Investors in diversified mining business South32 Ltd (ASX: S32) have endured a tough stretch in recent times.
The company's shares have dipped by 20% over the past six months, falling from $3.66 per share in February to $2.93 apiece at the time of writing.
For context, the All Ordinaries Index (ASX: XAO) is up by 5.5% during the same period.
And those losses deepened last week after the ASX 200 mining stock revealed a setback in Mozambique.
On Thursday, the company reported that it has been unable to secure a new electricity supply agreement for its majority-owned Mozal aluminium smelter.
So, Mozal's operations are only guaranteed until March 2026 when the current deal expires.
The market didn't take the news well with shares in the ASX 200 mining stock sinking by 5.2% on Thursday alone.
What happened?
South32 holds a 63.7% stake in the Mozal operation, which includes an aluminium smelter and supporting transport infrastructure.
In FY24, Mozal produced more than 300,000 tonnes of aluminium and stands as Mozambique's largest industrial employer.
For the past six years, South32 has been working with the Mozambique government and other associated parties to secure a new electricity supply agreement.
However, the ASX 200 mining stock has not been able to agree a deal that would secure affordable electricity for the smelter.
As a result, South32 plans to scale back investment and place the asset into 'care and maintenance' once the existing agreement expires in March.
The decision means that the group's share of production from Mozal is now forecast to drop from about 355,000 tonnes in FY25 to 240,000 tonnes in FY26.
Beyond that, no aluminium output will be possible unless a new electricity deal is struck.
So what?
Analysts at Macquarie Group Ltd (ASX: MQG) have explored the potential fallout for South32 and its share price.
The broker expects FY26 aluminium output from Mozal to be 33% lower than its prior forecast of 360,000 tonnes.
Macquarie also sees little chance of South32 securing a more favourable power deal, making it likely that no longer term agreement will be reached.
That said, it warrants mentioning that the ASX 200 mining stock produces a suite of different commodities across Australia, South America, and Southern Africa.
Beyond aluminium, the miner has operations spanning bauxite, copper, nickel, zinc, lead, silver, metallurgical coal, manganese, and other aluminium products.
Aluminium contributed just 13% of the group's operating earnings (EBITDA) in the first half of FY25.
Furthermore, South32 also owns the Hillside smelter in South Africa and a 40% stake in Brazil's Alumar smelter as part of its aluminium portfolio.
Macquarie's verdict
After factoring in the Mozal risks, Macquarie has trimmed its share price target for South 32 by 6%.
However, the broker has retained an outperform rating for the ASX 200 mining stock.
Its new 12-month target of $3.20 per share implies 9% upside for investors from $2.93 per share at the time of writing.
