South32’s long road from ‘crapco’ to copper

MATT Daley, the Australian-born CEO of South32, takes over a company far simpler in structure than the demerged assets bequeathed to his compatriot, Graham Kerr.When Kerr made his inaugural comments as CEO in 2015, he was basically managing the mines BHP hadn’t the stomach for. “Crapco” is how the market termed it – a sobriquet to which Kerr was able to comfortably refer years later, having successfully divested of the “troublesome” operations.Gone are South32’s thermal coal mines in South Africa, its metallurgical coal in Australia, and nickel assets in Colombia. In their place, Kerr bought 45% of Sierra Gorda, a copper mine in Chile for $1.4bn in upfront cash in 2022, and before that he took a bet on exploration assets in Alaska that later attracted the investment of the US government.Then, on July 1, the group announced it was selling nearly its entire aluminium chain – bauxite mining, and alumina and aluminium processing facilities – for $4.1bn in cash and shares to Alcoa, the US company.It is the last of Kerr’s corporate surgery at South32 having signalled his intention to resign in May, and among his most consequential. For one, the transaction decisively takes South32 out of the business of smelting and refining towards mining, or “closer to the resource”, according to analysts at Citi, a bank.Secondly, the Alcoa deal halves South32’s operating assets from eight to four. Closure and rehabilitation provisions also fall, about 70% to about $500m. The outcome is a “structurally lower-risk, lower-cost business”, says Citi.In an interview with Miningmx, Kerr alluded to the particular pressures of competing with China in the aluminium chain. The business, especially the Hillside facilities in South Africa, were potentially vulnerable, he said: “Not only was it in the best interests of our shareholders, but also in the best interests of our people who work at Hillside [in South Africa] and Worsley [Australia].” Alcoa’s scale and leverage mean the aluminium business is “sustainable in the long term”, he added.Alcoa takes on $750m in asset-level debt from South32. All in all, the transaction has an enterprise value of $5.6bn. While that’s below Citi’s valuation – an aluminium bull – the cash enables South32 to fund its development assets, especially copper, which commands a higher premium than aluminium and ought to lift the group’s valuation.“We’re going through a period of higher cash demand now as we build Hermosa but on the other side we’re generating large amounts of cash,” said Daley. Hermosa, a $2bn zinc and manganese project in Arizona, is a big deal for South32 as it’s the first of its major new developments. Owned since 2017, it is due to begin production in 2029.Once Hermosa is fully built, South32 may then revisit its payout policy. Daley was keen to add, though, that the board will opine on South32’s development pipeline. Kerr has swapped present-day cash flow for future rewards and so it falls to Daley to deliver. No pressure then.Says Daley: “About 55% of our earnings will come from copper, about 30% from lead and silver, and we’ve got a further 55% growth trajectory from our approved and in-execution projects. It’s a really compelling story.  Graham’s done a superb job positioning the portfolio and it’s my job to pick it up and grow it from here.”Takeover target?One interesting sidelight to South32’s investment story is that it might now, as a simpler business with medium-term production in the offing, become a target for a larger rival, as Reuters speculated in July.Relative valuations could make a case for a cut-price deal, the newswire argued. The market, though, doesn’t seem to be valuing in the prospect. Shares in South32 increased 9% on the day of the Alcoa deal but have since retraced. That is despite Daley taking up the reins at South32, riding a crest of good news.On the same day he officially took over from Kerr, South32 said it was proceeding with a fourth grinding line at Sierra Gorda, a $725m project (100% basis), expanding processing capacity a quarter to about 60 million tons a year, lifting attributable copper production 30% by mid-2030. Days later, South32 received a major boost when US authorities permitted the Hermosa project about two months ahead of the deadline.That provides some vindication of Kerr’s strategy to refocus South32 on the US, where securing critical metals is a national priority. The rest is over to Daley.“It’s been a fun day,” Daley remarked on his first 24 hours in the role. But as a former operations director at Anglo American and head of  Glencore’s copper business in Canada, he knows tougher days will come.A version of this article first appeared in The Mining Yearbook due to be published on Miningmx this week.The post South32’s long road from ‘crapco’ to copper appeared first on Miningmx.Weiter zum vollständigen Artikel bei Mining.com Weiter zum vollständigen Artikel bei Mining.com