I will start by saying that I think you have all bought into S32 for its diversity of metal production, and for its long life low-moderate cost operations that will produce metals and profits for decades, not to mention its big growth opportunities - I know I did. And didn't metal prices have an extraordinary flurry over the last 12 months - we will soon see how much of that has translated into revenue and profits (FY21Q4 production report was 21 July, FY21 Profit report was 19 August).
You have probably also appreciated that S32 has got rid of a few "duds" that it inherited over the last couple of years.
But lets just look at S32 as a Coal Company.
Illawarra Coal will produce 5.9Mt of coking coal in FY22 and 0.9Mt of steaming coal (aka "really bad coal") at a current cost of USD$126/t (per latest guidance).
For extended periods in the last 10 years, the coal price has been less than USD$150/t and as probably averaged USD$100/t with downward excursions to USD$50/t - it has been painful, and Illawarra Coal has been a marginal business at best.
But let us now look at FY22. Here is the Newcastle spot price graph over the last few years.
My rough calculations of the earnings from Illawarra Coal alone (since met and thermal coal are roughly on same price trajectory):
FY22H1 - average price USD$176/t - profit USD$50/t
FY22H2 - average price USD$326/t - profit USD$200/t
Spot220713 - price USD$426/t - profit USD$250/t
So FY22 Full Year will probably give us - Profit (pre-tax, ie PBT) USD$1.02B (about AUD$1.5B).
[Note that as the asset has been written off, and company is debt free, for this business PBT will roughly be the EBITDA].
At current SPOT, a full year PBT would be USD$1.7B (about AUD$2.4B).
But these are, of course, extraordinary times, and prices will get back to "normal" and profits will be lower.
So let us look at forward prices - not projections.
Forward coal price ex Newcastle (as benchmark):
- FY23 >USD$350/t
- FY24 ~USD$270/t
- FY25 ~USD$260/t
- FY26 ~USD$250/t
- FY27 ~USD$250/t
So in the out years, PBT ~USD$840M pa (about AUD$1.2B pa).
At current sp of $3.50 the market cap of S32 is AUD$16B.
With Illawarra Coal producing about AUD$4B of PBT total in FY22 and FY23, and then PBT of AUD$1.2B pa thereafter, it would seem that you could justify a valuation for Illawarra Coal that is greater than half the current market cap of S32.
I will add the obvious proviso that the business would need to be sustainable as a business, meaning that the resource needs to be proven (it seems to be) and approvals need to be in place to operate (permitting is the main current issue and risk).
My title for this thread was a bit provocative - the metals business is not quite a free extra on top of the coal business - but you get the idea.
Open for critique and comments ........
(20min delay)