South32 Ltd.recently announced the results of its South Africa Manganese strategic review and its intention to substantially reduce cash costs at a number of operations. Citing poor forecasts for commodity demand and prices, South32 said it expects to take a pre-tax, non-cash impairment of US$1.7 billion when it reports its December 2015 half-year financial results. Most of that relates to the Australia Manganese and South Africa Energy Coal divisions, $900 million and $400 million, respectively.

“The completion of the South Africa Manganese strategic review is important for our company as it will allow us to re-base manganese ore production at a significantly lower level while reducing Rand denominated mine gate costs by a commensurate amount,” said Graham Kerr, CEO, South32. “When combined with the restructuring initiatives that are currently being finalized at many operations across our portfolio, we expect to further strengthen our financial position.

In response to a sharp decline in manganese ore and alloy prices, South32, as 60% owner and operator of the largest manganese business globally (the Samancor Manganese Joint Venture), suspended mining activity at the Hotazel manganese mines (Hotazel) in November. This suspension removed around 700,000 metric tons (mt) of manganese ore production from the global supply chain and inventories at the Hotazel mines have declined substantially as a result.

South32 will restart Hotazel, but at a substantially reduced rate and with greater flexibility. The Hotazel mines will ramp-up to a saleable production rate of 2.9 million mt/y, taking approximately 900,000 mt/y or 23% of saleable production out of the market for the foreseeable future. At the same time, optimized mine plans, redundancies and other restructuring initiatives are expected to reduce Rand denominated mine gate costs by a commensurate amount. Annual sustaining capital expenditure is also expected to decline by approximately 80% to $7 million (South32’s share) in the 2017 fiscal year.

To reposition South Africa Manganese, South32 will eliminate 620 jobs across the joint venture. It will accelerate the second phase of the Central Block development project at Wessels ($19 million budget, South32’s share), which will enable mining to relocate closer to critical infrastructure and reduce cycle times. Saleable production will be reduced by 36% at the Wessels mine to 740,000 mt/y. The mining and processing footprint at Mamatwan will also be optimized, where saleable production will be reduced by 18% to 2.2 million mt/y. The company will continue to operate of only one of four furnaces at the Metalloys smelter, which is now generating free cash flow.

“The demerger of South32 has given greater focus to our operations and has created the necessary environment for our employees to enact change and improve performance. Our teams are currently finalizing plans that will deliver a meaningful reduction in costs at Illawarra Metallurgical Coal, Cerro Matoso, Worsley Alumina and Australia Manganese,” Kerr said. “These initiatives are expected to result in a substantial reduction in employee numbers during the remainder of FY16 and will be detailed in our December 2015 half-year financial results.”

The Samancor Manganese joint venture is the world’s largest producer of manganese with operations in South Africa and Australia. Its Australian operations include GEMCO, an open-cut manganese mine in the Northern Territory, ranked as the largest and one of the world’s lowest cost manganese ore producers, and TEMCO, a manganese alloy plant in Tasmania. The joint venture’s African operations include the HMM mines, Wessels and Mamatwan, located in the Kalahari Basin in South Africa’s Northern Cape Province, a region that holds about 80% of the world’s known manganese resource endowment.