Breaking four production records wasn't enough to keep South32 Ltd (ASX: S32) in investors' good books today as the stock fell with the broader market in late trade.
Shares in the diversified miner shed 1% to $1.81, which is in-line with the S&P / ASX 200 (Index: ^AXJO) (ASX: XJO), after management delivered production increases for coal and manganese ore but said it would take a $US1.9 billion ($2.6 billion) writedown.
There was a lot riding on today's result as it was the first quarterly South32 is handing down as a standalone entity since it was demerged from BHP Billiton Limited (ASX: BHP). BHP also posted its quarterly today and you can read about it here.
Here are six things you need to know about South32's production report:
- South32 broke four annual production records that include saleable alumina at Brazil Aluminium, coal at Illawarra Metallurgical Coal, alloy at Australia Manganese and ore at South Africa Manganese.
- Metallurgical coal production was the standout as it recorded a 25% increase to 7.5 million tonnes in 2014-15 compared to the previous year, while aluminum production was the worst as it fell 14% year-on-year to just over 1 million tonnes. The big drop in aluminium was largely due to the closure of South32's high cost Bayside smelter and maintenance work at other facilities.
- The miner's Appin Area 9 metallurgical coal project is expected to be completed ahead of schedule in the second half of 2015-16 and is around 20% below the original budget of $US845 million.
- South32's chief executive Graham Kerr said the miner's priority is to maximise financial performance per share instead of volume. This should please investors given that the plunge in commodity prices is largely due to oversupply fears.
- The strategy means the miner is focused on cost-cutting although no new update was given except a comment that the $US60 million in corporate office costs will eventually be offset by efficiency drives. The miner stressed its commitment to maintain its investment grade rating with Standard and Poor's and Moody's, which have assigned a BBB+ and Baa1 rating, respectively.
- The $US1.9 billion write-down in book value of its assets is offset by a prior fair value uplift of $US2.1 billion for its Australia Manganese and South Africa Manganese assets. This means a lower depreciation charge for the assets than previously indicated.
The production report won't win the miner any new fans, but it won't make any new enemies either. The stock looks good value to me but the investment proposition lies heavily in the medium-term outlook for commodity prices.
There is also scope for South32 to make acquisitions in this depressed market as the miner is well funded with net cash of $US54 million and modest gearing.
But those looking for stocks with nearer term upside potential without the risk of volatile commodity prices should sign up for free below to see what the experts at the Motley Fool have uncovered.
