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Why the South32 Ltd share price climbed 5% higher today

Diversified mining company South32 Ltd (ASX: S32) is one of the big movers on the local market today, with its shares up 5% to $3.90.

Most miners had a strong start to the day following a surge in metal prices overnight, with aluminium and nickel, two of South32’s products, up 5.5% and 7.5% respectively on the London Metal Exchange.

Furthermore, South32 just released its quarterly update.

Production volumes

South32 had a mixed result in terms of production volumes. Nickel production increased to 10,700 tonnes, up 6% on the previous quarter. Silver production exceeded 3 million ounces, up 28% on the previous quarter. On the downside, volumes of zinc and manganese ore declined 7% and 10% respectively.

Ongoing rehabilitation work at the Illawarra project induced the company to slash its metallurgical coal full-year production guidance from 4.5 million tonnes to 4.1 million tonnes. The mine is expected to return to its historical rates of production of above 8 million tonnes per annum from the end of FY2020.

The production of aluminium and alumina – the compound from which the metal is obtained – declined 2% due to maintenance work in the company’s aluminium projects in Brazil and South Africa, but South32 expects these operations to meet their production guidance for FY2018.

Aluminium prices are at a 7-year high on the back of U.S. sanctions on Russian producer Rusal, and are tipped to surge further in the coming months.

Cash balance

In the favourable commodity price environment, South32’s cash balance increased 33% to US$1.9 billion during the quarter, supporting the company’s generous cash handouts.

South32 conducted an US$85 million on-market share buy-back during the quarter, bringing forward its US$1 billion capital management program. The company has already bought back 176 million shares at an average price of $2.89 per share.

After the end of the quarter, South32 paid a US$221 million interim dividend and a US$154 million special dividend.

Foolish takeaway

Shares in South32 traded close to $4 today, which is an all-time high, but I wouldn’t be surprised to see them push even higher in the coming weeks.

Despite the mixed operational update, I think the company will take advantage of sustained commodity prices to further strengthen its cash balance. Its diversified operations grant additional stability, which is why I’d pick South32 over a single-commodity play like Alumina Limited (ASX: AWC) –  today’s top gainer on the ASX200.

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Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. 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 Scott Phillips.

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