SOUTH32 expected to complete the sale of its stake in its South African Energy Coal (SAEC) business to Seriti Resources in the December quarter, but the onset of the COVID-19 pandemic had delayed a review of the South African manganese smelting business.
Commenting in its March quarter production and corporate update today, the Sydney- and Johannesburg-listed group also said it had suspended the remainder of its $1.43bn share buy-back programme, and cut sustaining capital expenditure to $500m owing to COVID-19 economic effects.
South32 had bought $77m in its own shares during the quarter under review, equal to 53 million shares at an average price of A$2.21/share. It had also paid a $53m special dividend. However, it had decided not to continue with the remaining $121m of the buy-backs. The programme could be extended beyond its current September 4 completion date.
On the basis of its comments today, South32 might be making headway renegotiating an existing coal sales agreement (CSA) between SAEC’s Wolvekrans Middleburg Complex (WMC) and Eskom’s Duvha power station.
As recently as February, South32 CEO, Graham Kerr, said the company had invoked a “hardship clause” in respect of the CSA which is loss-making whilst Mike Fraser, South32’s southern Africa COO, said failing to find a way with Eskom could imperil the Seriti deal.
South32 said today that Eskom had agreed to an interim pricing arrangement between WMC and Duvha “… in order to ensure continuous supply while Eskom undertakes their review of the hardship claim”.
South32’s SAEC has suffered difficulties in the first nine months of the group’s financial year. Export production was temporarily halted as a result of the 21-day lockdown imposed by the South African government resulting in 7% less sales. The lockdown had also reduced domestic coal demand from Eskom, said South32.
Export prices have also been under pressure: South32 said SAEC “realised a discount” of one fifth to the API4 (indexed coal) in the nine months ended March.
Meanwhile, South32 had submitted filings for required regulatory and third party approvals for the sale of SAEC. “Subject to a number of material conditions being satisfied, the transaction remains on track to be completed in the December 2020 half year,” it said.
The group was also considering the sale of its manganese alloy business partly owing to high electricity cost inflation. There had been progress, but “… the timeline to complete the review has been impacted by government restrictions in response to COVID-19.
“On 27 March we placed our South African manganese alloy smelter, Metalloys, on temporary care and maintenance in response to the national lockdown,” it said.
South32’s net cash fell by $127m to $150m in the March quarter following payment of an interim dividend. Whilst South32 had cash and cash equivalents of $1.2bn, it had decided to deal cautiously with COVID-19 which economists believe will result in negative GDP growth in 2020 in every economy except India and China.