South32 Ltd.

The stable outlook on South32 Ltd. reflects our view that the company's strong balance sheet provides it with a comfortable financial cushion and rating buffer to pursue growth opportunities or weather potential weakening in trading conditions. To maintain the 'BBB+' rating, we expect South32's adjusted funds from operations (FFO)-to-debt ratio to be more than 45% while its free operating cash flow remains positive through the cycle. If trading conditions are favorable, we expect the company's credit metrics to be well above these thresholds. Although a less likely scenario over the next two years, we could lower the rating if South32's credit metrics deteriorate, including its adjusted FFO-to-debt ratio falling to less than 45% on a sustained basis. This scenario could

...South32 Ltd.'s commitment to a conservative capital structure and low leverage supports a strong balance sheet through the cycle. The company's actively managed balance sheet enabled it to maintain an adequate rating buffer and overcome a volatile commodity pricing environment during the COVID-19 pandemic, which we expect to continue through the year ending June 30, 2021. Management used certain financial levers to support the balance sheet as the pandemic unfolded, including the suspension of the share buyback, dividends that reflect prevailing market conditions, and reduced sustaining capital expenditure. We expect South32's earnings volatility, margins, and capital requirements to improve following the divestments of South Africa Energy Coal (SAEC) and Tasmanian Electro Metallurgical Company (TEMCO). The repositioning of the portfolio away from thermal coal in South Africa and manganese smelting in Australia should reduce sustaining capital expenditure as well as increase the predictability...

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