S32 set to start building M&A warchest, Citi says

S32 management´s efforts to cut costs and ensure its assets were generating cash received an endorsement from analysts at Citi on Friday.

According to Heath R. Jansen, Jatinder Goel, Harsh Bardia and Amit Lahoti, the Australian-based metals miner was set to "significantly" exceed its medium-term cost reduction targets.

On their estimates, S32 had already achieved $182m of its projected $350m in cost savings until fiscal year 2018.

Among the drivers of those cost reductions were a 17% reduction in staffing levels, procurement savings totalling $160m and a $275m reduction in its capital expenditure programme.

Costs were set for a further drop of $118m in the second half of its 2016 fiscal year, the broker added.

On the basis of the above, Citi upgraded its recommendation on the shares from 'neutral' to 'buy' and lifted its target price from 50p to 75p, with the latter driven by upgrades to the broker´s estimates for the company´s earnings and net present value.

Capital expenditure and cost reductions should lead to approximately $140m of cash flow in the second half of the year and $660m for fiscal year 2017.

Even at then current 'spot' prices cash flow generation should hit about $500m in fiscal year 2017, "which would still start to build the M&A war chest," Citi said.