cost reductions--though this was offset by US$51 million in inflationary cost increases.

The company continued its strategy of cost reduction during the half, generating free cash flow of US$626 million, "as we further optimised our operations and benefitted from our operating leverage," said South32 CEO Graham Kerr.

"Our strong balance sheet and simple capital management framework is designed to reward shareholders as financial performance improves," he said, referring to its total interim dividend of US$192 million.

Morningstar senior equity analyst, Matt Hodge, said the company had "correctly followed through on its increased ability to pay dividends to shareholders, and signals an intention to do more in future".

Across the group's operations, South32's top revenue contributors in 1H17 were its South African aluminium and energy coal businesses, which added $601 million and $539 million, respectively.

Its Australian-based Illawarra metallurgical coal operation recorded $471 million in revenue--up 65 per cent on 1H16.

South32's Cannington silver and lead mine in Queensland contributed $412 million in revenue, which was down slightly on 1H16.

Its outlook for the full year is based on several commodity price assumptions, including an alumina price of US$316 per tonne, a thermal coal price of US$84 per tonne, an average blended coal price of US$146 per tonne, a silver price of US$17 per troy ounce and a lead price of US$2,267 per tonne.

Hodge questions the accuracy of these assumptions: "The shares are overvalued, pricing in ongoing commodity price strength, which we think is unlikely to be sustained."

"We think it will be challenging for South32 to maintain earnings at current levels, as commodity prices normalise as China's 2016 economic stimulus wanes."

For coal, both coking and thermal, Hodge anticipates reduced Chinese demand as it loosens domestic production constraints: "Longer term, we expect a modest contraction in China's steel consumption to weigh on coking coal and manganese prices."

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Glenn Freeman is Morningstar's senior editor.

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