South32 Earnings: Result Is Down on Lower Prices and Volumes

No-moat South32′s S32 2023 result was weaker than our expectations. Adjusted net profit after tax was USD 920 million, or around AUD 0.20 per share, down from USD 2.6 billion last year. Adjusted EBITDA also fell 47% to about USD 2.5 billion, on lower prices and sales volumes. Otherwise, higher costs were offset by favorable foreign exchange movements. The USD 3.2 cent (about AUD 4.9 cents) per share fully franked interim dividend was 82% below last year on lower earnings but was consistent with the minimum 40% payout ratio. It also modestly increased its remaining share buyback by USD 50 million to USD 130 million, the small amount immaterial to our fair value estimate. South32′s balance sheet is strong, with a modest net debt of about USD 480 million, 0.2 net debt/EBITDA.

We retain our fair value estimate for no-moat South32 of AUD 4.10 per share. Elevated metallurgical prices saw the division comprise around one-third of fiscal 2023 EBITDA, but we forecast metallurgical coal to be less than 10% of EBITDA at the end of our forecast period in fiscal 2028. This is driven by our view that metallurgical coal prices will revert to our assumed midcycle price of roughly USD 150 per metric ton from 2027 based on our estimate of the marginal cost of production, down from spot of roughly USD 260 per metric ton. Lower metallurgical coal production of around 4.7 metric tons in fiscal 2028, down from 5.4 million in fiscal 2023, also provides an assist. This is consistent with South32′s strategy to transition its portfolio to more metals such as aluminum, alumina, copper, and zinc, that are more likely to benefit from decarbonization and electrification. We forecast alumina and aluminum to comprise roughly 30% of fiscal 2028 EBITDA, followed by nickel (17%), manganese (14%), and silver (13%). Copper and zinc comprise the remainder, with the latter driven by the company developing its Taylor zinc-lead-silver project in Arizona, which we think is likely.