South32 share price sinks 8% amid rising cost guidance

Higher expected costs have thrown cold water on the South32 share price today…

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Key points

  • The South32 share price is trading 8.2% lower following the release of its quarterly report
  • An increase in the company's operating unit cost guidance for FY22 appears to have unsettled investors
  • Costs are expected to be higher than previously thought due to currency changes, material costs, and royalties

The South32 Ltd (ASX: S32) share price is having a hard time attracting support on Tuesday. Increased selling pressure has arrived at the doorstep of the mining metals company following its March quarterly report.

In afternoon trade, South32 shares are trending lower with a fall of 8.4% from its previous closing price. As a result, the miner is now sitting at $4.43 per share. For comparison, the S&P/ASX 200 Index (ASX: XJO) is 1.9% in the red — retracting further from its recent green streak.

Let’s peel back the layers of South32’s latest announcement.

Are cost pressures creeping up?

The March-ending quarter was a busy one for South32, yet the market is not on its side today. Despite production numbers being markedly higher quarter on quarter for key products including silver, lead, and metallurgical coal, it looks like investors are focusing on the cost side of the equation.

Based on the quarterly report, the multi-billion-dollar mining giant is forecasting its full-year operating unit costs to move upwards. The revision to the FY22 cost guidance is a reflection of stronger producer currencies, inflated input costs, and an increase in price-linked royalties. In turn, the South32 share price is suffering today.

Furthermore, the increased operating unit costs are expected across most of the company’s operations. The only operation listed by South32 that has avoided revised guidance is the Sierra Gorda copper mine. Meanwhile, some of the operating unit cost increases include the following:

  • Worsley Alumina: US$257 per tonne increased to US$265 per tonne
  • Brazil Alumina: Approximate 5% increase from US$262 per tonne
  • Cannington: US$120 per tonne to US$131 per tonne
  • South Africa Manganese (FOB): US$2.51 per dry metric tonne to US$2.79 per dry metric tonne

What else?

On a more positive note, the company expects FY22 production to be in line with previous guidance.

In addition, South32 successfully completed the acquisition of its 45% interest in the Sierra Gorda copper mine during the quarter. This tallied up to be a US$1.4 billion acquisition for the mining beast.

Another initiative to reward shareholders during the quarter was the purchasing of a further 5 million shares through a buyback arrangement. At the end of the quarter, South32 has another US$285 million in buybacks remaining.

How has the South32 share price performed?

Despite today’s weakness, the South32 share price provided shareholders with market outperformance in 2022. While the ASX 200 has slipped 3.3% lower, the metals company is up roughly 9% over the same duration.

Finally, Goldman Sachs currently holds a conviction buy rating on the company. With its diversified exposure to base metals and strong free cash flow, Goldman has happily tagged it with a $5.80 price target.

Motley Fool contributor Mitchell Lawler 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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