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 November 23, 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 the context of strong growth in demand.
Similarly, he believes the energy coal market “to be a good marketplace”, with expectations for this sector to maintain 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 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 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, having mine lives of multiple decades.
“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 had 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 of the Klipspruit colliery – the announcement of which is expected before the end of the year – the start of exploration at the southern areas of Gemco manganese mine, in the Northern Territory, and the delivery of the first higher-grade nickel ore from the La Esmeralda deposit, in Cerro Matoso, in Colombia.
New opportunities for capital allocation are also being maintained.
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, moreover, that there were not many opportunities that had “tickled interest”.
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.
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. The project is expected to deliver a 5%, or about 10 000 t/y, power-neutral increase in production.
With the increase in power supply in South Africa and the downturn in the economy causing a decline in overall demand, Kerr noted the positive impact of the halting of load-shedding on its operations, particularly at the Hillside aluminium smelter.
Fraser added that Hillside had 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 related to the timing of when South32 embarked on the Hillside expansion and the rights that followed the expansion. Issues raised 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 “the [bulk] of the pricing for the smelters is based on the contract and not directly impacted by price increases”.
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 – a demonstration of the flexibility built into the South African operations.
South32 increased volumes by 19% and used its stockpiles to counter the impact of the stronger rand, inflation and higher price-linked royalties.