South32 has released its quarterly report for September 2021.
- Maintained FY22 production guidance with our operations continuing to deliver to plan, taking advantage of rising commodity prices.
- Delivered a US$254 million increase in the company’s net cash position to US$660 million, with higher commodity prices and third party logistics disruptions resulting in a build in working capital.
- Achieved a 7% increase in manganese production, with a quarterly record at South Africa Manganese and a strong start to the year at Australia Manganese.
- Maintained production above nameplate capacity at Worsley Alumina, with the operation continuing to benefit from improvement initiatives.
- Restored production to normalised rates at Brazil Alumina in October, following an incident that damaged one of the bauxite unloaders at the refinery in July 2021.
- Increased production at Mozal Aluminium, with smelter productivity benefitting from the investment in the AP3XLE energy efficiency technology.
- Recorded sequentially lower base metals production, with Cerro Matoso impacted by a temporary equipment outage, while Cannington extracted a planned series of lower grade stopes.
- Entered into binding conditional agreements to acquire a 45% interest in Sierra Gorda, an operating copper mine in Chile which is expected to deliver copper equivalent production of 214 000 t in CY21e (100% basis).
- Exercised its pre-emptive rights to acquire an additional interest in its hydro powered aluminium smelter, Mozal Aluminium.
“Our operations continue to perform well, achieving record production at South Africa Manganese and maintaining production above nameplate capacity at Worsley Alumina. Production at Mozal Aluminium was higher, with the smelter benefitting from our investment in the AP3XLE energy efficiency technology.
“Our teams continue to achieve strong operating results, despite the ongoing challenges of COVID-19 across the globe.
“Our operating performance has further strengthened our financial position, supporting the continuation of our on-market share buy-back, and subsequent to the end of the period, payment of our US$256 million fully franked ordinary and special dividends in respect of the June 2021 half year.
“We continue to actively reshape our portfolio for a low carbon future, and last week entered into binding conditional agreements to acquire a 45% interest in Sierra Gorda, a long life, opencast copper mine in Chile. We have also recently exercised our pre-emptive rights to acquire an additional interest in Mozal Aluminium. These initiatives, and our ongoing work with Alcoa in Brazil to investigate the Alumar smelter’s potential restart using renewable power, will see us increase our leverage to the metals critical to the green energy transition,” said Graham Kerr, South32 CEO.
- South32’s net cash balance increased by US$254 million to US$660 million during the quarter. Notwithstanding the strong cash generation, which included net distributions of US$45 million (South32 share) from its manganese equity accounted investments (EAI), the company has experienced a build in working capital as a result of higher commodity prices and third party logistics disruptions at many ports across its geographic footprint.
- The company exercised its pre-emptive rights to acquire an additional shareholding in Mozal Aluminium from MCA Metals Holding GmbH (Mitsubishi) during the quarter. Subsequent to the end of the period, the Industrial Development Corporation of South Africa (IDC) also notified Mitsubishi of its intention to trigger their preemptive rights. Accordingly, its shareholding is expected to increase by a minimum of 16.6% to 63.7% for a headline purchase price of US$166 million. Completion of the transaction is subject to the satisfaction of customary conditions.
- Subsequent to the end of the period, the company entered into two binding conditional agreements with Sumitomo Metal Mining and Sumitomo Corporation (collectively Sumitomo) to acquire a 45% interest in the Sierra Gorda copper mine in Chile for an upfront cash consideration of US$1.55 billion and a contingent price-linked consideration of up to US$500 million. The upfront consideration is expected to be funded from cash on hand and a US$1 billion acquisition debt facility. Completion of the transaction is expected around the end of calendar year 2021, subject to the waiver or non-exercise of pre-emption rights held by 55% joint venture partner KGHM Polska Miedz, and competition and regulatory approvals.
- The company’s strong financial position also supported the purchase of a further 10 million shares via its on-market share buy-back at an average price of AUS$2.95 per share in the September 2021 quarter. Subsequent to the end of the period, it also paid a fully franked ordinary dividend of US$163 million and a fully franked special dividend of US$93 million in respect of the June 2021 half year. Its US$2 billion capital management program is 88% complete with US$231 million remaining to be returned to shareholders ahead of its extension or expiry on 2 September 20225.
- Subsequent to the end of the quarter and consistent with its commitment to maintain an investment grade credit rating, S&P and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings for the Group.
- During the quarter, the Colombian government passed legislation to increase the country’s corporate tax rate to 35% from 1 January 2022 (it was previously scheduled to reduce from 31% to 30% on this date). Notwithstanding this increase, the company’s FY22 Group underlying effective tax rate is expected to return to normalised levels that reflect the corporate tax rates of the geographies where the Group operates which include: Australia 30%, South Africa 28%, Colombia 31%6, Mozambique 0%6 and Brazil 34%.
- South32 has commenced a process to investigate the potential divestment of its interest in the Eagle Downs Metallurgical Coal development option.
Development and exploration update
- The company continued work on its Taylor Deposit pre-feasibility study (PFS) at the Hermosa project, while making progress with the scoping study for the Clark Deposit. It expects to report the outcomes for the Taylor PFS around the end of the calendar year.
- Subsequent to the end of the period, it completed the summer exploration season at it Ambler Metals joint venture. Although total drilling metres and productivity were impacted by adverse weather and challenges in fully staffing the programme, sufficient material was recovered to complete planned metallurgical work and geotechnical drilling at the Arctic Deposit.
- The company invested US$7 million during the September 2021 quarter in its early stage greenfield exploration opportunities. With COVID-19 restrictions generally diminishing across jurisdictions, activity continues to ramp-up with multiple programs targeting base and precious metals underway in Australia, the US, Canada, Argentina, Peru and Ireland.
- The company directed US$15 million towards exploration programmes at its existing operations and development options during the September 2021 quarter (US$11 million capitalised), including US$0.5 million for its EAI (US$0.1 million capitalised), US$4 million at the Hermosa project (all capitalised) and US$6 million at Ambler Metals (all capitalised).
Worsley Alumina (86% share)
Worsley Alumina saleable production decreased by 7% (or 72 000 t) to 1 006 000 t in the September 2021 quarter. Following the prior period’s drawdown of hydrate inventory, the refinery continued to operate above nameplate capacity with calcination rates now normalised. FY22 production guidance remains unchanged at 3 965 000 t with the refinery continuing to benefit from improvement initiatives. Notwithstanding the continued strong operating performance, elevated caustic soda prices are expected to further impact the refinery’s Operating unit cost guidance for FY22 of US$241/t.
The company realised a 15% premium to the Platts Alumina Index on a volume weighted M-1 basis for alumina sales in the September 2021 quarter, with the realised prices benefitting from a legacy supply contract with Mozal Aluminium, and elevated global freight rates which are also reflected in operating unit costs.
Brazil Alumina (36% share)
Brazil Alumina saleable production decreased by 22% (or 77 000 t) to 272 000 t in the September 2021 quarter following an incident in July that damaged one of the two bauxite unloaders at the refinery. The operation took immediate action to mitigate the disruption through the installation of temporary loading infrastructure and returned to full capacity in October. With the ramp-up of the refinery meeting prior expectations, FY22 production guidance remains unchanged at 1.3 million t.
Separately, South32 is working with its partner Alcoa to investigate a potential restart of the Alumar aluminium smelter in 2H22 using 100% renewable energy from 2024. It expects to make a decision on the potential restart by the end of the calendar year.
Hillside Aluminium (100%)
Sales decreased by 5% in the September 2021 quarter as port congestion impacted the timing of shipments.
Mozal Aluminium (47.1% share)
Mozal Aluminium saleable production increased by 3% (or 2000 t) to 68 000 t in the September 2021 quarter as the smelter’s productivity benefitted from the investment in the AP3XLE energy efficiency project. Notwithstanding the further impact of load-shedding, the smelter continues to test its maximum technical capacity, and FY22 production guidance of 273 000 t remains unchanged.
Sales decreased by 19% in the September 2021 quarter as port congestion impacted the timing of shipments.
The smelter sources alumina from the Worsley Alumina refinery with approximately 50% priced as a percentage of the LME aluminium index under a legacy contract and the remainder linked to the Platts alumina index on an M-1 basis, with caps and floors embedded within specific contracts. As a result of these contracts, the smelter paid a premium to the Platts index on an M-1 basis for alumina sourced during the September 2021 quarter.
Illawarra Metallurgical Coal (100%)
Illawarra Metallurgical Coal saleable production increased by 9% (or 163 000 t) to 1 888 000 t in the September 2021 quarter with longwall productivity improving, following challenging strata conditions and a longwall move in the prior period. Notwithstanding, energy coal production declined as no sales of low-margin coal wash material were made in the quarter, with elevated freight rates making them uneconomic.
While the lower total volumes are expected to adversely impact operating unit costs, realised prices will benefit due to fewer sales of the lower priced product and the current strong metallurgical coal market. FY22 production guidance remains unchanged at 7.3 million t, with an extended longwall move scheduled at the Dendrobium mine in the December 2021 quarter. Further longwall moves are planned for the March 2022 and June 2022 quarters.
Australia Manganese (60% share)
Australia Manganese saleable production increased by 4% (or 31 000 wet t) to 897 000 wet t in the September 2021 quarter with the PC02 circuit continuing to operate above nameplate capacity, supported by an improvement in product yield. FY22 production guidance remains unchanged at 3.5 million wet t.
The company disclosed its updated mineral resource estimate in September to incorporate results from the initial phase of its ongoing Southern Areas exploration programme, adding a further 17 million t to GEMCO’s Total Mineral Resource of 157 million t.
South Africa Manganese (60% share)
South Africa Manganese saleable production increased by 12% (or 70 000 wet t) to a record 668 000 wet t in the September 2021 quarter, due to higher volumes of premium material from the Mamatwan mine. While starting the year well ahead on an annualised basis, FY22 production guidance remains unchanged at 2.2 million wet t as the company monitor market conditions and its continued use of higher cost trucking.
Ore sales decreased by 11% during the September 2021 quarter as the company established additional finished goods inventory ahead of a planned shut. Notwithstanding the lower volumes, the company achieved a premium to the medium grade 37% manganese lump ore index on a volume weighted M-1 basis as we optimised our sales mix.
Cerro Matoso (99.9% share)
Cerro Matoso payable nickel production decreased by 12% (or 1300 t) to 9600 t in the September 2021 quarter as plant availability was impacted by an unplanned transformer outage. FY22 production guidance remains unchanged at 43 800 t with the operation implementing mitigating actions to recover volumes across the remainder of the year.
The company’s ferronickel product sells with reference to the LME Nickel index price on a M or M+1 basis. While product discounts averaged 9% during the September 2021 quarter, these have reduced for recently completed sales.
Cannington (100% share)
Cannington payable zinc equivalent production decreased by 19% (or 18 900 t) to 78 200 t in the September 2021 quarter as planned surface maintenance lowered plant throughput, and average grades declined following the prior period’s extraction of a higher grade mining sequence. Ore mined increased by 8% as continued strong underground performance supported the establishment of additional run of mine inventory during the surface outage.
The operation remains on-track to transition to 100% truck haulage from the June 2022 quarter, with FY22 production guidance remaining unchanged (silver 11 647 000 oz, lead 1 126 000 t and zinc 639 000 t.
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