Bayon Financial

Graeme Cunningham

Independent Insight Provider

Bayon Financial provides industry and company analysis focusing on mid and small cap equity research coverage across a range of sectors including mining, financials and telecoms.

Equity Bottom-Up

South32 Limited operates as a diversified metals and mining company. The Company produces alumina, aluminum, coal, manganese, nickel, silver, lead, and zinc. South32 conducts business globally.

<ul>
<li>South32's Q1/26 operational results declined overall yoy, inline with guidance, with output down for all metals except for manganese</li>
<li>A turn around continues, with segments that were non-core or facing major operating issues sold off, while the prices of its major metals have rebounded this year</li>
<li>The P/B has hovered just above 1.0x for years on low returns from the restructuring and global health crisis, leaving room for expansion on an expected rebound in ROE </li>
</ul>


South32's Q1/26 operational results declined overall yoy, inline with guidance, with output down for all metals except for manganese
A turn around continues, with segments that were non-core or facing major operating issues sold off, while the prices of its major metals have rebounded this year
The P/B has hovered just above 1.0x for years on low returns from the restructuring and global health crisis, leaving room for expansion on an expected rebound in ROE 


South32: Q1/26 Output Down But Range of Pressures Priced In

BHP Group Ltd operates as an international resources company. The Company offers mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel, and copper concentrate, as well as petroleum exploration, production, and refining. BHP Group serves customers worldwide.

<ul>
<li>Operational results for Q1/26 (fiscal Q3/26) were muted with iron ore production near flat yoy, copper and steelmaking coal down and only energy coal rising significantly </li>
<li>The company noted the completion of iron ore sales contract negotiations with China Mineral Resources Group, finally removing that over six-month overhang on the price </li>
<li>We still see downside risk from iron ore and copper prices and deteriorating macro as insufficiently priced in at valuations that are towards the high end of the past decade </li>
</ul>


Operational results for Q1/26 (fiscal Q3/26) were muted with iron ore production near flat yoy, copper and steelmaking coal down and only energy coal rising significantly 
The company noted the completion of iron ore sales contract negotiations with China Mineral Resources Group, finally removing that over six-month overhang on the price 
We still see downside risk from iron ore and copper prices and deteriorating macro as insufficiently priced in at valuations that are towards the high end of the past decade 


Rio Tinto Limited is an international mining company.  The Company has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock, diamonds, talc and zircon. Dually-listed company with RIO LN.

<ul>
<li>BHP reported Q1/26 operational results broadly on track with full year guidance, with output across the divisions ranging from 20% to 27% of the full year estimate</li>
<li>While production of copper, iron ore, alumina, silver and gold saw strong gains yoy, aluminum output was near flat, bauxite declined, and some divisions fell qoq on weather issues</li>
<li>We see rising risks to both iron ore and copper prices which are unlikely be offset by strong aluminum, with our valuation well below the consensus low-end and market price</li>
</ul>


BHP reported Q1/26 operational results broadly on track with full year guidance, with output across the divisions ranging from 20% to 27% of the full year estimate
While production of copper, iron ore, alumina, silver and gold saw strong gains yoy, aluminum output was near flat, bauxite declined, and some divisions fell qoq on weather issues
We see rising risks to both iron ore and copper prices which are unlikely be offset by strong aluminum, with our valuation well below the consensus low-end and market price


Rio Tinto: Q1/26 Operations On Track With Guidance

<ul>
<li>The aluminum price could remain high this year, beyond just the output reduction from the conflict in the Middle East, with limitations on supply also from other regions </li>
<li>This could boost South32's EBITDA potentially beyond consensus, with a shift away from alumina and towards aluminum this year, given the yoy decline in the price of the former  </li>
<li>The low P/B at 1.5x leaves room for a rerating on a potential recovery from the weak ROE which justified the large discount to BHP and Rio in recent years</li>
</ul>


The aluminum price could remain high this year, beyond just the output reduction from the conflict in the Middle East, with limitations on supply also from other regions 
This could boost South32's EBITDA potentially beyond consensus, with a shift away from alumina and towards aluminum this year, given the yoy decline in the price of the former  
The low P/B at 1.5x leaves room for a rerating on a potential recovery from the weak ROE which justified the large discount to BHP and Rio in recent years


South32: Potential Aluminum Boost With Muted Valuation

<ul>
<li>The China iron ore ban remains opaque, with some reports of an expansion to Newman fines, but others indicating a pause, and it has had limited effect on trade statistics</li>
<li>The company has selected 'surprise' new CEO, Mr. Brandon Craig, who has experience across all three major divisions, over the previous frontrunner Ms. Geraldine Slattery </li>
<li>We see a marginal effect from the China ban, but other major risks to the iron ore and copper divisions, and there is downside to our SOTP with moderate multiples </li>
</ul>


The China iron ore ban remains opaque, with some reports of an expansion to Newman fines, but others indicating a pause, and it has had limited effect on trade statistics
The company has selected 'surprise' new CEO, Mr. Brandon Craig, who has experience across all three major divisions, over the previous frontrunner Ms. Geraldine Slattery 
We see a marginal effect from the China ban, but other major risks to the iron ore and copper divisions, and there is downside to our SOTP with moderate multiples 


BHP: Iron Ore Ban Opacity, Surprise New CEO

Independent Insight Provider, Bayon Financial

Mr. Cunningham is a CFA Charterholder with over 15 years of experience as an equity research analyst, mostly on the sell side at investment banks, including Goldman and Jefferies, and with some time on the buy side. He has covered the consumer, telecoms, financials, energy and mining sectors, with a focus mainly on Southeast Asia, including Thailand and Vietnam.

Graeme Cunningham
Independent Insight Provider
• Bayon Financial

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A higher aluminum price on supply constraints beyond just the Straits closure could boost earnings and offset an alumina decline, while the muted P...

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The continued opaque China iron ban has had minimal effect on BHP's price, a 'surprise' CEO has been chosen, and our SOTP implies aggressive...

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