South32 Makes Huge Move into Chile

South32 has followed Sandfire Resources and Newcrest in committing to a copper-led future with a $A2.8 billion plunge into the Chilean copper industry where it will join its former parent, BHP.

The move should please South32 investors after several years of buybacks. The company says it will use debt and its huge cash pile of $US660 million to finance the transaction, meaning no call for shareholders to contribute.

The move will allow South32 to wean itself off coal if it wants to – it has coking coal interests in NSW, having quit its South African thermal coal business, now the record earnings from selling coal to steel companies will help finance the move into Chilean copper.

News of the deal saw South32 shares soar as much as 11.5% to a high of $4.07 yesterday. The shares then eased to close at $3.83, still up a solid nearly 5% on the day.

South32 said in Thursday’s statement that it will buy a 45% interest in the Sierra Gorda copper mine in Chile from the Sumitomo group of companies of Japan for an upfront cash consideration of $US1.55 ($A21. billion) plus a $US500 million ($A680 million) contingent price-linked payment linked to the mine’s copper production rates and metal prices in the years from 2022 to 2025.

The move follows Sandfire’s proposed purchase of a Spanish copper mining and process complex for nearly $A2.6 billion) while Newcrest this week revealed plans to expand output at four of its pillar mines (Cadia, Lihir, Red Chris in Canada and Havieron/Telfer) that will see it maintain gold output around current levels of 2 to 2.2 million ounces a year until 2030, but boost copper output in the same time by 37%.

The driver for the interest in copper is the rapid rise in demand from renewables such as solar, wind farms and electric vehicles of all types, as well as the emerging demand for buses, truck and machinery of all types.

In Thursday’s statement, South32 said the Sierra Gorda is an operating mine in the prolific Antofagasta copper mining region in northern Chile, which is expected to produce 180,000 tonnes of copper, 5,000 tones of molybdenum, 54,000 oz of gold and 1.6 million oz of silver in 2021.

The acquisition provides South32 with joint control alongside 55% joint venture partner KGHM Polska Miedz (KGHM), a global miner listed in Poland.

KGHM is a Polish multinational corporation that employs around 34,000 people around the world and has been a major copper and silver producer for more than 50 years. KGHM has eight mines located in Poland, Canada, the USA and Chile and is actively advancing a further four projects.

BHP controls the huge Escondida copper mine in the Atacama desert region of Chile (Rio Tinto is a minority shareholder), southeast of Sierra Gorda. Escondida is the biggest copper mine in the world and is located in the world’s biggest copper mining country in Chile.

BHP has also has the Cerro Colorado and Spence mines in Chile as well as a stake in the Anatamina mine in Peru.

In its statement on Thursday, the company said the purchase “is expected to be immediately earnings accretive” and besides using its cash and debt to pay for the deal, it also “expect to use our current strong cash generation to minimise acquisition debt facility utilisation, replacing it with long-term funding following completion, with the intention of maintaining our investment grade credit rating through the cycle.”

South32 CEO, Graham Kerr said “We are actively reshaping our portfolio for a low carbon world and the acquisition of an interest in Sierra Gorda will increase our exposure to the commodities important to that transition. Copper is a critical metal in the decarbonisation of the world’s energy networks and has strong long-term market fundamentals.

“Adding Sierra Gorda further improves our portfolio and is expected to immediately lift Group margins and earnings, supporting future shareholder returns while retaining strength and flexibility in our balance sheet.

“The transaction expands our operating and development presence in the Americas and provides exposure to a long-life asset with a large resource base. The operation has existing opportunities to unlock further upside through improved production efficiency, resource expansion and exploration.

“Through our extensive due diligence of the opportunity over the past nine months, we believe we have identified an operation that is benefitting from significant historical investment and current, capital efficient de-bottlenecking work. The operation is serviced by excellent infrastructure, including access to renewable power and seawater for processing. Looking ahead we see an opportunity for continued strong performance at Sierra Gorda with our new partner, KGHM, that can deliver substantial value to South32’s shareholders.”

Sierra Gorda is a large-scale operation, with a copper-molybdenum-gold sulphide mineral reserve of more than 1 billion tonnes, and a mine life of more than 20 years.

“The scale and costs of the operation benchmark favourably with other top Chilean mines of similar scale with the operation on-track to produce copper equivalent production of 214,000 tonnes in the 2021 calendar year at an operating unit costs of ~US$1.29/lb (world prices rose to $US4.50 a pound or more on Wednesday).

The mine commenced construction in 2011 and was commissioned in 2014. It is serviced by established infrastructure, including renewable power and a seawater pipeline, with freight rail and a national highway connecting the operation to the ports of Antofagasta and Angamos.


About 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.

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