Ground Breakers: South32 take giant steps out of bulks in mine sale as met coal train leaves the station

Indonesian coal dynasty and Aussie trader fly in with US$1.65 billion deal for South32’s Illawarra coal mines

It will see South32 focus purely on battery, base and critical metals like copper, zinc, silver, manganese and aluminium

Westgold to pay first dividend since 2021

South32 (ASX:S32) has put its money, or someone else’s it seems, on plans to become a solely battery metals focused play as it looks to exit coking coal for good.

The BHP (ASX:BHP) spinoff will nab up to US$1.65 billion for the sale of its 5Mtpa Illawarra met coal mines in New South Wales, a primary supplier via an integrated supply chain to BlueScope Steel’s (ASX:BSL) Port Kembla steelworks.

Who are the buyers? A 70-30 JV between Golden Energy And Resources, a vehicle of the Indonesian Widjaja family dynasty that also owns 59% of ASX-listed met coal miner Stanmore Resources (ASX:SMR) and M Resources, a coal trader founded and run by Matt Lattimore, a multi-millionaire who used to lead coal sales for the Curragh mine when it was under Wesfarmers’ stewardship.

GEAR also owns half of the Ravenswood gold mine in partnership with Owen Hegarty’s EMR Capital.

The transaction, which includes US$1.05b in up front cash, US$250m deferred to 2030 and a price linked cash payment of up to US$350m, is due to close in H1 FY25 and will see S32 realise 7.2x the average annual free cash flow of the mines once all payments are received.

It’s due to complete in the first half of the next financial year, with the caveat that BlueScope has pre-emptive rights to come over the top if they so choose.

South32 is chasing cash after making a final investment decision on the Taylor zinc mine at its Hermosa project in Arizona, where it will spend over US$2 billion to bring the base metals mine into operation by 2027.

S32 boss Graham Kerr said the deal, which comes after the announcement it would sell its 50% stake in the undeveloped Eagle Downs project in Queensland’s Bowen Basin to Stanmore, was consistent with the $13 billion miner’s plan to focus on critical minerals.

“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,” he said.

“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.”

South32 (ASX:S32) share price today

2039 end date … or is it?

Illawarra met coal delivered 1.787Mt of met coal and 258,000t of thermal coal in the December half, for sales of 1.759Mt of coking and 337,000t of energy coal.

South32 pulled in prices of US$276/t for its met sales and US$101/t for thermal, with two longwall moves and an extended outage at Dendrobium contributing to a 39% drop in volumes on H1 2023 and lift in operating costs from US$124/t to US$167/t year on year.

That underpinned US$171m in underlying EBITDA on the asset, down from US$407m a year earlier, but operations are expected to improve in the second half due to a shorter duration for the two longwall moves planned in the June quarter.

It expects to produce 5Mt in FY24 at US$150/t, with brighter times ahead at the Appin mine from the second half of FY25, when a move to single longwall mining and added ventilation will enable mining to continue in the Area 7 zone of the mine until 2039 at a capital cost of some US$311m.

There are two mines operating in the Illawarra coal operations, Appin and Dendrobium.

While Appin still has decades to run, South32 had planned to run the latter until 2028 when mining was due to cease after it dumped a proposal to extend the mine in 2022.

Development approval in parts of the mine run until 2030, but the decision not to pursue further extensions to 2041 was taken in light of protests over its potential impacts on the Sydney water catchment. It came despite the recognition of the mine as ‘state significant infrastructure’ a year earlier due to its role supplying BlueScope’s Port Kembla steelworks.

South32 copped a $2.9 million charge to put towards a community water improvement program for taking surface water at Dendrobium without a licence between 2018 and 2023. It said at the time that it had paid $5.6m for the passive use of surface water in the mining operation.

Now the operations are going into the hands of a coal-first operator, it could open the door to the next domain expansion again after South32 said the US$700 million capex would not deliver the returns required to make it worth the hassle.

Westgold caps comeback year with shareholder returns

Westgold Resources (ASX:WGX) has splashed its cash back in the direction of shareholders for the first time since 2021, offering 1c per share unfranked to investors who stuck with it during trying times.

Wayne Bramwell’s gold miner flipped its after tax result from an $11 million loss in H1 2023 to a $44m profit in H1 FY24, powered by a 22% lift in realised gold prices to $2963/oz.

That saw revenues lift 15% to $363m, bearing the fruits of moves to clear its hedgebook, which saw Westgold previously cop big discounts to prevailing gold prices — which hit a spot record late last year.

Cashflow from operations rose 204% to $161m, while sales costs fell 11% to $291m despite all in sustaining costs rising 1% to $2093/oz in the December half on lower production.

MD Bramwell said the decision to issue an interim dividend marked WGX’s ‘growing confidence’ in its network of Mid West WA gold mines.

“In H1 we completed construction of our hybrid power stations and solar farms, drilled to extend mine lives and started both the Fender and Great Fingall underground mines. We continued to invest in our people and full credit must go to our 1,300 staff and contractors who support our operations, as their collective efforts delivered these financial results,” he said.

“With the H1 results behind us, the Board has determined to pay our first dividend under the new dividend policy. This interim dividend reflects our financial strength and growing confidence in the business, marking another milestone in Westgold’s ongoing transformation.

“Looking forward, we see opportunity to continuously improve in all areas of our business. Safety, productivity and profitability are essential to building a sustainable business and with a clear focus, we look to H2, FY24 with confidence.”

The market’s focus is likely to turn to M&A, with $879m capped Westgold sitting on $238m of cash and bullion. That cash pile is likely to grow further before its $4.7m dividend payment is made in April.

It announced a new $100m revolving facility with ING and SocGen in November free of mandatory hedges, giving it more than $300m of ammunition to support expansionary purchases. Westgold was notably outbid by neighbouring rival Ramelius Resources (ASX:RMS) in a contest for Cue-based gold explorer Musgrave Minerals last year.

Already this year has seen significant action in gold M&A. Red 5 (ASX:RED) and Silver Lake Resources (ASX:SLR) announced a $2.2 billion merger of equals that will combine the King of the Hills gold miner with the owner of the Deflector and Mount Monger mines, while Newmont have announced plans to claw US$2 billion from the sale of non-core mines including their Telfer and Havieron assets in WA.

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