South32 bullish on aluminium, manganese, energy coal prospects

27 November 2017

With the price of various commodities having improved during the 2017 financial year, diversified miner South32 remains optimistic about the aluminium, manganese and energy coal sectors for the year ahead.

“Manganese led the way [in terms of price increases], and metallurgical coal, energy coal, zinc, lead and alumina all rose during the year, says South32 CEO Graham Kerr.

Speaking during a teleconference following the group’s annual general meeting, on Thursday, Kerr expressed optimism for the aluminium sector, particularly in light of the recent curtailments in aluminium production by China.

Kerr suggested that South32 could make a positive impact on aluminium supply, in light of strong growth in demand.

Similarly, he believes the energy coal market “to be a good market place”, with expectations for this sector to stay at a similar price level going into the new year.

While manganese “has run hot” in the last six months, Kerr, however, expects some downward pressure on the commodity as a result of a forecast moderation in demand from China, an expected drop in steel production and the influx of niche manganese suppliers.

Kerr further maintains the belief that South32 has a set of operations that can continuously be optimised to extract value for shareholders, with several group operations, such as Energy Coal South Africa, Manganese South Africa  and Illawarra in Australia, for example, having mine lives of multiple decades to ensure ongoing business.

“In terms of the portfolio within Southern Africa . . . every opportunity we have . . . we will continue to study,” South32 Africa COO Mike Fraser said, reiterating Kerr’s comments that South32 has spent significantly in advancing projects and studies.

Additional opportunities lie in unlocking resources, as is evident from the group’s  progress made towards approving a project to extend the life-of-mine at the Klipspruit colliery – the announcement of which is expected before the end of the year – the start of exploration at the southern areas of South32’s Northern Territory Gemco manganese mine, and the delivery of the first higher-grade nickel ore from the La Esmeralda deposit, in Cerro Matoso, in Colombia.

New opportunities for capital allocations are also maintained, as seen from the exploration agreements with Trilogy Metals to extend a high-grade copper resource at the Bornite deposit in Alaska; Arizona Mining on the Hermose zinc, lead and silver project, in Arizona; and AusQuest on base metals prospects in Peru and Australia, Kerr emphasised.

Moreover, “South32 will continue to explore merger and acquisition opportunities . . . but it is through the lens of value [in terms of commodity attractiveness and value add to shareholders] that we will look at the opportunities,” he said.

Kerr reiterated the miner’s interest in metallurgical coal and its bias to base metals. While South32 would continue to invest in the energy coal business in South Africa, the group, as a publically listed company, had no plans to increase its exposure to energy coal outside South Africa.

He noted, however, that there were not many opportunities in the market that have “tickled interests”.

Despite comments made on cost pressures in its first quarter results in October, where South32 noted that “industry cost curves continued to steepen as a result of US dollar weakness, rising raw material input costs and the environmental policy response in China,” Kerr stressed that the pressures were not specific to the group.

“In general, industry cost pressures, at the moment, are probably stronger than we saw 12 months ago. But to some degree we have seen higher prices, particularly in the aluminium value chain, offset that,” he said.

South32, nevertheless acknowledged that, should external pressures persist for the remainder of the 2018 financial year, the miner would not be immune to additional cost inflation.

ALUMINIUM

South32’s aluminium business remains strong, with the Mozal smelter, in Mozambique, having produced a record 271 000 t of aluminium for the 2017 financial year.

South32’s bauxite mines, alumina refineries and smelters in Australia, South Africa and Brazil earned more than $2.8-billion of the group’s revenue, which contributed 35% to the overall group earnings before interest, taxes, depreciation and amortisation.

Meanwhile, South32 had approved a $38-million energy efficiency project at Mozal aluminium. The project is expected to deliver a 5%, or about 10 000 t/y, increase in production with no associated increase in power consumption.

With the increase in supply of power from the market in South Africa and the downturn in the economy causing a decline in demand, Kerr noted the impact of the halting of load-shedding on its operations, particularly at the Hillside aluminium smelter.

Fraser added that Hillside has a stable power supply, partly as a result of slightly improved technical performance from State-owned power utility Eskom, as well as a drop off in industrial demand, particularly as prices start rising.

South32’s current material concerns regarding Hillside include the electricity supply agreement with Eskom, for which the group is in discussion with the power utility and which Kerr hopes will be resolved soon.

While Fraser could not disclose further details, he noted that the issue relates to the timing of when South32 embarked on the Hillside expansion and the rights that followed the expansion. Issues include whether the contract ends in 2020 or 2029.

“We are trying to find a solution that will be much more sustainable for all large power users in South Africa,“ Fraser added.

With regard to Eskom’s proposed 20% tariff increase, Kerr noted that South32 would not quantify the impact on the aluminium smelters, “on the basis that the majority of the pricing for the smelters is based on the contract and not directly impacted by price increases”.

MANGANESE

Manganese was emphasised as a “bright spot”, experiencing real success in the past 12 months, according to Kerr.

He noted that, as the price improved, South32 increased its output over the year – a demonstration of the flexibility built into the South African operations to take advantage of the higher prices and offset cost pressures.

South32 increased volumes by 19% and used its stockpiles to counter the impact of the stronger rand, inflation and higher price-linked royalties.

South32 had invested into the Wessels manganese mine Central Block project in the Northern Cape over the past 18 months, with operations having recently been commissioned. Operations were said to be “running well”.

“We will continue to run the manganese business as it is today, but subject to volume and price,” Kerr said, explaining that the Kalahari, being the world’s largest basin of manganese, is very much the “swing producer” as demand declines in China.

“If prices continue to remain strong, we will continue to produce, if prices drop dramatically, we will look at how we will scale our prices back if we are not making any value-add out of that,” he said.

SOUTH AFRICAN COAL

South Africa Energy Coal saw an overall drop in saleable production as a result of heavy rain and associated delays in the development of the Wolvekrans Middelburg Complex.

However, by the June quarter of the 2017 financial year, South32 achieved an 11% improvement in production as new mining areas were being opened up.

“We are starting to see some emerging costs coming back into the business as mining picks up and as prices are higher,” Fraser said.

He, however, suggested that the most significant challenge for the Wolvekrans business was Eskom’s price for domestic coal.

Meanwhile, coal export challenges include the weather events that delayed work at Wolvekrans, as well as delays at the Richards Bay Coal Terminal (RBCT). RBCT declared a force majeure as a result of a severe storm last week. While the port opened on Monday, there is a backlog.

“Because of these events, we will be behind on the annualised shipping,” Fraser said.

Nevertheless, looking to the year ahead, Kerr noted that South32 will continue to optimise its portfolio to deliver value to its shareholders.

We will seek more exposure to base metals and we’ve made a good start through our exploration partnerships . . . our financial results for the 2017 financial year, together with the strides we’ve made towards our sustainability, diversity and safety targets, give me confidence for the year ahead,” Kerr concluded.

Source: Mining Weekly