Somewhere between economic logic and the chaos of gambling lies the art of commodity pricing. Expectations change so swiftly that a structural surplus of supply in, say, thermal coal or even manganese will not halt a surge in their price. This is welcome for miner South32. But prices never rise forever. Absent other opportunities, management need to start paying out more to its shareholders.

Maiden full-year results reported on Thursday offered some promise and lots more reality. A year after its spin-off from BHP Billiton, South32 has cut costs and improved cash flow. There was a loss of $1.7bn, but this largely stemmed from a writedown. It was implicit acknowledgment of how, on the company’s forecast commodity prices, development of a part of its operations make no economic sense. Some of the adjustments were already announced earlier this year, since which time coal and other minerals have rallied. As the market focuses on the future, so London-listed South32 shares have doubled this year.

Writedowns are a non-cash item; South32 has positive free cash flow of about a billion, for the second year running, despite weak operating earnings. These were much worse than last year, with one of the few bright spots the performance of Cannington, an Australian zinc and silver mine.

Either this leftover cash buys more growth (Anglo American’s stake in manganese producer Samancor is for sale) or South32 ought to pay a dividend. It has a 40 per cent earnings payout policy, which right now means it is returning very little. With no volume increase expected through 2018, profit growth depends on higher commodity prices, or acquisitions.

If South32 does keep up its positive free cash flow, then it should be paying its investors more. The shares yield under 1 per cent. Otherwise the odds are that its valuation, already well below its peers, will persist.

Email the Lex team at

Get alerts on South32 Ltd when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article