Hillside future depends on Eskom deal

South32 moots closure of Richards Bay aluminium smelter as progress stalls on renegotiating power supply

The outcome of a renegotiated power supply contract with Eskom will determine whether the Hillside Aluminium smelter in Richards Bay remains a worthwhile business for global diversified metals and mining company South32.

“While obviously we want Hillside to be successful, it’s been a good operation for a long period of time. What we need is a sustainable business, which means a good power contract,” South32 CEO Graham Kerr said on Thursday after the release of results for the six months to end-December. “Otherwise you have got to question whether it’s actually worth it in terms of generating a return.”

The closure of the Hillside smelter would have an adverse effect on not just the Richards Bay economy but SA in general.

It would hurt the entire aluminium industry and cause more unemployment as the country reels from job losses in the mining sector. The loss of a large power consumer like Hillside will also ultimately raise power tariffs for all users in SA, said South32 COO Mike Fraser.

The company said there has been a dispute over whether an existing power supply agreement with Eskom ended in 2020 or 2028. It has been agreed that a renegotiation of the contract is the best way forward. Fraser said the company has been working with Eskom towards a resolution.

But progress has stalled in recent months as the utility is faced with an operational crisis that has led to unprecedented levels of scheduled power cuts across SA this week.

Both Hillside and South32’s Mozal smelter in Mozambique experienced a much higher frequency of load-shedding in the last six months of 2018, the company reported in its results.

“It’s a very desperate situation for Eskom at the moment,” Fraser said. “We continue to lobby very hard not just within Eskom but our key political stakeholders to get a resolution as soon as possible because there are opportunities that we can exploit for the SA economy if we can get an early resolution on it,” he said.

Overall, South32 reported a strong performance in the first half of its 2019 financial year.

Revenues were up 9% compared with first half of its 2018 financial year, profits after tax were 18% higher and underlying earnings increased 17%.

The company which was spun out of BHP Billiton in 2015

also announced an interim dividend of 5.1 US cents per share for the half year and a special dividend of 1.7c per share to be paid on April 4.

The company’s performance was driven by record production at its Australia Manganese operation, and a 106% increase in production at Illawarra Metallurgical Coal in New South Wales. Revenues were up at SA Manganese, and even the Hillside smelter, but dropped at the Mozal operation and at SA Energy Coal where exports for the half year were hurt by a dragline incident in August 2018.

Kerr said the sale of SA Energy Coal remains on track, with binding bids expected by the end of June 2019.

Interest in the stake has been very strong and there is more competition than expected, the South32 CEO said.

The division supplies coal to Eskom but Fraser said the utility has no objection to the direction South32 is taking with the sale and only wants assurances that a new owner would honour the existing coal supply contracts with Eskom.

WE NEED A BUSINESS THAT IS SUSTAINABLE, MEANING A GOOD POWER CONTRACT. OTHERWISE YOU HAVE TO ASK IF IT’S ACTUALLY WORTH IT