* Lower aluminium prices lead to 25% drop in profit
* South32 in talks to sell its South Africa energy coal unit
* Shares drop to their lowest in over 2 years (Recasts to add details from statement, analyst comments, background on trade war and coal, and share performance)
By Aditya Soni
Aug 22 (Reuters) - Australian miner South32 Ltd reported a bigger-than-expected 25% drop in annual profit as the trade war between China and the United States hurt aluminium prices, sending its shares lower by as much as 5.8% on Thursday.
South32 also said it was in talks to sell its South Africa thermal coal business to Johannesburg-based Seriti Resources, the latest company to get out of energy coal at a time when investor pressure and climate change concerns are prompting businesses to limit their exposure to fossil fuels.
The miner's fortunes have soured in tandem with a decline in aluminium prices, which have come under pressure this year due to a slowdown in China - the world's biggest consumer of the metal - as the Sino-U.S. trade war has escalated.
Alcoa and Norsk Hydro ASA, two of the world's biggest aluminium producers, warned last year that the trade war was clouding the outlook for the metal.
"It is a pretty tough mix of commodities of coal, manganese and aluminium," said Damian Rooney, a director of equity sales at Argonaut, referring to the commodities that South32 sells. Price for all three of those metals are down.
The miner's underlying earnings, excluding the impact of one-off items, fell to $992 million, below analysts' expectations of $1.04 billion in profit, according to IBES data from Refinitiv.
South32's stock was trading at its lowest in more than two years. The broader market was up 0.4%.
The miner, which had flagged last year that it was looking to sell its energy coal business in South Africa, did not disclose a deal value, but said it consists of a modest upfront cash payment and a deferred price mechanism.
Seriti Resources was not immediately available for comment.
The planned sale follows Rio Tinto's exit from coal in 2018 and comes days after the head of BHP Group, the world's biggest miner, said the company had put its thermal coal operations under review..
"Ethical investors continue to vote with their feet on a number of issues and I am sure South32 is mindful of that," Rooney said.
"Although Australia has a rich history of coal mining and there is still significant power demands from the utilities for coal-fired generation it has become a slightly acquired taste," he said.
Norway's $1 trillion sovereign wealth fund said in June it may have to sell its stake in South32 to meet tighter ethical investing rules adopted by the country's parliament.
Reporting by Aditya Soni in BENGALURU; Editing by Anil D'Silva and Tom Hogue