What will South32 do with its cash pile?

The di­ver­si­fied miner is ex­pected to have $1bn in cash soon, mak­ing some an­a­lysts be­lieve a share buy-back may be on the cards.

Finweek English Edition - - THE WEEK - Ed­i­to­rial@fin­week.co.za By David McKay

south32has been among the most con­ser­va­tive of the di­ver­si­fied min­ing firms listed on the JSE, es­pe­cially in re­spect of man­ag­ing its cash, which is ex­pected to top $1bn be­fore its year-end on 30 June.

The com­pany, how­ever, has been non-com­mit­tal on what it in­tends to do with any ex­cess cash be­yond its cur­rent div­i­dend pol­icy, which is to pay 40% of un­der­ly­ing earn­ings af­ter cap­i­tal ex­pen­di­ture.

An­a­lysts, how­ever, feel that a share buy-back may be in the off­ing.

Last month, it posted in­terim head­line share earn­ings of 11.6 US cents per share com­pared to a loss of 6 cents a share in the pre­vi­ous fi­nan­cial year in which it booked $1.7bn in as­set im­pair­ments. Free cash flow to­talled $626m, which took net cash to $859m from which it will pay the $192m in­terim div­i­dend, equal to 3.6 US cents a share. This would take cash on hand to $667m – well above the $500m buf­fer that Gra­ham Kerr, CEO of South32, has stated as a pref­er­ence through­out the min­ing cy­cle, whether times are bad or good.

Given that cash flow from coal and man­ganese in par­tic­u­lar are good, and al­low­ing for the fact that be­yond stay-in-busi­ness cap­i­tal, ex­pan­sion­ary cap­i­tal is rel­a­tively mod­est, there’s likely to be an ex­cess of cash. It’s not re­ally pos­si­ble to fac­tor in ma­jor merger and ac­qui­si­tion ac­tiv­ity as Kerr has in­di­cated that the firm will con­tinue to ex­am­ine bolt-on ac­qui­si­tions rather than big-bang deals. “In the ab­sence of in­vest­ment, we ex­pect in­creased prob­a­bil­ity that ex­cess cash could be used in a share buy-back or dis­trib­uted via a spe­cial div­i­dend,” said an an­a­lyst who de­clined to be named. In fact, of the two op­tions, a buy-back is more likely as South32 has not built up enough frank­ing cred­its in Aus­tralia to make a spe­cial div­i­dend tax-ef­fi­cient. (Frank­ing cred­its are tax al­ready paid by the com­pany which it then passes on to the in­vestor thus re­duc­ing the in­vestor’s tax li­a­bil­ity.) “We are un­sure of the quan­tum of this highly prob­a­ble buy-back but ex­pect it to be at least $200m, which is broadly sim­i­lar to the in­terim div­i­dend of $192m,” the an­a­lyst said. It’s also pos­si­ble that South32 may not wait for the end of the fi­nan­cial year to an­nounce the buy-back pro­gramme. The ben­e­fit of a buy-back is that it in­creases the pro­por­tion of earn­ings dis­trib­uted to share­hold­ers who want to re­main ex­posed to the stock for a longer pe­riod whilst also pro­vid­ing a re­turn, es­pe­cially if the share is con­sid­ered un­der­val­ued. CEO of South32

South32’s Wors­ley Alu­mina re­fin­ery in Western Aus­tralia

Gra­ham Kerr

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