South32 Regulatory News (S32)

14 September 2017

South32 Limited

(Incorporated in Australia under the Corporations Act 2001)

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32 ADR: SOUHYISIN: AU000000S320

south32.net

2017 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.

· Annual Report 2017

· 2017 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 2017 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 2017 announcement issued on 24 August 2017. 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 2017 Annual Report in full.

1. Principal risks and uncertainties

Risk management

Risk is inherent in our business. To maintain our social licence to operate, remain a valued member of our communities and ensure our continued success, we actively manage our risks. Our risk management framework sets out our overall approach to risk management including how we identify, monitor and manage material risks associated with our activities. This framework applies to all employees, Directors and contractors of South32 and its subsidiaries. 

Strategic and External risks

Fluctuations in commodity prices, exchange rates, interest rates and the global economy

Risk: Our earnings, balance sheet and cash flows are affected by the volatility of commodity prices, exchange rates and interest rates. Significant deterioration in commodity prices or unfavourable currency movements have the potential to adversely impact the value of our operations and our ability to declare dividends. Financing costs, currency, input costs and commodity prices are managed based on floating indices. Prices are determined by the balance of supply and demand for commodities. Costs are impacted by the local currencies of operations.

Mitigation: We expect commodity prices and exchange rates to remain volatile. The quality of our operations and commitment to a strong balance sheet mitigates against this volatility. In addition, our diverse commodity and geographical exposure reduces the impact of volatility relative to a single commodity, single geography producer. We also actively monitor the markets in which we operate and continuously review our operating and capital expenditure plans.

Political events, actions by governments or tax authorities

Risk: New regulations, such as changes to taxation policy or controls on imports, exports and prices have the potential to adversely impact our business. We make long-term investments that depend on long-term fiscal and regulatory stability. Risks of nationalisation, renegotiation or nullification of contracts, leases, permits or agreements vary by jurisdiction.

Mitigation: We are committed to creating shared value. Whilst regulatory complexity and associated costs of compliance are increasing, we regularly engage with regulators in a transparent way to ensure potential changes are identified, understood and incorporated into our risk management approach. We publish an annual Tax Transparency and Payments to Governments report which outlines our approach to tax governance and details our tax payments to governments on a country-by-country and project by project basis.

Cost inflation and labour disputes could impact operating margins and expansion opportunities

Risk: Price inflation of key inputs has the potential to negatively impact operating margins. Labour is a significant operating cost and varies depending on the underlying demand for people. An increase in capital costs or scheduling delays could also impact financial returns on capital investments.

Mitigation: Our people are our most valuable resource. We aspire to have constructive relationships with our employees and trade unions across our business. We monitor the markets in which we operate to understand cost inflation impacts. Investment decisions are governed by our capital management framework and all discretionary investments compete, based on the assessed risk and key financial criteria.

Climate change

Risk: Climate change can impact a business' revenue and expenditure in several ways. This could result in exposure to carbon pricing, litigation, changes in technology, changing demand and supply conditions, reputational impacts and physical impacts from climate change, depending on how we and broader society respond.

Mitigation: To mitigate or adapt to climate change risks, take advantage of opportunities and support global action, our Climate Change Strategy focuses on:

· Climate change opportunity

· Climate resilience

· Emissions reduction

We also undertake climate change scenario analysis, which supports our business strategy and capital allocation decisions. Our operations carry out exploration as well as research and development necessary to support these activities. We support climate action and the transition to a lower carbon future. We have also chosen not to develop any new greenfield energy coal basins and there is no material risk to the book value of our current assets. More information

can be found in Our Approach to Climate Change report, which is on our website.

Failure to maintain, realise or enhance existing reserves

Risk: Mineral/Coal Resource and Ore/Coal Reserve estimates are based on our knowledge of deposits using generally accepted industry practice through appropriate data collection, analytical assessment and studies. Our value is limited to the known resource and reserve position. Failure to take the right opportunities to optimise and enhance our resource and reserve position could detrimentally impact long-term shareholder returns. Our understanding of the resource and reserve position also impacts how we value and report our operations and our decision making on investment opportunities.

Mitigation: We have a number of initiatives in place to optimise our operations, unlock their potential and identify new options that may compete for capital. Our capital management framework and capital prioritisation process is designed to maximise total shareholder returns. We report Mineral/Coal Resources and Ore/Coal Reserves as required by the ASX Listing Rules and rely on Competent Persons with sufficient relevant experience to provide these estimates. We apply a comprehensive program of review and audit aimed at providing assurance in respect of Mineral/Coal Resources and Ore/Coal Reserves estimates.

Deterioration in liquidity and cash flow

Risk: External factors may adversely impact cash flows, liquidity and cash reserves. As a result, interest rate costs on borrowed debt and future access to financial capital markets could be adversely affected.

Mitigation: We have committed to maintain an investment grade credit rating and strong liquidity throughout economic cycles. We manage our balance sheet and cash flow within strict financial criteria and will not combine undue financial and commodity price leverage.

Operational Risks

Health and safety risks in respect of our activities

Risk: Health and safety events that have the potential to adversely impact our people and operations are covered in detail within the Sustainability sections of the Annual Reporting Suite, which is published on our website.

Mitigation: The health and safety of our employees is paramount and underpins everything we do. Our operations have comprehensive health and safety policies with associated performance requirements that are designed to prevent and mitigate exposures. Our Care Strategy is focused on reducing the exposure of our people to health and safety risk through creating an inclusive workplace, where work is well-designed and we continuously learn and improve to deliver safe outcomes.

Access to water and power

Risk: Water and power are critical to our operations. Continued access to water and power to support our existing activities on current terms is not guaranteed. Underlying factors can change, such as the climate, counterparties, contractual arrangements or government policy.

Mitigation: We work closely with suppliers of water and power, engaging on a long-term, mutually beneficial basis. We also work to secure energy and water resources within our control, noting that the risk of access to power in Africa has decreased, while the risk of access to water for our operations has increased, subject to seasonal variations. Where appropriate, we are diversifying our energy supply sources and investing in desalination facilities.

Water and waste water management, and environmental risks

Risk: Our operations have the potential to impact biodiversity, land, water and related ecosystems. Scrutiny in this area is increasing and regulatory requirements or stakeholder expectations may prevent or delay project approvals and result in increased mitigation costs or compensatory actions. The sustainability of operations may also be impacted.

Mitigation: We are committed to excellence in water and waste water management and use water responsibly, taking into account natural supply variations. Whilst regulatory complexity and the associated costs of compliance are increasing, our policies and standards are designed to prevent, monitor and reduce the impact of our operations on the environment.

Unexpected operational or natural catastrophes

Risk: Our operations and transport networks can be exposed to incidents such as fire, explosion, flooding, geotechnical failures, loss of power supply, mechanical equipment failures and unexpected natural catastrophes. The frequency and severity of these incidents may be exacerbated by climate change.

Mitigation: Our operations use tools to analyse risks and design plans that prevent or limit impacts. This includes incorporating the most up-to-date climate parameters into our planning, risk and valuation models. Contingency, business continuity and disaster recovery plans facilitate rapid response to significant events and ensure the safe restoration of operations. Where available and cost effective, we purchase insurance to mitigate financial consequences.

Counterparties that we transact with may not meet their obligations

Risk: We contract with commercial, government and financial counterparties, including customers, suppliers and financial institutions who may fail to perform against contracts and obligations, impacting cost or price performance. Non-supply or changes to the quality of key inputs may impact both production volumes and costs at our operations.

Mitigation: We proactively engage with all counterparties to manage instances of non-supply or quality control prior to occurrence. Our operations use counterparty credit ratings and manage within set counterparty limits. Our insurance program mitigates the financial consequences of supply disruption, subject to availability and cost.

Risks of fraud and corruption

Risk: We are exposed to the risks of fraud and corruption, both within and external to our organisation. Fraud and corruption may lead to regulatory fines, financial loss, litigation, loss of operating licences or reputational damage.

Mitigation: Our people are trained to assess potentially fraudulent or corrupt activities. Our Code of Business Conduct, policies and procedures mandate expectations aligned with legislative and regulatory requirements. We provide our employees and third parties with mechanisms to safely report suspected fraud or corruption.

Breaches of information technology security

Risk: Our information technology systems could be subject to security breaches resulting in theft, disclosure or corruption of information. Security breaches could also result in misappropriation of funds or disruption to operations. Cyber security risk is increasing due to the continued deployment of technology in our industry and operations as well as the number and sophistication of cyberattacks.

Mitigation: Cyber security risk is managed by our network and physical control frameworks, together with anti-virus software. Monitoring of networks, ethical hacking and data analysis is undertaken to identify suspicious activity and potential exposures. The Risk and Audit Committee reviews the management of cyber security risk twice a year.

Failure to retain and attract key employees

Risk: The loss of key personnel or the failure to attract, train and retain sufficiently qualified employees could affect our operations, financial position and growth.

Mitigation: The attraction and retention of key personnel is a priority and fundamental to our long-term success. Our people approach guides how we attract, employ, develop, engage and retain talented people. We focus on having an inclusive workplace, developing future leaders and investing in our people.

2. Related party transactions

Extract from Note 31 'Key management personnel', page 164 of the 2017 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 2017 (FY16: nil).

Loans to key management personnel

There were no loans with key management personnel during the financial year and as at 30 June 2017 (FY16: nil).

Transactions with key management personnel's personally 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 2017 (FY16: nil).

Extract from Note 32 'Related party transactions', page 165 of the 2017 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. Interest is paid based on the three month LIBOR and the one month JIBAR.

(2) Amount includes a loan made on a commercial basis, with interest charged at commercial rates and is due to be repaid no later than 30 June 2019.

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 doubtful debts has been recognised in relation to any outstanding balances and no expense has been recognised in respect of bad or doubtful debts due from related parties.

Transactions with BHP Billiton Group

Prior to the Demerger, the Group entered into a Separation Deed with BHP. The Separation Deed deals with matters arising in connection with the Demerger of the Group from BHP.

The Separation Deed principally covers the following key terms: assumption of liabilities, limitations and exclusions from indemnities and claims, contracts, financial support, Demerger costs and litigation.

3. Directors' Responsibility Statement

The following statement was prepared for the purposes of the South32 Group's 2017 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 2017 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 that are set out on pages 101 to 166 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 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."David Crawford AO, Chairman and Graham Kerr, Chief Executive Officer.

4. No Change Statement and Notice of Annual General Meeting

Shareholders are advised that the financial statements in the 2017 Annual Report do not contain any material changes to the South32's Financial Results and Outlook for the year ended 30 June 2017 announcement issued on 24 August 2017 on SENS.

Notice is hereby given that the Company's Annual General Meeting will be held at 10.30am (AWST) on 23 November 2017 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 20 October 2016.

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

JSE Sponsor: UBS South Africa (Pty) Ltd14 September 2017