South32 Ltd (ASX: S32) shares are having a tough start to the week.
In morning trade, the mining giant's shares are down 5% to $2.95.
Why are South32 shares falling?
Investors have been heading to the exits this morning after the miner released a disappointing update on its Mozal Aluminium operation.
South32's Mozal Aluminium operation is located near Maputo, Mozambique. It notes that the smelter produces high-quality, primary aluminium for domestic and export markets.
It contributes approximately 3% of Mozambique's national gross domestic product and is a significant industrial employer, providing jobs for thousands of employees and contractors.
At the last count, South32 held 63.7% of Mozal, the Industrial Development Corporation of South Africa Limited held 32.4%, and the Government of the Republic of Mozambique held the remaining 3.9%.
What was the update?
This morning, South32 provided an update in relation to its ongoing work to secure a new electricity supply agreement for the Mozal Aluminium smelter.
The mining giant explained that electricity is supplied to Mozal under an agreement which is due to expire in March 2026.
Historically, the majority of electricity for Mozal has been generated in Mozambique by a hydro-electric power generator, Hidroelectrica de Cahora Bassa (HCB). HCB is majority owned by the Government of the Republic of Mozambique.
Under the agreement, electricity from South Africa's Eskom is supplied to Mozal when HCB is unable to meet all of Mozal's electricity requirements.
However, despite working with the Government of the Republic of Mozambique, HCB and Eskom for the last six years to secure electricity supply to Mozal beyond March 2026, it has been "unable to agree an affordable electricity price tariff."
In addition, it highlights that "HCB has also recently indicated that drought conditions have the potential to impact its electricity generation and capacity to deliver sufficient hydro-electric power to Mozal."
As a result, South32 notes that this has "resulted in increased uncertainty regarding future electricity supply to Mozal."
Potential impairment
South32 warned that it is assessing the carrying value of Mozal given the increased uncertainty regarding future electricity supply. It expects to recognise an impairment expense in its FY 2025 results in August.
In addition, given the uncertainty of operating beyond March 2026, South32 revealed that its FY 2026 production guidance for Mozal is under review.
Though, it is worth noting the company is continuing to engage with the Mozambique government, HCB, and Eskom in the hopes of securing affordable electricity supply that would allow Mozal to operate beyond March 2026.
Following today's pullback, South32 shares are down almost 20% since this time last year.
