South32 flies under the radar in South Africa because the share isn’t index linked. But the company has been on a strong run this year thanks to the metallurgical coal price. That’s buoyed interim revenue at a time when other mineral prices have shrunk.
Basic underlying share earnings were US12.2c a share, down 44% year on year. Without good old-fashioned coal, South32’s performance would have been worse.
Its shares have rallied almost 16% year to date — and were up more before last week’s mining share bloodbath. Over two years the stock has returned 77% to investors, including dividends, against a comparatively measly 28% from mining major Anglo American.
The company is also an important player in South Africa’s ongoing infrastructural tragicomedy, owing to the manganese it rails from the Northern Cape and the megawatts it consumes at its Hillside aluminium smelters in KwaZulu-Natal’s Richards Bay. For both, capacity constraints are a hazard and a strategic headache.
South32 sold 1.6Mt of attributable manganese in the six months ended December, of which 1Mt were from the Northern Cape (the balance came from Australia). Combined, manganese comprised 17% of underlying earnings before interest, tax, depreciation and amortisation (ebitda) in the half year, second to metallurgical coal (30%). Aluminium comprised 11% of ebitda owing to a sharp correction in the metal’s price last year. Hillside production totalled 337,000t during the period.
South32 management is concerned about the futures of both manganese and aluminium. Why? Predictably, the answer lies at the government’s door
So at more than a fifth of ebitda, the two minerals are important constituents of South32’s performance. Their relevance to South Africa is even greater, and needs no further mention. Yet South32 management is concerned about the futures of both. Why? Predictably, the answer lies at the government’s door.
For Hillside, there’s a fear its coal-fired power supply will make its product increasingly unwanted, especially in the European market where it sells the most metal and where at present a $10/t premium is paid for green aluminium. South32 CEO Graham Kerr sees that premium widening to $40/t in a matter of years, and higher yet in the longer term.
That’s why his team, led by COO of the group’s Africa and Colombia assets Noel Pillay, hatched talks with Eskom about buying 50% of the utility’s Koeberg production, for which it will pay a premium. Kerr reasons that with a dedicated supply of nuclear power, Hillside can secure its future as well as some downstream industry, such as semi-fabricator Hulamin in KwaZulu-Natal.
There are headwinds though. An analyst questions how green certification can be procured from power normally bundled to the national grid. Another issue is the lack of management continuity at Eskom. Its latest CEO of only three years, André de Ruyter, has left after his exposé of alleged government corruption and lack of political will. Who knows whether the new CEO — whoever it will be — can pick up the baton with South32? Equally uncertain is the attitude of the government, whose yet-to-be-appointed electricity minister joins the slew of broth-stirrers with oversight of the utility.
Failing to come up with a clean energy plan for Hillside is not existential yet, but would seriously dent the competitiveness of the facility
“From our point of view, this is absolutely worth a discussion, given whoever’s at Eskom,” says Kerr. “Yes, we have been in talks with De Ruyter, but it’s also been a discussion with the rest of the Eskom team.”
In addition to the premium, Hillside is a downstream initiative that's being planned with the IDC, which Kerr says is a key input to South Africa’s grid-strengthening plans. Supply of the material is being wrapped up in the talks Kerr expects Eskom to continue to hold.
Failing to come up with a clean energy plan for Hillside is not existential yet, but would seriously dent the competitiveness of the facility. “The likes of Ford, Tesla ... just won’t touch it. You could probably sell the aluminium elsewhere, but it would be at a discount,” says Kerr.
About 1,200km west of Richards Bay is Hotazel, the epicentre of the world’s largest manganese reserves. South32’s Wessels mine there is capable of expansion and in fact needs it to lower mining costs. South32 has said it is weighing about $50m in relatively small-scale capital expansion and has been talking about lifting manganese output, provided Transnet can unlock capacity — a point of discussion which tops the agenda of manganese export capital allocation contracts, due to enter its third iteration (Meca 3).
Talks have just about kicked off — but instead of bargaining over the benefits of economies of scale, South32 has been told by Transnet it will lose rail allocation rather than gain it. Transnet announced in late February that six emerging miner firms in manganese have been allocated 2Mt of rail capacity.
“If it eventuates, it’s problematic. It increases costs. Every ton on road is significantly more expensive than on rail,” says Pillay. A manganese price of $5/t is needed to support large-scale road freight — a level the price hasn’t reached since mid-2020. Expansion of the group’s facilities is largely stymied. “Negotiations have just started. We want to motivate it shouldn’t all apply to us,” says Pillay.
Asked if South32 saw in Meca 3 an opportunity to test the concept of operating on concession an expanded rail network it would finance, the response was somewhat guarded. Transnet’s proposal is that the private sector provide it with upfront capital. This is despite operating shortfalls which caused the utility to forfeit R50bn in bulk mineral exports last year, according to Minerals Council South Africa chief economist Henk Langenhoven. Says Kerr of Transnet: “Would you give them your money?”
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