South32 faces impairment at Mozal Aluminium smelter amid electricity supply challenges

South32 will report an impairment from its Mozal Aluminium Smelter in Mozambique due to a inability to negotiate a new electricity agreement over a six-year period.

The announcement appeared to send South32’s share price reeling on Monday, with its price down by 5.8% to R34.42. A year ago, the share was trading at R44.75.

South32 said in a statement on Monday that its production guidance from the plant was under review, and an associated impairment expense would be recognised in the 2025 financial results.

Electricity is supplied to Mozal under an agreement that expires in March 2026.

Historically, the majority of electricity for Mozal has been generated in Mozambique by the hydro-electric power generator, Hidroeléctrica de Cahora Bassa (HCB), owned by the Mozambique government. Under the agreement, electricity from Eskom is supplied to Mozal when HCB is unable to meet all of Mozal's requirements.

“We have been working with the government of Mozambique, HCB, and Eskom for the last six years to secure electricity supply to Mozal beyond March 2026. To date, Mozal has been unable to agree to an affordable electricity price tariff,” South32 said.

HCB had also recently indicated that drought conditions had the potential to impact its electricity generation and capacity to deliver sufficient hydro-electric power to Mozal.

“These factors have resulted in increased uncertainty regarding future electricity supply to Mozal,” South32 said.

“We are assessing the carrying value of Mozal, given the increased uncertainty regarding future electricity supply, and expect to recognise an impairment expense in our 2025 results. We will provide the quantum of the impairment expense when this assessment is completed.”

It said they would continue to engage with the Mozambique government, HCB, and Eskom to secure affordable electricity supply to enable Mozal to operate beyond March 2026 and maintain its significant contribution to the economy of Mozambique.

Mozal Aluminium is located near Maputo, Mozambique. The smelter produces high-quality primary aluminium for domestic and export markets. Mozal contributes about 3% of Mozambique’s GDP and is a significant industrial employer, providing jobs for thousands of employees and contractors.

South32 holds 63.7% of Mozal, the Industrial Development Corporation of South Africa holds 32.4%, and the Mozambique government holds 3.9%.

The ongoing challenge to the profitaility of South32’s aluminium smelter operations - it also owns the Hillside smelter in South Africa - is well reflected in the group’s 2024 annual report.

Earnings before interest, tax, depreciation, and amortisation (Ebitda) from its aluminium operations fell by nearly half in the 2024 financial year, by $115 million to $121m, for an operating margin of 4%, after a 6% reduction in average realised aluminium prices, and higher energy costs more than offset lower smelter raw material input costs.

The Mozal and Hillside smelters are supplied with alumina from South32’s mines in Australia and Brazil. Group aluminium production was unchanged at 1.1 million tons for 2024 as Hillside saw record production, Brazil Aluminium continued to ramp up, and Mozal Aluminium started to deliver on a recovery plan.

Brazil Aluminium was placed on care and maintenance in 2015, but was restarted in the 2022 financial year in a joint effort by South32 and Alcoa, and the smelter now operates with 100% renewable electricity.

HCB is 85% held by Mozambique government-owned Companhia Electrica do Zambeze and is the fourth largest reservoir in Africa, occupying 2 700 square kilometres and a 26-metre average depth.

It started operating in 1977, producing 960MW, compared with the capacity of 2 075MW at present. In 2024, Eskom purchased 66% of HCB’s electricity. The Mozambique government has indicated it intends not to renew its Eskom supply contract in 2030.

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