SOUTH32 has raised a flag on possible South African coal export delays if the underperformance of the country’s government-owned transport and logistics company, Transnet, was allowed to continue.
Mike Fraser, COO of South32, told media today at the firm’s interim results presentation that there had been “deep conversations” with Transnet regarding the recovery of its railway line linking Mpumalanga province to Richards Bay Coal Terminal in KwaZulu-Natal.
This was not yet affecting exports but “… if it continues longer we will see that pressure building”. The problems stemmed not only from heavy rain, but also vandalisation of locomotives during the annual shut-down, said Fraser.
Fraser is also managing negotiations with Eskom, another South African government-owned institution, regarding a new electricity tariff for the Australian firm’s aluminium smelters in KwaZulu-Natal.
An agreement with Eskom to price power for the Hillside aluminium smelter had been agreed, but the firm was waiting for approval from the National Energy Regulator of South Africa. It was a fixed rand price, with a PPI escalator, for ten years, covering all three potlines. Fraser said it was difficult to compare it with the previous dollar-denominated, LME-linked tariff because of greater rand volatility in the pricing.
One other item of unfinished business in South Africa was the sale of South32’s South African Energy Coal (SAEC) business to Seriti Resources, a privately-held coal producer. For transaction completion, Eskom must agree to a revised coal supply contract from South32’s Wolvefontein Middelburg Complex to Eskom’s Duvha power station. The current agreement is loss-making.
South32 CEO, Graham Kerr, said approval of the new contract was awaited from National Treasury and Eskom, and “all assurances are” that this would be done by end-March.
Delays had probably stemmed from the distractions of Covid-19 vaccines and the Zondo Commission into state capture, which had absorbed the attention of Treasury and some senior Eskom executives. As a result of probes into corruption, Eskom was applying more stringent corporate governance.
INTERIM PRESSURE
South32’s half-year profits were pressured by weak prices for metallurgical and energy coal, alumina, manganese ore, and nickel, which offset cost savings and higher volumes at Illawarra Metallurgical Coal, Worsley Alumina, and Cannington. Group costs fell 9%, benefiting from efficiencies, a temporary build in inventory, and a weaker rand.
Underlying earnings rose 4% to $136m, but headline earnings fell 10% to 1.8 US cents a share. The interim dividend was increased 27% to 1.4 US cents a share. By the end of January, South32 had increased its net cash holdings to $452m from $275m at end-December.
The group is forecasting higher output from its Cannington, Illawarra, and Cerro Matoso mines for the full year, while guidance for the other operations is unchanged. Cerro Matoso will benefit from accelerating its low-capital, high-grade Queresas and Porvenir project.
REFOCUS
South32 is restructuring its portfolio towards base metals and is currently working on three base metals projects in North America: two pre-feasibility studies at the Hermosa project (the Taylor and Clark deposits) and a third pre-feasibility study at the Ambler Metals Joint Venture in Alaska.
Kerr said the NSW Independent Planning Commission’s refusal of the application for a life extension project, Dendrobium Next Domain, at Illawarra, was a surprise. South32 had several options, including appealing the decision, submitting a revised plan, or optimising Illawarra without Dendrobium Next. Management would have a clearer idea of the way forward by the end of the financial year.
After resuming share buybacks in October, South32 has increased its capital management programme by $250m to $1.68bn, which means it will return $259m to shareholders by September this year. In the past six months, it bought back 66m of its shares at an average price of A$2.34 a share.
