Maximising value over volume

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 08 Apr 2016   Posted by admin


In a weak commodity market, South32 has reduced its net debt by almost US$300 million and remains on track to meet production guidance for the majority of its upstream operations.

By Rachel Seeley

THE spinoff of South32 from BHP Billiton in May 2015 was touted as a major step in the evolution of BHP, designed to create long-term value for shareholders and create two successful companies. Since its listing on the ASX, the Johannesburg Stock Exchange and the London Stock Exchange, South32 has worked to reduce debt and operating costs, placing it in good stead to achieve sustained growth by taking advantage of the low market conditions.

“The continuing optimisation of our high quality operations and balance sheet has enabled us to reduce net debt by almost US$300 million, despite continued weakness in commodity markets,” South32 chief executive Graham Kerr said in the company’s financial results and outlook for the half year ended 31 December.

“Our low financial gearing and operational leverage is a powerful combination and the decisive action we are taking across our portfolio will strengthen short term cash flow.”

In the company’s December quarter report, Mr Kerr stated South32 was on track to meet production guidance at most of its operations, which were divided into Australian region and African region assets, with operations at under-performing assets already cut or suspended to protect the company’s financial position.

“In order to protect our strong financial position in the currently challenging environment we have already cut or suspended production at our South Africa Manganese ore mines and Alumar, Metalloys, TEMCO and South Africa Aluminium smelters,” Mr Kurr said.

“Further decisive action will be taken as we seek to maximise short-term cash flow while preserving longer-term value.”

South32’s Australia region assets comprise alumina, bauxite, coal, manganese, silver, lead, zinc and nickel assets in Australia and South America.

 Worsley Refinery

Alumina

South32 holds an 86 per cent interest in Worsley Alumina, an integrated bauxite mining and alumina refining operation in WA.It is one of the largest and lowest cost alumina refineries in the world, shipping product to customers including South32’s Hillside and Mozal Aluminium smelters in Southern Africa.

South32 achieved production records at Worsley for the half year ended 31 December at 1.993mt (South32’s share) – a 2 per cent increase on the previous corresponding period – as the operations processed stockpiled alumina hydrate and benefitted from additional efficiency gains. The company stated that a 2 per cent decline in sales for the period reflected a timing difference as one shipment slipped into the March 2016 quarter.

Saleable production guidance for the full 2016 year remained unchanged at 3.95mt, with a further lift to 3.97mt anticipated in fiscal 2017 as incremental capacity creep is delivered by improving the consistency of ore feed and increasing refinery availability and utilisation. Operating unit costs declined by 11 per cent for the period to US$228 per tonne as the US dollar strengthened, general consumables and energy prices declined, and additional labour productivity gains were embedded.

In February 2016 South32 advised that it had established specific cost targets for a number of its more challenged operations and this included plans to reduce operating unit costs at Worsley, including sustaining capital expenditure, to about US$200/t in fiscal 2017.

 

Metallurgical coal

South32’s wholly-owned Illawarra Metallurgical Coal operates three underground mines near Wollongong in NSW. The coal is trucked to Port Kembla for distribution to domestic and international customers.

In the half year to December 31, the operations achieved production of 3.298mt of metallurgical coal and 658,000t of energy coal – down 17 per cent on the previous corresponding period.This was a result of challenging geological conditions encountered at the Appin and Dendrobium mines, and a planned longwall move completed during the December quarter. Another two longwall moves were expected to be completed in the March 2016 quarter.

Operating unit costs declined by 13 per cent during the period to US$62/t.

Production guidance for the full 2016 financial year was revised down to 6.9mt of metallurgical coal and 1.35mt of energy coal, but revised up for fiscal 2017 to 8.15mt of metallurgical coal and 1.38mt of energy coal.

The company’s cost target for Illawarra involved a reduction of operating unit costs, including sustaining capital expenditure, by 37 per cent to approximately US$66/t in fiscal 2017. Specific initiatives included the fundamental reorganisation of the mining complex into two operations and the removal of layers of management and functional support and the reduction of at least 300 employees and contractors before the end of fiscal 2016, equivalent to 14 per cent of the employee and contractor headcount at the end of fiscal 2015.

South32 stated the Appin Area 9 project would be completed in the March 2016 quarter. Underground development of approximately US$58 million per annum project would not be compromised given the company’s “commitment to maximising long-term value”.

 

Manganese

South32 holds a 60 per cent interest in Australia Manganese, which comprises the GEMCO open-cut mine on Groote Eylandt in the Northern Territory and the TEMCO manganese alloy plant in Tasmania. GEMCO, one of the world’s lowest-cost manganese ore producers, exports its ore product through port facilities at Milner Bay to TEMCO, which uses this ore to produce high carbon ferromanganese, silicomanganese and sinter.

The majority of TEMCO’s alloy production is exported to customers in Asia and North America, with the balance of TEMCO’s production being sold to steel customers in Australia and New Zealand. Australia Manganese saleable ore production increased by 6 per cent to a record 1.589mt in the first half of 2016, with fiscal 2016 saleable production guidance remaining unchanged at 5.1mt.

South32 stated that the mining and processing plans at GEMCO were being adjusted to ensure the operation retained its leading, low-cost position in the industry. This included a revised ramp-up profile for the PC02 project and a 200,000t (4 per cent) reduction in financial 2017 saleable ore production guidance to 5.2mt.

Saleable manganese alloy production increased by 2 per cent to 85,000t in the first half of 2016. In response to market conditions, South32 suspended production at one of TEMCO’s four furnaces for a minimum of three months. While production would be impacted in the June 2016 half year, customer commitments would continue to be met from inventory.

“A double digit improvement in labour productivity and a substantial reduction in procurement costs are expected to more than offset a 27 per cent increase in the strip ratio (from 3.0 to 3.8) between FY15 and FY17,” South32 stated.

“Consequently, operating unit costs, including sustaining capital expenditure are expected to decline by 43 per cent to approximately US$1.56 [per dry metric tonne] in FY17.”

Specific measures being taken to reposition GEMCO included the reduction of 82 employees and contractors before the end of the 2016 financial year, equivalent to 8 per cent of the employee and contractor headcount at the end of fiscal 2015, and the decision not to recruit 55 roles planned as largely related to the PC02 project.

Additional measured included a targeted 6 per cent increase in the productivity of the mining fleet; the continued aggregation of procurement activities to the region, which was expected to deliver savings of about US$10 million in fiscal 2017; and a 56 per cent reduction in sustaining capital expenditure to approximately US$40 million during fiscal 2017.

 

Silver

South32’s wholly-owned Cannington silver, lead and zinc underground mine and concentrator operation near Mount Isa in Queensland is one of the world’s largest producing silver mines. Concentrate produced at Cannington is trucked to the Yurbi rail loading facility and then railed about 800km to the Port of Townsville for export.

In the first half of fiscal 2016, payable silver production decreased by 3 per cent to 11.9 million ounces, with the average silver grade remaining steady. However, a significant increase in average zinc ore grade led to a 13 per cent increase in zinc production to 418,000t. Production guidance for the full 2016 fiscal year remained at 21.65moz of payable silver, 175,000t of payable lead and 80,000t of payable zinc.

Operating unit costs for the half year declined by 15 per cent to US$153/t. South32 stated that this largely reflected a favourable movement in foreign exchange rate markets and a reduction in labour costs and contractor spend. Company plans would see the employee and contractor headcount decrease by about 17 per cent by the end of fiscal 2016. Further initiatives to increase labour productivity and operational efficiencies were being pursued, including a renewed focus on procurement, which was expected to deliver a US$20 million saving in fiscal 2017.

 

Nickel

The Cerro Matoso open-cut lateritic nickel mine and ferronickel smelter, in which South32 holds a 99.94 per cent interest, is near Montelibano, in the Córdoba Department in northern Colombia.

South32 stated that Cerro Matoso payable nickel production declined by 17 per cent to 175,000t in the first half of 2016 as the average ore grade decreased, consistent with the mine plan. Payable nickel production guidance remained unchanged at about 365,000t for the financial year, with a similar rate of production anticipated in fiscal 2017.

The higher grade La Esmeralda deposit had the potential to deliver an increase in the average ore grade between 2018 and 2022. A new social and environmental licence to allow access to the ore body was granted in December 2015.

 Aus2

Looking ahead

When announcing the major restructuring plans in February 2016, Mr Kerr stated that South32 expected to further strengthen its financial position and increase its cash generating capacity.

“We will continue to focus on the things we can control – safety, volume, costs and capital expenditure – as we seek to optimise the performance of our operations.” he said.

“This strategy to maximise value rather than volume, our high quality operations and well-defined financial policies underpin our resilience at current prices and we remain exceptionally well positioned for any improvements in industry fundamentals.”