South32 production on track but there are cost pressures

It’s been a rough week or so for mining production numbers, so a quarterly report from South32 may have been met with some nervousness from the market. This is a good time to remind you that the JSE attracts mining companies with operations all over the world, so pressures in South African production don’t translate into pressures on businesses with offshore operations.

With that out the way, it may make more sense to you that South32 released unchanged production guidance for FY22, with operations delivering according to plan. The group operates in Australia, Southern Africa and South America. It’s a bit like the old days of Super Rugby.

With a pre-feasibility study completed for the zinc-lead-silver Taylor Deposit in Arizona, the group also looks set to expand in the northern hemisphere.

South32 has reported strong quarterly production results in aluminium, copper, zinc, nickel and coal. Manganese production fell due to planned maintenance at the South African mines. This is the first time the group has reported copper production, now that the Sierra Gorda investment has been completed.

Supply chain issues are in play here, particularly in the aluminium value chain where movement of inventory at operations has slowed down. The company is obviously mitigating this to the greatest extent possible.

With freight pressures, higher raw material input prices and major currency movements, guidance for operating costs per unit has been revised higher.

Capital expenditure guidance has been reduced by USD36 million to USD702 million, attributable to a deferral of spend at Worsley Alumina into FY23 among other things.

At the end of March, South32 had cash of USD52 million after acquiring a 45% interest in the Sierra Gorda copper mine for USD1.4 billion during the quarter. This was funded by USD600 million cash and USD800 million from a short-term acquisition bridge facility. The bridge was repaid after the end of this period through the company’s inaugural USD bond issuance, in which USD700 million in senior unsecured notes (due 2032) were issued. These carry an interest cost of 4.35% per annum.

A group like this is always busy with deals. For example, the sale of the Metalloys manganese alloy smelter is not proceeding and will remain on care and maintenance for now. In better news, the group received approval from the Brazilian Competition Authority for the acquisition of an additional 18.2% interest in the Mineracao Rio do Norte bauxite mine, taking the ownership stake to 33%.

Finally, South32 is no longer selling commodities to Russian entities. Exposure to the country has historically been limited and no new business relationships are planned.

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