South32 expects its manganese and coal businesses to be among the beneficiaries of improved demand from China, even though prices are likely to remain volatile.
The diversified miner on Thursday posted a sharp jump in half year underlying earnings on the back of ongoing cost reductions and stronger prices for coal and manganese, which are both extensively used in steelmaking.
The company made a US$620 ($804) million profit in the six months to December 31, compared to a US$1.7 ($2.21) billion loss a year ago.
Underlying earnings, which excluded the impact of heavy non-cash writedowns last year, surged to US$479 ($622) million from just US$26 ($33) million a year ago, reflecting the improving prospects for the miner.
"We do expect that China will continue down the path of looking for a cleaner climate and looking for more efficiency and more productive value adding capacity,” chief executive Graham Kerr told reporters.
"We expect there will be a push towards higher quality product and we think that does suits our businesses in manganese and metallurgical coal."
Prices of major commodities rebounded during 2016, underpinned by Chinese government stimulus packages for its steel and construction sectors, as well as falling local supply because of newly-introduced anti-pollution rules.
While iron ore prices nearly doubled, prices for manganese and metallurgical coal nearly tripled. They have since dropped more than 40 per cent from their 2016 peaks.
South32, the world’s largest producer of manganese ore, said it took advantage of the surge in prices by opportunistically lifting production in the December quarter.
However it could not fully benefit from higher coal prices due to a forced temporary shutdown at its Australian operations and planned maintenance in South Africa.
"We should not move away from the fact that we expect commodity prices will continue to be volatile. So we are focused on the things that we can control and make sure we can ride through all the different cycles,” Mr Kerr said.
The company has slightly raised its target cost prices for most of its commodities in the 2016/17 year, but has maintained its production guidance, saying it expects a strong finish to the financial year.
The miner indicated it is likely to increase payouts to shareholders, declaring its first interim dividend since being spun off from BHP Billiton in 2015.
South32 shares were down 3.5¢, or 1.31 per cent, at $2.635 at 12.20pm.
Image: South32 CEO Graham Kerr. The West Australian.