[miningmx.com] – WITH debt reduction all the rage in the world’s mining sector, it’s significant that South32 cut its indebtedness by a sizeable $206m during its September quarter. This leaves a net amount of $196m still on the balance sheet.
The Perth-headquartered group’s CEO, Graham Kerr, said in response to Miningmx questions that there was “no fixation’ with getting the balance sheet into a net cash position. In the view of analysts, however, applying the brakes to debt is crucial to the group’s fortunes.
Derryn Maade, an analyst for HSBC, argued that a fifth consecutive year of under-performance for mining shares had heightened the competition for investment dollars. In this environment, it was increasingly difficult for mining firms to mark out their attractiveness as something special.
“Investors are displaying risk averse tendencies, favouring exposure to strong balance sheets, high quality assets and commodities with relatively strong fundamentals,” said Maade. “In our view, South32 benefits from quite a robust balance sheet”.
Yet the group needs to have this because the metals South32 produces – aluminium, manganese and coal – all have relatively weak medium-term prospects. Of these, its Illawarra Coal and South African manganese assets are currently loss-making. A Colombian mine, Cerro Matoso Nickel, is also losing money.
James Oberholzer, an analyst for Macquarie Bank, believes South32 will also seek to expand its $350m cost-out (reduction) target and that Cerro Matoso may join the Ferroalloys manganese smelting business in South Africa in mothballs.
“The continued decline in South32’s core commodity prices has put severe pressure on our base case forecasts for the company and the sustainability of some of its core assets including South African manganese, Illawarra and Cerro Matoso,” said Oberholzer.
“If spot prices don’t improve, then we believe material cuts at Illawarra and closures of Cerro Matoso and South African Manganese look inevitable,” he said. South32 has also temporarily shut its Hotazel manganese mine but this would probably be reopened following a strategic review in January, he said.
There is also risk at another asset, the thermal coal production of the South African-based, 17 million tonnes a year (mtpa) Wolverkrans Colliery which South32 is battling hard to keep at break-even owing to poor conditions in the seaborne thermal coal market.
Whilst it was not facing the difficulties that forced Glencore to put its Optimum Coal Mine into business rescue, it was hoping to avoid cash leakage, said South32’s South African COO and president, Mike Fraser.
He acknowledged that the group’s priority at the Wolverkrans Middleburg mining complex was to achieve break-even.
Asked by Miningmx to detail operating conditions at its South African coal businesses, Fraser said Khutala was generating a margin, but Wolverkrans was more challenging.
“We have two fixed contracts which are Eskom related contracts. The first one is Khutala which is a cost plus operation. We are in conversation on how to extend the life of that operation to tie it to the Kendal [power station] expected life for another 30 years,” said Fraser.
“We do generate a margin on that operation,” he added.
“The second power contract we have is to supply coal to the Duvha power station. We supply coal out of our Wolverkrans Middleburg mining complex. About 50% or 8.5mtpa goes to Duvha and the rest to the export market. That is a challenging operation,” said Fraser.
“Our objective at this point in the cycle is to ensure that we do not lose cash out of that operation. How do we, in this point of the cycle, make a profit?
“That contract runs to 2034 and we have an opportunity in the way the contract is drafted to maximise our revenue by meeting the sweet spot of quality range of product that we supply to Duvha and that’s what we are working hard to do.
“So with the right attention, we can make sure at least in this cycle that we are breaking even and giving us optionality if there’s a possible recovery in the export price,” said Fraser.
