Wednesday’s ASX trading session has come and gone, with some major – and majorly bad – news for Origin Energy and some expansion plans for South32 among the day’s tidings.
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Surging electricity, gas, coal and oil prices have forced Origin Energy (ASX: ORG) to drop its operating conditions and earnings guidance for the 2022-23 financial year while the company says the 2021-22 year – which ends at the end of this month (June 30) – will see mixed earnings because of the impact of the Russian invasion of Ukraine has had on energy prices and coal supply problems with its huge Eraring power station north of Sydney.
In a statement to the ASX Wednesday, Origin said it was seeing what it called “extreme volatility across commodity markets” especially in the NSW thermal coal market where a shortage threatens origin’s Eraring power station’s viability.
“There is currently extreme volatility across commodity markets, driven by a combination of global energy supply and security concerns, exacerbated by the impact of the Russian invasion of Ukraine, with subsequent unprecedented increases in international energy prices including coal, gas and oil.
A shortage of coal and high prices seems to be making the company’s efforts to run Eraring power station in NSW more difficult and loss-making, but the company revealed a $300 million jump in cash distributed by its LNG business in Queensland.
“Domestically, coal plant outages and high coal and gas prices have contributed to a steep escalation in wholesale electricity prices,” Origin told the ASX.
The shortage of coal for the Eraring station north of Sydney (Australia’s largest) saw Origin slash the profit target for its electricity business.
Analysts said the threat to Eraring deepens the already dire energy crisis engulfing the east coast energy – gas and electricity – markets.
Origin said the “challenges’ of maintaining coal supplies to Eraring Macquarie had “deteriorated significantly” in recent weeks because of production issues at supplier Centennial Coal’s nearby Mandalong mine that are not expected to ease until next year.
It’s no wonder the shares ended down 13.7% at $5.91. They had been as low as $5.64 in trading.
Origin had previously provided guidance for its Energy Markets Underlying EBITDA for 2022-23 of a range of $600 – $850 million.
But now due to “material developments in global and Australian energy markets”, the company has withdrawn all guidance for fiscal 2023.
And the higher returns from gas exports and the problems at Eraring have seen Origin’s 2021-22 performance hit hard.
Origin told the ASX Wednesday that it now expects what it described as “consolidated group Underlying EBITDA to be around the mid-point of the original guidance range of $1,950 – $2,250 million.”
That would be around $2.1 billion, a little more than the $2.48 billion reported for 2020-21. Origin’s bottom line in that year was a loss of more than $2.1 billion as it took losses on write downs and other one offs of close to $2.5 billion.
The 2022 financial year has seen “higher earnings from Integrated Gas as Australia Pacific LNG (which have) benefited from strong commodity prices (and) are expected to offset a decline in Energy Markets earnings.”
Origin told the market that its “Integrated Gas and Corporate Underlying EBITDA is expected to be higher at $1,700 – $1,800 million, compared to the original guidance of $1,500 – $1,650 million, driven primarily by higher oil and LNG prices, with production and operating and capital expenditure at Australia Pacific LNG in line with expectations.
“The cash distribution to Origin net of oil hedging loss is expected to be around $1.4 billion, compared with the original guidance of about $1.1 billion,” Origin said.
“In Energy Markets, ongoing challenges with coal supply have been impacting Eraring Power Station throughout FY2022. However, the situation has deteriorated significantly in recent weeks, with material under-delivery of contracted coal compared to expectations, and with Centennial Coal notifying Origin of further production constraints at its Mandalong mine.
“Deliveries from the Mandalong mine are expected to be interrupted during the remainder of FY2022 and into the first half of FY2023. Equipment supply chain delays are also expected to impact coal deliveries in FY2023.
“The recent material under-delivery of coal to Eraring results in lower output from the plant, additional replacement coal purchases at significantly higher prices, and is being exacerbated by coal delivery constraints via rail.
“Despite positioning the year with a relatively low short position across all states, the lower output from Eraring results in a greater exposure to the purchase of electricity at current high spot prices in order to meet customer demand. “
Origin said that as a result of the problems in the energy markets business, it is looking at a sharp fall in earnings for the year to June 30 – “Origin now expects Energy Markets Underlying EBITDA in FY2022 to be $310 – $460 million, lower than the original guidance range of $450 – $600 million,” the company told the ASX on Wednesday.
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South32 (ASX: S32) plans to spend another $US200 million deepening its involvement in the aluminium business in a deal which will give it control of a major aluminium smelter in Mozambique in southern Africa.
But the terms of the deal have raised eyebrows among investors and saw the company’s shares weaken yesterday.
The company told the ASX on Wednesday that it had just wrapped up the purchase of another 16.6% of Mozal Aluminium from MCA Metals Holding GmbH (part of the Mitsubishi group of Japan).
South32 said the final cash consideration of around $US200 million “reflects elevated cash and working capital adjustments at acquisition date as the business continues to benefit from strong aluminium prices”
“Following completion, our shareholding in Mozal Aluminium will increase to 63.7%, with our equity share of aluminium production now expected to be 281,000 tonnes for 2021-22 and 370,000 for 2022-23.”
South32 Chief Executive Officer, Graham Kerr said in the statement to the ASX: “Our acquisition of an additional interest in Mozal Aluminium is another major milestone and comes 22 years following the commissioning of the hydro-powered smelter. It further integrates our position along the aluminium value chain with the smelter a major customer of our Worsley Alumina refinery.
“We are continuing to increase our exposure to metals important to a low carbon future. Following today’s completion and the progress with the Alumar aluminium smelter restart in Brazil using 100% renewable power, we remain on track to grow our annualised equity share of green aluminium production by more than 100% before the end of FY23, taking the Group’s total aluminium production next year to 1.230 million tonnes.”
There was no mention in the statement from the company why the terms of the deal had changed. In September, 2021, the company announced it was buying 25% of Mozal from the Mitsubishi arm for $US250 million which would take South32’s stake in the smelter to 72.1%.
Eight months later the share is cut to $16.6%, meaning the total share falls to just over $63% and the premium is higher.
The terms in the 2021 announcement valued the smelter at $US1 billion (25% at $US250 million). Wednesday’s deal values the smelter at $US1.2 billion, based on the price for the smaller amount South32 is paying of $US200 million (that’s $US1.2 million for every 1% share of the smelter)
South32 shares ended down 0.8% at $4.96.
