South32, a former BHP spin-off, shines with ‘future-facing metals’
What is behind this value gain and is the performance sustainable? A good question, says Graham Kerr, who has led South32 since the demerger.
At its half year results in February the miner posted a record net profit of over $1.4bn.
A large contribution came from high prices for its metallurgical coal in the Illawarra which goes into steelmaking. And Kerr cites operational excellence that has set production records.
The bigger story is that South32’s suite of future-facing metals that it either mines or processes has seen a huge uplift in demand in the last 12 to 18 months. Ergo, the price of these commodities has also lifted with operating margins between 30 and 50 per cent.
The forces of war and Covid have knocked commodity prices around, but the winning strategy for South32 has been to ride the energy transition.
The portfolio that Kerr’s team was left with seven years ago looks very different today.
“We had a very large exposure on a revenue basis to a lot of the bulks: the energy coal, the met coal, the manganese. If you look at the transactions we have done over the last couple of years and if you normalise met coal price, our exposure to forward-facing metals such as copper, aluminium, zinc now makes up roughly 85 per cent of our revenue stream,” he says.
The miner got its name South32 from the latitude at which most of its operations sat in Australia and Southern Africa. But even that looks outdated.
Kerr is just back from a couple of weeks in Arizona at the miner’s Hermosa project, funnily enough sitting exactly at latitude North32. “We have developed the pre-feasibility study on Taylor, which is a zinc deposit in Arizona. We bought Sierra Gorda in Chile to get copper exposure, we’ve increased what we have in nickel in Columbia and we have Ambler Nickels going on at the moment in Alaska,” he says. “That transformation, not only in commodity but also country risk has helped us push forward.”
Kerr see growth in exposure to copper, zinc and nickel, building on a strong position in alumina and aluminium. The metals are in high demand for batteries, EVs, renewable construction or oil-based plastic substitution.
A month ago in his biggest deal to date, Kerr added copper to the portfolio, buying a 45 per cent stake in the Sierra Gorda copper mine in Chile for $US1.5bn ($2.03bn) in cash.
The mine has a 20-plus year life and a reserve of over a billion tonnes, but had been overlooked by other big players because of poor operational performance. The market verdict is that South32 bought at a good price.
Asked about Ukraine, Kerr says from a humanitarian perspective he watches with concern but on business the miner has little direct exposure of shipments to Russia or Ukraine.
The war did force the company to abandon the sale of African manganese alloy smelter Metalloys to Satka Investments, a business with interests in both Russia and Ukraine.
“I would probably put in the category of too hard,” admits Kerr. “There were conditions precedent and obviously with some of the global tensions going on it was probably something that wasn’t easily achieved.”
The shock upside for South32 is metallurgical coal. “It tells you something about commodity prices – no matter who you are you will never get it completely right,” says Kerr. “On 31 January we cut our deck to talk to investors: you had a hard coking coal price of $US445 a tonne.”
Kerr told investors he expected more supply from Queensland and an easing of demand from Europe and China. “As a consequence, we expected the price to start to retreat to $US325 in the next three to four months and then down to $US200 a tonne.”
Today met coal is trading at over $US600 a tonne. As it turns out, Russia is a large met coal producer. Kerr now sees the price stronger for longer.
Another wild ride has been nickel after billionaire Xiang Guangda – the “Steve Jobs of metals” and owner of the largest nickel producer in China – made a massive wrong-way bet that the price would fall. The bet backfired spectacularly when Russia invaded Ukraine and nickel went through the roof before being suspended.
Volatility aside, Kerr says nickel splits into two: class one for battery technology and class two for stainless steel. In Bolivia South32’s ferro-nickel is class two but he is also closely watching how the Chinese are working with Indonesian suppliers to convert class two to class one.
It is Arizona where Kerr is looking for growth to underpin the future value of South32.
The Hermosa project, 80km southeast of Tuscon, was bought in 2018 and has three chunks of value. The Taylor deposit has lead, silver and zinc like South32’s Cannington mine in Australia. Studies confirm a long-life, low-cost quartile ranking and first production is targeted for 2027. The there is the Clark deposit of manganese oxide where Kerr expects to produce battery-grade material for the likes of Tesla. And thirdly a land exploration package, where early results indicate not just zinc and silver but hard holes of copper.
Kerr says there is excitement on the ground as employees see progress and both US and Australian governments talk up critical minerals.
“On the critical minerals list is zinc which has just been added; on that list for a period of time has been manganese because of battery application. They know they are building something and that will help with some of the US energy and security requirements. I think that gives our people an uplift,” he says.
South32 has a 2050 net zero carbon emissions target and plans to halve emissions by 2035. One carbon challenge is the energy-intensive smelting of aluminium and its precursor alumina. Kerr says aluminium has to be part of decarbonisation. The strength and lightweight qualities have put alumina on the critical minerals list, too, but in the last 10 to 15 years oversupply from China has dulled prices.
That is changing as China confronts emissions and Kerr says growth outside China will be very important.
“There are not that many new smelters being started in the Western world. People are starting to ask where is that material going to come from, particularly if that material needs to be green for the end consumer,” he says.
South32 is restarting the Alumar aluminium smelter in Brazil with Alcoa. It has also increased its stake in the Mozal aluminium smelter in Mozambique. Both are 100 per cent hydro-powered.
Back home, the miner’s Worsley alumina smelter still uses coal-fired power. South32 has two coal suppliers, one of which also supplies the West Australian government’s power station. The transition challenge is not about cost or technology, but the community and long-term relationships with suppliers.
“We are very conscious of Collie being a mining town. So we are working with the government about how we do a just transition in that space. But certainly our expectation very soon will be to move from coal-fired to gas and then ultimately to another source such as hydrogen,” says Kerr.
He says the global average carbon intensity for alumina refining is running at 1.2x and Worsley runs at 0.81x. The global benchmark target is 0.6x and transition from coal to gas will bring Worsley to 0.6x. A decision on the move from coal to gas is expected in around 18 months.
One real downside for commodities is the current shipping news – some ports like Richards Bay in South Africa are extremely difficult to operate in for South32.
Graham Kerr’s simple message is that the world needs copper, zinc and nickel.
“The mining industry has not really invested for the last 10 to 15 years. That will create quite a large supply demand gap and a great opportunity for companies like South32,” he says.
As to the 2015 demerger from BHP, he says that for both companies it was absolutely the right decision.
Sitting at No.1 and No.21 on the ASX, he’s got a point.
In 12 months shares in listed miner South32 are up a stirring 70 per cent. A company spun off by BHP in 2015, holding a bunch of assets that it no longer felt were worth keeping, is now knocking on the door of the ASX top 20 club with a $22bn valuation.