South32 Regulatory News (S32)

6 September 2019

2019 ANNUAL REPORT

South32 Limited (ASX, JSE, LSE: S32; ADR: SOUHY) (South32) advises that the following documents have today been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.morningstar.co.uk/uk/NSM.

• 2019 Annual Report

• 2019 Corporate Governance Statement

• Appendix 4G: Key to Disclosures - Corporate Governance Council Principles & Recommendations

These documents may be accessed via South32's website:https://www.south32.net/investors-media/annual-report-suite or www.south32.net

Additional information

The following information is extracted from the 2019 Annual Report (page references are to pages in the Annual Report) and should be read in conjunction with South32's Financial Results and Outlook for the year ended 30 June 2019 announcement issued on 22 August 2019. Both documents can be found at www.south32.net and together constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the 2019 Annual Report in full.

1. Principal risks and uncertainties

Risk management

Our risk management framework is well established, with strong governance and risk management processes in place. In FY19, as part of our continuous improvement process, we have simplified the approach, provided more effective tools and focused our efforts on lifting the risk capability and practices across our business.

Through ongoing engagement, management keeps the board informed on the strategic risks facing the Company globally. The identification and assessment of these risks is informed, among other things, by an understanding of our business, significant trends in our operating environment and the relevant interests, expectations and concerns of key stakeholders that are most likely to influence our success. Our annual evaluation with senior leaders and the Board considers emerging trends, new impacts from internal and external factors, while ensuring continued alignment with our purpose.

We have identified 13 strategic exposures that have the potential to significantly impact the performance and sustainability of our business. Some elements of these risks may be relevant across the entire Group, while others may be specific to a single commodity or operation.

Ensuring that our people go home safe and well

Strategic Risk: A safe and healthy working environment is fundamental to living our values. This goal promotes the culture we aspire to and meets societal expectations, as well as our expectations of each other.

If we don't provide a safe working environment, it may result in physical harm to our employees, contractors and communities. This could negatively impact team morale, Total Shareholder Returns (TSR) and stakeholder confidence.

Our response:

·; In everything we do, we focus on the health and safety of our people, contractors and communities;

·; We engage, develop and train our people to ensure our work is well designed;

·; We continuously improve our work environment to make it safer and more productive for our people;

·; We have comprehensive health and safety policies, systems and standards with associated performance requirements designed to prevent and mitigate exposure to health and safety risks;

·; We investigate significant events, put preventive and corrective controls in place, and share our learnings across the organisation - so that everyone can benefit; and

·; We have an independent assurance function that reviews our risk register and the associated controls, to test how effective they are.

Actions by governments, political events or tax authorities

Strategic Risk: When changes in legislation, regulation, and/ or policy impact our strategic goals and the way we work, we aim to effectively manage this uncertainty.

This includes uncertainty surrounding direct and indirect taxes and royalties in the countries where we operate, as well as around broader policy decisions and regulatory changes, relating to:

·; Nationalisation of mineral resources;

·; Renegotiation or nullification of contracts;

·; Leases, permits or agreements; and

·; Environmental performance.

Our response:

·; We have the specialised knowledge we need in our functions and through consultants, including tax management capability, tax advice, and external relations advice;

·; We monitor political activity in all jurisdictions we operate in;

·; We engage with our key stakeholders, identifying them through active mapping and developing comprehensive engagement plans;

·; We work through selected industry associations to influence how the industry is positioned;

·; While we monitor policy, legislative and regulatory changes, we also engage with relevant authorities; and

·; We produce an annual Tax Transparency and Payments to Governments Report, which shows how we meet our regulatory tax obligations.

Portfolio composition

Strategic Risk: Our aim is to outperform our peers by reshaping our portfolio. This will create exposure to high-quality operations in commodities with a strong and sustainable outlook, as well as in jurisdictions where we believe we can operate into the future - in line with our values.

We invest for value in our preferred commodity and jurisdictional exposures. We do this by progressing our internal development options and by acquiring exploration opportunities, development projects or existing operations.

If we don't invest in a disciplined way, or divest non-preferred exposures, we could reduce TSR.

Our response:

·; We keep our strategy front of mind - it informs our portfolio composition, including an annual review with Board and Lead Team together;

·; We have a dedicated greenfields exploration team focused on delivering a flow of low-cost, high-quality resource development options;

·; We apply a rigorously developed and independently verified Commodity Price Protocol (CPP) process, to develop long-term prices for our portfolio commodities;

·; We maintain a strong life of operations planning process. By evaluating the embedded options in our operations, we can progress with organic options at the right time;

·; We follow strong due diligence processes for acquisitions and new business ventures;

·; We apply a standardised valuation methodology with consistent key macro-economic assumptions;

·; We have a mature and independent peer review process, which we rigorously follow to make key investment decisions; and

·; We actively manage portfolio change with dedicated specialists, to deliver integration and separation benefits.

Global economic uncertainty and liquidity

Strategic Risk: Our aim is to manage risks related to uncertain and changing macroeconomic conditions. We'll do the same when it comes to the volatility in commodity, currency and debt capital markets - given how much they can impact our earnings, balance sheet and growth goals.

Our response:

·; Our diverse portfolio strengthens our resilience to the disruption of any one commodity, geography or operation - compared with single mine or commodity companies;

·; We prioritise a strong balance sheet and an investment grade credit rating, so that we remain in control through economic cycles;

·; We test our financial strength across a range of scenarios, including a depressed demand and pricing environment. We also maintain a minimum liquidity buffer;

·; Our commercial strategy is designed to ensure we stay resilient and take advantage of new opportunities;

·; We carry out qualitative global economic scenario assessments, monitor meaningful leading indicators, and adjust our commercial approach accordingly;

·; We maintain strong relationships with high-quality customers and suppliers from all around the world;

·; We mostly sell our products with reference to floating, market-based prices, which are broadly correlated with floating global currency markets and the input costs we're exposed to; and

·; We carry out an annual review of our CPP, which we use to inform our financial planning and how we operate.

Unexpected operational or natural catastrophes

Strategic Risk: Our operations and transport networks can be disrupted by events such as:

·; Fire;

·; Explosion;

·; Flooding;

·; Geotechnical failures;

·; Tailings dam failures;

·; Loss of power supply;

·; Mechanical/electrical equipment failures; and

·; Unexpected natural catastrophes.

Our response:

·; When facing potential catastrophes, we put safety and wellbeing at the heart of everything we do;

·; We use a strong system of risk management in design, construction and operation phases, to analyse risks and design plans that prevent or limit business impacts;

·; We have business continuity and disaster recovery plans in place. We've tested these to make sure we can respond rapidly to major events and safely restore our operations;

·; We have governance functions independent of the operations. These give us assurance against our own comprehensive internal standards for equipment integrity, tailings dams management and technical stewardship;

·; We maintain insurance against many, but not all, potential losses or liabilities arising from operating risks. This may not fully cover all financial losses; and

·; We work with external experts, relevant industry bodies and technology suppliers, to provide additional assurance and input.

Key talent identification, attraction and retention

Strategic Risk: Our ability to identify, attract and retain key talent and develop capabilities is fundamental to delivering our strategic priorities.

Failure to ensure the right capabilities and talent within our business erodes shareholder value.

Our response:

·; We focus on enhancing our offering to employees and potential employees to distinguish ourselves in the market;

·; We continually seek ways to better engage and empower our workforce, including leading flexibility policies and a focus on ensuring we maintain an inclusive workplace;

·; Our dedication to "making a difference" inspires our people;

·; We identify key talent and provide them with experience and growth through time in critical roles;

·; We have effective approaches to talent and recruitment management, remuneration, skills development and succession planning;

·; Our strategic planning process identifies capability requirements for the future;

·; We work to strengthen our reputation and status in the community as an employer of choice through community engagement programs; and

·; We have developed and are implementing a long-term workforce planning and talent management program across the organisation.

Changing societal expectations and acceptance

Strategic Risk: There are growing expectations of shared value outcomes from mining and metals companies by government, investors, employees, host communities and broader society.

By understanding and maintaining stakeholder acceptance, we can manage the effect of business impacts to achieve shared value.

Our response:

·; We embrace the concept of shared value - it's at the heart of our purpose;

·; We maintain connection and understanding of stakeholder acceptance and needs through routine mapping and engagement on a wide range of environmental, social and governance issues;

·; We work with appropriate industry associations and organisations who are shaping the dialogue between society and mining. This helps us enhance our understanding of social expectations across our portfolio;

·; We have internal subject matter expertise, policies and governance processes to help us identify shared value opportunities, as well as integrate social expectations into our planning and decision-making - at all levels;

·; Our organisational investment proposition and purpose is clear, to minimise any misalignment with our owners' expectations of us; and

·; We manage and transparently report on regulatory obligations, commitments, and areas where we're working. This means we can optimise our value proposition to society and the communities we operate in.

Evolving culture of the organisation

Strategic Risk: We recognise the value of a strong culture. It's at the core of how we deliver our purpose and strategy.

As our organisation grows and matures, our culture must evolve with it. This will help us keep delivering on our strategy, achieve our purpose and live our values.

Our response:

·; We're working to better understand the gap between what our culture is and what we want it to be - and to have a clear approach to help us close it;

·; We make sure our ways of working (systems, symbols and behaviours) are aligned to our aspired culture; and

·; We identify effective levers to move our culture and use them deliberately to address any misalignment.

Predictable operational performance

Strategic Risk: Predictable operational performance improves our ability to keep our people safe, meet our regulatory and social obligations, provide quality products to our customers and deliver TSR.

If we can't safely achieve our production targets and mitigate rising unit costs, it will impact directly on our profits and cash flow, as well as our ability meet our commitments to our stakeholders.

Our response:

·; We carry out rigorous quality assurance programs over our operations and marketing;

·; We review our asset health and integrity on a regular basis;

·; We reconcile the performance of our mineral resource and ore reserve quality against production on an annual basis;

·; We carry out rigorous modelling and reviews of our geotechnical drilling data;

·; We operate within target operating windows and regularly review our internal scheduling and operational planning;

·; We monitor raw material supply contracts and implement early detection procedures at load port;

·; We've developed and implemented long-term and short-term planning, scheduling and verification of developments;

·; We carry out operational resource planning and regularly review our productivity metrics;

·; We apply structured work design processes for critical or high value tasks; and

·; We apply verification systems to ensure we're compliant with work standards.

Maintain competitiveness through innovation and technology

Strategic Risk: It's clear that technology and innovation are advancing at a rapid pace. And companies who don't keep up find themselves falling behind in TSR.

To stay competitive, we'll organise our business in a way that means we can identify, adopt and maintain innovation and technology that delivers shareholder return.

Our response:

·; We've implemented a clear approach to innovation, improvement and technology;

·; We've organised the coordination and delivery of programs focused on adoption of critical technology across the business;

·; We've planned to identify opportunities to test and scale emerging innovation and technology;

·; We've developed and implemented rigorous internal standards and processes (technology 'ways of working');

·; We benchmark our digital operations performance to industry best practice, and we implement strategies to close any gaps;

·; We actively manage cyber security and data centre risks through our system of risk management;

·; We monitor customer satisfaction and manage customer support; and

·; We follow a rigorous assurance process for our approach to innovation, improvement and technology.

Security of supply of logistics chain and critical services

Strategic Risk: Our logistics chain includes road, rail and ports. Our critical services include gas, power (sourcing and generating) and water.

By securing our supply at commercially acceptable terms, we can capitalise on market opportunities, run safe and predictable operations, and deliver life of operations plans.

If we fail to do this, it could result in a disruption to our operations, increased operational costs and financial penalties.

Our response:

·; We build strong strategic partnerships with Tier 1 suppliers of road, rail, port facilities, water, gas and power, on a long-term, mutually beneficial basis;

·; We have a clearly defined B-BBEE (Broad-Based Black Economic Empowerment) strategy in South Africa to support the secure supply of electricity to the smelters;

·; We actively work to secure resources within our control to strengthen the resilience of our operations' logistics and critical services against supply disruption; and

·; We explore opportunities to optimise existing sources, and identify alternate sources, for critical services.

Maintain, realise or enhance the value of our resources and reserves

Strategic Risk: We exist to realise the potential of the resources and reserves we are entrusted to develop.

We work to continually optimise our operations through our sound technical and economic understanding of our resources and reserves.

If we fail to do this, it will have a significant impact on TSR and ultimately, the sustainability of the Company.

Our response:

·; We report Mineral Resources and Ore Reserves (including Coal Resources and Coal Reserves) in accordance with the JORC Code as required by Chapter 5 of the ASX Listing Rules;

·; We apply an annual business planning standard and process, structured to get maximum value across the life of our operations;

·; Our capital prioritisation, capital allocation & short-term planning processes prioritise the highest value options across our portfolio;

·; We apply a rigorous project development process that includes independent peer review of project risks and approval tollgates; and

·; Our closure standard ensures that our full life of operations value incorporates closure and rehabilitation liabilities.

Climate change resilience

Strategic Risk: By using climate change scenarios, we can identify opportunities and threats to our portfolio and operations.

We assess these risks through a framework that includes policy, market and physical factors.

Our response:

·; We seek to understand our portfolio performance in a range of future climate scenarios, considering both opportunities and threats;

·; We use the latest climate modelling data to inform us of the level of risk to our operational plans;

·; We identify potential controls in the short, medium and long-term to improve the climate change resilience of our portfolio;

·; We prioritise our land management efforts to improve resilience, including minimising land disturbance and maximising rehabilitation efforts;

·; We support the Paris Agreement objectives and are committed to achieving net zero carbon emissions by 2050;

·; We identify and implement greenhouse gas reduction and energy efficiency projects, with our emission reduction targets linked to our remuneration; and

·; We're transparent with our disclosure of climate change-related opportunities and threats in our annual Our Approach to Climate Change report, which is prepared with regard to the Recommendations of the Task Force on Climate-related Financial Disclosures.

2. Related party transactions

Extract from Note 29 'Key management personnel', page 122 of the 2019 Annual Report

Key management personnel compensation

Transactions with key management personnel

There were no transactions with key management personnel during the year ended 30 June 2019 (FY18: nil).

Loans to key management personnel

There were no loans with key management personnel during the financial year and as at 30 June 2019 (FY18: nil).

Transactions with key management personnel related entities

There were no transactions with entities controlled or jointly controlled by key management personnel and there were no outstanding amounts with those entities as at 30 June 2019 (FY18: nil).

Extract from Note 30 'Related party transactions', page 123 of the 2019 Annual Report

Transactions with related parties

Outstanding balances with related parties

(1) Amount owing relates to short-term deposits and cash managed by the Group on behalf of its equity accounted investments. Interest is paid based on the three month London Inter-Bank Offer Rate and the one month Johannesburg Inter-Bank Agreed Rate.

(2) Amounts owing from associates include loans to Port Kembla Coal Terminal Limited. An interest free loan repayable by 30 June 2030 and an interest bearing loan repayable by 30 June 2020. Interest is paid based on the Bank Bill Swap Bid Rate and is secured against other shareholders of the associate.

Terms and conditions

Sales to, and purchases from, related parties of goods and services are transactions at market prices and on commercial terms.

Outstanding balances at year end are unsecured and settlement mostly occurs in cash.

No guarantees are provided or received for any related party receivables or payables.

No provision for expected credit losses has been recognised in relation to any outstanding balances with the exception of US$1 million on initial application of AASB 9 on 1 July 2018. No expense has been recognised in respect of expected credit losses from related parties in FY19.

3. Directors' Responsibility Statement

The following statement was prepared for the purposes of the South32 Group's 2019 Annual Report and is repeated here for the purposes of complying with DTR 6.3.5. It relates to, and is extracted from, the South32 Group's 2019 Annual Report and is not connected to the extracted and summarised information presented in this announcement.

"The Directors state that to the best of their knowledge:

a) The consolidated financial statements and notes on pages 78 to 125 were prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group and the undertakings included in the consolidation taken as a whole; and

b) The Directors' Report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

This Directors' Report is made in accordance with a resolution of the Board."

Karen Wood, Chair and Graham Kerr, Chief Executive Officer and Managing Director. 

4. No Change Statement and Notice of Annual General Meeting

Shareholders are advised that the financial statements in the 2019 Annual Report do not contain any material changes to the South32's Financial Results and Outlook for the year ended 30 June 2019 announcement issued on 22 August 2019 on RNS and SENS.

Notice is hereby given that the Company's Annual General Meeting will be held at 10.30am (AWST) on 24 October 2019 in the Golden Ballroom, Pan Pacific Hotel, 207 Adelaide Terrace, Perth, Western Australia 6000, Australia to transact the business as set out in the Notice of Annual General Meeting to be dispatched no later than 25 September 2019.

About South32

South32 is a globally diversified mining and metals company. We produce bauxite, alumina, aluminium, energy and metallurgical coal, manganese, nickel, silver, lead and zinc at our operations in Australia, Southern Africa and South America. We are also the owner of a high grade zinc, lead and silver development option in North America and have several partnerships with junior explorers with a focus on base metals. Our purpose is to make a difference by developing natural resources, improving people's lives now and for generations to come, and to be trusted by our owners and partners to realise the potential of their resources.

Further information on South32 can be found at www.south32.net.

JSE Sponsor: UBS South Africa (Pty) Ltd6 September 2019