Why the South32 (ASX:S32) share price is jumping 11% to a multi-year high

This mining giant’s shares just hit a multi-year high…

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The South32 Ltd (ASX: S32) share price has been a strong performer on Thursday.

At one stage, the mining giant’s shares were up as much as 11% to a multi-year high of $4.07.

The South32 share price has pulled back since then but remains up 4% to $3.80 at the time of writing. 

Why is the South32 share price charging higher?

Investors have been bidding the South32 share price higher today after it announced a new acquisition.

According to the release, South32 has entered into binding conditional agreements with Sumitomo Metal Mining and Sumitomo Corporation to acquire a 45% interest in the Sierra Gorda copper mine in Chile.

The release advises that the parties have agreed on an upfront cash consideration of US$1.55 billion for the stake.

In addition, South32 has agreed to provide the sellers with a contingent price-linked consideration of up to US$500 million. This is payable at threshold copper production rates and prices in the years 2022-25.

What is Sierra Gorda?

Sierra Gorda is an operating mine in the prolific Antofagasta copper mining region in Chile. It is expected to produce 180kt of copper, 5kt of molybdenum, 54koz of gold, and 1.6Moz of silver in 2021 on a 100% basis.

Today’s acquisition provides South32 with joint control alongside 55% joint venture partner KGHM Polska Miedz. It is a global miner listed in Poland.

Management notes that the transaction is expected to be immediately earnings accretive, with the upfront purchase consideration benchmarking favourably to historical investment, production and valuation multiples of 3.3x FY 2021 underlying EBITDA.

The deal will be funded via a combination of cash on hand and an underwritten US$1 billion acquisition debt facility. This will maintain the company’s balance sheet strength and flexibility.

At the end of September, South32’s unaudited net cash balance stood at US$660 million.

Management commentary

South32’s Chief Executive Officer, Graham Kerr, commented:

We are actively reshaping our portfolio for a low carbon world and the acquisition of an interest in Sierra Gorda will increase our exposure to the commodities important to that transition.

Copper is a critical metal in the decarbonisation of the world’s energy networks and has strong long-term market fundamentals. Adding Sierra Gorda further improves our portfolio and is expected to immediately lift Group margins and earnings, supporting future shareholder returns while retaining strength and flexibility in our Balance Sheet.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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