South32 (ASX:S32) share price jumps as profit soars

The commodities rally of 2021 continues to pay benefits to ASX miners…

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Key points

  • South32 reported earnings and guidance today with a robust set of results 
  • The company made some minor adjustments to production forecasts in the coming years, but otherwise gained operating leverage and operating efficiency
  • In the last 12 months the South32 share price has jumped more than 64% 

The South32 Ltd (ASX: S32) share price is in the green in early trading today following the release of the company's financial results for the half year ended 31 December 2021.

At the time of writing, the ASX miner's shares are trading at $4.55 apiece, up 2.25% on yesterday's closing price.

South32 share price climbs as margins lift off

Highlights from the H1 FY22 results include:

  • Group's statutory profit after tax increased by US$979 million to US$1.032 billion in H1 FY22
  • Strong production results across a number of operations and high operating leverage translated into an improved operating margin of 44% (H1 FY21: 24%)
  • Underlying earnings increased by US$868 million to more than US$1 billion
  • Generated free cash flow from operations, including distributions from manganese EAI, of US$942 million
  • Finished the period with net cash of US$975 million
  • US$405 million fully franked interim dividend announced, 40% of underlying earnings
  • US$60 million allocated as a part of on-market share buyback program

What else happened this half for South32?

The company also noted its Worsley Alumina site continued to operate above nameplate capacity. Brazil Alumina, on the other hand, was a key takeout and achieved record production in Q2 FY22.

Meanwhile, its Cannington assets continued to perform strongly. Production guidance was revised higher by 5% for FY22 "as the operation prepares to transition to 100% truck haulage in Q4 FY22".

Additionally, the group's Cerro Matoso site in Colombia achieved a 26% spike in payable nickel.

Aside from that, South Africa Manganese came in with an all-time production record during Q2 FY22. This was underscored by more deliveries of premium material to market.

Operationally the company also saw "strong production results across a number of operations" that resulted in "high operating leverage". Consequently, the group's operating margin improved by 22 percentage points to 44%.

This result was in part helped by controllable costs sitting less than 3% of the group's cost base, "despite significant external pressure".

Management commentary

Speaking on the announcement boosting the South32 share price today, CEO Graham Kerr said:

We achieved a record operating margin of 44% and a significant improvement in our underlying earnings to US$1 billion in the half, following a broad recovery in commodity prices, while also making substantial progress reshaping our portfolio.

A number of our operations delivered strong production results during the half. We achieved record quarterly production at Brazil Alumina and South Africa Manganese during the period, while Worsley Alumina continued to operate above nameplate capacity.

Production guidance at Cannington has been revised higher by five per cent as the operation prepares to transition to 100 per cent truck haulage in the June 2022 quarter, which is expected to bring forward access to higher grade material.

This performance, together with our strong financial position, is enabling us to invest in our business, grow base metals production and substantially increase our returns to shareholders, with the board resolving to pay a record US$405 million fully franked ordinary dividend in respect of the period. The board has also resolved to expand our capital management program by US$110M to US$2.1B, leaving US$302M to be returned.

What's next for South32?

Guidance was unchanged from previous estimates in all areas except Australian Manganese, Illawara Metallurgical Coal and Cannington.

For Cannington, South revised guidance upward by 5% and forecasts 2,750kdmt of ore processed after reinstating its estimates on zinc, silver and lead production.

For the other two sites, the company downgraded guidance by 9% and 7% respectively, as a reflection of COVID-19 impacts.

The company also expects to produce 5kt of alumina at its Brazil Alumina operations by FY22, jumping to 140kt the following year.

South32 share price snapshot

In the last 12 months the South32 share price has jumped more than 64%. It has also climbed 11% this year to date.

Across all time frames South32 is in the green, more than can be said for the benchmark indices in the same time.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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