Cash-flush South32 is stay­ing in SA – de­spite frus­tra­tions

Even af­ter a bu­reau­cratic tus­sle with de­part­ment of min­eral re­sources, the South32's CEO Gra­ham Kerr in­sists that how to use its funds, rather than the board’s big­gest con­cern is about

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south32 CEO Gra­ham Kerr caused a mi­nor storm re­cently when he de­scribed SA’s busi­ness en­vi­ron­ment as “unin­spir­ing” and “de­press­ing” in a news­pa­per ar­ti­cle. For a usu­ally placid for­mer ac­coun­tant, this was a rare demon­stra­tion of blunt can­dour. The group said these com­ments are not gen­er­ally how it feels about its in­vest­ments in the coun­try, which ex­tend to coal, man­ganese and aluminium. Yet it’s hard to ig­nore its re­cent track record in re­spect of new busi­ness.

In 2016, it spent $2.25m for a 50% stake in North­ern Shield Re­sources, an ex­plo­ration firm op­er­at­ing in Canada’s Que­bec. A year later, it an­nounced two quick-fire in­vest­ments in Tril­ogy Me­tals and Ari­zona Min­ing, the for­mer op­er­at­ing in Alaska. For a com­pany called South32, that’s an in­ter­est­ing amount of north­ern hemi­sphere real es­tate.

Ac­cord­ing to Mike Fraser, chief op­er­at­ing of­fi­cer of South32’s African as­sets, Kerr’s out­burst had its roots in a re­cent ex­change with SA’s de­part­ment of min­eral re­sources (DMR) which, to be fair, is prob­a­bly enough to per­plex and frus­trate even the most phleg­matic among us.

Reg­u­la­tory chal­lenges

The com­pany had ap­plied to the DMR for a min­ing li­cence over prop­erty that would rep­re­sent the ex­ten­sion of Klip­spruit, a ther­mal ex­port coal project costed at about $250m and cre­at­ing em­ploy­ment for about 8 000 peo­ple in Mpumalanga dur­ing the con­struc­tion phase.

“I met with the min­is­ter [of min­eral re­sources] on two oc­ca­sions where he said he would try and re­solve it [the min­ing li­cence ap­pli­ca­tion] for us. He could see the ben­e­fits of the project and he would try and re­solve it for us,” said Fraser.

“Then this thing got stuck at the re­gional of­fice of the DMR and it just couldn’t get pro­gressed out of the re­gional of­fice. Then the pa­pers were lost and we had to re­sub­mit them.

“Then they asked for an en­gage­ment with the com­mu­ni­ties, which is not a re­quire­ment in terms of the law. But they wanted us to en­gage with the com­mu­ni­ties. We did that, had this en­gage­ment, had let­ters of support from the com­mu­ni­ties. Then the re­gional man­ager went on leave. “Then the pa­pers got lost again.”

Fol­low­ing this im­broglio, South32 was able to grad­u­ate the ap­pli­ca­tion out of a re­gional of­fice to the na­tional level but that un­for­tu­nately co­in­cided with the pub­li­ca­tion of the re­drafted Min­ing Char­ter, which Fraser said took ev­ery­one’s eye at the DMR, and in the in­dus­try for that mat­ter, off the ball.

There was also the prospect that in terms of pro­vi­sions in the new Min­ing Char­ter, the min­ing li­cence ap­pli­ca­tion for Klip­spruit could po­ten­tially in­tro­duce new re­quire­ments that were less eco­nom­i­cally at­trac­tive for South32. Al­though it’s un­likely the re­drafted Min­ing Char­ter will see light of day in its cur­rent form, it was at this junc­ture that South32 de­cided to re­sort to le­gal mea­sures.

“From our point of view we just thought any fur­ther de­lay in the in­vest­ment de­ci­sion of Klip­spruit ac­tu­ally risked the en­tire oper­a­tion be­cause, come 2019, we don’t have coal up the road,” he said.

“If we don’t start mak­ing that in­vest­ment de­ci­sion now, we are go­ing to be in a po­si­tion where we don’t have a busi­ness. So from a moral point of view, not even from a share­holder point of view, we said we could chal­lenge this just on the pure ba­sis of pro­tect­ing jobs, liveli­hoods and the com­mu­ni­ties,” Fraser added.

In the end, the mat­ter was pre­sented be­fore the High Court on 17 Au­gust.

South32 sub­se­quently is­sued a press state­ment once the story be­came pub­lic. It com­mented, rather soberly: “We are pleased with the High Court’s de­ci­sion to grant our Sec­tion 102 ap­pli­ca­tion for the amend­ment of the Klip­spruit Col­liery min­ing right, which in­cludes the pro­posed Klip­spruit Ex­ten­sion Project.”

Asked why the com­pany did not re­ceive more support from the min­is­ter of min­eral re­sources, Mosebenzi Zwane, or his de­part­ment, Fraser said: “I can’t de­ter­mine whether this is a very de­lib­er­ate strat­egy to ob­struct, or whether there’s just an in­com­pe­tent team around him.”

The Klip­spruit mine sits within the Springs-Wit­bank coal­field and pro­duces a nom­i­nal 8m tonnes of coal. The in­ten­tion is to open new re­serves as ex­ist­ing ac­ces­si­ble re­serves de­plete in about two years’ time. One of the prob­lems with the le­gal spat, how­ever, is that a de­ci­sion on the project has been de­layed.

If we don’t start mak­ing that in­vest­ment de­ci­sion now, we are go­ing to be in a po­si­tion where we don’t have a busi­ness.

“We’re prob­a­bly three months be­hind where we would like to be on the project so there has cer­tainly been an im­pact as a re­sult of the de­layed in­vest­ment de­ci­sion, but we’re look­ing at how we can catch that up now in the next while,” said Fraser. “And the real im­pact is that we’ve built in quite a bit of time for the wet sea­son now, par­tic­u­larly over De­cem­ber and Jan­uary, so we will look to see where we can catch up on that. But there may be a lit­tle gap on tim­ing.”

Strong cash gen­er­a­tion

Fraser in­sists there’s no in­vest­ment hold on SA per se; rather, the de­bate at ex­ec­u­tive com­mit­tee level is more about whether to al­lo­cate cap­i­tal to projects or re­turn it to share­hold­ers. “We are what we are,” said Kerr in an in­ter­view in Au­gust when asked by this cor­re­spon­dent whether the com­pany might be caught short when the min­ing mar­ket inevitably switches its at­ten­tion to ex­pan­sion and cap­i­tal growth over yield.

And what it is, is a money-print­ing ma­chine of a com­pany.

South32 had just an­nounced its yearend fig­ures. Apart from an im­pres­sive in­crease in the fi­nal div­i­dend to 6.4 US cents, tak­ing the to­tal div­i­dend to 10 US cents/share, the group also ex­tended its share buy-back pro­gramme, adding $211m to the $500m it al­ready promised to pur­chase. This lifted the to­tal cash re­turns yield to 8.3% and im­plied some $539m in share re­pur­chases dur­ing the cur­rent (2018) fi­nan­cial year.

“The big­ger de­ci­sion around cap­i­tal al­lo­ca­tion is if we can ac­tu­ally gen­er­ate or de­liver re­turns out of those op­por­tu­ni­ties that ac­tu­ally com­pete with the al­ter­na­tive uses of cash, such as share buy-backs or other re­turns to share­hold­ers,” said Fraser. “That’s ac­tu­ally the big­ger part of the con­ver­sa­tion for us rather than is there po­lit­i­cal risk to in­vest­ing in SA.”

He said the group would ap­prove Klip­spruit and con­tinue to in­vest sus­tain­ing cap­i­tal in its man­ganese busi­ness, which it shares in joint ven­ture with An­glo Amer­i­can through the Sa­man­cor en­tity. And more coal in­vest­ment is on the hori­zon.

The com­pany is wait­ing for ap­proval from Eskom to ex­tend Khutala, a cost-plus mine in Mpumalanga that pro­vides fuel to Ken­dal power sta­tion. There’s also green­field in­vest­ment that will take place at a prospect called Pe­ga­sus. “We have min­ing right ap­pli­ca­tions for Pe­ga­sus in place and when we get that we’re very clear that’s on our bat­ting or­der,” said Fraser. “We will mine Pe­ga­sus be­cause we ac­tu­ally need that coal to mix with our Wol­wekrans-Mid­del­burg Com­plex [an­other mine in Mpumalanga that has a sup­ply con­tract with Eskom].” An­a­lysts highly rate South32’s cash gen­er­a­tive abil­ity, which is per­haps a not too sur­pris­ing strate­gic goal of the group con­sid­er­ing it was born in the teeth of the com­mod­ity cri­sis fol­low­ing a de­ci­sion by BHP to de­merge its non-core as­sets; those for which it was hard to mo­ti­vate cap­i­tal al­lo­ca­tion. You don’t make such un­bundling de­ci­sions in the up-cy­cle. In terms of how it in­formed South32’s cor­po­rate DNA, it crys­tallised a king of or­phan’s sense of aus­ter­ity and re­serve.

Said one an­a­lyst: “Life con­cerns re­main the big­gest draw­back to South32’s in­vest­ment case, in our view. We note this is cen­tred on Can­ning­ton and GEMCO.” These are as­sets lo­cated in Aus­tralia that have a stated life of 10 and 12 years re­spec­tively and are es­ti­mated to rep­re­sent about 21% of South32’s to­tal net as­set value. “South32 has about three to five years be­fore need­ing to com­mit capex to new devel­op­ment,” said the an­a­lyst. “With am­ple cash gen­er­a­tion over this time­frame we are not overly con­cerned about the com­pany’s abil­ity to re­place ex­hausted pro­duc­tion for value.”

Mosebenzi Zwane Min­is­ter of min­eral re­sources

Gra­ham Kerr CEO of South32

Souht32’s Can­ning­ton mine is si­t­u­ated in north­west­ern Queens­land, Aus­tralia.

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