Wrap Text
Sale of Illawarra Metallurgical Coal
South32 Limited
(Incorporated in Australia under the Corporations Act 2001)
(ACN 093 732 597)
ASX / LSE / JSE Share Code: S32 ADR: SOUHY
ISIN: AU000000S320
south32.net
SALE OF ILLAWARRA METALLURGICAL COAL
South32 Limited (ASX / LSE / JSE: S32; ADR: SOUHY) (South32) has entered into a binding agreement to
sell Illawarra Metallurgical Coal[1] (Transaction) to an entity owned by Golden Energy and Resources Pte Ltd (GEAR)
and M Resources Pty Ltd (M Resources) (the Buyer).
The consideration for the Transaction is up to US$1,650M comprising:
• Upfront cash consideration of US$1,050M[2], payable at completion;
• Deferred cash consideration of US$250M, payable in 2030; and
• Contingent price-linked cash consideration of up to US$350M[3].
The total consideration represents a multiple of approximately 7.2x average annual free cash flow for
Illawarra Metallurgical Coal[4].
The Transaction is expected to complete in H1 FY25, subject to the satisfaction of certain conditions including
Foreign Investment Review Board approval, customary regulatory approvals and the waiver or non-exercise of
pre-emption rights held by BlueScope Steel (AIS) Proprietary Limited (BlueScope).
The Buyer will assume economic and operating control of Illawarra Metallurgical Coal on completion of the
Transaction, including all current and future liabilities.
South32 Chief Executive Officer, Graham Kerr said: “This Transaction will realise significant value for our
shareholders and is consistent with our strategy to reshape our portfolio toward commodities critical in the
transition to a low-carbon future.
“It will streamline our portfolio, strengthen our balance sheet and unlock capital to invest in our high-quality
development projects in copper and zinc.
“The Transaction will also simplify our business and reduce our capital intensity.
“Illawarra Metallurgical Coal produces high-quality metallurgical coal, a key ingredient in the production of steel,
which will be required until low-carbon steel becomes economically viable on a commercial scale.
“GEAR and M Resources are established participants in the Australian metallurgical coal industry, with a strong
commitment to environmental and safety standards, who are well positioned to continue Illawarra Metallurgical
Coal’s contribution to the local steel industry and the Illawarra and Macarthur regions.
“Our focus remains the safe and reliable operation of Illawarra Metallurgical Coal. Over the coming months we will
work with the Buyer, our workforce, the local community, government, customers and suppliers to support a
successful transition of ownership.�
Transaction highlights
The Transaction will unlock significant value for our shareholders and is consistent with our strategy:
• Upfront and deferred cash consideration of US$1,300M plus exposure to metallurgical coal price upside
of up to US$350M through contingent price-linked cash consideration;
• Simplifies our portfolio to focus on our operating positions and growth options in the aluminium value chain,
base metals and manganese;
• Strengthens our balance sheet and unlocks capital to invest in our high-quality development projects in
copper and zinc, which have the potential to underpin a ~45% increase in our base metals production[5];
• Reduces our operating footprint and our functional support; and
• Reduces our capital intensity, with Illawarra Metallurgical Coal comprising ~35% of Group capital expenditure[6].
Following completion, the proceeds from the Transaction will be allocated in accordance with our capital
management framework and commitment to an investment grade credit rating. Our capital management
framework is designed to support investment in our business and deliver returns to shareholders in the most
efficient and value accretive manner.
Transaction details
The Transaction is subject to the waiver or non-exercise of pre-emption rights held by BlueScope, pursuant to a
coal supply agreement between Illawarra Metallurgical Coal and BlueScope. If BlueScope exercises its
pre-emption rights, the Transaction with the Buyer will not proceed and South32 will instead divest Illawarra
Metallurgical Coal to BlueScope on the same commercial terms and conditions as agreed with the Buyer.
The Transaction is also subject to no material adverse change prior to completion, pursuant to which the Buyer
may elect to terminate the Transaction if an uncured event occurs resulting in a significant reduction in coal
output, net assets or reserves. The material adverse change definition is also subject to a number of customary
exclusions.
The Transaction includes an upfront deposit of US$40M payable to South32. The deposit will be refunded if the
conditions precedent to the Transaction are not satisfied (with the exception of international merger clearances).
Accounting and tax
Illawarra Metallurgical Coal will be reported in the South32 Group’s Underlying financial results as a discontinued
operation until completion of the Transaction. Upon completion, South32’s shareholding in Illawarra Metallurgical
Coal, including all associated assets and liabilities, will be transferred to the Buyer.
As a result of the Transaction, the Group’s FY24 financial statements will include a non-cash impairment reversal
of up to ~US$520M (~US$370M post-tax). This income will be excluded from FY24 Underlying earnings, in
accordance with the Group’s accounting policies.
We do not expect a cash tax liability upon completion of the Transaction.
Advisers
BofA Securities is acting as a financial adviser and Herbert Smith Freehills as legal adviser to South32.
The Buyer
GEAR M Illawarra Met Coal Pty Ltd will acquire 100% of Illawarra Metallurgical Coal. Subsidiaries of GEAR and
M Resources hold shares in GEAR M Illawarra Met Coal Pty Ltd of 70% and 30% respectively. The completion
obligations of the Buyer are guaranteed by GEAR.
GEAR is an investment vehicle that is focused on resources in Asia Pacific. GEAR’s current major investments
include a 59% interest in Stanmore Resources Limited, an Australian domiciled and listed metallurgical coal
producer with operations in the Bowen Basin in Queensland, and a 50% interest in Ravenswood Gold, a significant
gold mining operation located in north-east Queensland.
M Resources is an investment and marketing company with a global market presence and offices in Australia,
Singapore, Switzerland, UK, US, India, Latin America, and China. M Resources specialises in the trading of various
metallurgical coal products for steel manufacturing. M Resources also has substantial investments across the
mining value chain, including Stanmore Resources, One Rail, Metarock, and others.
About us
South32 is a globally diversified mining and metals company. Our purpose is to make a difference by developing
natural resources, improving people’s lives now and for generations to come. We are trusted by our owners and
partners to realise the potential of their resources. We produce commodities including bauxite, alumina,
aluminium, copper, silver, lead, zinc, nickel, metallurgical coal and manganese from our operations in Australia,
Southern Africa and South America. We also have a portfolio of high-quality development projects and options,
and exploration prospects, consistent with our strategy to reshape our portfolio toward commodities that are
critical for a low-carbon future.
Investor Relations
Ben Baker
T +61 8 9324 9363
M +61 403 763 086
E Ben.Baker@south32.net
Media Relations
Jamie Macdonald
T +61 8 9324 9000
M +61 408 925 140
E Jamie.Macdonald@south32.net
Miles Godfrey
T +61 8 9324 9000
M +61 415 325 906
E Miles.Godfrey@south32.net
Further information on South32 can be found at www.south32.net.
This announcement contains inside information.
Approved for release to the market by Graham Kerr, Chief Executive Officer
JSE Sponsor: The Standard Bank of South Africa Limited
29 February 2024
FORWARD-LOOKING STATEMENTS
This release contains forward-looking statements, including statements about trends in commodity prices and
currency exchange rates; demand for commodities; production forecasts; plans, strategies and objectives of
management; capital costs and scheduling; operating costs; anticipated productive lives of projects, mines and
facilities; and provisions and contingent liabilities. These forward-looking statements reflect expectations at the
date of this release, however they are not guarantees or predictions of future performance. They involve known
and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause
actual results to differ materially from those expressed in the statements contained in this release. Readers are
cautioned not to put undue reliance on forward-looking statements. Except as required by applicable laws or
regulations, the South32 Group does not undertake to publicly update or review any forward-looking statements,
whether as a result of new information or future events. Past performance cannot be relied on as a guide to future
performance. South32 cautions against reliance on any forward-looking statements or guidance.
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1 By way of the sale of subsidiary companies which hold South32’s 100% interest in Illawarra Metallurgical Coal, including the 16.67% shareholding in
Port Kembla Coal Terminal Limited.
2 Subject to customary working capital, net debt and capital expenditure adjustments.
3 The contingent price-linked cash consideration comprises up to US$350M applicable for five years from the date of completion with no annual cap.
The first two years will be calculated and paid on the second anniversary of completion and annually thereafter. The contingent price-linked
consideration will be calculated as 50% of incremental metallurgical coal revenue from equity production, net of royalties, based on the following
metallurgical coal price thresholds: Year 1: US$200/t, Year 2: US$200/t, Year 3: US$190/t, Year 4: US$180/t, Year 5: US$180/t.
4 Illawarra Metallurgical Coal annual average free cash flow over the period FY16 to FY23 of approximately US$229M. Calculated as Underlying
earnings plus depreciation and amortisation less capital expenditure.
5 This figure represents the potential copper equivalent production growth from the development of the Taylor deposit at our Hermosa project and
the fourth grinding line expansion project at Sierra Gorda, compared to FY23 production volumes from Cannington, Cerro Matoso and Sierra Gorda.
Copper equivalent production was calculated using FY23 realised prices. Refer to the market announcement “2024 Half Year Financial Results
Presentation� dated 15 February 2024 for further detail. The information in this announcement that refers to Production Target and forecast financial
information for Taylor is based on Probable (61%) Ore Reserves and Measured (1%), Indicated (5%), Inferred (9%) Mineral Resources and Exploration
Target (24%) for the Taylor deposit, and was originally disclosed in "Final Investment Approval to Develop Hermosa's Taylor Deposit" dated 15
February 2024. The Ore Reserves, Mineral Resources and Exploration Target underpinning the Production Target have been prepared by Competent
Persons in accordance with the JORC Code. South32 confirms that all the material assumptions underpinning the Production Target in the initial
public report referred to in ASX Listing Rule 5.16 continue to apply and have not materially changed. There is low level of geological confidence
associated with Inferred Mineral Resources and there is no certainty that further exploration work will result in the determination of Indicated Mineral
Resources or that the Production Target will be realised. The potential quantity and grade of the Exploration Target is conceptual in nature. In respect
of Exploration Target used in the Production Target, there has been insufficient exploration to determine a Mineral Resource and there is no certainty
that further exploration work will result in the determination of Mineral Resources or that the Production Target itself will be realised. The stated
Production Target is based on South32’s current expectations of future results or events and should not be solely relied upon by investors when
making investment decisions. Further evaluation work and appropriate studies are required to establish sufficient confidence that this target will be
met. South32 confirms that inclusion of 33% of tonnage (9% Inferred Mineral Resources and 24% Exploration Target) is not the determining factor of
the project viability and the project forecasts a positive financial performance when using 67% tonnage (61% Probable Ore Reserves and 1%
Measured and 5% Indicated Mineral Resources). South32 is satisfied, therefore, that the use of Inferred Mineral Resources and Exploration Target in
the Production Target and forecast financial information reporting is reasonable.
6 Based on Group capital expenditure (including equity accounted investments) for the period FY16 to H1 FY24. Excludes South Africa Energy Coal,
growth capital expenditure, intangibles, and capitalised exploration.
Date: 29-02-2024 07:10:00
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