South32 locks 45% stake in Sierra Gorda copper mine

South32 (LSE: S32; ASX: S32; JSE: S32) says it will proceed with the acquisition of a 45% stake in the  Sierra Gorda copper mine in Chile, as project partner KGHM Polska Miedz SA (WSE: KGH) chose not to increase its shareholding in the operation.

In October the Australian miner entered into two binding conditional agreements with Japan’s Sumitomo Metal Mining and Sumitomo Corp, which together owned almost half of Sierra Gorda, for US$1.55 billion cash plus a contingent price-linked consideration of up to US$500 million over the 2022 through 2025 fiscal years.

Poland’s KGHM holds 55% of the open pit operation in northern Chile and had a pre-emptive right over Sumitomo’s stake, which it will not exercise.

“Finding a producing copper asset of this size up for sale isn’t easy, but South32 has done it,” BMO Metals and Mining analyst David Gagliano wrote last month.

The deal 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’s also the miner’s second-biggest deal since it was listed in 2015, after being spun out of BHP. 

South32 paid US$1.3 billion in 2018 for 83% of Arizona Mining, which had a zinc, lead and silver project in the United States. 

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.

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 (US$5.2 billion and counting).

Sierra Gorda, which began production in 2014, has constantly 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 open-pit mine is located at an altitude of 1,700 metres and has enough ore to support at least 20 years of mining. South32 expects it to produce 180,000 tonnes of copper concentrate and 5,000 tonnes of molybdenum this year.

The deal is expected to close in early 2022.