The share price of South32 Ltd (ASX: S32) has skyrocketed higher today after the miner announced a major restructure is in the works. Its shares surged 12.6% to $1.07.
So What: South32 split off from its parent company, BHP Billiton Limited (ASX: BHP), in May 2015, with a share price of $2.13 and a market value north of $11 billion. But while many analysts expected it to outperform BHP, it has done nothing but fall in the time since as a result of crashing commodity prices.
It flagged an impairment of US$1.7 billion in today's announcement, although that won't have come as a surprise to investors. Other commodity producers, including BHP and Woodside Petroleum Limited (ASX: WPL), have also been forced to book write-downs as a result of the outlook, with most analysts forecasting further pain in commodities markets before conditions begin to improve.
Rather than responding negatively to the impairment however, investors are instead focused on the company's plans to restructure. As many as 620 jobs will be cut from South32's manganese projects in South Africa following a strategic review and in response to a sharp decline in manganese ore prices. It said mining activity will restart at South Africa Manganese immediately, albeit at a "substantially reduced rate" and with greater flexibility.
At the same time, more jobs could also be cut at other projects, including some in Australia. Further information will be provided when the group reports its first-half earnings results on 25 February.
Now What: One of the reasons analysts favoured South32 when it was first spun out of BHP Billiton was its ability to improve operating efficiencies and shed unnecessary costs. Although it will come at the expense of a number of jobs, this move could save South32 millions in costs per year, helping to boost its margins and overall earnings.
South32's shares have fallen hard since May, and could have even further to fall if conditions in the market do continue to deteriorate. Investors should keep these risks in mind before even considering buying a position in the business.
