South32: Metallurgical Coal Sale Completes Portfolio Transition

We modestly reduced our fair value estimate for no-moat South32 by 3% to AUD 3.50 per share after the company agreed to sell its Illawarra metallurgical coal business. Likely effective first half fiscal 2025, total sales proceeds are up to USD 1.65 billion in cash. USD 1.05 billion is receivable upfront. Additional deferred consideration of USD 250 million is receivable in 2030 and contingent consideration of up to USD 350 million, depending on metallurgical coal prices over the five years after the deal closes. Roughly USD 250 million in rehabilitation and other liabilities are also transferable to the purchaser. We think this is a modestly better deal for the purchaser than South32. We dislike the lengthy time before the deferred consideration is receivable, and under our current metallurgical coal price assumptions, only approximately half of the deferred consideration will be paid.