Delays in prospective acquisitions combined with continued high commodity prices has prompted South32 to buy back close to 5 per cent of its shares for $US500 million even before it pays its recently declared interim dividend.
The miner, which was spun out of BHP Billiton, has been strongly tipped to launch a share buy-back amid resurgent cashflows thanks to the surprise lift in many commodity prices over the past year or so.
"We recently explored the capital allocation possibilities for companies under our coverage ... and concluded that an on-market share buyback would be the most likely option," RBC analyst Paul Hissey told clients on the news of South 32's planned buy-back.
The surge in the manganese and coking coal prices has given South32's earnings a huge fillip, with the coking coal price in particular rising to more than $US200 from $US100 a tonne. Current talks in Tokyo are expected to see the quarterly price hold at around $US160 a tonne.
South32's share price fell 1.84 per cent on Monday to $2.67.
Also adding to the miner's cash reserves was the decision just over a month ago by the competition watchdog, the ACCC, to block pending a review the planned $US200 million ($262 million) acquisition of Metropolitan Collieries, which would have expanded the miner's coking coal acreage in the Illawarra, south of Sydney, as well as doubling its interest in the Port Kembla coal loader.
"South32 would become the Illawarra's only supplier of large volumes of coking coal in the medium term, following the expected closure of Glencore's Tahmoor mine," the watchdog noted when it stepped in last month.
Additionally, the recovery in the global price for manganese, which is mostly used to make specialty steel, has undermined earlier optimism that South32 would be able to take full control of its manganese operations in which the South African miner Anglo American has a large minority stake, which has also left the Australian miner with additional cash on hand.
South32 has a controlling 60 per cent shareholding in Samancor with Anglo holding the balance. The venture operates mines in Australia and South Africa. Anglo put its coal, manganese and iron ore operations on the block a year ago but the subsequent recovery in prices has resulted in this speculation fading.
When it ruled off its books at the end of December, South32 had net cash of $US859 million, with $US200 million earmarked for the Metropolitan Colliery purchase and $US192 million for the interim dividend.
"South32 remains a cash flow machine," Citi noted in a report issued to clients after the release of the miner's interim earnings in mid-February as it forecast net cash to reach $US1.4 billion by mid-year.
It forecast as much as $US1.6 billion could be returned to shareholders in fiscal 2018 while still keeping $US500 million in hand "for elusive value accretive M&A".
RBC's Mr Hissey said: "South32 could be one of the companies best placed to distribute excess cash flows to shareholders, given a lack of internal capital options, which could consume the additional circa $US850-1200 million excess cash we think is likely to materialise over calender year 2017-18.
"We note that under our base case after deducting 500 million shares bought back at $2.72/share, net cash at the end of fiscal 2018 would be just under $US1.5b. This would leave South32 with sufficient headroom to pursue other growth opportunities, should they present."
