South32 is set to divest its thermal coal assets in South Africa Energy Coal (SAEC) to Seriti Resources in an upfront payment deal worth around ZAR100 million ($9.8 million).
SAEC has incurred South32 $US578 million ($851.8 million) in impairment charges in the 2019 financial year, given the market outlook for thermal coal demand and prices.
In the same period, SAEC reduced the group’s profit after tax by 71 per cent to $US389 million.
South32 chief executive Graham Kerr marked the divestment as an important milestone as the company continues to reshape its portfolio.
“Completion of this transaction will substantially reduce our capital intensity, strengthen our balance sheet and will improve the group’s operating margin,” Kerr said.
Seriti submitted an offer for SAEC in August, with an upfront cash payment that South32 described as “modest.”
South32 will also receive 49 per cent of the free cash flow generated by SAEC until March 2024, with any payments capped at a maximum of ZAR1.5 billion a year.
Kerr said South32 was pleased to enter into an agreement with a black-owned and operated South African mining company.
“We ran an exhaustive and competitive process and we believe Seriti as an established operator is ideally positioned to unlock the potential of South Africa Energy Coal’s existing domestic and export operations, including its significant untapped resource base,” he said.
Seriti chief executive Mike Teke said the acquisition helped the company fulfil its ambition to become a black-owned and controlled mining champion.
The SAEC acquisition will enable Seriti to offer further long-term coal supply solutions to South Africa’s main electricity supplier Eskom.
“The combination of our energy coal businesses will realise further operational and technical efficiencies enabling us to better service our customers by offering competitive energy solutions,” Teke said.
Seriti is already supplying around 24 million tonnes of thermal coal a year to Eskom’s three power stations, generating about 23 per cent of the country’s electricity.