Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

Fiscal 2017 production guidance for South32 is maintained for most commodities following the second quarter. However, lower coking coal output after issues at Illawarra is the primary driver of our lower fiscal 2017 EPS of AUD 0.23, down from AUD 0.26 previously. The reduction in coking coal matters, given current elevated prices and margins. Slower first-half production is also likely to dilute this year’s realised price, as volumes contracted at lower prices are yet to be delivered.Despite lower near-term forecast earnings, our AUD 1.70 per share fair value estimate remains. The shares are overvalued, pricing in ongoing commodity price strength, which we think is unlikely. Based on our fiscal 2017 earnings forecast, South32 trades on a P/E multiple of 12, which highlights an implicit expectation for commodities to remain near this year’s relatively favourable levels. We think coal prices in particular are vulnerable as China loosens domestic production constraints. Our longer-term forecast for no steel consumption growth in China will likely weigh on demand for manganese and coking coal once the impact of China’s 2016 stimulus abates.Analyst: Mathew Hodge

Fiscal 2017 production guidance for South32 is maintained for most commodities following the second quarter. However, lower coking coal output after issues at Illawarra is the primary driver of our lower fiscal 2017 EPS of AUD 0.23, down from AUD 0.26 previously. The reduction in coking coal matters, given current elevated prices and margins. Slower first-half production is also likely to dilute this year’s realised price, as volumes contracted at lower prices are yet to be delivered.Despite lower near-term forecast earnings, our AUD 1.70 per share fair value estimate remains. The shares are overvalued, pricing in ongoing commodity price strength, which we think is unlikely. Based on our fiscal 2017 earnings forecast, South32 trades on a P/E multiple of 12, which highlights an implicit expectation for commodities to remain near this year’s relatively favourable levels. We think coal prices in particular are vulnerable as China loosens domestic production constraints. Our longer-term forecast for no steel consumption growth in China will likely weigh on demand for manganese and coking coal once the impact of China’s 2016 stimulus abates.Analyst: Mathew Hodge

Raising South32's Near-Term Commodity Price Forecasts, but Long-Term Outlook Unchanged

South32 Ltd

Raising South32's Near-Term Commodity Price Forecasts, but Long-Term Outlook Unchanged