South32 to lift SA manganese output, but the pall of Transnet rail disruption persists

Freight Train

SOUTH32 increased production guidance for manganese ore from its South African joint venture about 10% to 2.2 million tons (Mt) for its 2021 financial year.

Commenting in its third quarter production report, in which it also registered continued operating losses for another South African unit – its 91% owned South African Energy Coal (SAEC) – the group said higher manganese output was owing to strong demand that enabled it to use higher cost trucking capacity.

However, rail logistics had been a challenge, as per previous quarters.

“March 2021 quarter ore sales volumes declined by 15%, with third party rail logistics impacted by wet weather and shipments slipping into the June 2021 quarter following the declaration of force majeure by Transnet,” South32 said.

South32 exports its manganese ore from South Africa through the government-owned Transnet Freight Rail. Capacity utilisation on Transnet’s routes has been disrupted since last year, partly owing to the impact of Covid-19 on staffing levels.

The Perth-headquartered group warned at its interim results in February that export delays as a result of the reduced capacity utilisation at Transnet were possible.

Issues at Transnet were also partly behind SAEC’s ongoing losses and a 30% discount on its coal against indexed South African coal exports. Realised export prices were also lower, partly owing to a stronger rand to the dollar.

Third quarter export coal sales fell 30% to 1.88Mt as South32 reduced production from unprofitable pits. The group has not provided production guidance for its South African coal for the 2021 year.

South32 said previously it expected to close the sale of its stake in SAEC to Seriti Resources, a privately-held domestic coal producer, in the current quarter. It had expected the deal to close last but it has been embroiled in controversy.

This is owing to a provisional agreement between SAEC and Eskom, the state-owned power utility, to sell coal supplied to Eskom’s Duvha power station at a higher price than the coal sales agreement (CSA). South32 told Miningmx that the Duvha contract was so underwater that SAEC would remain loss-making unless the contract was renegotiated.

“Anyone in our situation would say this is not tenable; you cannot continue to support a significantly loss-making business for another 10 years,” said Mike Fraser, COO of South32 in an interview on April 15. 

The third quarter was otherwise a healthy one for South32 which said it had registered year-to-date production records at its alumina and manganese assets in Brazil and Australia respectively.

The sale of non-core precious metals royalties totalling $55m, the unwind of capital build, and a strong operating performance resulted in a $242m increase in group cash to $517m as of March 31.

South32 also continued with its share buy-back programme purchasing two million shares in the quarter at an average price of A$2.78/share, equal to $90m. As of the quarter-end, South32 had $169m of its $1.43bn share buy-back remaining.