Why South32 is right to ditch aluminium for copper

If you want to understand South32's  (ASX: S32) decision to sell its entire aluminium business to Alcoa, the simple thing to do is look at an index of copper miners and compare it to Alcoa and South32's share prices.

Over the past two years, copper has climbed from under US$4 a pound towards US$6.20 as copper consumption intensifies globally. 

It’s lifted the share prices of major copper producers – BHP, Lundin, Southern Copper – as their EBITDA margins jump above 50%. 

Aluminium, meanwhile, has trudged along, and alumina – the more relevant product for our purposes here – has collapsed from its late-2024 spike, leaving refining margins underwater across much of the industry.

Copper is exciting investors and being pulled forward by electrification. Aluminium plays second fiddle, waiting for the copper-aluminium ratio to hit unacceptable levels and drive substitution.

South32 has seen what everyone in the global mining industry is seeing, and sold its aluminium interests to Alcoa for up to US$5.6 billion to focus on copper. The decision makes sense.

Aluminium is an energy business — and South32 didn't want to play that game

Aluminium is sometimes called "congealed electricity". Creating it is unbelievably electricity intensive. It is only ever as cheap as the power flowing into the smelter, which is why so much is produced in China.

That's precisely where South32 was exposed. Its flagship Hillside smelter in South Africa runs on Eskom power under a contract that expires in 2031, in a country where electricity is becoming more politically fraught by the day.

Hillside's unit costs have climbed roughly 75% over the past decade. The Brazilian operations - minority stakes in assets operated by others - have lurched from profits to losses and back. And sitting over the whole division was about US$1.2 billion in eventual clean-up liabilities.

South32 owned these assets not by grand design but by inheritance: they were the loose ends BHP spun off in 2015. There was never a scenario where South32 out-muscled the majors in aluminium. It was a mid-sized landlord of scattered, energy-hungry assets in a value chain that's becoming more capital intensive.

The same assets are worth more in Alcoa's hands

Alcoa is a natural owner. Worsley's bauxite mines and refinery sit practically next door to Alcoa's own Western Australian refining network. This lets Alcoa blend ores across mining leases, consolidate mine planning and squeeze out costs no-one else could. Alcoa puts the synergies at around US$900 million.

Alcoa gets a good deal for sure: scale on the cheap. South32 gets to exit on reasonable terms. That is what a sensible divestment for both sides looks like.

What's left is what the decade wants

The mines South32 keeps tell the story. After the sale, the company is essentially a copper, silver, zinc and lead miner - those metals will supply around 85% of its earnings - built on three assets.

Sierra Gorda, its copper mine in Chile, has just been approved for a major expansion that lifts output by about 30% and earns a roughly 20% return even at today's copper price.

Hermosa, a new zinc-silver-lead mine under construction in Arizona, adds growth from one of the safest mining addresses on earth.

And Cannington, in outback Queensland, is one of the world's largest silver mines, a handy thing to own with silver trading high.

The risk, of course, is that South32 is pivoting into copper at precisely the moment copper is becoming expensive, both to buy and to build. Hermosa's cost blowout is a taste of that, and any acquisition would come in a market where every miner on earth is hunting the same metal.

The price of certainty

South32 has banked roughly US$3.8 billion in net cash, handed shareholders a fully franked special dividend in Alcoa shares, and emerged as a focused base-metals miner the market can finally value like its copper peers, which trade at a meaningful premium.

South32 spent a decade tidying BHP's attic. It just sold the last of the heavy furniture, at a fair price, to the one buyer who really wanted it, and kept the metals the future runs on.

Copper miners ETF

For investors wanting diversified exposure to copper miners, the ETFS Global Pure Play Copper Miners ETF (ASX: CPPR) launched this quarter with a management fee of 0.39%.