JOHANNESBURG (miningweekly.com) – Diversified miner South32 reported solid performances across its aluminium supply chain for the financial year ended June 30, with record production from Mozal Aluminium, in Mozambique, and near-record production at the Hillside aluminium smelter, in South Africa.
“Our aluminium smelters and refineries operated at their maximum technical capability,” CEO Graham Kerr said in a webcast on Thursday, noting that the smelters and refineries continue to operate and further test their maximum technical capability.
Mozal’s production increased by 2% to 271 000 t as the smelter maintained benchmark levels of current efficiency and potline performance, while benefiting from fewer load-shedding events.
The miner expects production to remain largely unchanged at 269 000 t in the 2018 and 2019 financial years.
Operating unit costs decreased by 4% to $1 495/t for the year under review, as the benefit of stronger sales volumes was partially offset by higher electricity input costs.
Ninety-four pots were relined in the year at a cost of about $204 000 each. A further 82 pots will be relined in the 2018 financial year.
Mozal Aluminium became profitable in the period under review, while its underlying earnings before interest and taxes (Ebit) increased to $76-million. Strong sales volumes of more than $32-million, as well as a 12% increase in the average realised price of aluminium, were partially offset by higher alumina costs.
South32 noted that while additional productivity gains are being pursued, the cost profile of the smelter is significantly influenced by power and raw material inputs, as a result of the operation’s high variable cost base.
Mozal Aluminium, under a long-term contract, uses hydroelectric power generated by Hidroeléctrica de Cahora Bassa (HCB). HCB delivers power into the South African grid to State-owned power utility Eskom, with Mozal Aluminium sourcing its power through the Mozambique Transmission Company (Motraco).
The pending approval of the $38-million AP3XLE energy efficiency project is expected to increase yearly production at Mozal Aluminium by about 5%, with no associated increase in energy consumption, said South32 CFO Brendan Harris.
While the project is expected to result in a modest increase in expenditure in the 2018 financial year, it is also expected to deliver a strong rate of return on incremental investment.
First production is anticipated in the 2020 financial year, with the full benefit expected to be realised by the 2024 financial year.
The South African aluminium business, meanwhile, is achieving benchmark levels of current efficiency and potline performance, having restarted 22 pots in the quarter ended December 31, 2016, and owing to fewer load-shedding events.
While saleable production increased by 2% to 714 000 t in the 2017 financial year, the operations are targeting record production of 720 000 t for the 2018 and 2019 financial years.
Operating unit costs remained largely unchanged at $1 454/t as higher electricity costs linked to the London Metal Exchange (LME) aluminium price and the impact of a stronger rand were largely offset by a reduction in pot relining costs.
A total of 75 pots were relined in the period at a cost of about $234 000 each. A further 139 pots are scheduled to be relined in the 2018 financial year.
While additional productivity gains are also being pursued, South32 noted that the cost profile of the smelter will be more heavily influenced by power and raw material inputs, owing to the operation’s high variable cost base.
The Hillside smelter sources power from Eskom under long-term contracts. However, the price of electricity supplied to potlines one and two is linked to the LME aluminium price and the rand/US dollar exchange rate.
The price of electricity supplied to potline three is based on the rand and linked to South African and US producer price indices.
Underlying Ebit increased by $137-million to $219-million in the financial year under review, with the significant improvement in profitability underpinned by a 13% increase in the average realised price of aluminium and stronger sales volumes.
The higher LME aluminium price-linked electricity costs, however, negatively impacted on underlying Ebit by $21-million.
Meanwhile, South32’s South African energy coal business underperformed in the 2017 financial year, with production down 9% to 28.9-million tonnes.
This is despite an 11% improvement in performance in the June quarter as throughput increased at the Wolvekrans-Middelburg Complex (WMC) export plant.
“Coal export volumes declined by around 20% as peak development at the WMC was delayed by adverse weather, and storms affected shipments out of Richards Bay, in June,” Harris pointed out.
Despite the improving trends, the miner notes that a 5% reduction in total coal production to 27.5-million tonnes is anticipated in the 2018 financial year, as the delay in development activity at the WMC and the depletion of the North dump “continue to weigh on performance”.
However, a 7% improvement in total coal production to 29.3-million tonnes is anticipated in the 2019 financial year.
The coal operations’ operating unit costs increased by 12% to $29/t, as the operation’s high fixed cost base was absorbed by lower sales volumes and the rand appreciated.
South32 expects the operating unit costs to increase to $32/t in the 2018 financial year, owing to a further decline in production and general inflation.
Underlying Ebit increased by $117-million to $212-million in the 2017 financial year as a higher average realised coal price and a favourable movement in working capital more than offset the impact of lower sales volumes and general inflation.
Sustaining capital expenditure (capex) decreased marginally to $56-million, which was $19-million lower than planned, as adverse weather impacted the development schedule at the WMC.
Sustaining capex is, however, expected to increase to $112-million in the 2018 financial year, as the rate of investment in the WMC accelerates.
Major project capital expenditure is further expected to increase to $50-million in the following financial year, which reflects planned investment in the Klipspruit life extension (KPSX) project. A final investment decision for the $265-million project is pending, with a decision expected in the first quarter of the 2018 financial year.
Harris noted that the KPSX project has been reconfigured to provide longer-term flexibility. Kerr added that, if the project was to proceed, it would deliver important export tonnes, as well as provide additional options in the longer term as the group looks to optimise opportunities in the domestic market.
South32 is targeting an improvement in performance at the WMC following the establishment of focused export and domestic teams and will further sustain capital to new openpits at the complex.
In response to higher prices, South32 had increased production at its South African manganese operations by nearly 20%, “demonstrating the flexibility we built into that business”, Kerr said.
The South African manganese operations increased production by 327 000 wet metric tonnes to two-million wet metric tonnes in the year ended June 30, as the group continued to take advantage of stronger demand and pricing by using higher cost trucking activity and opportunistically selling fine grained Wessels concentrate.
“This low-cost product, which accounted for 9% of sales across the financial year, receives a substantial product discount when referenced to index prices,” the group stated, noting that manganese alloy saleable production decreased by 20%, or 18 000 t, to 73 000 t in the financial year under review, as a result of furnace instability.
Metalloys continues to operate one of its four furnaces.
In the first half of the 2016 financial year, South32 had reconfigured the Hotazel mines to operate at a rate of 2.9-million wet metric tonnes a year, but with greater flexibility production of 3.1-million wet metric tonnes is expected in the 2018 financial year, while production in the 2019 financial year will be adjusted in response to market demand.
Free-on-board manganese ore operating unit costs increased by 9% to $2.09 per dry metric tonne unit (dmtu) in the 12 months to June 30, owing to a stronger rand, general inflation and higher price-linked royalties.
Further, the drawdown of low-cost Wessels concentrate stockpiles largely offset higher costs associated with opportunistic trucking activity.
The costs are expected to remain largely unchanged at $2.06/dmtu in the 2018 financial year, despite a reduction in sales volumes, as the ramp-up of the Wessels Central Block is expected to reduce cycle times and improve productivity.
Underlying Ebit increased by $157-million to $110-million in the year under review as a significant improvement in average ore and alloy prices and stronger ore sales volumes were only partially offset by higher royalties, as well as an increase in trucking activity.
While sustaining capex decreased by 18% to $9-million in the 2017 financial year, it is expected to rise to $23-million in the 2018 financial year. This includes $4-million for alloys. “This rise in investment primarily reflects a general increase in mine and equipment maintenance,” according to South32.
The performance of its South African and Mozambican operations contributed to strong free cash flow, providing South32 the financial strength and flexibility to invest in its business and to start building a pipeline of future options and to increase its return to shareholders, Kerr noted.
“Looking to the year ahead, South32 will continue to unlock value within its existing operations . . . and stretch performance in a sustainable way,” he said.