BofA-South32 Ltd Death knell for Mozal？No power contract. No aluminium.-20250814

Mozal: No power contract = No aluminium

South32 announced that, as a result of unsuccessful discussions with its power suppliersin Mozambique / South Africa, it will begin the process of decapitalizing Mozal, itsMozambique aluminium smelter, with a view to placing the asset on care andmaintenance from March 2026 when the current power contract runs out. Investmentsin pot-relining, typically done on a rolling basis, will cease due to the multi-monthpayback period associated with them. S32 will take a $372 mn impairment against theasset. We remove Mozal from our model from late FY2026. 2027E EBITDA -10% toUS$2.3 bn. We lower our PO by 5% to A$3.50 (GBp170, ZAR41) based on c.1x our newNPV. Reiterate Buy. While the news is disappointing we still see deep value in shares.

Mozal: No power contract = No aluminium

This situation is really a shame, in our view. Mozal is a fairly well-run smelter and amajor industrial asset in Mozambique, contributing c. 3% of GDP. Mozambique itself isnaturally “long” hydro-electricity which supplies over 90% of local power. So what is theproblem? We understand the issues relate to negotiations on transfer pricing andinvolves South32, Government of Mozambique, Hidroeléctrica de Cahora Bassa (HCB, alocal utility) and Eskom (South African state-owned utility). The power used by Mozal iseffectively generated in Mozambique but is transported to Mozal via South African grid.We understand negotiations have been ongoing for several years with little progress.S32 takes its duty to shareholders seriously and is unwilling to sign an unfair contract.