South32 sells nearly all its aluminum business to Alcoa for $5.6B

Australia’s South32 (ASX: S32) has agreed to sell nearly its entire aluminum portfolio to Alcoa (NYSE: AA, ASX: AAI) in a deal valued at up to $5.6 billion.

In an announcement on Wednesday, the Perth-based miner said it has entered a binding conditional agreement to sell most of its global aluminum business, comprising interests in Worsley Alumina (86%), Hillside Aluminium (100%) in South Africa, and a trio of Brazilian assets — the MRN bauxite mine (33%), an alumina refinery (36%) and an aluminum smelter (40%).

The Mozal Aluminium operation in Mozambique, which is currently under care and maintenance, is excluded from the transaction, though its sale remains under active consideration, the company said.

As consideration, Alcoa will make an upfront payment of $3.1 billion in cash and $1 billion in stock equating to approximately 6% of its issued share capital.

In addition, the US aluminum giant would also assume around $750 million in liabilities related to the acquired assets, and could make a further $750 million payment tied to future aluminum prices to 2030.

Shares of Alcoa fell around 2% to just above $51 apiece during after-hours trading on the announcement, for a market capitalization of $13.75 billion. Earlier this month, the stock surged to a four-year high of $84.38, benefiting from the rise in aluminum prices driven by the US-Iran war.

South32 also fell 2% at market open in Australia, trading at a market capitalization of A$17.5 billion.

‘Simpler’ portfolio

The sale of the aluminum assets, says South32, allows the company to slim down its business to focus on the “high-margin copper, zinc, silver and lead operations” and to maintain its status as a major manganese producer.

The announcement also coincides with the official start of Matthew Daley’s tenure as the group’s new chief executive officer and managing director, succeeding Graham Kerr.

“This Transaction will unlock significant value for shareholders and repositions South32 as a leading upstream base-metals-focused company with high-margin assets and transformational growth,” Kerr said as he departs from a role he has held South32 split from BHP (ASX: BHP) over a decade ago.

“Following completion, our portfolio will be focused on high-quality, long-life assets leveraged to attractive market fundamentals, with approximately 85% of pro-forma EBITDA from base and precious metals,” incoming CEO Daley said.

“This will enable a leaner, lower-cost operating model that will deliver ongoing value through an anticipated $125 million per annum reduction in overhead costs as new support structures are implemented,” he added.

In the coming years, the company is expecting approximately a 55% growth in production from its Taylor zinc-lead-silver project in Arizona and a planned expansion at the Sierra Gorda copper mine in Chile.

$900M in synergies

For Alcoa, the transaction would “add a high-quality, low-cost, and globally diversified set of mining, refining and smelting assets, further strengthening Alcoa’s mine-to-metal platform,” it said in a press release.

The Pittsburgh-based company estimates that the assets are expected to generate significant synergies of approximately $900 million in net present value, further reinforcing its position as a leading pure-play upstream aluminum company.

“This is exactly the type of opportunity Alcoa is built to execute,” said William Oplinger, president and CEO of Alcoa. “These high-quality, globally relevant assets are a strong strategic fit within our portfolio.”

Alcoa currently holds positions in seven mines globally, including the Huntly mine in Australia, the world’s largest bauxite mine.