TRADE ACTION
Buy 2,000 S32 paying no more than $4.95
Target price $6.00
Stop-loss $3.75
South32 Ltd is a diversified mining and metals company. The company’s segments include producing bauxite, alumina, aluminum, metallurgical coal, manganese, nickel, silver, and zinc. Operations are located in Australia, South Africa, and South America
In an effort to get this recommendation out quickly, we will not go into great detail about all of the company’s operations and the outlook for prices for each of the commodities the company produces. One can easily generalise that prices for all the company’s commodities are elevated above historical levels and look to remain at higher prices for the foreseeable future. Reasons for high prices
- Under Investment – In the last few years, because of the uncertainty caused by covid and ESG concerns, investment has not been made to expand commodity production across the board.
- Russia /Ukraine – Because Russia invaded Ukraine, western companies and countries have stopped taking commodities from Russia.
- Strength in global economies – Global economies are continuing to return to normal levels of growth
So, you have supply restrictions while demand continues to grow, which will lead to sustained higher prices.
The financials look strong with the company trading on one year forward p/e of 7.4 times earnings, strong free cash flow, and no net debt. This means the company can continue to increase dividends and look to complete additional capital management going forward while still investing in growing the business.
The company recently invested in growth by completing the purchase of a 45% stake in the Sierra Gorda copper mine in Chile for an upfront payment of US$1.4bn. This transaction was funded from US$600M cash on hand and a debt facility of US$800M. Based on forecasts, even after this transaction, the company will be back to having a US$400 net cash position by June. This shows the significant amount of cash benign generated by the business.
Looking at the chart, there is still a strong uptrend in place, and we see no reason why the move higher cannot continue.