South32 books profit fall, flags sale of South African coal unit

South32 has reported a profit slump as it revealed plans to sell its South African coal unit.

South32's manganese operations in South Africa. Picture: Supplied

South32 is in exclusive talks to sell its South Africa energy coal unit to Johannesburg-based Seriti Resources Holdings, the miner said on Thursday, as it reported a sharp fall in annual profit including a large impairment charge against that business.

South32 (S32) said net profit fell by 71 per cent to $US389 million in the 12 months through June, mostly because of $US578m in charges against the South African coal operations.

The miner said Seriti’s offer includes a modest upfront cash sum, with a deferred payment mechanism under which both companies would share benefits from any gains in commodity prices for an unspecified period. That offer is subject to final negotiations, South32 said.

A group including Seriti last year bought Anglo American PLC’s New Largo coal assets for about $US65m, as the roughly 80 per cent black-owned miner seeks to become a top supplier to South Africa’s state-owned power utility Eskom. Eskom supplies some 90 per cent of the country’s electricity.

Investors have been eagerly anticipating the sale of South32’s coal business in South Africa, which it first said it might jettison in 2017 and which made an underlying loss in fiscal 2019. Macquarie has previously said a deal, even for a nominal amount, would be beneficial for the global miner’s stock, as companies with sizeable exposure to South Africa are typically discounted in the market because of concerns over sovereign risk.

“When we announced our intention to broaden the ownership of South Africa Energy Coal in November 2017, our vision was that it become a sustainable, black-owned and operated business, consistent with South Africa’s transformation agenda,” South32 Chief Executive Graham Kerr said in a statement.

The company didn’t make any further comment about an ongoing review of its manganese alloy smelters, saying it would update the market in due course. Mr. Kerr recently said the company was reviewing the future of those smelters — which could lead to their suspension, closure or sale — because of changing market conditions that have made them less profitable.

Underlying earnings in its Australian manganese alloy unit halved during the latest fiscal year, while its South Africa manganese alloy business swung to a loss.

South32, the metals and coal mining company spun out of BHP Group in 2015, reported a 25 per cent drop in group underlying earnings, mainly because of weaker aluminium and thermal coal prices, but said it will increase an ongoing capital management program by $US250m to $US1.25 billion.

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