Why is S32 Share Price falling?, page-14

Australian listed mining giant South 32 is believed to be circling the $1.5 billion-plus Caserones copper project in Chile that is up for sale by its Japanese owner.

Investment bank JPMorgan is advising on the sale of the mine that is on offer by Japan-based mining and energy conglomerate JXTG.

Observers believe that South 32 could be successful in its pursuit of the asset, with the Japanese group unlikely to sell to a Chinese company given the historic rivalries between the two countries, while the asset is not expected to be of a quality that would attract resource powerhouses Rio Tinto and BHP.

JXTG, along with Mitsui entities, purchased the Caserones mine project in 2006 for $US137 million and it was developed into an operating mine over the next eight years.

It has a mine life of 28 years, and for the period from April to December produced 103,000 tonnes of copper concentrate, the raw material used in smelting, and copper cathode, used in the manufacture of wires and pipes.

The Wall Street Journal in April reported that as a producing mine, Caserones could prove attractive to companies that want copper without spending the money and time required to develop an operation, and because Chile is seen as a favourable mining jurisdiction.

But one deterrent for South 32 could be the higher-than-expected operating costs and production expenses that have plagued the owners in the past.

Its capital costs ballooned to $US4.2 billion from original estimates of about $US2 billion.

South 32 has a market value of $16.17bn. BHP and Rio Tinto are considered to be cautious buyers in the market.

It is understood that more greenfield sites have been on their agenda, rather than embarking on major mergers and acquisitions.

However, copper assets are highly sought-after thanks to high prices, partly driven by a lack of investment in new mines and burgeoning demand for electric and hybrid vehicles.

That outlook has helped spur recent deals.In April, Canada’s Lundin Mining struck a $US800 million pact to acquire the Chapada copper mine in Brazil from Yamana Gold. That came after Lundin lost out in September to China’s Zijin Mining for the $US1.41 billion acquisition of Nevsun Resources, a producer of copper and other metals.

A global operator, JXTG’s metal business is focused on activities like mining, refining and smelting.

The interest in the mine by South 32 comes as a divestment by the Australian-listed group of its South African Energy Coal is thought to be close, with bidders now shortlisted.

The expectation is that the business will sell for about $1bn.

Remediation costs, which some estimate to be about $700m, are expected to be carried by South 32, so in reality, the $16.17bn miner will likely net about $300m for the operation.

South African Energy Coal accounts for about 11 per cent of South 32’s earnings.

Macquarie Capital and Morgan Stanley are working on the sale.

The business is located in the Mpumalanga coal fields and includes four collieries and three processing plants, producing energy coal for the domestic and export market.

In April last year, the entity became a stand-alone business to be managed separately from the rest of the South32 Group, with South32 owning 92 per cent and a Broad-Based Black Economic Empowerment consortium owning the remainder.