South32 (ASX:S32) said late Tuesday that it expects higher returns from a simplified business following its agreement to sell aluminum value chain assets to Alcoa in a $5.6 billion deal.
The company expects its group operating margin to rise to at least 48% after the transaction from 31% in fiscal 2026, with potential for further margin expansion from overhead reduction and the commissioning of its US-based Taylor project for zinc, lead, and silver mining.
South32, which holds assets across Australia, Africa, and the Americas, will produce five commodities following the deal, down from seven as of fiscal 2026, while its count of operated sites will fall to four from seven.
According to a July 1 filing, Alcoa's payment will comprise $3.1 billion in cash, about $1 billion in Alcoa shares, $750 million of assumed net debt, and up to $750 million in contingent value rights linked to realized London Metal Exchange aluminium and alumina prices through 2030.
In a July 2 note commenting on the initial deal disclosure, Jefferies believes that a more coherent portfolio makes the potential for a material medium-term valuation re-rating for the company, which the investment firm said has historically traded at a discount compared to its peers.
The investment broker believes that the deal removes South32's largest structural valuation overhang, shifting focus to base and precious metals.
In a Sept. 10 filing, Alcoa priced a $2.6 billion senior notes offering to help finance the deal, which includes $1.5 billion of 6.625% notes due 2034 and $1.1 billion of 6.875% notes due 2036.
