On the short-term economics, South32’s (S32) further shift toward being a base metals-dominant miner has come at a bad time. Copper, zinc and lead prices are weak, as is aluminium.
Nickel is a bright spot thanks to Indonesian supply worries and electric vehicle-driven demand, although production is forecast to fall 13 per cent in the current financial year, which ends 30 June. But with a more long-term view, South32 getting closer to hiving off its South African thermal coal assets, which is a strong move. Thermal coal spot prices are forecast to stay around the current level of $70 (£54) a tonne by Macquarie for years, and South Africa has just embarked on a major reform of troubled state power company Eskom.
The diversified miner announced this week it would hand Seriti Energy its South Africa Energy Coal business for R100m (£5.3m) and 49 per cent of the free cash flow from the business until 2024. There are still seven different approvals needed for the deal to go through, including sign-off from the South African government and Eskom.
The sale price pales in comparison to the $504m (£391m) non-cash impairment in the books at the end of the 2019 financial year on the basis of the thermal coal unit being sold. This figure already included an estimated sale price from Seriti.
BMO analyst Edward Sterck said South32 would not get much from the free-cash-flow arrangement. “The minimal upfront price is as expected, and we do not expect South32 to receive much in the way of future payments,” he said. “Nonetheless, exiting difficult operations in a challenging socio-political environment will probably be seen as a small positive.”
South32 chief executive Graham Kerr said the sale would “substantially reduce” capital intensity and up the company’s operating margin, which stood at 34 per cent in the 2019 financial year, compared with 37 per cent the year before. Despite the process to sell the thermal coal business lasting for over a year and the plan existing before that, South32 continued to spend expansion cash on the division. This came to $377m between July 2017 and June 2019, and included $185m on extending the life of the Klipspruit colliery by 20 years.
