JPM-South32 Mozal aluminium smelter impairment and guidance review；retain Neutral-20250714

Key takeaways: 1) Uncertainty around Mozal Aluminium smelter’s power tariffoutlook has led S32 to flag an impairment (net asset value last reported at $500m),along with an FY26 guidance review (currently 370kt vs JPM now at 326kt), 2) wehave reduced operating capacity over the next 12 months given the likelihood S32won’t continue to reline pots (and then needs to ramp up), and we factor in a stepchange higher in power pricing that reduces our NPV from ~$1.1bn to $130m , and3) We believe the issue will compound market nervousness on the Hillside powercontract reset in 2031, along with broader investor perceptions of operatingperformance. Our NPV based PT reduces from $3.30ps to $3ps after a hit to ourMozal valuation. We retain a Neutral rating and preference for BHP for diversifiedmining exposure, or CSC for leveraged base metal exposure.

•Uncertain power outlook at Mozal to trigger impairment, FY26 guidancereview. Despite working with the Government of Mozambique and Eskom(South Africa’s state-owned power generator) over the past 6 years, Mozal hasnot been able to agree on an affordable electricity price tariff for the smelter forthe upcoming contract reset. The current supply agreement expires in March2026. As a result, S32 has flagged an impairment in FY25 (current net assetvalue is $500m), and stated that FY26 guidance is under review.

•S32 likely to wind down near-term production, LT costs higher. Prior to theannouncement, our NPV for Mozal was ~US$1.1bn (10% of Group), whichhas now fallen to US$130m (1% of Group) after factoring in higher long termpower costs. This implies a $270m impairment charge (assuming the auditorshave a similar valuation). Mozal accounts for 6% of our FY25 EBITDA, nowreducing to 3% in FY27. The issue also brings into question the long-term costoutlook at Hillside, due for a power contract reset in 2031 (our NPV is US$1.6bn or 17% of Group). While we expect an agreement to eventuate, thereis also the risk the asset becomes unviable and closes (unlikely at this stage)which would mean S32 sell the alumina into the 3 rd party market, andpotentially need to spend the ~$116m closure costs early. However, it is worthnoting Mozal is a significant contributor to the Mozambique economy,generating ~3% of national GDP and providing thousands of jobs. This impliesthe Government should eventually come to an agreement that supports theongoing operation of the smelter (albeit potentially with a lower margin).