MARKETS

Massive cost reductions on the way at South32

SOUTH32 is seeking to reduce costs by a further $US1.05 billion ($A1.4 billion) over the next thr...

Kristie Batten
Massive cost reductions on the way at South32

It comes after the BHP Billiton spin-off pulled $282 million of costs out of the business in the 2015 financial year.

South32 CEO Graham Kerr told journalists yesterday morning that around two thirds of the savings came from labour and contractor costs.

The company is targeting further reductions of $350 million per annum to the end of the 2018 financial year by reducing contractor usage and rates; optimising energy and consumables usage; driving equipment and labour productivity; and implementing procurement initiatives.

South32 is expecting FY16 capital expenditure of $700 million, including $50 million for major projects.

Around $20 million will be spent on brownfields exploration with a “modest investment” in greenfields planned.

Worsley Alumina, Cannington silver and zinc, Australian manganese and Illawarra energy coal production will increase slightly over the next two years, while South African manganese and Brazilian aluminium output will remain steady.

A review of the South African manganese division is underway, which could lead to a reduction in planned production.

While Kerr acknowledged some of South32’s assets were tougher than others, he denied any were considered “non-core”

“We’ve got some assets that are challenging around returns,” he said.

South African coal, Australian metallurgical coal and Cerro Matoso nickel production will be lower in FY16.

Kerr described coal as a challenging area and ruled out a bid for any Australian coal assets up for sale.

"Those particular coal assets in Australia, it is a more challenging environment around permitting some of these operations, or growing these businesses,” he said.

“And I just don't think at the moment, in this current pricing environment, that is where we would see any strong returns being generated to be perfectly frank."

But Kerr didn’t rule out opportunistic merger and acquisition activity.

“We’re commodity agnostic – we’d look at opportunities where we can see ourselves adding some value through the skills we have,” he said.

Results

In its maiden set of numbers, South32 reported a pro-forma net profit after tax of $28 million and underlying earnings of $575 million.

The company had net debt of just $402 million, a gearing ratio of 4% and an undrawn revolving credit facility of $1.5 billion.

As expected, South32 did not pay a dividend, but reiterated its commitment to distribute at least 40% of underlying earnings going forward.

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