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South32 agrees to $US1.65 billion sale of Illawarra Metallurgical coal mine

South32 (ASX:S32) has agreed to sell its Illawarra Metallurgical Coal mine and processing plant, located south of Sydney, to Indonesian and Australian buyers for up to $US1.65 billion.

The buyers include the Indonesian-controlled Golden Energy and Resources, which controls Stanmore Resources, and M Resources, controlled by Australian coal trader and investor Matt Lattimore. Additionally, Sinar Mas Group, one of Indonesia’s largest multinationals, ultimately owns Golden Energy and Resources.

The deal comprises an upfront cash payment of $US1.05 billion to South32, along with a deferred sum of $US250 million payable in 2030, and an additional $US350 million over five years, contingent on market prices reaching agreed thresholds.

This sale allows South32 to reshape its business focus towards commodities critical for the transition to a low-carbon economy, such as base metals and manganese. The company previously sold its thermal coal operations in South Africa in 2021 and is now seeking to produce more metals expected to be in demand during the energy transition.

CEO Graham Kerr stated that the sale will streamline their portfolio, strengthen their balance sheet, and unlock capital for investment in high-quality development projects in copper and zinc. The transaction, expected to be completed by the final six months of calendar 2025, is valued at roughly 7.2 times average annual free cash flow for the operation.

The Illawarra Metallurgical Coal operation will be acquired by an entity called GEAR M Illawarra Met Coal, with a 70% ownership by Golden Energy and Resources and 30% by M Resources. South32 mentioned that the sale will result in a non-cash impairment reversal of up to $US370 million after tax in its June 30, 2024, results, and all current and future liabilities will be assumed by the buyer.

The Illawarra mine has experienced volatility in profits and revenues, including declines due to the re-positioning costs of its longwall mining machines. Furthermore, South32 mentioned another deal with M Resources, selling its 50% stake in the Eagles Downs coking coal project in Queensland.

BlueScope Steel holds first refusal rights over the mine, which must be addressed before the sale proceeds, either through waiver or non-enforcement. BlueScope has the option to sell its right or convert it into a long-term coal supply agreement.