Triple-listed spin-off South32 on Thursday announced significant job cuts at its South African and Australian operation as a means to reduce cash costs following a warning to its shareholders that it expects to book a non-cash impairment charge of US$1.7 billion when it reports its December 2015 half year financial results, which will be released on 25 February 2016.

South32 CEO Graham Kerr said that the completion of the South Africa manganese strategic review is important for the company as it will allow it to re-base manganese ore production at a “significantly lower level” while reducing Rand denominated mine gate costs by a commensurate amount.

“When combined with the restructuring initiatives that are currently being finalised at many operations across our portfolio, we expect to further strengthen our financial position and increase our cash generating capacity through the cycle,” Kerr announced.

In response to a sharp decline in manganese ore and alloy prices, South32 suspended mining activity at the Hotazel manganese mines in November 2015, removing around 700 000 t of manganese ore production from the global supply chain.

Following the strategic review, mining activity will restart at South African manganese assets with immediate effect, but at a substantially reduced rate and with greater flexibility.

Subject to market conditions, the Hotazel mines will ramp-up to a saleable production rate of 2.9 Mtpa taking approximately 900 000 tpa or 23% 1 of saleable production out of the market for the foreseeable future.

At the same time, optimised mine plans, redundancies and other restructuring initiatives are expected to reduce Rand denominated mine gate costs by a commensurate amount, while annual sustaining capital expenditure is also expected to decline by about 80% to $7 million in the 2017 financial year.

To ensure that South32’s South African manganese operation are “appropriately structured” for the current environment, yet flexible enough to benefit from an eventual recovery in prices, the company would reduce its employee base by 620 employees across the joint venture.

It would also reduce production at its Wessels and Mamatwan mines by 36% and 18% to 740 000 tpa and 2.2 Mtpa, respectively.

South32 would also operate only one of four furnaces at the Samancor manganese joint venture Metalloys smelter, which is now generating free cash flow.

“We will continue to focus on the things that we can control; safety, volume, costs and capital expenditure, as we seek to optimise the performance of our operations," says Kerr, noting that the strategy to maximise value rather than volume, our high quality operations and well-defined financial policies underpin our resilience at current commodity prices and we remain exceptionally well positioned for any improvement in industry fundamentals.

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