REG - South32 Limited - Sale of Illawarra Metallurgical Coal

South32Announcement

29/02/2024 07:00

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RNS Number : 8725E  South32 Limited  29 February 2024

 

 

 

 

29 February 2024

 

South32 Limited

(Incorporated in Australia under the Corporations Act 2001 (Cth))

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32; ADR: SOUHY

ISIN: AU000000S320

south32.net

 

 

SALE OF ILLAWARRA METALLURGICAL COAL

South32 Limited (ASX / LSE / JSE: S32; ADR: SOUHY) (South32) has entered into
a binding agreement to sell Illawarra Metallurgical Coal 1  (Transaction) to
an entity owned by Golden Energy and Resources Pte Ltd (GEAR) and M Resources
Pty Ltd (M Resources) (the Buyer).

The consideration for the Transaction is up to US$1,650M comprising:

·    Upfront cash consideration of US$1,050M(( 2 )), payable at
completion;

·    Deferred cash consideration of US$250M, payable in 2030; and

·    Contingent price-linked cash consideration of up to US$350M 3 .

The total consideration represents a multiple of approximately 7.2x average
annual free cash flow for Illawarra Metallurgical Coal 4 .

The Transaction is expected to complete in H1 FY25, subject to the
satisfaction of certain conditions including Foreign Investment Review Board
approval, customary regulatory approvals and the waiver or non-exercise of
pre-emption rights held by BlueScope Steel (AIS) Proprietary Limited
(BlueScope).

The Buyer will assume economic and operating control of Illawarra
Metallurgical Coal on completion of the Transaction, including all current and
future liabilities.

South32 Chief Executive Officer, Graham Kerr said: "This Transaction will
realise significant value for our shareholders and is consistent with our
strategy to reshape our portfolio toward commodities critical in the
transition to a low-carbon future.

"It will streamline our portfolio, strengthen our balance sheet and unlock
capital to invest in our high-quality development projects in copper and zinc.
 

"The Transaction will also simplify our business and reduce our capital
intensity.

"Illawarra Metallurgical Coal produces high-quality metallurgical coal, a key
ingredient in the production of steel, which will be required until low-carbon
steel becomes economically viable on a commercial scale.

"GEAR and M Resources are established participants in the Australian
metallurgical coal industry, with a strong commitment to environmental and
safety standards, who are well positioned to continue Illawarra Metallurgical
Coal's contribution to the local steel industry and the Illawarra and
Macarthur regions.

"Our focus remains the safe and reliable operation of Illawarra Metallurgical
Coal. Over the coming months we will work with the Buyer, our workforce, the
local community, government, customers and suppliers to support a successful
transition of ownership."

Transaction highlights

The Transaction will unlock significant value for our shareholders and is
consistent with our strategy:

 ·               Upfront and deferred cash consideration of US$1,300M plus exposure to
                 metallurgical coal price upside of up to US$350M through contingent
                 price-linked cash consideration;
 ·               Simplifies our portfolio to focus on our operating positions and growth
                 options in the aluminium value chain, base metals and manganese;
 ·               Strengthens our balance sheet and unlocks capital to invest in our
                 high-quality development projects in copper and zinc, which have the potential
                 to underpin a ~45% increase in our base metals production 5 ;
 ·               Reduces our operating footprint and our functional support; and
 ·               Reduces our capital intensity, with Illawarra Metallurgical Coal comprising
                 ~35% of Group capital expenditure 6 .

Following completion, the proceeds from the Transaction will be allocated in
accordance with our capital management framework and commitment to an
investment grade credit rating. Our capital management framework is designed
to support investment in our business and deliver returns to shareholders in
the most efficient and value accretive manner.

Transaction details

The Transaction is subject to the waiver or non-exercise of pre-emption rights
held by BlueScope, pursuant to a coal supply agreement between Illawarra
Metallurgical Coal and BlueScope. If BlueScope exercises its pre-emption
rights, the Transaction with the Buyer will not proceed and South32 will
instead divest Illawarra Metallurgical Coal to BlueScope on the same
commercial terms and conditions as agreed with the Buyer.

The Transaction is also subject to no material adverse change prior to
completion, pursuant to which the Buyer may elect to terminate the Transaction
if an uncured event occurs resulting in a significant reduction in coal
output, net assets or reserves. The material adverse change definition is also
subject to a number of customary exclusions.

The Transaction includes an upfront deposit of US$40M payable to South32. The
deposit will be refunded if the conditions precedent to the Transaction are
not satisfied (with the exception of international merger clearances).

Accounting and tax

Illawarra Metallurgical Coal will be reported in the South32 Group's
Underlying financial results as a discontinued operation until completion of
the Transaction. Upon completion, South32's shareholding in Illawarra
Metallurgical Coal, including all associated assets and liabilities, will be
transferred to the Buyer.

As a result of the Transaction, the Group's FY24 financial statements will
include a non-cash impairment reversal of up to ~US$520M (~US$370M post-tax).
This income will be excluded from FY24 Underlying earnings, in accordance with
the Group's accounting policies.

We do not expect a cash tax liability upon completion of the Transaction.

Advisers

BofA Securities is acting as a financial adviser and Herbert Smith Freehills
as legal adviser to South32.

The Buyer

GEAR M Illawarra Met Coal Pty Ltd will acquire 100% of Illawarra Metallurgical
Coal. Subsidiaries of GEAR and M Resources hold shares in GEAR M Illawarra
Met Coal Pty Ltd of 70% and 30% respectively. The completion obligations of
the Buyer are guaranteed by GEAR.

GEAR is an investment vehicle that is focused on resources in Asia Pacific.
GEAR's current major investments include a 59% interest in Stanmore Resources
Limited, an Australian domiciled and listed metallurgical coal producer with
operations in the Bowen Basin in Queensland, and a 50% interest in Ravenswood
Gold, a significant gold mining operation located in north-east Queensland.

M Resources is an investment and marketing company with a global market
presence and offices in Australia, Singapore, Switzerland, UK, US, India,
Latin America, and China. M Resources specialises in the trading of various
metallurgical coal products for steel manufacturing. M Resources also has
substantial investments across the mining value chain, including Stanmore
Resources, One Rail, Metarock, and others.

About us

South32 is a globally diversified mining and metals company. Our purpose is to
make a difference by developing natural resources, improving people's lives
now and for generations to come. We are trusted by our owners and partners to
realise the potential of their resources. We produce commodities including
bauxite, alumina, aluminium, copper, silver, lead, zinc, nickel, metallurgical
coal and manganese from our operations in Australia, Southern Africa and South
America. We also have a portfolio of high-quality development projects and
options, and exploration prospects, consistent with our strategy to reshape
our portfolio toward commodities that are critical for a low-carbon future.

 Investor Relations
 Ben Baker

T          +61 8 9324 9363

M        +61 403 763 086

E          Ben.Baker@south32.net (mailto:Ben.Baker@south32.net)
 Media Relations
 Jamie Macdonald                                                            Miles Godfrey

T          +61 8 9324 9000                                                T          +61 8 9324 9000

M        +61 408 925 140                                                  M        +61 415 325 906

E          Jamie.Macdonald@south32.net
E          Miles.Godfrey@south32.net
 (mailto:Jamie.Macdonald@south32.net)                                       (mailto:Miles.Godfrey@south32.net)

Further information on South32 can be found at www.south32.net
(http://www.south32.net) .

This announcement contains inside information.

Approved for release to the market by Graham Kerr, Chief Executive Officer

JSE Sponsor: The Standard Bank of South Africa Limited

29 February 2024

 

FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements, including statements about
trends in commodity prices and currency exchange rates; demand for
commodities; production forecasts; plans, strategies and objectives of
management; capital costs and scheduling; operating costs; anticipated
productive lives of projects, mines and facilities; and provisions and
contingent liabilities. These forward-looking statements reflect expectations
at the date of this release, however they are not guarantees or predictions of
future performance. They involve known and unknown risks, uncertainties and
other factors, many of which are beyond our control, and which may cause
actual results to differ materially from those expressed in the statements
contained in this release. Readers are cautioned not to put undue reliance on
forward-looking statements. Except as required by applicable laws or
regulations, the South32 Group does not undertake to publicly update or review
any forward-looking statements, whether as a result of new information or
future events. Past performance cannot be relied on as a guide to future
performance. South32 cautions against reliance on any forward-looking
statements or guidance.

 1  By way of the sale of subsidiary companies which hold South32's 100%
interest in Illawarra Metallurgical Coal, including the 16.67% shareholding in
Port Kembla Coal Terminal Limited.

 2  Subject to customary working capital, net debt and capital expenditure
adjustments.

 3  The contingent price-linked cash consideration comprises up to US$350M
applicable for five years from the date of completion with no annual cap. The
first two years will be calculated and paid on the second anniversary of
completion and annually thereafter. The contingent price-linked consideration
will be calculated as 50% of incremental metallurgical coal revenue from
equity production, net of royalties, based on the following metallurgical coal
price thresholds: Year 1: US$200/t, Year 2: US$200/t, Year 3: US$190/t, Year
4: US$180/t, Year 5: US$180/t.

 4  Illawarra Metallurgical Coal annual average free cash flow over the period
FY16 to FY23 of approximately US$229M. Calculated as Underlying earnings plus
depreciation and amortisation less capital expenditure.

 5  This figure represents the potential copper equivalent production growth
from the development of the Taylor deposit at our Hermosa project and the
fourth grinding line expansion project at Sierra Gorda, compared to FY23
production volumes from Cannington, Cerro Matoso and Sierra Gorda. Copper
equivalent production was calculated using FY23 realised prices. Refer to the
market announcement "2024 Half Year Financial Results Presentation" dated 15
February 2024 for further detail. The information in this announcement that
refers to Production Target and forecast financial information for Taylor is
based on Probable (61%) Ore Reserves and Measured (1%), Indicated (5%),
Inferred (9%) Mineral Resources and Exploration Target (24%) for the Taylor
deposit, and was originally disclosed in "Final Investment Approval to Develop
Hermosa's Taylor Deposit" dated 15 February 2024. The Ore Reserves, Mineral
Resources and Exploration Target underpinning the Production Target have been
prepared by Competent Persons in accordance with the JORC Code. South32
confirms that all the material assumptions underpinning the Production Target
in the initial public report referred to in ASX Listing Rule 5.16 continue to
apply and have not materially changed. There is low level of geological
confidence associated with Inferred Mineral Resources and there is no
certainty that further exploration work will result in the determination of
Indicated Mineral Resources or that the Production Target will be realised.
The potential quantity and grade of the Exploration Target is conceptual in
nature. In respect of Exploration Target used in the Production Target, there
has been insufficient exploration to determine a Mineral Resource and there is
no certainty that further exploration work will result in the determination of
Mineral Resources or that the Production Target itself will be realised. The
stated Production Target is based on South32's current expectations of future
results or events and should not be solely relied upon by investors when
making investment decisions. Further evaluation work and appropriate studies
are required to establish sufficient confidence that this target will be met.
South32 confirms that inclusion of 33% of tonnage (9% Inferred Mineral
Resources and 24% Exploration Target) is not the determining factor of the
project viability and the project forecasts a positive financial performance
when using 67% tonnage (61% Probable Ore Reserves and 1% Measured and 5%
Indicated Mineral Resources). South32 is satisfied, therefore, that the use of
Inferred Mineral Resources and Exploration Target in the Production Target and
forecast financial information reporting is reasonable.

 6  Based on Group capital expenditure (including equity accounted
investments) for the period FY16 to H1 FY24. Excludes South Africa Energy
Coal, growth capital expenditure, intangibles, and capitalised exploration.

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