South32's Mozal Smelter: Navigating Geopolitical Storms and Drought-Driven Uncertainties in Aluminum Production

The Mozal Aluminum Smelter, South32's flagship operation in Mozambique, sits at the crossroads of geopolitical tension, climate volatility, and energy dependency. As the world's fourth-largest aluminum producer, South32 faces mounting risks to its financial health and operational viability due to prolonged electricity tariff disputes, drought-induced hydropower shortages, and Mozambique's political instability. This article examines the interplay of these factors and their implications for investors, advocating a cautious approach until critical uncertainties are resolved.

The Power Struggle: Mozal's Lifeline Hangs on Expiring Agreements

South32's Mozal smelter, responsible for 12% of global primary aluminum production, relies entirely on electricity sourced from South Africa's Eskom. This arrangement, which channels 950 MW of hydropower from Mozambique's Cahora Bassa Dam via Eskom, is set to expire in March 2026. Negotiations to extend the deal remain unresolved, with no viable renewable energy alternatives at scale available.

The risk? A prolonged tariff dispute or failure to secure terms could force South32 to either pay premium rates for imported power or face production cuts. Recent production growth—12% year-to-date (YTD) to 265,000 tonnes in FY2025—could reverse if the smelter's energy supply is disrupted. reveals investor sensitivity to these risks, with shares down 18% since January 2025 amid uncertainty.

Drought's Double Whammy: Hydropower Declines and Rising Costs

Mozambique's hydropower sector, which provides 40% of the country's energy, is buckling under severe drought exacerbated by climate shifts. Reduced water inflows at Cahora Bassa—the continent's largest hydropower plant—have already constrained output. With NOAA forecasting below-average rainfall through Q3 2025, the risk of further declines in hydropower generation is acute.

For Mozal, this means higher energy costs as Eskom may seek tariff hikes to offset its own supply crunch. Worse, prolonged drought could force Eskom to prioritize domestic demand over cross-border exports, leaving South32 scrambling for alternatives. The company's recent $135M in “idle capacity and remediation costs” (Q3 FY2025) hints at the financial toll of operational disruptions.

Political Unrest and Supply Chain Vulnerabilities

Mozambique's post-election civil unrest in late 2024 exposed the fragility of Mozal's logistics. Road blockages delayed alumina shipments, prompting South32 to temporarily cut production. While conditions stabilized by early 2025, the Constitutional Council's delayed ruling on election results (due in December 2024) risks reigniting violence.

A renewed crisis could disrupt trucking routes, port operations, and power transmission lines. With Mozal's inventory management already strained—sales dropped 18% in Q3 2025 due to stockpile adjustments—any further delays could force production halts or inventory liquidation at fire-sale prices. This volatility underscores the need for investors to monitor political stability metrics, such as World Bank's Mozambique Conflict Index or local election updates.

Financial Implications: Impairment Risks and Earnings Volatility

The convergence of these risks creates a “perfect storm” scenario for South32's balance sheet. Key concerns include:
1. Asset Impairment: If the power agreement collapses or prolonged underperformance occurs, Mozal's $4 billion book value could face write-downs, eroding equity.
2. Earnings Volatility: A 10% energy cost increase could reduce EBITDA by $150M annually, given Mozal's 350,000-tonne production target.
3. Debt Exposure: South32's net debt ($1.2 billion as of March 3025) could rise if capital is diverted to secure alternative energy sources.

Investors should scrutinize South32's Q4 FY2025 earnings call for updates on power negotiations and impairment testing. Historically, earnings calls have significantly influenced SZX.AX's performance, with the October 2024 call preceding a 0.7% decline, indicating the stock's volatility around these events. A failure to secure a deal by early 2026 could trigger a rating downgrade, raising borrowing costs.

Investment Strategy: Proceed with Caution

Risk Factors to Monitor:
- Power Agreement Update: Any announcement by Q1 2026.
- Drought Impact: Cahora Bassa reservoir levels and regional rainfall forecasts.
- Political Stability: Mozambique's security situation and election aftermath.

Recommendation:
- Hold or Reduce Exposure: Until clarity on the power deal emerges, South32's shares carry excessive risk for all but the most speculative portfolios.
- Diversify Energy Exposure: Investors reliant on energy-intensive miners should pair South32 with firms like Rio Tinto (RIO) or Alcoa (AA), which benefit from hydroelectric stability in Brazil or Canada.
- Consider Aluminum ETFs: Funds like JJAR offer broader exposure to the metal, mitigating single-asset risks.

Conclusion

South32's Mozal smelter is a microcosm of the challenges facing energy-dependent mining assets: climate-driven supply chain fragility, geopolitical instability, and reliance on aging infrastructure. While Mozal's production recovery in 2025 is encouraging, its long-term viability hinges on resolving the power dispute and weathering Mozambique's political storms. Until these risks are mitigated, investors are advised to tread carefully, prioritizing firms with diversified energy portfolios and stable operating environments. The Mozal saga underscores a broader truth: in an era of climate and geopolitical turbulence, resilience—not scale—is the ultimate determinant of success.