Project Milky Way Announcement

RNS Number : 0735P

South32 Limited

14 October 2021

 

14 October 2021

South32 Limited

(Incorporated in Australia under the Corporations Act 2001 (Cth))

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32 ADR: SOUHY

ISIN: AU000000S320

south32.net

SOUTH32 TO ACQUIRE A 45% INTEREST IN THE SIERRA GORDA COPPER MINE

South32 Limited (ASX, LSE, JSE: S32; ADR: SOUHY) (South32) is pleased to announce that it has entered into two binding conditional agreements with Sumitomo Metal Mining (TYO: 5713) and Sumitomo Corporation (TYO: 8053) (collectively Sumitomo) to acquire a 45% interest in the Sierra Gorda copper mine in Chile (Sierra Gorda) via the acquisition of a 45% indirect interest in Sierra Gorda S.C.M. (SGSCM) for an upfront cash consideration of US$1.55B[1] (Transaction). South32 has also agreed to provide Sumitomo with a contingent price-linked consideration of up to US$500M, payable at threshold copper production rates and prices in the years 2022-25[2].

Sierra Gorda is an operating mine in the prolific Antofagasta copper mining region, which is expected to produce 180kt of copper, 5kt of molybdenum, 54koz of gold and 1.6Moz of silver in 2021 (100% basis)[3]. The acquisition provides South32 with joint control alongside 55% joint venture partner KGHM Polska Miedz (KGHM), a global miner listed in Poland.

•	The Transaction is expected to be immediately earnings accretive, with the upfront purchase consideration benchmarking favourably to historical investment, production and valuation multiples (3.3x FY21 Underlying EBITDA)[4].
•	Funding will be via a combination of cash on hand and an underwritten US$1B acquisition debt facility that will maintain our balance sheet strength and flexibility. The Group's unaudited net cash balance at the end of September 2021 was US$660M.
•	We expect to use our current strong cash generation to minimise acquisition debt facility utilisation, replacing it with long-term funding following completion, with the intention of maintaining our investment grade credit rating through the cycle[5].
•	We will continue our flexible execution approach with regards to the remaining US$231M capital management program balance.

South32 Chief Executive Officer, Graham Kerr said "We are actively reshaping our portfolio for a low carbon world and the acquisition of an interest in Sierra Gorda will increase our exposure to the commodities important to that transition. Copper is a critical metal in the decarbonisation of the world's energy networks and has strong long-term market fundamentals.

"Adding Sierra Gorda further improves our portfolio and is expected to immediately lift Group margins and earnings, supporting future shareholder returns while retaining strength and flexibility in our Balance Sheet.

"The transaction expands our operating and development presence in the Americas and provides exposure to a long-life asset with a large resource base. The operation has existing opportunities to unlock further upside through improved production efficiency, resource expansion and exploration.

"Through our extensive due diligence of the opportunity over the past nine months, we believe we have identified an operation that is benefitting from significant historical investment and current, capital efficient de-bottlenecking work. The operation is serviced by excellent infrastructure, including access to renewable power and seawater for processing. Looking ahead we see an opportunity for continued strong performance at Sierra Gorda with our new partner, KGHM, that can deliver substantial value to South32's shareholders."

Transaction details

Sumitomo has agreed to provide South32 with a tax indemnity in relation to potential changes in the Chilean in-country tax regime as it pertains to SGSCM up to an agreed cap.

The Transaction is subject to the waiver or non-exercise of pre-emption rights held by KGHM under the
Joint Venture Agreement. If KGHM exercises its pre-emption rights then the Transaction will not proceed and Sumitomo will instead dispose of the 45% interest to KGHM on the same terms and conditions as the agreement with South32. There will be minimal fees payable by South32 on the acquisition debt facility in this scenario.

Completion of the Transaction is expected around the end of calendar year 2021, subject to conditions including competition and regulatory approvals, for which South32 has agreed to a break fee payable in limited circumstances.

Sierra Gorda overview

Sierra Gorda is a conventional open pit mine located in the Antofagasta region, at relatively low altitude (1,700m above sea level) in northern Chile. The mine commenced construction in 2011, ahead of commissioning in 2014. The operation benefits from high quality, modern processing equipment, with historical capital investment to CY20 of ~US$5B (100% basis). It is serviced by established infrastructure, including renewable power and a seawater pipeline, with freight rail and a national highway connecting the operation to the ports of Antofagasta and Angamos.

Sierra Gorda is a large scale operation, with a copper-molybdenum-gold sulphide mineral reserve[6] of more than 1 billion tonnes, and a mine life of more than 20 years ^[7] . The scale and costs of the operation benchmark favourably with other top Chilean mines of similar scale with the operation on-track to produce   copper equivalent production of 214kt in CY21e[8] at Operating unit costs of ~US$1.29/lb[9].

There are a range of growth and improvement opportunities available to Sierra Gorda, including the capital efficient de-bottlenecking project that is underway to lift plant throughput by ~6% to ~50Mtpa and copper recoveries by ~2% to 85% in the medium term[10]. A feasibility study is underway for a brownfield Oxide Project which is assessing the opportunity to process material stockpiled at the mine[11]. Potential exists for further exploration upside at the Pampa Lina deposit and across the regional land package.

KGHM is a Polish multinational corporation that employs around 34,000 people around the world and has been a major copper and silver producer for more than 50 years. KGHM has eight mines located in Poland, Canada, the USA and Chile and is actively advancing a further four projects.

1	Subject to customary working capital and net debt adjustments.
2	50% of incremental revenue realised above the following copper price thresholds, only where payable copper production exceeds the agreed thresholds: CY22: US$4.10/lb and 158kt Cu, CY23: US$3.90/lb and 151kt Cu, CY24: US$3.85/lb and 166kt Cu, CY25: US$3.80/lb and 158kt Cu.
3	Refer to production guidance and production target as outlined in "Foreign Estimates - clarifying statements as required by ASX Listing Rule 5.12" in this announcement. Key facts and material assumptions to support the reasonable basis for disclosing production targets and forecast financial information is provided in Annexure B of this announcement.
4	Upfront Enterprise Value (EV) refers to the upfront bid EV of US$1.7B, which comprises US$1.55B upfront purchase consideration and target net debt of ~US$150M.
5	We expect to maintain our current BBB+ and Baa1 credit ratings, with S&P and Moody's respectively.
6	Prepared in accordance with NI 43-101 and the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) Standards.
7	Refer to "Foreign Estimates - clarifying statements as required by ASX Listing Rule 5.12" in this announcement.
8	Recovered metal in CuEq terms is calculated using the total revenue divided by the Cu price. Average metallurgical recovery assumptions are 83% for Cu, 57% for Molybdenum and 53% for gold. The prices used are Sierra Gorda's CY20 realised prices excluding the impact of treatment and refining charges.
9	Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales and TCRCs, divided by sales volumes.
10	Medium term target is expected average CY22 to CY26.
11	Stockpiled ore referred to in this announcement is unclassified and South32 cannot confirm whether the estimate has been compiled using an appropriate foreign reporting co

Adviser

UBS AG is acting as financial adviser and Herbert Smith Freehills as legal adviser to South32. Cariola Díez Pérez-Cotapos is acting as Chilean legal adviser to South32.

About us

South32 is a globally diversified mining and metals company. Our purpose is to make a difference by developing natural resources, improving people's lives now and for generations to come. We are trusted by our owners and partners to realise the potential of their resources. We produce bauxite, alumina, aluminium, metallurgical coal, manganese, nickel, silver, lead and zinc at our operations in Australia, Southern Africa and South America. With a focus on growing our base metals exposure, we also have two development options in North America and several partnerships with junior explorers around the world.

Investor Relations
Alex Volante T  [phone] M  [phone] E  [e-mail]	Tom Gallop T   [phone] M   [phone] E  [e-mail]
Media Relations
Miles Godfrey M  [phone] E  [e-mail]	Jenny White T  [phone] M  [phone] E  [e-mail]

Further information on South32 can be found at www.south32.net .

This announcement contains inside information.

Approved for release by Graham Kerr, Chief Executive Officer
JSE Sponsor:  UBS South Africa (Pty) Ltd
14 October 2021

Forward-looking statements

This release contains forward-looking statements, including statements about trends in commodity prices and currency exchange rates; demand for commodities; production forecasts; plans, strategies and objectives of management; capital costs and scheduling; operating costs; anticipated productive lives of projects, mines and facilities; and provisions and contingent liabilities. These forward-looking statements reflect expectations at the date of this release, however they are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed in the statements contained in this release. Readers are cautioned not to put undue reliance on forward-looking statements. Except as required by applicable laws or regulations, the South32 Group does not undertake to publicly update or review any forward-looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance. South32 cautions against reliance on any forward looking statements or guidance, particularly in light of the current economic climate and the significant volatility, uncertainty and disruption arising in connection with COVID-19.

Foreign Estimates - clarifying statements as required by ASX Listing Rule 5.12

The estimates of mineral resource and mineral reserve for Sierra Gorda Cu-Mo-Au deposit are qualifying foreign estimates under the ASX Listing Rules and stated by KGHM as being classified in accordance with National Instrument 43-101 and CIM Standard for Disclosure (NI 43-101) as at 31 December 2014 and published by KGHM Polska Miedz on their website on 25 June 2015 ( https://kghm.com/sites/kghm2014/files/mrmr_english.pdf ) . The mineral resource estimates are reported inclusive of mineral reserves. These qualifying foreign estimates have not been updated since 1 January 2015. South32 is representing the mineral resource and mineral reserve estimates on a 100% basis and in million tonnes for tonnage whereas information on mineral resource and mineral reserve published by KGHM Polska Miedz on their website on 25 June 2015 are presented on a 55% basis and in kilo tonnes for tonnage. South32 Competent Persons converted the mineral resource and mineral reserve estimate to a 100% basis and in million tonnes by dividing the tonnage by 550 in discussion with the SGSCM Technical Team. In discussion with SGSCM Technical Team, contained metals were also converted using factors provided in footnote c) of Table 2. South32 confirms that no additional estimation or assumptions were considered in the tonnage conversion to represent the estimates on a 100% basis. Production depletion to date would likely result in approximately 18% reduction in the reported mineral resource and approximately 20% reduction in the reported mineral reserve for sulphide ore. In addition, approximately 110Mt of oxide mineral reserves have been stockpiled on surface.

The categories of mineral resource classification used are in accordance with NI 43-101 and the CIM Standards.
NI 43-101 is a 'qualifying foreign estimate' (Chapter 19, ASX Listing Rules) and has similar categories of resource classification as the JORC Code (Appendix 5A, ASX Listing Rules). Similarly, the categories used for Ore Reserve classification is similar as the JORC Code but is named differently. Ore Reserve is referred as mineral reserve, Proved Ore Reserve is referred as proven mineral reserve and Probable Ore Reserve is referred as probable mineral reserve under NI 43-101. In accordance with NI 43-101 and CIM Standards, mineral resources are not mineral reserves and do not have demonstrated economic viability. There is no certainty that all or any part of mineral resources will be converted to mineral reserves. Additional drilling may be required to verify geological and mineralisation continuity, and there is no certainty that all the inferred resource will be converted to measured and indicated resource. Quantity and grades are estimates and are rounded to reflect that the estimates are an approximation.

South32 considers these estimates to be both material and relevant to South32 given that Sierra Gorda has the potential to be a material mining project to South32.

Reliability of estimate: The estimates of mineral resources and mineral reserves were reported in accordance with NI 43-101 in the technical report "Mineral Resources and Mineral Reserves Report" dated 25 June 2015. South32's key technical and operational personnel conducted site visits as part of the due diligence process. South32 has been provided information on mining and processing parameters and operational performance to date.
Sierra Gorda is an operating mine and infrastructure is in place to run the mine in its stated capacity. All legislative approvals are in place to enable extraction of the stated mineral reserves.

To the extent known, the mineral resource estimate was completed using 1,352 drill holes and the mineral reserves were estimated assuming an open pit mine with conventional sulphide flotation facility to produce copper and molybdenum concentrates.

South32 is not in possession of any new information or data relating to the foreign estimate that materially impacts on the reliability of the estimates. The assessment of reliability using criteria in Table 1 of Appendix 5A (JORC Code) is provided in Annexure A of this announcement.

This announcement contains information in relation to the Sierra Gorda deposit, financial forecasts and assumptions as provided to South32 by Sumitomo Metal Mining Co. Ltd and Sumitomo Corporation, as part of our due diligence with respect to the Transaction. All material assumptions (including economic) upon which this information and financial forecasts are based are contained in this market announcement.

Following completion of the Transaction, it is South32's intention to conduct a work program to report resources in accordance with the JORC Code. Additionally, a resource optimisation study will be conducted to convert the Mineral Resources to Ore Reserves and report Ore Reserves in accordance with the JORC Code (2012). The work program is anticipated to be completed within three years and will be funded using internal cash reserves.
 

Cautionary statement

•	The estimates of mineral resources and mineral reserves for Sierra Gorda are qualifying foreign estimates under the ASX Listing Rules and are not reported in accordance with the JORC Code.
•	Competent Persons have not done sufficient work to classify the qualifying foreign estimates as Mineral Resources and Ore Reserves in accordance with the JORC Code.
•	It is uncertain, that following evaluation, the foreign estimates will be able to be reported as Mineral Resources or Ore Reserves in accordance with the JORC Code.

Competent Persons' statements

In accordance with ASX listing rule 5.12, Matthew Readford, a Competent Person, employee of South32 and Member (Chartered Professional) of the Australasian Institute of Mining and Metallurgy, confirms the information in this market announcement that relates to the Sierra Gorda NI 43-101 mineral resource foreign estimate published by KGHM Polska Miedz on their website on 25 June 2015 is an accurate representation of the available data and studies for Sierra Gorda Mine provided to South32 by Sumitomo Metal Mining Co. Ltd and Sumitomo Corporation, Joint Venture owners of Sierra Gorda S.C.M. Matthew Readford has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity being undertaken to qualify as a competent person for the reporting of Mineral Resources in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code). Mr Readford consents to the inclusion in the report of the matters based on their information in the form and context in which it appears.

In accordance with ASX listing rule 5.12, Quinton de Klerk, a Competent Person, employee of Cube Consulting Pty Ltd and Fellow of the Australasian Institute of Mining and Metallurgy, confirms the information in this market announcement that relates to the Sierra Gorda NI 43-101 mineral reserve foreign estimate published by KGHM Polska Miedz on their public website on 25 June 2015 is an accurate representation of the available data and studies for Sierra Gorda Mine provided to South32 by Sumitomo Metal Mining Co. Ltd and Sumitomo Corporation, Joint Venture owners of Sierra Gorda S.C.M. Quinton de Klerk has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and the activity being undertaken to qualify as competent person for the reporting of Ore Reserves in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code). Mr de Klerk consents to the inclusion in the report of the matters based on their information in the form and context in which it appears.

Table 1: mineral resource and mineral reserve as at 31 December 2014 (55% basis)^(a)

Mineral resource											Contained metal
Type	Classification		Tonnes (kt)		Cu (%)		Au (g/t)		Mo (%)		Cu (t)		Au (kg)		Mo (t)
Sulphide	Measured		200,503		0.41		0.07		0.03		818,053		13,835		58,146
	Indicated		683,135		0.40		0.06		0.02		2,712,045		40,305		129,796
	Measured & indicated		883,638		0.40		0.06		0.02		3,530,098		54,140		187,942
	Inferred		46,036		0.35		0.04		0.01		161,127		1,749		2,762
	Total mineral resource		929,674		0.40		0.06		0.02		3,691,225		55,889		190,704
Oxide	Measured		13,241		0.38						50,579
	Indicated		39,052		0.33						129,262
	Measured & indicated		52,292		0.34						179,841
	Inferred		540		0.26						1,403
	Total mineral resource		52,833		0.34						181,244
Mineral reserve											Contained metal
Type	Classification		Tonnes (kt)		Cu (%)		Au (g/t)		Mo (%)		Cu (t)		Au (kg)		Mo (t)
Sulphide	Proven		189,135		0.41		0.07		0.03		775,454		13,239		56,741
	Probable		610,669		0.40		0.06		0.02		2,442,674		36,640		122,134
	Total mineral reserve		799,804		0.40		0.06		0.02		3,218,128		49,879		178,875
Oxide	Proven		12,884		0.38						49,300
	Probable		37,378		0.33						124,307
	Total mineral reserve		50,263		0.35						173,607
	Stockpiled ore		24,687		0.33						81,009

Notes:

a)  The mineral resource and mineral reserve estimates represent the 55% ownership of KGHM as a proportion of the actual total mineral resource and mineral reserve estimates. Tables may not add due to rounding.

Table 2: mineral resource and mineral reserve as at 31 December 2014 (100% basis)^(a)

Mineral resource											Contained metal(c)
Type	Classification		Tonnes (Mt)		Cu (%)		Au (g/t)		Mo (%)		Cu (Mt)		Au (t)		Mo (kt)
Sulphide	Measured		365		0.41		0.07		0.03		1.49		25.2		105.7
	Indicated		1,242		0.40		0.06		0.02		4.93		73.3		236.0
	Measured & indicated		1,607		0.40		0.06		0.02		6.42		98.4		341.7
	Inferred		84		0.35		0.04		0.01		0.29		3.2		5.0
	Total mineral resource		1,690		0.40		0.06		0.02		6.71		101.6		346.7
Oxide	Measured		24		0.38						0.09
	Indicated		71		0.33						0.24
	Measured & indicated		95		0.34						0.33
	Inferred		1		0.26						0.00
	Total mineral resource		96		0.34						0.33
Mineral reserve											Contained metal (c)
Type	Classification		Tonnes (Mt)		Cu (%)		Au (g/t)		Mo (%)		Cu (Mt)		Au (t)		Mo (kt)
Sulphide	Proven		344		0.41		0.07		0.03		1.41		24.1		103.2
	Probable		1,110		0.40		0.06		0.02		4.44		66.6		222.1
	Total mineral reserve		1,454		0.40		0.06		0.02		5.85		90.7		325.2
Oxide	Proven		23		0.38						0.09
	Probable		68		0.33						0.23
	Total mineral reserve		91		0.35						0.32
	Stockpiled ore(b)		45		0.33						0.15

Notes:

a)  Tables may not add due to rounding.

b)  Stockpiled ore referred to in this announcement is unclassified and South32 cannot confirm whether the estimate has been compiled using an appropriate foreign reporting code.

c)  The contained metals were converted using the following: Cu(t) to Cu(Mt) - Dividing by 0.55 million; Au (kg) to Au(t) - Dividing by 550; and Mo(t) to Mo(kt) - Dividing by 550.

The following document has today been submitted to the National Storage Mechanism and will shortly be available for inspection   at https://data.fca.org.uk/#/nsm/nationalstoragemechanism :

· South32 Limited - South32 to acquire a 45% interest in the Sierra Gorda Copper Mine - Annexures A and B

 

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