Worsley Approvals And GEMCO Restart Will Strengthen Mining Operations

Key Takeaways

• The Worsley Mine Project and GEMCO restart promise future revenue growth and improved operating margins, backed by recent approvals and phased mining activities.
  
• Focused cost management and critical mineral projects are set to enhance net margins and cash flows, supporting future earnings growth.
  
• Operational risks, geopolitical challenges, and market volatility could pressure South32's margins and competitiveness, impacting overall financial performance.

Catalysts

Operates as a diversified metals and mining company.

• The Worsley Mine Development Project's recent receipt of primary state and federal environmental approvals enables new bauxite mining, expected to sustain production through FY '36, likely impacting future revenue positively.
  
• The phased restart of mining activities at GEMCO, with increased export sales anticipated from June 2025, aligns with a potential uplift in revenue and improved operating margins.
  
• Continued focus on cost performance, with lower operating unit costs expected across most guided operations in H2 FY '25, sets the stage for future improvements in net margins.
  
• The construction of the Taylor zinc-lead-silver project and exploration efforts at Hermosa suggest future revenue growth from critical minerals, driven by increased production capabilities.
  
• An expected unwind of working capital to add cash generation in the second half of FY '25, improving cash flows and potentially bolstering earnings.

South32 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming South32's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.8% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $697.9 million (and earnings per share of $0.3) by about May 2028, up from $-238.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, up from -33.2x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 11.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

South32 Future Earnings Per Share Growth

Risks

• South32 has faced safety challenges, including a fatal accident at Cerro Matoso, which indicates potential operational risks and could increase costs for improving safety measures, impacting net margins.
  
• The company's production guidance has been affected by civil unrest in Mozambique, leading to uncertainties and potential disruptions, which could negatively impact revenue.
  
• South32's exposure to U.S. tariffs on aluminum, though relatively small, poses a risk of increased costs and reduced competitiveness in the U.S. market, potentially affecting overall revenue.
  
• The Hermosa project faces timing issues and potential cost increases, leading to delayed capital expenditures and impacting free cash flow projections, which could pressure earnings.
  
• The uncertainty surrounding future demand and production capacity changes in the aluminum market, especially with reliance on Chinese supply, could lead to pricing volatility, affecting revenue and profit margins.

Valuation

• The analysts have a consensus price target of A$3.561 for South32 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.5, and the most bearish reporting a price target of just A$2.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $697.9 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$2.75, the analyst price target of A$3.56 is 22.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.