Barry FitzGerald: South32's manganese 'mishap'? More 'like Saudi Arabia going offline for a year'

The ASX-listed manganese stocks are up and about thanks to Cyclone Megan’s arrival at Groote Eylandt on March 16/17.

As is usually said when cyclones come through, it left a trail of destruction. Not that us southerners heard much about the mayhem.

But South32 (ASX:S32) certainly did because Megan slammed an ore carrier into the export wharf for its GEMCO manganese mine on Groote, a 60:40 joint venture with the somewhat distracted Anglo American.

For a while there, South32 gave the impression there was not too much to worry about. But eventually it ‘fessed that yep, the hit on the manganese operation was severe.

So much so that it doesn’t expect the operation to get back to full production until the March quarter next year.

That’s no big deal for a company of South32’s scale and diversity. Same goes for Anglo American.

But it is a big deal for the global manganese market as Groote is the world’s second biggest producer, accounting for about 12% of the market. In oil equivalent terms, it would be like Saudi Arabia going offline for a year.

Needless to say, manganese prices have taken off. The average spot price rose 29% month-on-month in April to $US3.92/dmtu for 37% material ex-South Africa (Groote is 44% and is priced accordingly).

It has gone higher since to $US4.04/dmtu and no one is too sure where it will pull up given the size of the hole punched in to the supply side of things by Megan.

For the other manganese producers the price hike is a welcome reprieve from the six-year lows in pricing witnessed last year when China was not in a buying mood and preferred to drawdown on stocks.

The recent share price performance of ASX-listed producer Jupiter Mines (ASX:JMS) – the world’s biggest pure manganese play – reflects the benefits of Megan’s black swan qualities.

It was 17c or so before Megan hit Groote. It has since marched to 30c (mid-week) for a market cap of $588 million on the strength of its near half share in the Tshipi mine in South Africa’s remote Kalahari manganese province (South32 is involved in a mine next door).

Tshipi is the world’s fourth biggest manganese mine. It is a low cost producer ($US2-$US2.20/dmtu), with Jupiter’s share of earnings highly leveraged to the manganese price.

Jupiter pointed out recently that a $US1 increase over 12 months in the price of manganese is worth an additional $A146 million in earnings. Because it is a consistent dividend payer, higher prices also equals higher dividends.

Another to benefit is the ASX-listed integrated manganese producer out of Malaysia, OM Holdings (ASX:OMH), which has a 13% effective interest in Tshipi. It shares have come up from 40c to 51c in response to the Groote situation.

By now, followers of Garimpeiro will have sussed he doesn’t normally focussing on companies of profitable/dividend paying status like Jupiter. So what about the juniors in the manganese space?

They don’t have a bottom line as such to benefit from the rise in manganese prices. But judging by the share price gains in recent weeks by more than a few of them, the Groote incident has been good for investor interest in the sector.

It is a feature of the manganese juniors that rather than focussing of producing manganese ore for steel makers in China, they are pursuing “new energy’’ opportunities, or the battery metals market if your prefer (Tshipi is doing the same, as is South32 at an undeveloped project in Arizona).

According to Jupiter, high-growth demand for battery grade manganese is expected to outpace growth in supply in the second half of this decade, leading to a market deficit.

Garimpeiro likes the sound of that.

So check out the likes of Firebird (ASX:FRB), Element 25 (ASX:E25), Euro Manganese (ASX:EMN), Black Canyon (ASX:BCA), Accelerate (ASX:AX8) and Bryah (ASX:BYH).

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