South32 restructures, flags US$1.7B writedown

The world’s largest manganese producer is taking a machete to supply so that it can rebalance the market.

South32 (LSE: S32; US-OTC: SOUHY) will remove 23% — or 900,000 tonnes per year — of future saleable production from its Hotazel manganese mines in South Africa.

The Hotazel mines include Mamatwan, an open-pit mine that produces lower-grade ore, and the Wessels mine, which has a higher-grade ore mined 300 metres below the surface.

The mines are in the Kalahari basin of South Africa’s Northern Cape province, a region that holds 80% of the world’s known manganese resources, according to figures from South32.

They are owned by Samancor Holdings, a joint venture in which South32 owns a 60% stake, and Anglo American (NASDAQ: AAUK; LSE: AAL), which has a 40% interest.

The cuts in manganese production follow a decision in November 2015 to suspend mining at the Hotazel mines, which took out 700,000 tonnes of manganese ore production from the global supply chain and slashed inventories. Mining is restarting at Hotazel, but at a much lower rate of 2.9 million tonnes per year.

The cuts in South Africa will lower the headcount across the joint-venture by 620 employees. Production at the Wessels mine will drop 36% to 740,000 tonnes per year, while production at the Mamatwan mine cuts back to 2.2 million tonnes per year, or 18%.

In addition, only one of four furnaces at the joint venture’s Metalloys smelter will operate. The Metalloys alloy plant one is of the largest smelters in the world, producing high-carbon ferromanganese and medium-carbon ferromanganese alloy.

Samancor also owns operations in Australia, including Gemco, an open-pit manganese mine in the Northern Territory, the largest and one of the world’s lowest-cost manganese ore producers, and Temco, a manganese alloy plant in Tasmania. Together the operations are known as “Australia Manganese.”

Like many other commodities, manganese has lost more than half of its value in recent years. The metal fetched over US$3 per kilogram in January 2011, and at press time sold for just US$1.48 per kilogram.

“It will not be until commodity prices have stabilized and all companies have made the necessary adjustments that a platform for relative comparisons can be made again,” analysts at Investec Securities said in a research note. “South32 is certainly making an effort in this regard.”

While it makes meaningful cuts to supply at its manganese operations in South Africa, South32 also plans to lower costs at its manganese operations in Australia (Gemco and Temco), at Illawarra Metallurgical Coal’s three underground coal mines in southern Australia, its Cerro Matoso nickel mine and smelter in northern Colombia, and at Worsley Alumina, one of the largest and lowest-cost bauxite mining and alumina refining operations in the world. These initiatives, the company says, will lower headcount for the rest of the fiscal year.

In a statement, South32 CEO Graham Kerr said the restructuring at many operations across its portfolio will “strengthen our financial position and increase our cash-generating capacity through the cycle.”

Still, he warned, the company is “not immune to external influences and the significant change in the outlook for commodity prices,” and said management would post non-cash charges of US$1.7 billion when it reports its December 2015 half-year financial results.

“This is a classic example of ‘cleaning up the balance sheet’ going forward,” Toronto-based independent analyst Alka Singh says. “The new management team wants to take the writedowns and move ahead.”

“We will continue to focus on the things that we can control — safety, volume, costs and capital expenses — as we seek to optimize the performance of our operations,” South32 CEO Kerr said. “This strategy to maximize value, rather than volume. High-quality operations and well-defined financial policies underpin our resilience at current commodity prices, and we remain exceptionally well positioned for any improvement in industry fundamentals.”

South32 was created in May 2015 by spinning-off non-core assets owned by BHP Billiton (NYSE:BHP; LSE: BLT), where Kerr served as chief financial officer.

Most of the assets funnelled into South32 were acquired by BHP in 2001, when it merged with London-based Billiton.