South32 completes Sierra Gorda stake buy

The Japanese flag will now be replaced by Australia’s. (Image courtesy of KGHM.)

South32 (ASX, LON, JSE: S32) has completed the acquisition of a 45% stake in Sierra Gorda copper mine in Chile from Japan’s Sumitomo Metal Mining and Sumitomo Corp. for $1.4 billion cash.

The deal, which includes a contingent price-linked consideration of up to $500 million over the 2022 through 2025 fiscal years, was deemed by chief executive Graham Kerr as “a major milestone.”

“By adding copper to our portfolio, along with our recent commitments to substantially increase our green aluminium production, we are making significant progress reshaping our portfolio for a low carbon future,” Kerr said in the statement.

The deal comes after Poland’s KGHM Polska Miedz SA (WSE: KGH), which holds 55% of the open-pit mine and had a pre-emptive right over Sumitomo’s stake, chose not to increase its stake in the northern Chile operation.

The acquisition marks the Perth-based miner’s entry into the world’s largest copper-producing country ahead of an expected demand boom for the metal.

It is also the miner’s second-biggest deal since it was listed in 2015, after being spun out of BHP.  South32 paid $1.3 billion in 2018 for 83% of Arizona Mining, which had a zinc, lead and silver project in the US

The company believes Sierra Gorda, which has a production capacity of about 150,000 tonnes of copper concentrate and 7,000 tonnes of molybdenum, will add between 70,000 and 80,000 tonnes of copper to its portfolio.

It also said the operation would immediately contribute to earnings, improving the company’s margins.

A feasibility study is also underway for a brownfield oxide project, which is assessing the opportunity to process material stockpiled at the mine, and potential exists for further exploration upside at the Pampa Lina deposit, and across the regional land package.

Rough path 

KGHM, which took control of the mine in 2012, has been criticized for the steep investment allocated to developing the Chilean mine ($5.2 billion and counting).

Sierra Gorda, which began production in 2014, has failed to meet expectations due to challenging metallurgy and difficulties in using seawater for processing. 

The Polish miner, which is looking to sell foreign mines and reinvest the proceeds in its domestic operations, has said it has no plans of putting Sierra Gorda on the chopping block. KGHM, however, has ruled out the possibility of taking on full ownership. 

The mine is located at an altitude of 1,700 metres and has enough ore to support at least 20 years of mining. 

South32 expects its portion of Sierra Gorda to contribute 31,000 tonnes of copper equivalent, 27,000 tonnes of copper production, 10,000 ounces of gold and 225,000 of silver for the rest of 2022.