Diversified mining and metals company South32 on Thursday forecast short-term price volatility for the commodities it produces, but also highlighted its strong cash position and its work to further optimise its global portfolio of assets.
In a speech delivered at the company’s 2018 annual general meeting, CEO Graham Kerr said the company’s overall financial performance benefited from stronger commodity prices and its efforts remained focused on mitigating inflationary pressure.
“We anticipate some price volatility in global commodity markets, driven by rising trade tensions and a strengthening US dollar. However, strong demand for higher-quality raw materials is expected to continue as China implements policy initiatives to meet environmental reforms,” said Kerr.
Additionally, improved production from many of its operations, along with a continued focus on productivity gains and procurement savings, will allow the company to further mitigate industry wide inflationary pressure.
The company’s disciplined approach had helped mitigate broader inflationary pressure, particularly in its downstream processing facilities, he emphasised.
South32 chairperson David Crawford highlighted that the company had earned revenue of $7.5-billion in the past financial year, while its underlying earnings had increased by 16% to $1.3-billion and its profit by 8% to $1.3-billion.
This strong financial performance translated into free cash flow from operations, including equity accounted investments of $1.4-billion and an increase in the net cash balance to $2-billion, he said.
“In April, we started managing South Africa Energy Coal (SAEC) as a standalone business. This fundamental redesign is expected to deliver $50-million of annual cost savings for the group from the 2020 financial year.”
Consistent with the objective of transforming SAEC, South32 also started a process to broaden its ownership.
In a teleconference with media on Thursday, South32 COO Mike Fraser said there had been strong interest from credible parties for SAEC and that the company remained committed to exiting the business.
South32 is seeking to secure a majority black ownership for the business, if possible; however, the managed process to reduce its shareholding and exit the business remains at an early stage and the final ownership structure will only be known within the next six to nine months.
“The contract SAEC has with [State-owned power utility] Eskom has been troublesome for us, and the contract is unlikely to be high on Eskom’s agenda to solve. We continue to engage with Eskom, including on the changes in ownership, but whether a change in ownership will occur before or after the contract is reviewed is unclear at the moment,” added Fraser.
Additionally, the company, as along with many industries in South Africa, is concerned about the state of Eskom’s health, which is seen as a significant risk to the economy and investments.
“Even Eskom is starting to recognise that it cannot trade its way out of this position and we continue to see huge price escalations to cover debt, which is not sustainable.”
Turning to the impact of US tariffs on aluminium, Fraser highlighted that none of the aluminium from the company’s Mozal operation, in Mozambique, was exported to the US, with 100% of the metal exported to the European Union.
Further, only between 0% and 10% of the aluminium from its South Africa operations is exported to the US and South32 can redirect production elsewhere, if required. The tariff had also translated into a price premium differential to the US, and this meant that the realised price had not seen a material impact, Fraser explained.
Kerr, meanwhile, emphasised that the company planned to remain in South Africa and to leverage its strong manganese projects, namely the mechanised, underground Wessels mine and the terraced opencast Mamatwan mine, both in the Kalahari, as well as its aluminium operations.
South32 also delivered record production at Australia Manganese and a 10% increase in total manganese ore production in response to favourable market conditions, highlighted Kerr.
“We achieved another production record at Mozal Aluminium and increased production at Cerro Matoso by 20% as we benefitted from a full year of higher-grade ore from La Esmeralda.
“We also realised a significant lift in the operating margin of our aluminium value chain because of tight markets and our long alumina position,” Kerr added.
Further, the company also delivered an improvement in equipment productivity at several operations and has renegotiated energy supply and logistics contracts to deliver additional value.
“At Worsley Alumina, we have developed the low reactive silica West Marradong resource, which is allowing us to optimise caustic soda consumption rates.”
In August, South32 acquired Arizona Mining, which added the high-grade zinc, lead and silver Hermosa project, in Arizona, in the US, and a prospective land package to its portfolio.
“Hermosa is one of the industry’s most exciting base metals options. Our near-term priority is progressing the twin exploration decline that will allow us to start underground drilling. This will increase our geological understanding of the resource and allow us to test for extensions,” enthused Kerr.
In September, the company finalised the acquisition of a 50% interest in the Eagle Downs metallurgical coal project in Queensland’s Bowen basin, and assumed operational control, which added another attractive development option within its growing portfolio.
“We are currently in the process of commencing the feasibility study to assess the optimised mine design and development plan for this project.”
The company continues to see opportunities to create value through its greenfield exploration strategy, which has grown to 18 active projects. This includes the partnership in Alaska with Trilogy Metals, where South32 exercised its second-year option on the advanced exploration project at Bornite.
“We continue to transform the composition of our business, and have made progress towards achieving our diversity targets,” added Kerr.
As part of reducing its carbon footprint, the company started construction of a 6 ha, 3 MW solar farm at Cannington, in Queensland, Australia. The solar farm – South32’s first solar installation – will deliver reduced greenhouse-gas emissions by offsetting gas consumption with solar energy.
Further, as part of its recent applications for a mining extension project in South Africa, South32 developed a comprehensive wetland offset strategy. The detailed design mitigated wetland losses that could result from the SAEC project, in Mpumalanga, during the first five years of mining.