SOUTH32 kept production guidance unchanged across its properties following the first quarter of its 2019 financial year, including at its thermal coal assets in South Africa where a partial sales process of the asset has been officially kicked off.
South Africa Energy Coal (SAEC), as the business unit is called, is still gunning for 29 million tonnes (Mt) in production for the year even though first quarter annualised numbers are shy of that number, coming in at a rate of about 24.7Mt.
An incident to a dragline at SAEC’s Klipspruit affecting two million tonnes of output, described by South32 as “insurable”, had already been factored into the guidance number. “We are currently working with our insurers on a schedule for the dragline’s repair and recommissioning,” the company said in its first quarter production report.
On successive quarter comparative basis, production at SAEC was 13% lower at 6.2Mt. In addition to the dragline damage, which affected export production, domestic production declined in response to lower demand, despite the commencement of a new contract to sell additional lower quality stockpiled product in the June 2018 quarter, it said.
Elsewhere in the South Africa asset suite, manganese saleable ore production increased by 8% to 515Mt in the September 2018 quarter as production ramped up at Wessels following a planned shutdown that commenced in May 2018. “We continued to take advantage of favourable market conditions by selling lower quality secondary product and utilising higher cost trucking.” it said. “FY19 production guidance remains unchanged at 2,050kwmt.”
Manganese alloy saleable production decreased by 50% (or 11kt) to 11kt in the September 2018 quarter as a planned furnace shutdown was completed during the quarter.
South32 remains fairly cash flush with some $679m in the coffers, despite corporate activity in which it bought zinc prospect Arizona Mining for $1.3bn and Eagle Downs, an metallurgical coal producer in Australia’s Bowen Basin for $106m.
Arizona Mining is forecast to cost about $850m in capital expenditure, but the group is likely to remain highly cash generative. According to Macquarie, the company will generate $1bn per year in free cash flow between 2020 and 2023.
The proceeds of the SAEC sale may also boost the company’s cash. The division generated $353m in underlying earnings before interest, tax, depreciation and amortisation for the 2918 financial year, but since then the thermal coal price has vastly improved. On the basis of bids so far, South32 may have a bidding war on its hands, according to one UK bank which is not allowed to be quoted by media.
Within the broader portfolio, South32 registered a much improved performance from Illawarra, its metallurgical coal producer, the performance of which was disrupted in the last financial year by mining problems. An improvement in the asset’s long wall productivity “… underpinned an annualised production rate of 7.6Mt in the quarter,” said Graham Kerr in notes to the first quarter production report.
