South32 Regulatory News (S32)

7 September 2018

South32 Limited

(Incorporated in Australia under the Corporations Act 2001)

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32ISIN: AU000000S320

south32.net

South32 Limited

2018 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 2018

• 2018 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 2018 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 2018 announcement issued on 23 August 2018. 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 2018 Annual Report in full.

1. Principal risks and uncertainties

Risk management

We continuously develop and enhance our risk and control procedures to improve risk identification, assessment and monitoring, and to embed risk management into our decision-making processes. Our effective management of risk ensures the achievement of our strategic objectives, the realisation of opportunities and enhances our resilience to change. We have a dedicated global risk function that assists in identifying and recording strategic risks facing the Group, and monitors mitigating actions.

The Board is informed about the strategic risks facing the Company at each scheduled Board meeting. The identification and assessment of these risks is informed, amongst other things, by an understanding of our business model, significant trends in our operating environment and the relevant interests, expectations and concerns of key stakeholders that are most likely to influence our ability to create sustainable shareholder value. Each risk will be revisited in FY19 to consider emerging trends and new impacts from internal and external factors.

We have identified 15 strategic risks that have the potential to significantly impact the performance and sustainability of our business, as listed below. Elements of those risks may be relevant across the entire Group, whilst others may be specific to a commodity group or operation.

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

Risk: Industry earnings, balance sheet and cash flows are affected by the volatility of commodity prices, currencies and interest rates. Financing costs, currency impacts, input costs and commodity prices are managed based on floating indices. Prices are determined by the balance of supply and derived demand for commodities. Costs are impacted by the local currencies of operations. 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.

Mitigation:

· Commitment to a strong balance sheet

· We maintain a diverse commodity portfolio and geographical spread to provide resilience against volatility relative to single commodity, single mine and single geography competitors

· We actively monitor the markets in which we operate

· We have a centralised marketing team

· We continually review our operating and capital expenditure plans

Actions by governments, political events or tax authorities

Risk: The value of our investments depends on long-term fiscal stability and may be affected by political, economic, tax and legal changes beyond our control. The resources sector can often be subject to unpredictable, higher direct and indirect taxes and royalties in our countries of operation that can negatively impact on cash flow. The decisions of regulators relating, for example, to nationalisation of mineral resources, renegotiation or nullification of contracts, leases, permits or agreements, may impact our business model.

Mitigation:

· We have specialist external relations teams

· We have a comprehensive stakeholder relations strategy in place in all our countries of operation

· We monitor policy, legislative and regulatory changes whilst actively engaging with relevant authorities, for example, through written submissions and International Council on Mining and Metals (ICMM) membership

· We have specialist tax management capability and seek expert tax advice as needed

· Our annual Tax Transparency and Payments to Governments Report demonstrates how we meet our regulatory obligations

Cost inflation and labour dispute impact on operating margins and expansion

Risk: Inflation of input and capital costs could adversely impact financial returns. Labour is a significant operating cost that may vary depending on industrial action and scheduling delays. Our need to reduce operating costs may impact negatively on previously communicated labour commitments.

Mitigation:

· Our strategy seeks to optimise our operations and sustainably lower operating costs and capital expenditure

· Our investment decisions are governed by a robust capital management framework

· All discretionary investments compete for capital, based on assessed risk and value

· We engage proactively with all trade unions and our people in line with local labour laws

· Enterprise bargaining agreements are in place and the internal and external environment is continually monitored to identify any possible industrial action

Access to water and energy

Risk: Water and energy are critical to our operations, however scarcity of supply, counterparties, change in government policy and increasing cost of natural resources can impact our operations and supply chain.

Mitigation:

· We work closely with suppliers of water and power, on a long-term, mutually beneficial basis

· We actively work to secure water and energy resources within our control to strengthen our operations' resilience to water and power security risks

· We explore opportunities to secure alternate, reliable water and energy sources

Failure to maintain, realise or enhance value due to inadequate knowledge of our resources and reserves

Risk: We aim to maximise shareholder value by continually optimising our operations. Failure to maintain technical and economic understanding of our Mineral/Coal Resources undermines our ability to identify the right opportunities to optimise and enhance our operations. This will detrimentally impact on shareholder returns and, ultimately, the sustainability of the Company.

Mitigation:

· Our resources and reserves are estimated by mineral industry professionals who have relevant experience to act as Competent Persons in accordance with the JORC Code. We strengthen this process by applying our governance framework using internal and external subject matter experts

· We seek to identify the opportunities that derive maximum value for each operation in our long-term planning process

· We have a capital prioritisation process that assesses our entire portfolio allowing us to invest in those opportunities that enable us to maintain balance sheet strength as well as maximise returns to shareholders

· Our short-term planning processes aim to translate these value opportunities into granular executable plans

Deterioration in liquidity and cash flow

Risk: External factors may adversely impact cash flows. If we compromise our balance sheet, liquidity and cash reserves, interest rate costs on borrowed debt and future access to financial capital markets could be adversely affected.

Mitigation:

· We are committed to a strong balance sheet, maintaining an investment grade credit rating and strong liquidity throughout economic cycles

· We manage our balance sheet and cash flow within strict financial criteria

Climate change impacts

Risk: Climate change may result in physical impacts and transition risks on our operational infrastructure, decreasing natural resource availability and increased occurrence of extreme weather events that can cause disruption to our operations, as well as increased operating and capital costs. Climate change driven by worsened greenhouse gas emissions may force a change in government policy about carbon taxes and/or trading which will impact on our operating costs.

Mitigation:

· We have established greenhouse gas emissions reduction targets

· We utilise the latest climate modelling data to inform us of the level of risk to our life of mine assets and disruption of operations

· We identify and implement greenhouse gas reduction and energy efficiency projects

· We prioritise our land management efforts to minimise land disturbance and maximise rehabilitation efforts

· We engage with stakeholders and decision-makers in the design of national carbon regulations

· We are transparent with our disclosure of climate change-related risks in our annual Climate-related Financial Disclosures

Health and safety risks in respect of our operational activities

Risk: There are inherent health and safety risks across the mining operations value chain. Apart from physical harm to our people and contractors, failure to maintain a high standard of safety may impact negatively on employee morale, the achievement of production targets and our licence to operate.

Mitigation:

· The well-being of our people is at the forefront of all our considerations and is fundamental to everything we do

· We have established comprehensive health and safety policies and associated performance requirements that are designed to prevent and mitigate exposure to health and safety risks

· We focus on significant events and critical controls

· We engage, develop and align our people to ensure we have disciplined execution of well-designed work

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

Water, waste and environmental risks

Risk: We recognise that our operations have the potential to significantly impact biodiversity, air, land and water resources. Advances in scientific understanding of these impacts, regulatory requirements and stakeholder expectations may prevent or delay project approvals and result in increased mitigation costs, offset or compensatory actions, weakening the overall sustainability of operations.

Mitigation:

· We have established policies and standards which are designed to prevent, monitor and limit the impact of our operations on the environment

· We actively address known contamination resulting from past activities

· We are committed to stewardship in water and waste water management

· We use water responsibly, taking into account natural supply variations

Unexpected operational or natural catastrophes

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

Mitigation:

· We use robust risk management tools to analyse risks and design plans that prevent or limit business disruption impacts

· We incorporate the latest climate impact parameters into our planning, risk and investment model

· We have established and tested business continuity and disaster recovery plans to facilitate rapid response to significant events and ensure the safe restoration of operations

· We maintain insurance against many, but not all, potential losses or liabilities arising from operating risks. As such, our insurance coverage may not be sufficient to fully cover us against potential loses arising from such risks

· We provide transparent reporting in our Climate- related Financial Disclosures to provide stakeholder assurance

Commercial 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 costs and production at operations.

Mitigation:

· We proactively engage with our counterparties to manage instances of non-supply or quality control prior to occurrence

· We use counterparty credit ratings and level of exposure to set counterparty limits

· Our insurance program mitigates the financial consequences of supply disruption, subject to availability and cost

Fraud and corruption

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

Mitigation:

· We have a Code of Business Conduct which confirms our commitment to upholding a unified approach to ethical standards of behaviour

· We have "zero tolerance" for fraud and corruption, with clear tone set by the Board and Lead Team

· Our ethics and compliance framework incorporates policies, procedures, training, and guidelines that help ensure that activities are conducted ethically

· We perform risk assessments as a critical part of our anti-corruption compliance program

· We maintain a system of internal controls to mitigate the risk of fraud and corruption

· We provide our people and third parties with mechanisms to safely report suspected fraud or corruption

Breaches of information technology security

Risk: Information technology systems may be subject to security breaches resulting in theft, disclosure or corruption of information. Security breaches might also result in misappropriation of funds or disruption to operations.

Mitigation:

· We maintain network and physical control frameworks and deploy up-to-date anti-virus software to provide a level of protection

· We monitor our networks and undertake ethical hacking and data analysis to identify suspicious activity and potential exposures

· We have established business continuity plans, inclusive of IT disaster recovery plans

Failure to retain and attract key people

Risk: The loss of key personnel or the failure to attract, develop and retain talent could affect our operations, financial position and growth.

Mitigation:

· We have designed an inclusive workplace and specific initiatives to engage and empower our workforce

· We focus on having the right people in the right roles, developing future leaders and maintaining a workforce with deep functional expertise

· We engage with our people at all levels to improve connectivity, support decisions and continuously improve

· We have policies and guidelines in place for talent and recruitment management, remuneration, skills development and succession planning

Support of our local communities

Risk: Our social licence to operate is dependent upon the engagement and support of the communities within which we operate or seek to operate. Community dissatisfaction can result in failure to attract people and business partners, operational delays and disruption and litigation, which can affect cost, production and, in extreme cases, the viability of our operations.

Mitigation:

· We have established policies and procedures designed to identify and understand our stakeholders, informing our stakeholder engagement plans and community investment approach

· We maintain regular and open dialogue with our stakeholders

· We work closely with communities and government to identify and manage impacts, build shared value and align stakeholder expectations to current economic reality

2. Related party transactions

Extract from Note 31 'Key management personnel', page 150 of the 2018 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 2018 (FY17: nil).

Loans to key management personnel

There were no loans with key management personnel during the financial year and as at 30 June 2018 (FY17: 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 2018 (FY17: nil).

Extract from Note 32 'Related party transactions', page 150 of the 2018 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 LIBOR and the one month JIBAR.

(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 BBSY and is secured against other shareholders of the associates.

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.

3. Directors' Responsibility Statement

The following statement was prepared for the purposes of the South32 Group's 2018 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 2018 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 97 to 153 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 2018 Annual Report do not contain any material changes to the South32's Financial Results and Outlook for the year ended 30 June 2018 announcement issued on 23 August 2018 on RNS and SENS.

Notice is hereby given that the Company's Annual General Meeting will be held at 10.30am (AWST) on 25 October 2018 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 26 September 2018.

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) Ltd7th September 2018