South32 Manganese Supply To Tighten

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South Africa has become the latest jurisdiction to impose a wide-ranging lock-down, affecting the outlook for the South32 manganese operations.

-SAEC may be exempt as it provides coal for domestic power
-Manganese market likely to tighten
-Diverse range of exposures and locations underpins business
 

By Eva Brocklehurst

Manganese production in South Africa will be curtailed, as the country locks down in the face of coronavirus. South Africa has resorted to a 21-day closure period and South32 ((S32)) has indicated this will affect manganese mining and the remaining furnace at Metalloys.

The company is also exposed to any South African government decision via its operations at Hillside aluminium smelter and South Africa Energy Coal (SAEC). In the case of the latter, this business is a critical supplier of thermal coal to the country's power sector and may be allowed to continue producing domestic supply.

However, brokers note, while national power generation will be exempt from restrictions, the impact on SAEC and Hillside is still to be clarified. The Hillside smelter at Richards Bay accounts for 12% of the company's FY20 operating earnings (EBITDA) and Ord Minnett anticipates it will cease production for the 21 days. 

Macquarie suspects exports of thermal coal will be stopped during the lock-down and Credit Suisse also assumes both mining and shipping activity will cease for manganese.

Manganese

While the GEMCO manganese operations in Australia, are likely to benefit from a jump in manganese prices, Ord Minnett suspects this could be countered by the loss from the South African operations, which account for 40-50% of global manganese supply.

Spot manganese is currently US$4.20 per dmtu and the broker would not be surprised if this doubled.

While the removal of South32's supply should tighten the manganese market, given the short duration, and the likelihood of a soft commodity demand backdrop in the immediate future, the impact on prices may be minimal, in Credit Suisse's view.

Ord Minnett estimates SAEC will be loss-making in FY20 and closing the operation will have a further negative impact, while noting South32 has the option to defer non-essential exploration and expenditure.

Worsley alumina mine in Australia, which provides significant volumes to Hillside would need to be re-directed and this could have a negative impact, the broker adds.

Morgan Stanley assesses the total revenue impact, assuming one month of disruptions, could be around 3% of FY20 revenue.

Macquarie believes Illawarra Coal (NSW) and Cerro Matoso (Colombia) are the main assets at the greatest risk of further interruptions. Increased restrictions in NSW could present significant issues with operating underground coal mines in that state.

Macquarie reduces FY20 earnings forecasts by -7% and points out earnings forecasts are within 5% of spot prices but 25% higher for FY21 because of an assumed recovery in a number of key commodities including alumina, nickel, aluminium and silver.

Credit Suisse makes no changes to its view but notes the situation is fluid. Sentiment is expected to drive the sector in the near term and there is potential that more countries follow suit. Otherwise, South32 appears well-placed to the broker, with a strong balance sheet and a diverse range of commodity exposures and locations.

Elsewhere

Ord Minnett notes, while there have been several mine closures across the resources industry, Australia is largely, to date, unaffected. So far there have been few cases of coronavirus infection on mine sites and measures have gone beyond just limiting non-essential personnel to the site.

The latest round of outages is a result of hard government measures. Impacts range from complete cessation of activities, as in Argentina, South Africa and New Zealand, to virtually no impact on Australia's Pilbara.

FNArena's database has six Buy ratings and one Hold (UBS). The consensus target is $2.87, suggesting 52.7% upside to the last share price. Targets range from $2.40 (Macquarie) to $3.20 (Morgans).

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