Diversified global mining company South32 Ltd (ASX: S32) released weak financial results today reflecting falling commodity prices in the year to 30 June 2016. Shares were lower in early trade suggesting the announcement came as no surprise to the market. Here are some of the key takeaways:
- Revenue down 25% to US$5.8 billion
- Statutory net profit after tax (NPAT) of -US$1.6 billion down from US$28 million last year
- Underlying NPAT down 76% to US$138 million
- Underlying earnings-per-share (EPS) down 76% to 2.6 US cents
- 1 US cent dividend declared
South32 has a current market capitalisation of some $10.8 billion so it is fair to say that the market is factoring in a significant improvement in results in future years. A 21% fall in average realised price for the company's key commodities during the year led to a 76% fall in underlying NPAT despite significant cost savings. This highlights how leveraged the business is to commodity prices and based on the current share price it seems that many are betting on a sustained recovery in the latter.
The underlying figure adjusts for various cost items relating to foreign exchange, the demerger from BHP Billiton Limited (ASX: BHP) last year and $1.7 billion in asset write-downs. It is important to remember that despite not having any cash impact in the past year, these write-downs represent shareholder money that the company has squandered at some point in the past.
It is perhaps reassuring then that South32 cut capital expenditure (capex) by 39% to US$383 million during the year, with US$351 million spent on sustaining capex and the remainder on new projects. However, mines have finite lives and so at some stage the company will have to spend large sums developing new projects once again. Depending on the wisdom of those projects, we may or may not see a repeat of last year's large asset impairments in the future.
To be fair, there are some positives in today's results. Controllable costs fell by US$386 million including a US$70 million reduction in corporate costs and free cash flow was US$597 million – dwarfing underlying profit thanks to low capex relative to depreciation. Further cost reductions are planned for 2017, but there is a natural limit to this process and sooner or later the company will require higher commodity prices to justify its market valuation in my view.
Finally, it was very sad to learn that South32 suffered four fatalities in 2016 whilst total recordable injury frequency (TRIF) increased from 5.8 to 7.7 per million hours worked.
