South32 Ltd refocuses after huge writedowns

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.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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