EDITORIAL: Hard to make a case for SA coal
South32 shows it is determined to relinquish its SA coal holdings by negotiating a sale to Seriti Resources
If you are looking for a glimpse into the future of SA coal, look no further than South32’s withdrawal from its local coal business.
South32 was itself spun out of the largest mining company in the world — BHP — in 2015. Just two years later, it began mulling its exit from SA coal. Now it looks like local black-owned player Seriti Resources is in pole position to acquire the business. The two have signed an exclusivity agreement to hash out the details. The numbers have not been finalised but it’s already been agreed that Seriti will pay a “modest” upfront amount and the balance will be deferred and will depend on the movements in export coal prices. And these have fallen off a cliff in 2019.
But it doesn’t look like South32 expects to make a killing from the sale. If anything, the multinational miner is paying in to offload the business. In anticipation of selling SA Energy Coal, South32 invested $377m in capital expenditure from the business’s own cash flows to make it sustainable.
Aside from the enormous liabilities, South32’s exit forms part of a fast-growing global trend away from coal.
CEO Graham Kerr told analysts last week that he’d be happy to sell the operations for a dollar — as long as the new owner was truly transformed and would take on all SA Energy Coal’s assets and liabilities. That’s because closure liabilities are big at $756m.
Before a closure certificate can be issued for any mine in SA, the environment has to be rehabilitated to a certain minimum standard. This typically comes at great cost and companies that are on their way out are often unwilling to pay. In some instances they avoid this by placing the operation into care and maintenance in perpetuity. Another trend is to sell the operations, along with the liabilities, to smaller players. Eventually, the operations become so marginal that the owners go belly-up and cannot be compelled to rehabilitate.
Aside from the enormous liabilities, South32’s exit forms part of a fast-growing global trend away from coal. This is especially true for thermal coal, which is largely used by coal-fired power stations, as opposed to metallurgical coal, which is higher quality and is used in the production of iron and steel.
As awareness about the climate crisis grows, governments, companies and financiers alike are coming under increasing pressure to move towards greener and more sustainable energy sources.
South32 sees the future attractiveness of thermal coal as “questionable”. It is not the only one. BHP this year signalled its intention to exit the thermal coal business. And Rio Tinto last year divested from large coal assets. Glencore has succumbed to investor pressure and agreed to cap its current coal production. Locally, Anglo American concluded the sale of all its Eskom-tied coal mines to Seriti in 2018. Meanwhile SA’s largest coal producer, Exxaro, recently said it was planning structural changes to its business, which include clean power initiatives.
South32 says SA Energy Coal is its largest and most difficult footprint in any of the places in which it operates. Although there are growth opportunities in the local market, South32 says they will be better unlocked if the business were black-owned.
“To be a global multinational company investing in growth projects that are domestically orientated to earn a utility-type return in a country with a country risk premium doesn’t make a lot of sense,” Kerr said.
Despite this country risk premium, South32 is still keen to hang on to its non-coal assets in SA for now. It remains committed even to its Hillside aluminium smelter in Richards Bay, which recently underwent a major restructuring and cut its staff complement by 500. The smelter reached record production but still made a loss of $75m in the year ended June 2019 due to higher input costs.
South32 is negotiating a new power deal for the smelter and believes it is close to securing one that will ensure the sustainability of the operations.
At its manganese mines in the Northern Cape, there is talk of opportunities for the company to invest in expanding operations at the premier resource should the economics stack up.