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SOUTH32 LIMITED - Sale of Illawarra Metallurgical Coal

Release Date: 29/02/2024 07:10
Code(s): S32     PDF:  
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 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 

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. 

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

Media Relations	
Jamie Macdonald 
T	+61 8 9324 9000
M	+61 408 925 140

Miles Godfrey 
T	+61 8 9324 9000
M	+61 415 325 906

Further information on South32 can be found at

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

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.


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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