The coal business is being sold to an entity owned by Golden Energy and Resources (GEAR) and M Resources, building on GEAR's metallurgical coal holdings in Australia.
The deal comprises an upfront cash payment of $1.05 billion at completion, and a deferred cash consideration of $250 million payable in 2030.
Analysts said the incoming cash would ease concerns around South32's balance sheet as it prepares to bring its $2.16 billion Taylor zinc project online in the United States.
"From our perspective, the sale price for met coal looks to be fair and this is an ageing asset that requires ongoing reinvestment to support the associated infrastructure," Citi analysts said in a note.
Shares of the diversified miner were trading 1.4% higher at 0031 GMT, outperforming the broader market (.AXJO), opens new tab, after having jumped as much as 5.3% earlier in the session.
The Illawarra project generated $1.64 billion underlying revenue in fiscal 2023 for South32, about 18% of its total underlying revenue.
South32 CEO Graham Kerr said the deal will streamline the company's portfolio and unlock capital to invest in development projects in copper and zinc.
"The transaction will also simplify our business and reduce our capital intensity," Kerr added.
The deal is expected to complete in the first half of fiscal 2025, subject to certain conditions including an approval from the Foreign Investment Review Board.
It is also subject to a waiver of pre-emptive purchase rights held by BlueScope Steel (BSL.AX), opens new tab which buys Illawarra coal, under the same commercial terms and conditions.
BlueScope, in a separate statement, said it will "consider its position" on the project sale.
Singapore-registered GEAR, owned by Indonesia's Widjaja family, would hold 70% of the Illawarra business, while Australia's privately held M Resources would own the rest, post completion of the deal.
