S t o c k h e a d's Josh Chiat has several S32 articles up dated...

S t o c k h e a d's Josh Chiat has several S32 articles up dated 16-17 Feb. I havent seen these on HC. I'll condense and combine:

We’ve seen lithium, nickel, copper and more commodities froth more feverishly than a freshly poured Guinness in the past couple of years.But the story about demand for metals from batteries goes beyond the most visible commodities that have drawn the interest of investors across the ASX.

Batteries, gigafactories, EVs and energy storage metal demands are eye-watering to say the least, and in most cases projections of future demand far outstrip what we can currently supply.

Take for instance, manganese. Around 90% of the global market for manganese comes from the steel industry, where it is used both in the refinement of iron ore and as an alloy which helps to harden and fortify the final steel product.But it is finding an emerging market as a critical component of lithium ion batteries.

Manganese is one of the most common ores on Earth, something that has stirred investment in R&D to develop batteries with higher manganese contributions and lower levels of rare and expensive nickel and cobalt metal.Even with current battery chemistries,

S t o c k h e a d’s Reuben Adams estimates Tesla’s manganese requirements equate to around 14% of annual global manganese sulphate production, or 65% of the projected output of Element 25’s (ASX:E25) Butcherbird project in the Pilbara.With that in mind there is a growing push for companies to develop new sources of high purity manganese sulphate, not least because around 90% of the market is concentrated in China.

Bearing in mind some grades of manganese sulphate go into fertilisers, according to data from the US Geological Survey US companies spent over US$28 million to November last year buying manganese sulphates out of China.That number is around double the same period in 2021.It has some of the world’s biggest mining houses taking notice, including $21 billion capped Aussie diversified miner South32 (ASX:S32).

30(%) for (20)30

South32 managing director Graham Kerr says manganese for batteries could rise from a tiny proportion of the end user demand to as much as 30% by 2030.It has informed the investment case for the company’s Hermosa project in the United States.The first cab off the rank at Hermosa, purchased in a US$1.3 billion cash buyout of TSX-listed Arizona Mining in 2018, will be the Taylor deposit.

A final investment decision on the development of that deposit is due by mid-2023 after a PFS last year suggested the mine would produce 111,000t of zinc, 138,000t of lead and 7.3Moz of silver annually over a 22-year mine life.

But the Clark deposit, also part of the Hermosa land package, is a different beast, containing a mixture of zinc, manganese and silver.

South32, a globally significant manganese producer through its 60% owned GEMCO operations in the Northern Territory and Wessels and Mamatwan projects in South Africa, announced a major technical breakthrough in its half-year results yesterday.It says it has established the ability to produce high purity manganese sulphate suitable for batteries from its Clark deposit, where 9.08% of the 55Mt resource is manganese metal.

Should Clark be developed, it would make South32 the only miner producing manganese on US shores.“We do believe that we’ve got to actually see manganese demand from batteries actually grow and that could possibly go from today where it’s probably somewhere around let’s say, 6%,” Kerr told media on a conference call yesterday.“We believe by calendar year (20)30 it could actually get up to about 30%.

“So I think as that market continues to evolve — China today is probably the major producer of manganese into batteries (and) they’re probably going to be the dominant force in Southeast Asia and they export at the moment.“But I think as you see legislative change occur in the US, which we’ll come back to, and similar kind of legislative change in Europe, both pushing EV vehicles, I think that will continue to actually grow the manganese demand into batteries.”

While investigations into whether South32 could produce manganese sulphate at its existing operations in Australia and South Africa are some way off, the introduction last year of the Biden Administration’s Inflation Reduction Act has shone a spotlight on Hermosa.

“The South African business and Australian business, we’ll look at the optionality around how we can support that. I think what positions Clark particularly well is it’s actually the only manganese project and there are no existing manganese operations today in the US,” Kerr said.“The Inflation Reduction Act that came out last year was all about trying to push EVs in the US but also have secure and, where possible, domestic US supply chains.

“And I think that’s where Clark is uniquely positioned. And it’s not only about security of supply and domestic security needs, it’s also about the cost of logistics when you’re right in their own backyard.

“We will also look at what that means for the rest of our business as that market continues to develop. It’s more the US now where the demand from customers is incredibly strong.”

Inflation. Reduction. Act.

The key piece of legislation will provide tax credits for US battery makers who have a 40% share of their critical minerals coming from the United States or countries with which it has free trade agreements.That rises every year until 2027, when the threshold will be 80%.Those terms provide a strong platform for South32’s push into North America.“There is no doubt that Inflation Reduction Act is having a positive impact on EVs, and a positive impact on demand for all the materials that are going to … go … into battery technology,” Kerr said.

“That Act has I think brought Clark quicker forward than what we probably would have planned.

“That’s why we’ve been accelerating work in that space. I think the team’s done a really good job.

“We shouldn’t lose sight of the fact that zinc that comes out of Taylor is also one of four critical minerals that are listed on that US critical minerals list and zinc is going to have an exponential increase in its demand with the growth of wind turbines.

“I think the other thing that will come out of Taylor will be silver which plays an important part in EVs, but also solar panels. So we’ve got two, if you like out of the four critical minerals.”

South32 (ASX:S32) has, like its progenitor BHP (ASX:BHP), made no bones of its belief the future of mining lies in metals for the energy transition.While two of its big revenue drivers remain its metallurgical coal business in New South Wales, that will be taking a back seat in the coming years as South32 ramps up its investments in nickel, copper, manganese, zinc, alumina and silver.

One market South32 boss Graham Kerr likes is lithium, an area where only a handful of the top miners have dared to tread.BHP (ASX:BHP) still views the market as too small and immature, though Rio Tinto (ASX:RIO) is a major bull with exploration and development prospects in Serbia and Argentina.

Kerr told media in response to questions on its half-year results call today that $21 billion capped South32 underestimated the lithium sector ahead of last year’s historic boom.A more than 50% rise in global EV sales to ~10.5m sent lithium prices skyrocketing to over US$80,000/t for battery grade chemicals and up to US$8000/t for 6% pure lithium concentrate in 2022, before a slight drop early this year.“

When it comes back to other commodities, we’ve been very clear that we do like nickel, we do like zinc, we do like copper. We think they are going to play an important role in how the world decarbonises,” Kerr said.“We’ve made a comment previously that look, lithium was probably one that we underestimated. There’s been less supply come to the marketplace and demand has probably been stronger than we expected three or four years ago.

”But, that does not mean lithium stocks are attractive M & A opportunities now.“So we do like lithium, but at the moment would probably make the comment that we think the majority of lithium stock is overpriced,” Kerr added.“We’ll have a look at it, but we think the value is probably not there for our shareholders at the moment purely from a buying perspective.”

South32 dividend below consensus but financial result “strong”

S32 will pay US$224 million or 4.9c a share to shareholders on the half year, after a 34% drop in profit after tax to US$685m. Consensus estimates suggested South32 would offer US5.2c a share, with Goldman Sachs tipping a US5.5c payout.Its underlying EBITDA fell 27% year on year to US$1.364b, despite a slight 0.4% lift in underlying revenue to US$4.524b

.Kerr says commodity markets have strengthened, with production growth and lower operating costs expected in the second half, while a financial investment decision on the Taylor deposit at the Hermosa project in Arizona is expected in the middle of calendar year 2023.

“The long-term outlook for our business is positive as a result of our portfolio investments and high-quality development options in the metals critical for a low-carbon future,” he told the market. South32 also added US$50 million to its buyback target, taking its total payout limit to US$2.3b, with US$158m to be returned to shareholders by September 1.

Copper equivalent production rose 12%, S32 said it had lowered or held its cost guidance largely unchanged for the majority of its operations, despite pressures from inflation.“In the short term, we’re in a period where we’ve actually managed to get our costs well under control. We’ve had good production growth in the first half with 12%, we’ve got another 6% that come through in the second half,” Kerr said.“Commodity prices are starting to increase versus the first half when you look at the second half.”

Diversified miner South32 (ASX:S32) continues to view steelmaking coal as a part of its long-term future as it gears its portfolio to benefit from the transition to green energy.

Echoing the position of its mother company BHP (ASX:BHP), which S32 was spun out of back in 2015, CEO Graham Kerr said met coal will be key part of the steelmaking process for at least 20 years.

Around 20% of the company’s revenue came from coking coal in the December half thanks to the record high prices currently for the tightly supplied commodity.

Around 12% came from manganese, but long term Kerr told media S32 wants metals driven by demand for solar panels, electric vehicles and wind turbines like silver, copper, aluminium and zinc to make up 80% of its revenue base.

However, he said met coal would remain part of its core commodity mix, with lower prices as supply and demand move into balance reducing its share of earnings over time.“When it comes to metallurgical coal, metallurgical coal goes into the making of steel and while there is lots of discussion about green steel via green hydrogen, they’re a way off being commercialised,” he said.“We have the view that’s 20 plus years. If you have a look at our partner down the road Bluescope Steel, we know they’re heading into a furnace rebuild for probably around 20 years without that technology, that’s certainly what’s happening in the industry.

“I do believe that the high quality coking coal that comes out the east coast of Australia’s quality is far better in terms of carbon impact in other parts of the world. But the world will continue to need to produce steel.”

Kerr thinks met coal prices will moderate from highs of more than US$400/t currently to US$200-300/t, but closer to US$200/t over the next 12 months.“We don’t feel uncomfortable with that kind of … met coal percentage of our earnings revenue knowing that today it’s about US$400/t and it’s probably going to drop closer to US$200/t, sub-US$200/t, ultimately that will come down as a percentage,” he said.

“For us it’s about how do we make sure that it’s set up to actually be economic through the cycles for that price up and down.”

South32 expects to submit an EIS this quarter for the extension of its Dendrobium mine after the project was given state significance status by the NSW Government last year, with the uncertainty of an approvals process still hanging over the mine.

Base metals to see strong demand

Strong commodity prices lifted South32 to a $1.03 billion profit today, up 1847% on the previous half year.

Along with coal, South32 is also enjoying near record prices in zinc and aluminium while one of the strongest metal performers in recent times, copper, will come into its portfolio once its purchase of 45% of the Sierra Gorda mine in Chile is finalised.

Kerr said there was a dearth of new projects to fill rising base metals demand from green energy.“I think zinc that’s going to more than double production and copper, silver and zinc are going to play a big part in how the world decarbonises from solar panels, to electric vehicles to wind turbines,” he said.“The other thing I don’t think people have done enough work on to be honest is the supply side in copper, in zinc, there’s been very low levels of investment over the last ten years.

“There’s not many projects that are shovel ready to go, there’s not a lot of new discoveries and all of these … are starting to see significant supply if you like fall off in terms of grade decline or tonnage etc.“

So I think medium to long term aluminium, zinc, copper, silver they’re going to be really attractive commodities to actually be in and that’s why we’ve been shifting our portfolio that way, and why roughly 80% of our future earnings on a revenue basis will be directed towards those materials.”

________________________

I heartily agree with GK's opportunities assessment. Cu Zn Mn Ni are set to soar as demand outpaces production. GK & team have plenty cash plus debt capacity for M&A if something worthwhile pops up.

Hold onto your hat.

Ash