South32's Mozal aluminium smelter in Mozambique is facing significant operational uncertainty due to ongoing power supply challenges, with key agreements expiring in March 2026, raising concerns about potential production cuts and increased costs.

The smelter relies entirely on power from South Africa's Eskom and Mozambique's Hidroeléctrica de Cahora Bassa (HCB), with negotiations over electricity supply and pricing ongoing since 2019, yet no resolution has been reached.

Recent drought conditions have severely impacted HCB's hydroelectric capacity, threatening electricity generation and potentially leading to higher tariffs and energy costs for Mozal.

Geopolitical tensions, climate change, and political instability in Mozambique further complicate the operational environment, with civil unrest following the 2024 elections adding additional risks.

South32 is reviewing the carrying value of Mozal and anticipates recognizing an impairment expense in its FY25 financial results, with potential asset impairment risks if power issues persist.

The company is also in discussions with the Mozambican government and HCB to secure a reliable electricity supply, as ongoing uncertainties threaten future production guidance.

If power supply problems continue, South32 could face earnings volatility, increased debt, and an estimated $150 million drop in EBITDA from a 10% rise in energy costs.

Electricity supply from HCB, which is critical for Mozal, is under threat due to drought conditions, which have reduced hydroelectric output and could lead to tariff hikes.

Despite robust production, with a 12% year-to-date growth to 265,000 tonnes in FY2025, investor sentiment has declined, causing an 18% drop in South32's share value since January 2025 amid ongoing supply uncertainties.

Production guidance for FY26 is now under review due to these persistent power and political risks, which could impact future output.

Political instability and civil unrest in Mozambique, especially following the 2024 elections, pose additional risks to supply chains and the stability of operations.

To mitigate these risks, South32 may consider diversifying power sources, investing in energy efficiency, and strategic planning to reduce reliance on uncertain supply agreements.

Aluminium production's high electricity dependence, with power costs accounting for up to 40% of total costs, underscores the importance of reliable electricity for maintaining profitability.

South32 has warned of potential impairment at Mozal, which could lead to a $600 million decrease in asset value if power issues remain unresolved.