South32 share price jumps on $2.5b coal sale

This mining giant is offloading its coal assets in Illawarra.

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Two young African mine workers wearing protective wear are discussing coal quality while on site at a coal mine.

Image source: Getty Images

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The South32 Ltd (ASX: S32) share price is storming higher on Thursday.

In morning trade, the mining giant's shares are up 5% to $2.97.

Why is the South32 share price rising?

Investors have been buying the miner's shares today after it announced the sale of its metallurgical coal assets in Illawarra.

According to the release, South32 has entered into a binding agreement to sell Illawarra Metallurgical Coal to an entity owned by Golden Energy and Resources and M Resources for up to US$1.65 million (A$2.54 billion).

This comprises an upfront cash consideration of US$1,050 million payable at completion, deferred cash consideration of US$250 million payable in 2030, and contingent price-linked cash consideration of up to US$350 million.

Management notes that the total consideration represents an attractive multiple of approximately 7.2x average annual free cash flow for Illawarra Metallurgical Coal.

The transaction is expected to complete in the first half of FY 2025, subject to the satisfaction of certain conditions. This includes Foreign Investment Review Board approval, customary regulatory approvals, and the waiver or non-exercise of pre-emption rights held by BlueScope Steel (ASX: BSL).

Why is it selling the assets?

South32 notes that this divestment reflects its strategy of reshaping its focus on commodities critical in the transition to a low-carbon future.

South32's CEO, Graham Kerr, explains:

This Transaction will realise significant value for our shareholders and is consistent with our strategy to reshape our portfolio toward commodities critical in the transition to a low-carbon future. It will streamline our portfolio, strengthen our balance sheet and unlock capital to invest in our high-quality development projects in copper and zinc. The Transaction will also simplify our business and reduce our capital intensity.

The South32 share price is down 33% over the last 12 months.

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 Scott Phillips.

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