S32 transformed its business last month through the planned sale of its aluminium, alumina and bauxite business to Alcoa in a deal worth up to US$5.6bn ($8.1bn), materially simplifying the company’s portfolio and accelerating its transition toward a future-facing base metals producer – discussed at the time here. Later in July, S32 delivered a solid fourth quarter update, discussed here, which has helped propel the stock towards fresh all-time highs.
Firstly, South32 has been explicit about what they’ll do with the funds from the Alcoa transaction, which is what we like to see when major strategic initiatives occur;
- Debt reduction: Around US$700 million will be used to repay outstanding bonds, strengthening the balance sheet.
- Shareholder returns: Investors will receive around US$500 million via an in-specie distribution of Alcoa shares, with further buybacks and additional capital returns expected.
- Growth investment: Capital will be directed towards the Sierra Gorda copper expansion and the Hermosa project, reinforcing South32’s copper growth strategy.
- Strong balance sheet: With an estimated US$3.8 billion net cash position after completion, South32 has significant flexibility, with the market now focused on the size of any additional capital return announced when the transaction closes in the 2H27.
Under the new structure, copper (Cu) is expected to account for around 55% of S32’s earnings by around FY30, once the Sierra Gorda expansion reaches full production. Pure-play copper producers have historically traded on meaningfully higher valuation multiples than diversified miners, and this has already started to play out for S32.
- Copper already represents approximately 34% of S32’s earnings (EBITDA) in FY26, with Sierra Gorda as the primary driver.
Key milestones underpinning South32’s copper growth story:
- Aluminium sale (expected 2H27): The proposed US$5.6bn sale to Alcoa removes a lower-growth business and increases copper’s share of group earnings almost immediately.
- Sierra Gorda expansion (first production FY30): A fourth grinding line is expected to lift copper production by around 30%, lower unit costs by 10%, and become the key driver of future Cu earnings growth.
- Hermosa-Taylor 1st production (2H28) development: The Arizona zinc-lead-silver deposit adds meaningful base metals volume from late 2027/early 2028, with the final federal permit secured as of July 2026.
- Hermosa-Peake copper deposit: A longer-dated copper growth option at Hermosa that further reinforces the copper skew beyond 2030.
The chart below illustrates that the valuation gap between Sandfire (SFR) and South32 (S32) has largely disappeared. SFR has historically traded on a significant premium as a pure-play copper producer, but both stocks now trade on broadly similar FY27–28 earnings multiples of around 13x. While SFR’s previously elevated P/E reflected the final stages of its heavy investment cycle and the ramp-up of Motheo, S32’s earnings were temporarily depressed by weaker aluminium and manganese markets rather than an expensive valuation.
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P/E Ratio South32 (S32) v Sandfire Resources (SFR) – Source Bloomberg
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P/E Ratio South32 (S32) v Sandfire Resources (SFR) – Source Bloomberg
MM remains very bullish towards copper but with our exposure growing since the evolution of S32 last month and the overall bullish trend across the sector, it’s important to keep some perspective on our holdings and plans into both strength and weakness – in MM’s Active Growth Portfolio we hold BHP Group (BHP), Sandfire (SFR), South32 (S32) and Evolution (EVN) for exposure to copper, albeit to a greater or lesser degree, i.e. BHP has iron ore and Potash, and for Evolution, gold is the dominant revenue stream with a growing coppering credit profile.
- We like S32 having bought the stock in mid-June; the question we ask today is whether the stock is becoming rich above $5, especially as we are consider increasing our mining exposure through a lithium name.
Despite this convergence in valuation, we don’t believe the market is fully recognising S32’s copper transformation. Copper earnings are still set to increase meaningfully as the Sierra Gorda expansion progresses and the aluminium business is divested, while Sandfire’s earnings profile appears relatively flat beyond the completion of Motheo Phase 2 unless another growth project emerges. Looking further ahead, South32’s FY30 earning (EBITDA) is forecast to reach around US$2.4 billion, underpinned by the Sierra Gorda expansion and its transition to a copper-dominant portfolio, yet this growth is not reflected in its current EV/EBITDA multiple. In contrast, Sandfire’s FY30 EBITDA is projected to decline to around US$1.0 billion, a divergence in medium-term earnings growth that we believe the market has yet to fully price.
From MM’s perspective, S32 offers the more compelling medium-term growth story at current valuations.
At some point, we are more likely to trim our copper exposure from SFR or BHP than the relatively new S32.
MM remains long and bullish towards S32 around $5.10
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