SALE OF ILLAWARRA METALLURGICAL COAL
South32 Limited (ASX / LSE / JSE: S32; ADR: SOUHY) (South32) has entered into a binding agreement to sell Illawarra Metallurgical Coal1 (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$1,050M2, payable at completion;
• Deferred cash consideration of US$250M, payable in 2030; and
• Contingent price-linked cash consideration of up to US$350M3. The total consideration represents a multiple of approximately 7.2x average annual free cash flow for Illawarra Metallurgical Coal4.
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 production5;
• Reduces our operating footprint and our functional support; and
• Reduces our capital intensity, with Illawarra Metallurgical Coal comprising ~35% of Group capital expenditure6.
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.
i hold S32
will be interesting to see if BSL takes the preemptive rights up
how will the market react to this
seems that S32 can't operate coal mines effectively ( first the African assets,now this )