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South32 could get a $600m cash injection

Brendon Lau

The South32 Ltd (ASX: S32) share price will be in the spotlight tomorrow after the diversified miner announced that it may reap around $600 million from the sale of its stake in South Africa Energy Coal after the market closed on Wednesday.

The news could give its embattled share price a much-needed shot in the arm with the S32 share price crashing close to 30% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and S&P/ASX 300 Metal & Mining (Index:^AXMM) (ASX:XMM) indices have gained around 15% each.

South32’s underperformance also stands in contrast to other notable miners. The BHP Group Ltd (ASX: BHP) share price jumped 12%, while the Independence Group NL (ASX: IGO) share price surged 46% over the period.

Details of the transaction

South32 said it reached a conditional binding agreement to sell its 92% stake in the coal asset to Seriti Resources Holdings Proprietary Limited (Seriti) and two trusts for an upfront cash payment of 100 million South African Rand ($9.8 million).

The ASX miner will also receive a deferred consideration of 49% of the annual free cash flow generated by the coal business from between the completion of the sale to March 2024. The payment is capped at 1.5 billion South African Rand per year. This equates to nearly $150 million in cash if using today’s exchange rate.

“We ran an exhaustive and competitive process and we believe Seriti, as an established operator, is ideally positioned to unlock the potential of South Africa Energy Coal’s existing domestic and export operations,” said South32 chief executive officer, Graham Kerr.

“This marks an important milestone as we continue to reshape our portfolio. Completion of this transaction will substantially reduce our capital intensity, strengthen our balance sheet and will   improve the Group’s operating margin.”

Possible impact on share price

I suspect the news will be welcomed by shareholders, particularly given the sensitivity around coal in this age of climate activism.

However, I don’t think the news will trigger a re-rating of the beaten down stock because cash isn’t the key issue with South32.

The reason why the stock is under pressure is because the spot prices of several of the commodities it mines are under pressure.

The divestment of South Africa Energy Coal won’t address this problem, although this is one business that is seen as a drag on the South32 share price.

More capital returns?

The other question some investors might be pondering is whether the miner will step-up its capital return program (it is currently undertaking an on-market share buyback and has up to ~US$149m to use).

I am not expecting management will make any changes in the near-term given that most of the payment for the asset is deferred and variable. But the extra cash flow will give the miner options, and that’s always a positive thing.

The post South32 could get a $600m cash injection appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019