South32, the group spun out of BHP, has reached an agreement to sell its South African thermal coal business to Seriti Resources, becoming the latest miner to ditch the unloved fossil fuel.
Under the deal, South32 will receive an upfront payment of $6.75 million and 49% of the cash generated by the business, which is called South Africa Energy Coal (SAEC), until 2024.
"The minimal upfront price is as expected, and we do not expect South32 to receive much in the way of future payments," said Edward Sterck, analyst at BMO Capital Markets. "Nonetheless, exiting difficult operations in a challenging sociopolitical environment will probably be seen as a small positive."
Miners are facing increasing pressure from investors to take firmer action on climate change and exit thermal coal, a dirty and polluting fossil fuel. Norway's $1 trillion sovereign wealth fund has said that it won't invest in and will sell its shares in large coal producers and consumers.
Rio Tinto became the first major miner to exit coal completely, selling off its final asset last year, while BHP is exploring sale options for its energy coal assets in Australia and Colombia.
Anglo American sold off some of its thermal coal mines in South Africa to Seriti and is working on a "pathway" to retire or dispose of its remaining assets.
However, even if thermal coal assets are divested, they typically end up in the hands of another company which continues to produce the carbon emitting fuel.
Mike Fraser, chief operating officer at South32, said that "in isolation, we are under no illusions that this deal changes the story".
South32, which is led by former BHP finance chief Graham Kerr, launched the sale process for SAEC in September 2018 and in August said it would take a $500 million impairment charge in light of Seriti's offer.
SAEC produces around 25 million tonnes of coal annually and sells around 60% of its output domestically, most of it to Eskom, South Africa's cash-strapped state utility company.
Coal is the dominant source of electricity in South Africa, accounting for approximately 85% of its generation in 2018, according to Stats South Africa.
Mike Teke, chief executive of Seriti said that the "acquisition will enable us to offer further secured, long term coal supply solutions to Eskom as a demonstrable commitment to sustainably support South Africa's energy needs."
He added that it will also enable Seriti to export coal.
South32 plans to keep its Illawara mine in Australia for coking coal, used in steelmaking. The company's other main assets are aluminium, manganese, silver and coking coal.
While shareholder pressure has been focused on thermal coal, used to generate electricity in power stations, mining companies are also having to evaluate whether to hold on to mines for coking coal, which is needed to make steel.
"For South32, this marks an important milestone as we continue to reshape our portfolio," said Mr Kerr. "Completion of this transaction will substantially reduce our capital intensity, strengthen our balance sheet and will improve the Group's operating margin."
(Writing by Becky Du Editing by Tammy Yang)
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