The South32 Ltd (ASX: S32) share price has gained 0.2% to rise to $1.13 in early trading, after the diversified miner released its half year results – including impairment charges of US$1.7 billion.
South32 has operations around the globe in a number of commodities, including in alumina, energy and metallurgical coal, manganese, nickel, silver, lead and zinc.
Thanks to commodities prices falling across the board, revenues fell 27% to US$2,981 million compared to the prior corresponding period (pcp).
Here's a quick summary of the key results…
- Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) US$542 million, down 52% on the pcp.
- Reported loss after tax – US$1,749 million
- Underlying earnings after tax US$26 million – down from US$460 million in the pcp
- Earnings per share US 0.5 cents compared to US 8.6 cents in the pcp
- Net tangible assets per share of US$1.69 (down from US$2.02 at the end of June 2015)
- No dividend declared
- Net debt down by US$286 million to US$116 million
- Operating cash flow of US$465 million.
So What?
It should be fairly clear to anyone that South32 is struggling with lower commodities prices – over which it has no control.
At an underlying earnings before interest and tax (EBIT) level, 4 of its 10 operations are unprofitable – so the good news is that 6 operations are still making money (at that level at least).
The only thing the miner can do is focus on its costs, the non-profitable operations and improve efficiency, which it is doing. South32 says it has cut costs of US$182 million already, and is focusing on major restructuring to cut another US$300 million of expenses out of the business in the 2016 financial year.
Capital expenditure is being cut back to the bone, falling by US$150 million to US$550 million.
Now what?
Restructuring operations costs money – not least in redundancy costs with South32 announcing a reduction in employees across a number of its businesses. That will see more one-off expenses in the full year results.
Ratings agencies Moody's and S&P has notified a number of miners, including South32, that their credit ratings are on review for downgrade based on updated commodity forecasts. With US$813 million of debt (partially offset by US$697 million of cash), South32 will likely be using some of that cash to pay down its debt.
Foolish takeaway
Despite US$1.69 of net tangible assets, South32 shares are no bargain, despite their A$1.13 share price. In the last half, 33 cents per share were written off net assets, and if commodity prices continue to fall or stay low, more writedowns could be coming.
