BHP spin-off South32 Limited (ASX:S32) provided the market with a mineral resources and ore reserves update.
Mineral and ore reserves provide a basis for life mine and underpin the enterprise value of a mining company. While mineral resources include all of the material of economic interest in the drilling area, ore reserves are the part of the mineral resources that can be economically mined. Mineral and ore reserves are reported according to the JORC Code which regulates how to classify Resource and Reserve estimates.
The 72-page document contains detailed information about its latest resource estimates for three of its key operations in Cannington, Groote Eylandt Mining and Illawarra Metallurgical Coal. Here’s what you need to know:
21% Increase in Mineral Resources at Cannington
South32 noted a 21% increase in estimated Mineral Resources at its Cannington operations in northwest Queensland. The company states that the increase is mainly due to foreign exchange rate movements, changes in commodity prices as well the inclusion of some resources that were previously excluded. There was no material impact to its ore reserves
Status of Mineral Resources Upgraded at GECMO; Downgrade of Ore Reserves
Groote Eylandt Mining, also referred to as GEMCO, is located in the Northern Territory and South32 has a 60% interest. The remaining 40% are being held by Anglo American.
Using industry specific terms, South32 basically upgraded the rating of its mineral resources due to additional drilling in areas that were previously just ‘indicated’. However S32 downgraded the status its ore reserves to reflect uncertainty in some of the areas.
Total mineral reserves declined by 6Mt to 169Mt while total ore reserves were estimated to be 82Mt, 12Mt less than last year’s 92Mt estimate. All volumes are reported as dry metric tonnes.
Coal Resources Upgraded at Illawara
Estimates of South32’s coal resources and coal reserves at Illawara were upgraded due to additional drilling and obtaining licenses. South32 has a 100% interest in Illawara, which is located in NSW.
The BHP spin-off has failed to impress so far as financial results have disappointed and commodity prices remain under pressure. Management aims to focus on cost-cutting over the upcoming years after announcing a pro forma profit after tax of US$28m. S32 has currently net debt of US$402m and intends to reduce costs by a US$305m per annum by FY18.
The mineral and ore reserve shows upgrades in Cannington and Illawara as well as both upgrades and downgrades at GEMCO. Overall the announcement will likely be perceived as positive, however the main driver for S32’s share price will be the outlook for its key commodities such as aluminium, nickel, coking coal and manganese. As long as price continue to hover around six year lows, S32 will likely experience further slides in earnings, despite solid production figures.
Nevertheless, since listing on the ASX South32’s outlook is little changed as the spin-off is expected to boast operating margins and overall profitability of its operations. Whilst falling price were the main drag on the share price, spin-offs often experience selling in the first few months as many investors were “forced” to hold the stock and therefore dump it in order to rebalance their portfolio. Trading significantly below its listing price and taking our current timing in the commodity price cycle into account, S32’s balance of risk has improved.
Author: Simon Herrmann
Sep 22, 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.