SOUTH32

Income statement and per-share data

Sources: FY22, FY23, FY24, FY25, FY26 Financial Results and Outlook. Diluted EPS FY22 derived from FY22 diluted denominator (4,679M shares). FY24 DPS = H1 0.4c + H2 3.1c (FY26 dividend table). Net margins are analyst calculations.

Revenue CAGR (underlying, FY22→FY26): approximately -6.5% p.a. (US$10.6bn → US$8.1bn), reflecting normalisation from FY22's record price environment and the exit of coal and nickel. On a continuing-ops statutory basis FY24→FY26 CAGR is +3.0% p.a.

Trend commentary: FY22 was a cyclical peak (record coal, aluminium and alumina prices post-Russia/Ukraine), producing record underlying EBITDA of US$4.76bn and a 30.1% ROIC. FY23 earnings fell 65% as prices normalised, compounded by a ~US$1.3bn Taylor impairment that drove a statutory loss. FY24 was the trough: Tropical Cyclone Megan idled GEMCO from March 2024, Cannington suffered a weather event, and further impairments pushed a second consecutive statutory loss (US$203M), though H2 FY24 recovered. FY25 marked the inflection — underlying earnings +75% on a 45% rise in alumina prices — but statutory profit was held to US$213M by US$464M of impairments (US$346M Mozal; US$118M Cerro Matoso; Reuters reported a flagged US$372M Mozal figure — the discrepancy appears to reflect pre-/post-tax or timing differences and should be reconciled to the FY25 Annual Report). FY26 delivered one of the strongest results in the company's history (underlying earnings US$1,032M, +55%) as copper, silver and aluminium prices rose (silver +US$331M and copper +US$314M to EBIT), Australia Manganese returned (+US$268M EBIT swing), and controllable costs fell US$58M. Statutory profit (US$1,087M) exceeded underlying earnings for the first time in years, aided by a US$249M reversal of impairment on the Sierra Gorda shareholder loan and a US$146M gain on contingent consideration revaluations.

Balance sheet

Sources: FY25 and FY26 Financial Results (net cash components, NTA/share, RCF); FY22 and FY25/FY24 results (NTA/share, net cash/debt); cash, total debt, inventories and debt split for FY22–FY25 from StockAnalysis/S&P Global MI (secondary). FY23 net debt (US$483M) is aggregator-sourced; FY24 net debt uses the company figure (US$762M), which differs from the aggregator's US$724M — likely due to held-for-sale classification of IMC balances. FY25 total assets of ~US$13.7bn is aggregator-sourced. FY25 cash includes US$80M classified as held for sale (Cerro Matoso).

Commentary: South32 has run a conservative balance sheet throughout, oscillating between modest net debt and modest net cash. The FY23–FY24 net debt reflected the Sierra Gorda acquisition (funded partly with debt), record FY23 shareholder returns (US$1,225M), and the FY24 earnings trough. IMC proceeds (US$938M received in FY25) restored net cash. In FY26, US$711M of Hermosa growth capex and US$327M of shareholder returns were more than covered by operating cash flow and a step-change in EAI distributions (US$503M). Debt consists principally of US$700M senior unsecured notes (interest cost US$31M p.a., implying a coupon of ~4.4%) and lease liabilities (largely Worsley's multi-fuel co-generation facility). Closure and rehabilitation provisions are large (discount unwind alone US$132M in FY26), and approximately US$1.1bn of these will transfer to Alcoa at completion.

Cash flow

Sources: FY26, FY25, FY23 results; FY25 annual reporting suite (FY24 comparatives). FY22 buy-back US$128M per FY22 results. FY24 dividends paid (US$163M) derived as H2 FY23 final (US$145M) + H1 FY24 interim (US$18M); the buy-back was paused in FY24. FY25 EAI net distributions of -US$44M derived as US$176M from Sierra Gorda less US$110M net funding to manganese (as stated in FY26 results), plus/minus rounding — the FY26 release cites FY25 EAI net distributions of US$66M, so the -44 figure should be treated as an analyst approximation; the company-stated figure is +66. FY22 free cash flow from operations including EAI distributions was US$2.6bn (FY22 results).

Correction note on the table above: the company-reported FY25 EAI net distribution figure is US$66M (FY26 results); readers charting this row should use 66 for FY25.

Commentary: Group FCF excluding EAIs has been compressed by Hermosa (cumulative growth capex of US$1.2bn over FY25–FY26 and US$1.0bn guided for FY27). The real cash story is in the EAIs: Sierra Gorda's record US$401M distribution in FY26 (classified as accrued interest on shareholder loans) and manganese insurance recoveries. FY27 will see total base metals and manganese capex rise to ~US$1.5bn (including EAIs), plus ~US$300M for the aluminium assets until completion.

Ratios

All ratios except ROIC are analyst calculations from the figures above and should be treated as indicative. The latest available current ratio (Trading Economics, most recent half-year period) implies ~2.8x (current assets US$3.48bn ÷ current liabilities US$1.23bn), likely as at 31 Dec 2025.

Commentary: Leverage is minimal on every measure; the binding constraint on capital allocation is not the balance sheet but the size of the Hermosa programme relative to the shrinking post-transaction asset base. Interest coverage on underlying measures overstates true financing cost burden only modestly because the dominant "finance cost" is rehabilitation-provision discount unwind rather than debt service.

Management guidance (FY27; FY28 where given)

Unit cost guidance FY27e: Sierra Gorda US$17.5/t ore; Cannington US$205/t; Australia Manganese US$3.15/dmtu; South Africa Manganese US$3.50/dmtu; Worsley US$320/t (FY26 results).

Bull case

1. Value crystallisation is largely locked in: US$3.1bn cash + US$1.0bn Alcoa shares + ~US$750M debt/lease assumption + ~US$1.1bn rehabilitation transfer versus an aluminium chain that generated only US$1,075M EBITDA in FY26 (US$210M alumina + US$865M aluminium, including idled Mozal) — and a ticking fee accrues from 15 Oct 2026.

2. Copper and silver leverage with growth: Sierra Gorda (+5% FY27, +2% FY28, ~+30% from FY31) and Cannington silver at elevated prices underpin a base-metals EBITDA base already above US$1.2bn.

3. Re-rating as a pure base-metals/critical-minerals name: lower emissions intensity (~95% of operational GHG exits), US-domiciled Taylor production from FY28 and potential ~US$650M EBITDA p.a. could close the discount to copper-weighted peers.

Bear case

1. Taylor risk remains elevated: a 53% overrun within two years of FID, attributed partly to contractor underperformance, raises the risk of further slippage; FY27 Hermosa capex of US$1.0bn absorbs most free cash.

2. Shrinking, more concentrated business: post-completion, earnings depend on a non-operated copper JV, a single Australian silver-lead-zinc mine with ~7-year underground reserve life, and manganese assets with operational constraints — prompting ratings reviews.

3. Price-driven results: FY26 growth was primarily price-driven (+US$596M EBIT); a reversal in silver (~US$70/oz realised) or copper (~US$5.92/lb) would rapidly compress earnings, while FY27 consensus already implies slight EPS decline.

Key catalysts and monitorables (next 12 months)

• September 2026 Quarterly Report (19–20 Oct 2026): first under Daley; Taylor progress; Notice to Proceed.

• Alcoa transaction regulatory approvals, MRN pre-emptive rights decisions and completion (H2 FY27 / H1 CY27).

• Size and form of post-completion capital return (~US$500M initial; possible in-specie Alcoa shares).

• S&P / Moody's rating resolution.

• Mozal divestment outcome.

• GEMCO water-management approvals (FY28 volumes).

• Taylor shaft and surface construction milestones against the April 2026 baseline.

• Cannington open-pit FID (targeted H1 FY28) and underground extension.

• Climate target reset (FY27).

• H1 FY27 results (Feb 2027) and dividend.

Analyst verdict

South32 enters FY27 at the most consequential inflection since its 2015 demerger. The Alcoa transaction, now endorsed by 99.18% of voting shareholders, is strategically coherent and financially attractive: it converts a carbon-intensive, energy-exposed and capital-hungry aluminium chain — whose alumina earnings collapsed by US$868M in a single year — into US$4.1bn of upfront cash and equity, transfers roughly US$1.1bn of rehabilitation obligations, and retains up to US$750M of price-linked upside. It also removes the bulk of the company's Scope 1 and 2 footprint, which should broaden the eligible investor base.

What remains is a higher-quality but smaller and more concentrated business. Sierra Gorda (66% margin, reserve life to ~2045, a capital-efficient expansion from FY31) and Cannington (53% margin, silver-rich) are excellent assets at current prices, and manganese provides cyclical cash once GEMCO's water issues are resolved. The critical swing factor is Taylor. The April 2026 reset — capex up ~US$1.1bn, first production pushed to H2 FY28 — dented management credibility at precisely the moment the equity story became dependent on growth delivery. Encouragingly, permitting is now complete (Final ROD, July 2026), reserves grew 52%, and life extended to ~33 years; but execution under a new CEO must be demonstrated quarter by quarter.

Valuation has already moved: shares are up ~65–80% over twelve months to ≈A$5, roughly 15x FY26 underlying earnings and close to the A$5.15 consensus target. Upside from here depends on (i) a sizeable post-completion capital return, (ii) sustained copper and silver prices, and (iii) a clean Taylor build. On balance, we view South32 as a fairly valued, de-risking transition story with asymmetric sensitivity to Hermosa execution — a hold-to-accumulate for investors seeking diversified base-metals and manganese exposure with a strong balance sheet, but one where the next four quarterly reports will determine whether the "leading ASX base metals company" ambition is earned.