South32: Navigating Challenges and Seizing Opportunities in the Mining Sector
South32, a diversified mining and metals company, has been making significant strides in the industry despite facing numerous challenges. The company, which operates in Australia, Southern Africa, and South America, has a diverse portfolio that includes bauxite, alumina, aluminum, and coal. One of its most notable assets is the Sierra Gorda mine located in the Atacama Desert in Chile, considered the richest copper basin in the country. South32 currently owns a 45% stake in this mine, with the remaining share held by Poland’s KGHM. The mine produced an impressive 86,200 tonnes of copper in 2020, highlighting its significance in South32’s operations.
CEO Graham Kerr has expressed a keen interest in expanding South32’s copper production to support the global energy transition. This ambition is driving the company to consider acquiring or building new mines. While no discussions about a potential sale of Sierra Gorda have taken place, KGHM views South32 as a long-term partner, which could facilitate future collaborations. The competition for new mining projects is intensifying, but South32 remains optimistic about its prospects. The company expects to determine the potential for copper at its Arizona deposit within the next year, which could further bolster its copper production capabilities.
In addition to its focus on copper, South32 is also looking to enhance its manganese operations in Australia. Despite a 59% profit drop in the past year, the company expects growth in this segment. South32 plans to increase its manganese production to 1 million wet metric tons in 2025 and 3.2 million in 2026. This ambitious plan underscores the company’s commitment to strengthening its position in the manganese market. Furthermore, South32 is working diligently to repair its damaged operations at the GEMCO mine in Australia. CEO Kerr has even expressed interest in buying out partner Anglo’s stake in GEMCO, which could provide greater operational control and efficiency.
Financially, South32 has demonstrated resilience despite facing headwinds. The company’s underlying profit for the past year was $380 million, beating market expectations. However, its metallurgical coal operations in Illawarra were affected by lower prices and reduced shipments, leading to financial strain. To mitigate these challenges, South32 plans to secure environmental approvals for its Worsley alumina project by 2024. The company has also declared a final dividend of 3.1 cents per share, reflecting its commitment to returning value to shareholders. Additionally, South32 plans to buy back $200 million worth of shares, signaling confidence in its long-term growth prospects.
South32’s recent financial results and outlook for the 2024 fiscal year provide further insights into the company’s performance and strategy. The company released its appendix 4E, financial results, and outlook, with additional reporting documents such as Appendix 4D to be provided separately. A conference call was held to discuss the 2024 financial results, with CEO Graham Kerr providing a video presentation on the company’s website. These announcements and documents have been submitted to the National Storage Mechanism and are available for inspection. The 2024 annual report will also be uploaded to the Financial Conduct Authority in electronic format.
Despite operational challenges, South32’s 2023-24 financial year had positive highlights. The company saw a decrease in numbers across the board, with a loss after tax of $205 million. The final dividend dropped by 57% to $0.035, and revenue from operations was $5.48 billion, with an underlying EBITDA of $1.8 billion. South32 declared a $554 million impairment for its Worsley Alumina operation due to stricter environmental regulations from the WA government, leading to downgraded production. Additionally, a $264 million impairment was declared for the Cerro Matoso nickel operation due to the current nickel price environment.
Despite these setbacks, South32 achieved a 10% increase in zinc production from the Cannington operation in WA. A production record was also achieved at the company’s South Africa manganese operation, resulting in a 3% increase with 2.2 million tonnes produced in FY24. CEO Graham Kerr highlighted these achievements, noting the company’s strengthened financial position and disciplined approach to capital allocation. This allowed for the payment of a $140 million fully-franked dividend and an expansion of the capital management program by $200 million, to be returned via an on-market share buy-back following the sale of Illawarra metallurgical coal.
South32’s focus is now on growing copper production at their Sierra Gorda mine in Chile and investing in the development of the Taylor deposit in Arizona. The Taylor deposit, part of the Hermosa project in Southern Arizona, has the potential to become one of the world’s largest and lowest-cost sources of zinc. Zinc is a crucial metal used to protect steel from corrosion, and its demand is expected to rise. South32 believes that the development of the Taylor deposit will provide strong future growth opportunities. The company plans to continue the construction of the $2.16 billion Taylor development in fiscal 2025, underscoring its commitment to long-term growth.
South32’s annual net loss has increased due to writedowns against some operations. The company’s underlying earnings were impacted by lower commodity prices and sales volumes. For the year ended June, South32 reported a net loss of $203 million, compared to $173 million the previous year. Underlying earnings fell by 59% to $380 million. The company declared a final dividend of 3.1 cents per share, totaling 3.5 cents for the fiscal year, a decrease from the previous year’s dividend of 8.1 cents. The board has approved a $200 million expansion of the capital management program, which will be used for share buy-backs after the sale of the Illawarra coal operation.
CEO Graham Kerr stated that lower commodity prices have significantly impacted key commodities such as nickel and energy coal. Nickel prices from the Cerro Matoso mine were 20% lower than the previous year, while energy coal from the Illawarra coal operation was sold for 26% less. The sale of the Illawarra coal operation has simplified the company’s portfolio and strengthened its balance sheet. This sale has also provided funds for the company to invest in development projects and growth options in base metals. Near-term investment options include the development of the Taylor deposit and projects to increase copper production at Sierra Gorda.
South32 aims to continue growing its portfolio and maintaining a strong balance sheet to navigate market downturns. The company remains optimistic about its future despite current challenges in the industry. The mining and metals sector is inherently volatile, but South32’s strategic investments and disciplined approach to capital allocation position it well for future success. The company’s focus on commodities for a low-carbon future aligns with global trends towards sustainability and environmental responsibility. As South32 continues to navigate the complexities of the mining industry, its commitment to growth and shareholder value remains unwavering.
In conclusion, South32 is a company that exemplifies resilience and strategic foresight in the mining and metals industry. From its operations in the richest copper basin in Chile to its ambitious plans for manganese production in Australia, South32 is navigating challenges and seizing opportunities with a clear vision for the future. The company’s financial performance, while impacted by external factors, demonstrates its ability to adapt and thrive. With a focus on expanding copper production and developing new projects, South32 is well-positioned to capitalize on emerging trends and drive long-term growth. As the company continues to evolve, its commitment to making a positive impact and delivering value to shareholders remains at the forefront of its strategy.