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South 32 – Impacted By Weak Commodity Prices And A US$115 Million Impairment

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

South 32 Ltd (ASX: S32) is an international mining and metals company that has several operations in Australia, South Africa and South America. South 32 specialises in producing bauxite, alumina, aluminium, energy and metallurgical coal, manganese, nickel, silver, lead and zinc. South 32 was demerged from BHP in 2015, and since has developed into one of the few global mid-tier diversified mining companies. South 32 has a market cap of $A10.4 billon.




What are the key features of the FY20 result for South 32?

South 32 revenue for FY20 is US$6,075 million, down 16% from FY19. South 32 reported a loss after tax for FY20 of US$65 million, down from profit after tax of US$389 million for FY19. Underlying earnings for FY20 is US$193 million, down 81% from FY19. South 32 will pay a final dividend of US 1 cent per share (fully franked).

South 32 reported a loss after tax due to an impairment and restructuring charges totalling US$115 million in relation to South 32’s manganese smelters. Another contributing factor was that South 32’s commodity markets (particularly manganese, alumina and metallurgical coal) experienced lower prices during FY20 relative to FY19. This was mainly attributed to the economic impacts of COVID-19.

South 32 reported sound production performances across the company’s assets. All operations apart from South Africa Energy Coal, South Africa Manganese and Cerro reported production increases on the year.

One positive note from South 32’s FY20 result is that the company enacted saving programs across the company that reduced costs of South 32’s operations. Particularly, Worsley Alumina, Brazil Alumina, Mozal Aluminium all observed around 12% cost reduction in operational costs. Hillside Aluminium observed a 25% cost reduction in operation cost. Illawarra Metallurgical Coal and Cannington observed a 1% and 8% respectively cost reduction in operation costs.

South 32 has a sound balance sheet with net cast at US$298 million. This is down from US$504 million from FY19 due to South 32’s capital management activities that included a final dividend to shareholders and the company’s on-market share buy back program.

What is the outlook for South 32?

South 32 did provide production guidance for FY21. Production guidance from South 32’s specific operations are slightly up from FY19. However, the main uncertainly facing South 32 is prices for the company’s producing commodities. If COVID-19 continues to disrupt South 32’s commodity markets moving into FY21, this will negatively impact South 32’s earnings. However, the commodity price cycle will turn in South 32’s favour over time.

What is the market reaction to the FY20 result?

The market reaction to South 32’s FY20 result is broadly neutral. South 32’s share price is down around 0.8% (as is the broader market) and is currently trading at A$2.135. South 32 is trading at a forward P/E ratio in the low-thirties and has an annual dividend yield of around 4.2%.



This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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