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South32 Rewards Investors With US$500 Million Bonus -- Update

27 Mar 2017 4:02 am
   By Rhiannon Hoyle 

SYDNEY--South32 Ltd. plans to hand US$500 million to shareholders, most likely via a share buyback, in another sign the global mining industry is regaining its footing.

With a rebound in commodity prices having turned many mining pits back into cash cows following a deep, multiyear downturn, Chief Executive Graham Kerr said South32 has no plans to sit on surplus capital and signaled a sustained recovery could lead the company to dole out even more money to investors.

"This is our first step," he said in an interview. "If we continue to generate strong cash flow like we have over the last six, 12, 18 months, then I would think this would be the first capital management program of many."

Miners' fortunes have been turning around following a rebound in prices for commodities including coal, iron ore and metals. In February, Rio Tinto PLC said it would repurchase some London-listed stock worth US$500 million after returning to profit in 2016.

South32 also reported a return to black, posting a net profit of US$620 million for the six months through December compared with a writedown-driven loss of US$1.75 billion a year earlier.

The Australia-based mining company, which was spun out of BHP Billiton Ltd. in 2015 with little debt, has been enjoying the recovery that has allowed it to build a cash pile while rivals pay back multibillion-dollar debt loads from a long spending spree.

On Monday, South32 said it was planning a US$500 million capital-management program that will at start as an on-market share buyback in Australia, funded from that cash pile.

Mr. Kerr signaled the company currently holds about US$1 billion in cash, saying South32 likes to keep a US$500 million cash buffer in the bank for possible acquisitions and "as of today, we are well in excess of that… about US$500 million in excess."

Chairman David Crawford added that the decision reflects "our confidence in the group's cash generating capacity."

The company has given itself flexibility on how to hand out the US$500 million and hasn't committed the entire sum to repurchasing shares.

Mr. Kerr said an on-market buyback is the most valuable way for South32 to spend its cash. That could change, however, if its pool of franking credits increases, which could make a special dividend more attractive later in the year, he said.

Companies receive credits as they pay Australian tax that, when dividends or buybacks are planned, can be distributed to Australian investors to avoid double taxation.

The value of the South32 program, which is expected to be completed in the next 12 months, is equal to about 4.5% of the miner's US$11-billion market capitalization. It follows a US$192 million interim dividend commitment at the miner's half-year results.

South32 was spun out of BHP to house a collection of assets--such as manganese mines and aluminum smelters--that the world's No. 1 miner no longer wanted. Executives have since restructured the businesses and made spending cuts.

"This announcement whilst positive, is not entirely unexpected, given South32's balance sheet position as well as the supportive commodity price environment" in recent months, said RBC Capital Markets analyst Paul Hissey.

It will also leave the miner "sufficient headroom to pursue other growth opportunities, should they present," he said.

Mr. Kerr said South32 continues to look at possible "opportunistic" M&A options.

South32 has previously expressed interest in buying Anglo American PLC's minority stakes in its manganese operations, but Mr. Kerr indicated a deal is now unlikely.

"From my perspective, it looks like he [CEO Mark Cutifani] is no longer running a sales process on that business," Mr. Kerr said.

Anglo American couldn't immediately be reached for comment, although the miner has been dialing back a broad program of asset sales as commodity prices have improved.

Meanwhile, a plan for South32 to purchase Peabody Energy Corp.'s Metropolitan Colliery coal operation for US$200 million has raised some concerns from Australia's competition regulator, which worries the acquisition will remove a rivalry that currently helps keep prices low and products varied for Australian steel makers. Mr. Kerr said the concerns are not unusual and the companies are working with the regulator on advancing the deal.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

March 27, 2017 00:02 ET (04:02 GMT)

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