When South32 hit the markets five years ago it was greeted with scepticism — even the derisory nickname CrapCo from some analysts. But after five years of hard work, chief executive Graham Kerr says the company is now at “the base camp”, with the next stage of growth in its sights.
The 2015 spin-out of BHP’s less-loved assets into South32 was seen as an easier deal for BHP boss Andrew Mackenzie than for the new South32 chief executive, then BHP’s chief financial officer.
Mackenzie was left with BHP’s so-called four core pillars — iron ore, coking coal, copper and petroleum — which were then generating margins of more than 10 per cent above the group’s overall margins.
Mr Kerr took with him a strong balance sheet — when South32 hit the ASX boards in May 2015, it had $US54m ($82.62m) in net cash — and a suite of well-run but scattered global assets, including manganese ore and alloys in Australia and South Africa, alumina in Australia and Brazil, aluminium in South Africa and Mozambique, energy coal in South Africa, coking coal in New South Wales and base metals in Colombia and Australia. He admits it wasn’t an easy portfolio to take on.
“When we started this journey after the demerger we really didn’t have any kind of growth options in the portfolio and that included not only greenfield options, but no brownfield options,” he said.
“We started at a rough time in terms of where the cycle was, and then had a bit of a return to strength for some of our commodity prices.”
Its South American thermal coal and manganese alloy businesses now seem destined for the exit, and South32 has added significant base metals exploration and development projects in Alaska and Arizona, along with new metallurgical coal options in Queensland.
But when South32 listed at $2.13 in May 2015, it floated into choppy waters. Within weeks the stock was down 20 per cent and the company was being touted as an easy target for Ivan Glasenberg’s Glencore or Mick Davis’s much-hyped private equity play, X2 Resources.
And on the flip side of that coin, South32 was also expected to go on a buying spree.
In its early years South32 was linked with bids for a suite of assets, from Rio Tinto’s Kestrel coking coalmine, to Anglo American’s South American niobium and phosphate assets, then to Iluka Resources, or even with a merger with Australian copper major OZ Minerals.
But Mr Kerr says he has never believed in buying operating assets, unless you can get them very cheap.
“There are not that many companies that have gone out there and made a lot of return for their investors based on simply buying existing assets. Despite what the investment bankers tell you, there’s not many you can look back at and say ‘that was a great acquisition’,” he said.
Instead, Mr Kerr says South32 has bought assets — most notably the Hermosa project in Arizona and its Ambler Metals joint venture in Alaska — aimed at replicating one of BHP’s great successes, the Cannington base metals mine in Queensland.
“What we’ve focused on is where most resource companies make value, and if you go back and look over time, it’s about buying early stage projects and converting them into businesses.
“I was there when we built Cannington, it’s about 22 years old now. It probably cost about $500m in round numbers at the time to build, and it’s been generating strong cashflows for the bulk of its life — in some years about a billion worth of cash, with very little investment in it. In terms of return on an investment in a capital asset there’s probably not many operations better than that,” he said.
For now Mr Kerr says South32 remains focused on steering its scattered assets through the greatest challenge of his career, the coronavirus crisis. But beyond that is the growth profile the market has always wanted to see from the mining major.
Five years on and South32 has defied many of the critics, however. It has since returned more than $US2.9bn to shareholders in dividends and share buybacks, spent $US1.8bn on buying growth options for the future and on greenfields exploration projects, and still has net cash of $US150m.
And despite the “second tier” slur that still follows the company about, South32 is still worth about $9.5bn, much as it was at the float. All of that has been achieved with much the same suite of assets it started with.
“Five years in, would I have liked to have gone faster? Yes. We’re at the base camp,” Mr Kerr said. “I think we have actually changed the portfolio from mature assets that are on the decline and in some cases assets that are low returning, such as thermal coal and manganese alloys — but they’re on the way out.
“But they’re replaced by assets that have a really strong growth projection, and they’re got a bias towards base metals, which I think is exactly where you need to be. We’re in that transition point at the moment.”
S32 Price at posting:
$1.91 Sentiment: Buy Disclosure: Held
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