South32's Thermal Coal Production and Domestic Sales drops, Export Surges

Australia headquartered coal miner, South32 having thermal coal mining operations in South Africa has announced its third quarter results (Jan-Mar'20) and first nine months (Jul'19 - Mar'20) results for ongoing FY20 that started from 1 Jul'19 and will end on 1 Jun'20.

Market conditions drives down coal production:

The results indicates that its saleable coal production decreased by 7% y-o-y basis to 5.65 MnT in Q3 FY20. In the first nine months starting from Jul'19 and ending in Mar'20, company's thermal coal production dropped by 5% to 17.4 MnT against the corresponding quarter of previous fiscal.

This drop has been attributed to the demobilisation of contractors in response to market conditions and heavy rainfall experienced in the March 2020 quarter.

Diversion of lower calorific value coal in export market

The miner's domestic sales recorded a plunge of 18% y-o-y during first nine months of FY20 whereas its exports surged by 12% during the same period as a result of improved dragline availability at Klipspruit mines and the diversion of lower calorific value coal to the export market to take advantage of favourable market conditions.

However, the diversion of lower calorific value coal had an impact on the miner's average price received for the export sales and it realised a discount of approximately 20% to the API4 index in the nine months ended March 2020.

Despite the increased export tonnages in first nine months ended March 2020, miner's export sales declined 7% q-o-q basis in Q3 FY20 due to the temporary closure of the Richards Bay Coal Terminal, caused by the national lockdown resulting in the deferral of shipments.

Change in pricing policy

The miner's average realised price for domestic coal in the nine months ended March 2020 stood USD 24/MT. In the June 2019 quarter, the company invoked a hardship clause in sales contracts contract to supply coal from the Wolvekrans-Middelburg Complex to the Duvha power station with a view to secure a long term pricing tariff that supports the sustainability of the business.

During the March 2020 quarter an interim pricing arrangement has been agreed to ensure continuous supply while Eskom undertakes their review of the hardship claim.

Withdrawal of production guidance

The company has withdrawn its FY20 production guidance following the nationwide lockdown in South Africa that is currently scheduled to expire on 30 April, having commenced at midnight on 26 March. While the miner's domestic operations are considered essential in South Africa for the maintenance of power generation and are exempt from the lockdown, domestic demand is expected to be impacted by lower total power generation during the June 2020 quarter.

The company's export operations were placed on temporary care and maintenance at commencement of the lockdown. The miner has subsequently requested and received government approval to undertake limited activity during the lockdown period and have partially remobilised at a reduced rate