February 14, 2018 / 11:03 PM / 9 days ago

UPDATE 2-Australia's South32 says steel demand buoys H1; costs, buyback pace seen hitting shares

* World no.1 manganese producer’s H1 core profit $544 mln

* Up 14 pct vs yr-ago, but below avg analysts’ estimate

* Shares off 2.7 pct; costs, slow buyback weigh -analyst

* Interim dividend 4.3 cents/shr, up from 3.6 cents/shr

* Also plans 3 cents/shr special dividend (Recasts, adds CEO, analyst comment, shares)

By Melanie Burton

Feb 15 (Reuters) - Australian miner South32 Ltd, the world’s biggest manganese producer, said first-half profit jumped 14 percent, slightly below estimates, after it cranked up production of the steelmaking ingredient amid strong demand and high prices.

South32, spun off from global mining giant BHP in 2015, said in a statement that underlying profit for the six months ended Dec. 31 grew to $544 million. That was short of the average estimate of $574 million from four analysts, and with company watchers saying costs had crept up, the stock slipped nearly 3 percent.

Hoisting its interim dividend nearly 20 percent, South32 said it would also pay shareholders a special dividend worth $155 million and offered an upbeat outlook for a business that saw first-half revenue grow 8 percent to $3.49 billion.

Demand for steel remains solid globally, chief executive Graham Kerr said during a call with reporters, driven by a robust Chinese economy and restocking ahead of the Lunar New Year that began on Thursday.

“From our perspective, China continues to be strong in terms of the economy...Fundamentally steel looks good across the globe,” he said. “We are more positive on steel than we thought we would have been 12 months ago.”

China’s drive to crack down on pollution has also burnished the global manganese outlook by driving down domestic supply, Kerr said.

“We achieved record production at (unit) Australia Manganese and Mozal Aluminium, (and) increased production guidance at South Africa Manganese in response to favourable market conditions,” South32’s CEO said. The company last month said manganese ore output rose 22 percent in the December quarter from a year earlier.

Still, investors’ response was negative. The shares were down 2.7 percent at A$3.60 by 0347 GMT, against 1.2 percent gains on the underlying S&P/ASX 200 index.

Analysts said the slow pace of a previously announced $750 million share buyback, as well as rising costs, weighed on investors’ minds.

“(I) Can’t help but feeling...like the special (dividend) component is really a ‘catch-up’ for the slow buyback program,” analyst Peter O‘Connor at Shaw and Partners in Sydney said in a report.

“(The) buyback (was) topped up by $250 million although we note that the first-half buying pattern has been below the required rate...$540m remains outstanding, to be purchased up to April 2019.”

Meanwhile Kerr said South 32 is looking to bolster its supply pipeline, declining to rule out acquisitions in coking coal.

Rio Tinto has started a sales process for its Queensland coking coal operations Kestrel and Hail Creek, industry sources say.

“We have been clear from day one we will look at M&A opportunities but we will always look at it through the lens of value,” Kerr said, without disclosing South32’s budget for acquisitions.

Reporting by Melanie Burton in MELBOURNE; Additional reporting by Susan Mathew in BENGALURU; Editing by G Crosse and Kenneth Maxwell

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