South32 Ltd. shares experienced a significant decline on Monday after the Australian mining company reported $818 million in impairment charges. The company’s stock declined by as much as 12.9% in Sydney, marking the largest intraday drop since March 2020. This downturn followed South32’s announcement of a pre-tax writedown of $554 million on its Worsley alumina asset and a $264 million reduction in the value of its Cerro Matoso nickel project in Colombia.
The Worsley alumina operation, located southwest of Perth, includes the Boddington bauxite mining and alumina refining project. Despite recently receiving environmental approval to extend its operational life by 15 years, the Western Australia government imposed conditions that South32 described as creating “significant operating challenges.” These new regulations, influenced by environmentalists’ concerns about the impact on Western Australia’s Jarrah forests and local wildlife, have led South32 to appeal the restrictions.
The writedown of the Worsley asset is expected to heighten concerns about global alumina supply tightening. This follows Alcoa Corp.’s earlier announcement this year of the closure of its Kwinana alumina refinery in Western Australia, which has an annual capacity of 2.2 million tons. Additionally, Rio Tinto Group declared force majeure on alumina cargoes from Queensland due to regional gas shortages, further impacting global supply.
In its quarterly operations statement on Monday, South32 revealed a 14% drop in copper production for the three months ending June 30, compared to the previous year, totaling 608,000 tons. Alumina output during this period was also lower than anticipated, primarily due to maintenance work on a conveyor belt used to transport ore to the refining plant. As a result, South32 lowered its alumina production guidance for the 12 months starting July 1 by 6%, bringing it down to 3.75 million tons.
The main risk to South32’s profitability, according to Citigroup Inc. analysts led by Paul McTaggart, remains the volatility in commodity prices. However, the company’s diversification into other minerals such as silver, manganese, and coal might help mitigate this risk.
South32’s shares were trading 12.7% lower at A$2.985 per share at 11:50 a.m. Sydney time. The sharp decline reflects the market’s reaction to the significant impairments and the operational challenges faced by the company. Investors are closely watching how South32 navigates these issues and whether its diversification strategy will provide the stability needed to weather the volatility in commodity prices.
The environmental conditions imposed on the Worsley alumina project have been particularly challenging for South32. The company has expressed concerns that these conditions could severely impact the future of the refinery. Environmental groups have raised alarms about the potential damage to the Jarrah forests, a critical habitat for wildlife in the region. South32’s appeal against these conditions indicates the company’s commitment to addressing environmental concerns while maintaining its operational capabilities.
The reduction in value of the Cerro Matoso nickel project also highlights the challenges faced by South32. Located in Colombia, the Cerro Matoso operation has been an important asset for the company. However, the $264 million writedown reflects the difficulties in maintaining its profitability despite fluctuating nickel prices and operational hurdles.
South32’s diversified portfolio, including investments in silver, manganese, and coal, offers some hope for mitigating the risks associated with the volatility of alumina and nickel prices. These minerals provide a broader revenue base, potentially cushioning the impact of any single commodity’s price fluctuations. Analysts at Citigroup believe this diversification could be crucial for South32’s long-term stability.
The broader market context also plays a role in South32’s current challenges. The global alumina supply chain has been under pressure, with significant disruptions such as Alcoa’s Kwinana refinery closure and Rio Tinto’s force majeure declaration. These events have contributed to a more constrained supply environment, heightening the impact of South32’s production issues.
