South32 not about to change mind on exit
New leadership in SA will not change South32’s plans to exit its domestic thermal-coal business because its decision was based on the investment community’s increasing aversion to the commodity rather than the operating environment in SA, says CEO Graham Kerr.
South32’s decision, announced in November, to run its SA energy coal as a separate business ahead of selling it, followed on the heels of Anglo American’s moves to exit its coal mines supplying Eskom. Eskom requires its suppliers to be at least 51% black-owned.
Kerr said the first step would be to make the coal business safe and sustainable and then to devise the best ownership structure for it. This would probably include a strategic black empowerment partner, employees and management and a listing on the JSE.
The group, which was spun out of BHP Billiton three years ago, has thermal coal, manganese and aluminium operations in Southern Africa, as well as mines in Australia, Colombia and Brazil.
Kerr said South32 still liked manganese and aluminium in SA. But over the years it had encountered rising protests from investors about its exposure to thermal coal. South32 also believed the world needed to decarbonise in the long term.
Continuing buoyant prices for manganese, aluminium and energy coal helped to drive revenue up 8% to $3.5bn com- pared with that of the matching period in 2016. Underlying earnings rose 14% to $544m.
With surplus cash, South32 was able to declare both an ordinary interim dividend and a special dividend for the six months to December, making a total distribution of $0.073 a share. It had also increased the amount it will spend on share buybacks.
In principle, share buybacks boost the value of a company’s shares by reducing dilution. Kerr said South32 had growth opportunities, but none that was ready to execute, so it was preferable to distribute excess cash to shareholders rather than accumulate it on the balance sheet.
Its aluminium smelters in SA and Mozambique are running at close to full capacity and it has increased its targeted production of manganese from SA for the full year to 2.04-million wet metric tonne units as prices have surged on increased demand and a stronger rand.
Kerr said aluminium prices had come off recent highs and were heading towards more sustainable levels, but manganese prices continued to exceed expectations, reflecting China’s steel output growth and shrinking domestic supply.
South32’s share price was 6% down at A$3.50 in Australia after the results were released and were 7% weaker at R32.50 on the JSE by late afternoon.
Despite the dividends, investors were responding to input cost pressures and lower forecast output from Australia’s Cannington mine.