South32 boss Graham Kerr hails ‘cheap’ $2.7bn copper deal
South32 has all-but completed its transformation into a base metals company after joining the rush for overseas copper assets.
South32 has all but completed its transformation into a base metals company after joining the rush for overseas copper assets, after the company put $US2bn ($2.7bn) on the table for a part-share in a Chilean copper mine.
The former BHP spin-out will buy 45 per cent of the Sierra Gorda copper mine in Chile, operated by Polish miner KGHM, from Sumitomo for $US1.55bn upfront and $US500m in trailing fees that could kick in if copper price and production targets are met.
South32 has been on the hunt for copper assets since its 2015 demerger from BHP, but has previously been unable to land a deal it is comfortable with.
South32 joins Sandfire Resources, Newcrest Mining and a host of Australian gold companies in looking overseas to bolster their portfolios, with Sandfire recently agreeing to pay $US2.5bn for the MATSA copper mining complex in Spain.
While South32 boss Graham Kerr has previously said the company saw more value in building new mines than acquiring operating assets, pointing to the 2018 decision to acquire Arizona Mining and its suite of US development projects for $US1.3bn, he said on Thursday the Sierra Gorda stake was “cheap” at the price the company was paying.
South32 shares rose 4.9 per cent, to $3.83 on Thursday following news of the deal.
The Polish-operated mine, which sits not far from BHP’s Spence copper operations, is set to produce about 214,000 tonnes of copper equivalent – or about 180,000 tonnes of copper, with by-products including gold, silver and molybdenum.
South32’s move on the mine comes after it agreed last month to pay $US250m for Mitsubishi’s 25 per cent stake in its Mozal aluminium operations in Mozambique, extending its holding in the smelter to 72.1 per cent.
Mr Kerr said that taken together with its divestment of its South African thermal coal mines, the recent reshaping of South32’s portfolio had cemented its position as a major base metals miner – counting aluminium as a base metal.
“We’ve aluminium, we’ve got zinc, we’ve got copper. If you go back and look at our 2021 financial year earnings, and you include Sierra Gorda, 80 of our earnings would now come from base metals and precious metals,” he said.
“If you went back four or five years ago you would have had a strong contribution from energy coal, metallurgical coal, and manganese. Those bulk commodities are becoming a much smaller part of our portfolio.
“I think we actually have a portfolio that is far more positioned for the future than it was at the time of the demerger.”
Copper will make up just under 20 per cent of South32’s earnings when the transaction closes, according to a company presentation, putting it on a roughly level footing with South32’s manganese operations and aluminium operations.
While KGHM still has the right to match South32’s offer for Sumitomo’s share in Sierra Gorda, Mr Kerr told analysts he believed the Polish miner was comfortable with its current holdings.
And he said he was not concerned about long-mooted moves by Chile’s government to hike royalties paid by the country’s copper industry.
The deal with Sumitomo includes a clawback clause that would see some of the purchase price returned to South32 if Chile raises copper taxes.
“If there’s a tax change implemented … we calculate what the value of that looks like from the net present value perspective and Sumitomo will pay us that money,” he said.
South32 will take on an additional $US1bn in debt to fund the acquisition, with the rest to be paid from the company’s cash on hand.
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