South32 confirms plans to sell SAEC to Seriti, extends share buy-back despite earnings pressure

Graham Kerr, CEO, South32

SOUTH32 confirmed market speculation it had entered into exclusive negotiations with Seriti Resources for the sale of its South African Energy Coal (SAEC) business and extended its capital return programme some $250m despite lower full year earnings.

The Sydney- and Johannesburg-listed group posted underlying earnings for the year ended June of $992m, a one quarter decline year-on-year owing to lower aluminium and thermal coal prices. This was despite a 3% lift in overall group volumes including record output at Hillside Aluminium and Illawarra, its metallurgical coal facility.

Basic underlying earnings fell less steeply – about 23% to 19.7 cents per share – by dint of the group’s $1bn share buy-back programme which totalled $938m as of the year-end. In addition to a 2.8 cents/share final dividend, equal to $140m, the group said it would buy a further $250m of its own shares taking the full buy-back amount to $1.2bn.

“Looking ahead our portfolio will include industry leading positions in alumina and manganese and we will continue to embed development options with a bias to base metals that have the potential to deliver meaningful growth in shareholder value,” said Graham Kerr, CEO of South32 in a statement.

Shares in South32 fell 4.55% on the Sydney Stock Exchange with a couple of hours trade left in the day. On a year-to-date basis, shares in South32 are nearly 20% down.

Including exceptional items, South32 reported a 71% decline in full year earnings to $389m which takes account of the recognition of a $504m non-cash impairment, including tax credits, in respect of its proposed sale to Seriti Resources of SAEC.

South32 detailed today the terms of an agreement with Seriti Resources, a black-controlled South African consortium led by Mike Teke, a long-standing coal executive. The deal comes with significant conditions with deal completion required by 2020.

Although not stated by either South32 or Seriti, these conditions include successfully concluding negotiations with Eskom, the South African power utility to whom SAEC supplies about half of its 25 million tons a year (Mt/y) in coal production, and the blessing of the Department of Mineral Resources and Energy (DMRE).

In its statement, Seriti confirmed it was in exclusive negotiations with South32 saying that it would pay¬†an up-front cash payment. It didn’t provide a number, but Mike Fraser, head of South32’s African assets, told Miningmx in April SAEC’s total rehabilitation liabilities were at some $692m.

Seriti also said that it had agreed a deferred payment mechanism whereby both companies will share in any commodity price upside for an agreed period. This will means the final consideration paid for SAEC by Seriti will account for potential volatility in the thermal coal price which is currently at $60 to $65/t, levels last seen in 2016.

“This is an exciting step forward for Seriti, and we look forward to continued engagement with South32 as we work together towards concluding a binding agreement,” said Teke in a statement today. Teke was formerly the CEO of Optimum Coal Holdings before it was sold to Glencore and then became chairman of Richards Bay Coal Terminal (RBCT).

He formed Seriti shortly after leaving RBCT and ending his term as chairman of the Minerals Council South Africa. In 2017, Seriti completed the R2.3bn purchase of domestic coal mines previously owned by Anglo American and the R850m purchase of New Largo, the strategically important power station coal project, also owned by Anglo.

Assuming it concludes the purchase of SAEC, Seriti will control 39Mt/y of Eskom dedicated coal comprising 32.5% of Eskom’s annual coal purchases of about 120Mt/y. SAEC brings 14Mt/y of Eskom coal and 10Mt/y in export production, as well as value export entitlement through RBCT.