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South32 to pay clean-up costs to close South African coal unit sale

South32 Ltd. will provide up to $250 million in funds to smooth the sale of its South African energy coal business to mining group Seriti Resources, the company said on Thursday.

South32 will pay $200 million across a decade to partly fund costs of the environmental clean up of the mines of its South Africa Energy Coal unit once they close, and a $50 million facility to pay for the costs of restructuring some loss-making mining sites, it said.

The deal would allow South32 to reshape its business by exiting the thermal coal sector at a time when many banks and insurers are scaling back financing for the sector because of global warming concerns.

Miners typically guarantee a larger portion of funds to cover rehabilitation costs if a buyer is small, to assure governments they won’t have to foot the bill, said analyst Peter O’Connor, at Australian investment firm Shaw and Partners.

“It’s a step backwards to go forward, but the key here is that they (South32) need to do this deal, it has been a burden on them for so long, it makes a cleaner, simpler, leaner business,” O’Connor said.

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Coal’s deteriorating demand outlook may play a larger part in future divestment and spin-off plans being considered by majors BHP Group, Anglo American Plc and Glencore, he added.

South32 announced the divestiture in November 2019 with Seriti initially providing a 100 million South African rand ($6.7 million) upfront payment and South32 receiving deferred payments based on future cash flows from the mines until March 2024, capped at 1.5 billion rand ($101.49 million) per year.

However, South32 agreed to drop the deferred payment plan and has downgraded the 100 million rand price to a nominal fee.

The sale to Seriti is expected to close before the financial year end, South32 Chief Executive Graham Kerr told a media call, as talks over terms of a coal supply deal with state-run South African power provider Eskom continue and it waits for approval from the South African Treasury.

Although South32 is stumping up less than a quarter of the roughly $875 million in closure liabilities, not including an established trust fund for older mines, Kerr expects rehabilitation costs to be adequately funded by the mines’ long lives, even as energy markets transition away from fossil fuels.

“It’s not like they are 5, 10, 20-year mines. Some of those operations are in excess of 40-year mine lives, so there is a long period of time for those closure liabilities to be paid off,” Kerr said.

“South Africa… have also just come out of a cycle of investing in their major power stations and they have been very clear that they do see that there will be a long period of time where they will depend on coal to fuel their domestic energy needs.”

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