Stocks In Focus: South32, October 1 2025

0:10G'day fools and welcome to Motley Fool Stocks in Focus our podcast and YouTube series that's right It's on both platforms. We give you the download on a company that maybe is in the news, maybe is widely owned, maybe just one that we think you might want to know about. Now, these aren't motley full recommendations. Let's be very, very clear. We're not saying you should or shouldn't buy this. We're selling here is a company. Here's how we think about it. Here are some of the pros, some of the cons. I will ask our analysts, as I do every week, whether they think it might be market beating over the next five plus years.

0:40But please remember, it's not a formal recommendation. The other thing I say every time, we can't give you personal advice and you'd have to decide whether it's right for you. Lastly, this is a long-term investment idea, but we don't know what's going to happen between now and then. Anything can change and usually does at any point during the investing journey. So circumstances will change. Our views may well change. This is at a point in time. In fact, we're recording this very, very, very late, the last day of September, 2025. So what happens from here is anyone's guess. This is just our view at that point in time.

1:12When I say our view, I mean his view. He, of course, is Ed Vesely. Motley Fool advisor, analyst, and all-round good guy. Ed, g'day. How are you? Hi, Scott. How are you as well? Very well. Thank you, mate. That's good. Let's get into the company South32. S32 is the code on the ASX. The company won't be super familiar to a lot of people, at least in terms of business. Probably know its name. They probably know it was spun off BHP Billiton. Other than that, mate, tell us, what is South32? Yeah, I can only assume that if there's some long-term BHP holders out there, they might already own these shares because, as you say, they were spun out 10 years ago back in 2015.

1:51It's a mining company, so it's not something I'm particularly interested in myself as an investor, but I thought it was worth looking into only because of the relationship that it used to have with BHP. So it's diversified mining and it predominantly focuses on metals, which it thinks are going to be used in the transition to new energy systems in the future. So that's one reason why you might be looking to buy the company. But basically, it has operations in Australia, southern Africa, not just South Africa, but in the southern part of the continent of Africa. And it's got operations in mines throughout the Americas, so North and South America.

2:34Its main metals, I guess, include alumina, aluminium and copper. They're the main ones. But as well as that, there's also things like zinc, lead, silver, nickel and so on. So it's a fairly diversified miner in the sense that it's got a number of different metals that it's mining. I guess it's the reason why BHP might have sold it or demerged it 10 years ago is because it had its own focus. And its history is such that it wanted to focus on iron ore and coal and copper itself, even though there's copper within South 32. But I think it's a fairly basic, fairly easy to understand business model. It's a miner.

3:18It basically spends a lot of money developing mines. It gets the ore out of the ground and then sends it off to wherever the customers might be around the world. So, yeah, that's basically what it does. Very nice, mate. A simple business model, but quite a complex business. A lot of commodities there, a lot of different geographic locations, maybe some internal diversification, maybe a lot of complexity. I'll let you decide because I now want to ask you about the pros. If you're watching this video, if you're listening to it on the Motley Fool Money podcast feed, you're thinking, well, should I be interested in South32?

3:50Why might an investor consider shares in South32, Ed? Well, I think it might be useful for someone to have South32 in the portfolio if they don't already own BHP. I think BHP is a little bit more concentrated. As I said, it's actually got four main commodities there, whereas South32 has several. I think the main reason why you would buy shares in South32 is because, according to the company at least, shareholders will benefit from its exposure to critical minerals, which, as I said just a moment ago, that these are the metals, and especially copper, these are the metals that are going to be needed for the energy transition.

4:27So as economies slowly move away from coal, who knows? We're going to have – I'm not an energy analyst by any stretch of the imagination, but there's going to be a move away from coal towards other sources of energy. And so these metals that I've mentioned, you know, copper, aluminium and so on, they're going to be needed quite intensely by customers. And I guess government mandates around the world are going to sort of encourage this sort of transition as well. So that's the macro reason why you might be looking to buy into it. If you come back to the company specifically, I looked at its FY25 results and they were actually pretty good.

5:07It saw revenue grow 17%. Now, the dollar figures I'll quote here are in US dollars. So revenue grew to$5.8 billion. So that was 17%. And what was interesting is in FY24, the year before, we had a loss of$519 million, but it turned that around and came in with a profit, an operating profit of$554 million. So that was quite good. And when you're looking at the net profit, again, there was a loss last year,$205 million. And this year was a gain or a net profit of$210 million. And the reason why that occurred was commodity prices were very good. And it also was able to increase production of a number of its metals out of the ground.

5:51So for example, copper was increased by 20 % and aluminium was increased by 6%. So when you combine increases in production with higher prices, you really can't help but make some good profits there. So they're the short-term reasons why you might want to buy. But I guess I remain sceptical that the company can actually continue to grow revenue at 17 % per annum or to grow its profits. I mean, it had a loss last year. It's got a reasonably okay profit this year. but the main, I guess, concern that I would have is whether or not it can continue in that vein. Mining companies are generally very, very cyclical, as you would know.

6:33Commodity prices will go up and down. Production will go up and down as well, depending on demand and also just the limitations of engineering and what's in the ground. So it depends on, I guess, the resources and the reserves that they have for the particular mines that they've got. but you know I'm a little bit I suppose lukewarm on companies like this is because I can't see a consistent trend. If I was to look at this company since listing and I know you've asked me why you would buy shares in South 32 I think I've got two main reasons there but I guess the concern I have is that whilst revenue was very good in FY25 since 2015 when it listed the compound annual growth rate is closer to around 4%.

7:19So what I've seen is that there's been massive fluctuations in revenue and profitability. For example, 2016, I've written the figures down here, it recorded a loss of 1.6 billion. But in 2022, when things were extremely favorable for the company, it recorded a profit of 2.7 billion. So even with that giant result, though, in 2022, its compound annual growth rate since the 2017 financial year, at least, is negative. And growth since listing is actually reasonably immaterial. So that's why I've always been a little bit lukewarm, Scott, with mining companies. But, you know, it is a decent company.

7:59The other reason why you might want to at least be favourable upon this is that at least right now there is net cash on its balance sheet. It's only a small amount. It's$43 million when you take away long-term debt. It had a gross long-term debt of around just under$1.4 billion, but there's enough cash there as well to give it a small cushion there. And I'd say that's going to be likely to be needed very much so as it continues to invest and develop these mines for exporting metals from wherever their mines are around the world. So that's basically, I guess, the reasons why you'd want to buy it but also be a little bit sceptical on that as well.

8:48Any other particular cons you would point out, or is it just the possibility that the pros may not be pro as much as we'd like for long enough? Yeah, well, I suppose, look, the other thing too is the company is buying back shares right now. And that's, look, I can only conclude that the board itself sees that the shares are cheap. I suppose you'd have to really not look at the profitability on any one year. For example, if you're just looking at the$205 million in net profit, its return on equity is around 4%. it's actually a fairly low margin. It could be cheap. It depends on what the future looks like.

9:22And I guess the board and senior management are going to be the ones that will know this company better than anyone. But looking at its history, I am a little bit sceptical that things can always be as good as they can be in, say, FY25. If we looked at the average earnings over five years, I think that's a better way to look at it. If you look at that over five years and you can include that big result in FY22, the average result, the average earnings are actually pretty good. And hence the price to earnings on that basis is around five times. So that looks cheap. But FY22 was a pretty remarkable year.

9:58It hasn't been repeated since. So right now it's 56 times last year's earnings. And of course, it didn't have a PE multiple at all in FY24 because of the loss. So I'd be concerned a little bit about the buyback. The debt situation is interesting too, because even though it's in a net cash position, it has in the past had to leverage up quite a lot just to invest in its business. So I think if you're comfortable with that and you're comfortable with a miner, which is very much exposed to commodities, which will wax and wane from one year to the next, it could be a very interesting, I guess, component of a portfolio.

10:34But you'd have to really consider it to be reasonably high risk. I like BHP better because it's a bit more diversified. And, for example, its iron ore operations are insanely profitable, Whereas I don't see insane profitability here at South32. But yeah, look, I think it has a place, but it's not, in my mind, a company that I think most people would need to have in a portfolio. That's the way I'd look at it. Nice summary. Thank you, sir. I guess I probably know the answer to this question, but let me ask you just for the sake of completeness. As in, it's not a formal recommendation, but if we take a five-year view, do you reckon South32 beats the ASX or maybe lags?

11:15Well, I can just consult. I've got the crystal ball here on the side. It doesn't. It's pretty floggy. Look, it's hard to say. I would actually, my view is that I suspect it will probably lag the market. But with that said, if commodity prices do go up quite nicely, then it could actually do very well and could be a very good outperformer of the rest of the market. There was some interesting commentary in the press the other day. I think it was in the Australian Financial Review that an analyst just finds some notes here. It was actually saying that because of the situation with supply chains coming out of China and having to be reshored and so on, there could be a lot of demand for the sorts of metals that this company is mining just for that reason alone.

12:01So that could be a very good or a very bullish signal for the future. But I think it still remains to be seen. We know that these prices are going to be volatile and there's a lot of variables that will affect where the, I suppose, the revenue goes and hence the profitability because of the number or the amount of costs that it has on the balance sheet and through its income statement. Look, I think it's probably an okay business, but I think on my view is I don't think it will outperform, but you can take that with a grain of salt if property, sorry, if property prices. if commodity prices shoot through.

12:39I can't predict commodity prices at all. So for that reason alone, I don't like the, I guess, the variability in the returns. They can be quite good one year and quite poor the next. So I'll put my opinion is no, it won't outperform the market over the next five years. I'll put it that way. Very good. Thank you. Sorry, mate. We had a bit of lag on the recording, I think. Mate, thanks for sharing your views on South32. Well, thanks for watching and listening. Speaking of which, if you're watching this on YouTube now, thanks for doing that. Do me a favour. Hit the like button below this video. Also, the subscribe button and the notification bell.

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