South32 to pull out of its local energy coal business

South32, the diversified miner spun out of BHP two-and-a-half years ago, will follow Anglo American’s lead and exit its energy coal business in SA.

It said on Monday it would invest R4.3bn to extend the life of Klipspruit colliery by 20 years.

From April, its energy coal business will be separately managed and South32 will seek new owners, including employees, communities and black business, with a possible listing on the JSE.

South32 and Anglo’s decisions follow Eskom’s insistence that its suppliers be 51% blackowned, coupled with political and regulatory uncertainty in SA and a negative long-term outlook for energy coal amid concerns about climate change.

South32 claims more than 40% black ownership of its South African coal business through credits earned on past transactions agreed with the Department of Mineral Resources. But historical credits may not be recognised if the courts make an adverse ruling on the question of once empowered, always empowered.

A judgment on this issue is awaited after the High Court in Pretoria hearing in November. South32 CEO Graham Kerr said the group was not leaving SA. It was committed to its Hillside aluminium smelter and manganese operations, which continued to deliver good returns. But it was a publicly listed company and thermal coal was coming under pressure for climate change reasons, making it difficult to predict long-term export pricing.

Eskom still needed coal but that meant the business would deliver utility-type returns, which were below South32’s targets, he said. “Establishing SA Energy Coal as a stand-alone business will enable us to improve the operation’s competitiveness and ensure its sustainability. This process will also allow us to further simplify our organisation and unlock additional value for shareholders.”

It was not South32’s policy to retain minority stakes in its operations, he said.

Peter Major, director of mining at Cadiz Corporate Solutions, said it was unfortunate to see multinational companies pulling out of SA, because no mining sector could survive without substantial and regular injections of foreign capital. Multinationals were accountable to various international investors, monitoring organisations and regulators with real clout, which compelled them to follow certain standards.

Major said that although South32 had other reasons to exit this business — namely negative international investor sentiment towards energy coal and SA — it could have continued to extract returns out of the business for some time.

Regulatory and political uncertainty and community unrest in SA had undoubtedly hastened the decision to exit.

Kerr declined to put a value on the business ahead of negotiations with potential buyers.

South32’s energy coal business employs 35% of its global workforce, at about 8,400 people, and consists of three mines producing about 30-million tonnes of domestic and export coal a year: Khutala, Klipspruit and the Wolvekrans Middelburg Complex.

South32 also has a 21% interest in the Richards Bay Coal Terminal.

The Klipspruit life extension project would provide 4,000 jobs during construction and 740 permanent jobs, Kerr said.

In April, Anglo agreed to sell its three operating coal mines supplying Eskom as well as four closed mines to Seriti Resources for R2.8bn.

The sale of its undeveloped New Largo deposit, which will supply Kusile power station, is also under discussion.