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Worst Behind South32?

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Shares in South32 ended up more than 3.6% yesterday at $3.38, despite more problems for its Illawarra Metallurgical Coal operations south of Sydney where uncertain mining conditions will hold back output in he year to June, 2018.

The company told investors in a strategy update that safety questions are behind the delays to one of its two mines in the region at Appin returning to full production. The problems have been apparent now for well over a year now

South32 said in the update it now expects to produce 4.5 million tonnes of hard coking coal from Illawarra, where operations at the Appin mine have been repeatedly impacted by a build-up of methane gas over the last 18 months.

That saleable production of 4.5 million tonnes is made up of 3.35 million tonnes of metallurgical (hard coking) coal, and 1.1 5 million tonnes of energy of thermal coal). Production will be weighted to the second half of FY18 given the recent outage at the Appin colliery .

The operation produced 7.07 million tonnes of coal of coking coal (much of it so-called hard or premium coking coal) last year. South32 is looking at the loss of more than $US400 million in revenue because of the problems at Appin in a full year.

Operations were partially restarted in October with the resumption of one longwall mining machine at the Appin colliery.

“We expect to return the Appin colliery to its prior two longwall configuration in the December 2018 quarter, after which we intend to ramp-up Illawarra Metallurgical Coal production safely and sustainably towards historical rates of more than eight million tonnes per annum,” South32 CEO, Graham Kerr said in the investor briefing yesterday.

That is a much longer delay than previously expected by investors - in effect the company says full production is a year away, assuming no more methane inflows into the mine.

The lower production will see mining operating unit cost at Illawarra is expected to jump to $US130 a tonne this financial year, compared to $US80 a tonne in in 2016-17. That’s because of the lower production and the loss of any economies of scale for the next year.

Hard coking coal of the quality produced at the Appin mine is currently selling for more than $US210 a tonne in the Asian market. Thermal coal sells for less than $US100 a tonne.

South32 also said in its strategy update that it had lowered its sustaining capital expenditure to $US470 million for the current year, down from an earlier target of $US500 million thanks to cuts at the Illawarra operations.

Sustaining capital expenditure for Illawarra Metallurgical Coal is now expected to be $US12 million in FY18 (previously $US150M) .

About two thirds of the reduction related to lower planned expenditure at Illawarra, due to underground development at the Appin mine being deferred.

The miner reaffirmed its 2017-18 production guidance for all its other operations.

The company has started the process of separating is South African coal mining assets from the rest of its businesses by listing them on South African stock exchanges.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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