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South32 Faces First Write-Down – More to Come?

South32 Faces First Write-Down – More to Come?
Jun 10, 2015 By Simon Herrmann

BHP Billiton spin-off South32 (ASX:S32) announced to the ASX that it is reviewing the value of its manganese operations. In plain English this means that the company faces its first writedown, following a sharp price decline of the metal. Just three weeks after the spin-off from BHP Billiton (ASX:BHP), South32 and its shareholders experience a first setback.

Managanese prices have struggled recently due low demand from China, which is a similar scenario to the more familiar iron ore commodity. As a result of the low prices South32 has decided to delay the restart of three of the four furnaces at its operations in South Africa and also review the fair value of its assets. The company states that the reason for the delay is the ‘commitment to maximise per share financial performance, rather than volume.’

The joint venture managanese operations explained

Samancor Manganese is the world’s largest producer of manganese with operations in South Africa and Australia. The Northern Territory mine ranks as one of the largest and lowest cost manganese mines in the world. Manganese is an important component of special steels and magnetic alloys. As we can see in the six-month price chart on the left hand side, manganese prices have declined signifcantly in the past year.

South32 is involved in joint venture operations in South Africa through the Hotazel Manganese Mine including the Metalloys smelter which is integrated in the same mine. Metalloys is one of the largest manganese smelters in the world and owned by Samancor Managenese in a 60:40 joint venture between South32 and Anglo American. Anglo American is listed on the U.K. stock exchange and is currently trading at a 6-year low.

South32’s Outlook

S32 closed at $2.09 cents on Tuesday which is below its listing price of $2.13. Investors wonder if the first writedown could be one of many more as South32’s key commodities remain under pressure amid subdued trading conditions.  Coal and manganese appear to be the laggards in South32’s balance sheet. However the outlook for aluminium, zinc and nickel appears brighter than a few years ago and should generally put S32 in a more comfortable position than previously estimated. Most bulk commodities remain in oversupply and it may take years to balance out, but the recent struggles have already been factored in by the market and Wise-owl will certainly keep an eye on South32 with conditions tipped to strengthen in 2016.

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Simon Herrmann Author: Simon Herrmann Jun 10, 2015

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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