South32 Regulatory News (S32)

22 August 2019

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

FINANCIAL RESULTS AND OUTLOOK

YEAR ENDED 30 JUNE 2019

South32 delivers strong operating result, reshapes portfolio and increases returns to shareholders

"Our strong operating result delivered Underlying EBITDA of US$2.2B for an operating margin of 34 per cent and free cash flow of US$1B. We finished the year with a net cash balance of US$504M, having returned US$938M to shareholders during the period.

"We achieved record production at Hillside Aluminium, a 57 per cent increase in volumes at Illawarra Metallurgical Coal and strong manganese ore production of 5.5 million tonnes, underpinning a 3 per cent increase in Group production volumes.

"We continued to reshape and improve our portfolio, funding the acquisitions of the Hermosa project and a 50 per cent interest in the Eagle Downs Metallurgical Coal project from our cash reserves and announcing the review of our manganese alloys business.

"We released a Mineral Resource estimate for the Taylor deposit at Hermosa, which was a key milestone as we progress one of the most exciting base metals projects in the industry. Work undertaken since its acquisition has significantly de-risked our investment, increased our confidence in the project and confirmed its ability to deliver strong returns to shareholders over many decades.

"Subsequent to the end of the year, we have entered into exclusive negotiations with Seriti Resources to finalise its offer to acquire our South Africa Energy Coal business. The divestment will significantly reduce the Group's sustaining capital intensity, further strengthen our balance sheet and improve margins.

"Looking ahead our portfolio will include industry leading positions in alumina and manganese and we will continue to embed development options with a bias to base metals that have the potential to deliver meaningful growth in shareholder value.

"Demonstrating our strong financial position and positive outlook for costs and production, today we announced a US$140M fully franked dividend and an increase in our capital management program of US$250M to US$1.25B, leaving US$264M expected to be returned by 4 September 2020."

Graham Kerr, South32 CEO

Safety

The most important commitment we make at South32 is to ensure everyone goes home safe and well. Built on our internal safety standards and risk management system, we provide clear global expectations on how our operations can proactively identify and manage safety risk. Our Total Recordable Injury Frequency (TRIF)(9)(10) improved by 12% to 4.5 per million hours worked, compared with our FY18 TRIF of 5.1.

In June 2019 we released our 2019 Tailings Storage Facilities Management report, consistent with our commitments to the International Council on Metals and Mining Position Statement on Preventing Catastrophic Failure of Tailings Storage Facilities. This report details our approach to tailings management and we remain committed to international best practice in the management and disposal of tailings at our operations.

Performance summary

The Group's statutory profit after tax decreased by 71% to US$389M in FY19 following the recognition of impairment charges totalling US$504M (US$578M post-tax, including de-recognition of deferred tax assets) in relation to our South Africa Energy Coal operation.

Underlying earnings decreased by 25% (or US$335M) to US$992M as our strong operating performance that delivered a 3%(11) increase in Group production volumes, and cost reduction initiatives across labour, energy and materials usage were more than offset by lower aluminium and thermal coal prices. Basic Underlying earnings per share decreased by a lesser 23% to US 19.7 cents per share as we benefitted from the continuation of our on-market share buy-back program which has reduced our shares on issue by 6%(12) since its commencement.

Specific highlights for the year included:

We finished the year with a net cash balance of US$504M having generated free cash flow from operations, including distributions from our manganese EAI, of US$1.0B. Our strong financial position allowed us to return US$762M to shareholders in respect of the period. This included payment of a US$256M fully franked interim dividend and declaration of a US$140M fully franked final dividend in accordance with our dividend policy, which seeks to return a minimum 40% of Underlying earnings in each six month period. A further US$366M was returned to shareholders as part of our ongoing capital management program, with US$281M allocated to our on-market share buy-back program and US$85M returned in the form of a special dividend. Demonstrating the disciplined approach we are taking to our capital management program, our confidence in the outlook for our business and an anticipated unwind in working capital during H1 FY20, the Board has expanded our program by US$250M to US$1.25B, leaving US$264M expected to be returned by 4 September 2020.

Looking ahead, the Group's production volumes are expected to rise by a further 3%(17) in FY20 with Illawarra Metallurgical Coal on-track to return to a three longwall configuration during the June 2020 quarter and Worsley Alumina expected to achieve nameplate capacity following an improvement in calciner availability. Higher production volumes, weaker producer currencies and lower raw material input costs, along with the continuation of initiatives to mitigate inflation and maintain margins are expected to result in lower Operating unit costs for the majority of our operations in FY20.

Earnings

The Group's statutory profit after tax declined by US$943M (or 71%) to US$389M in FY19. Consistent with our accounting policies, various items are excluded from the Group's statutory profit to derive Underlying earnings including: exchange rate loss on restatement of monetary items (US$3M pre-tax); impairment loss (US$504M pre-tax); loss on fair value movements of non-trading derivative instruments and other investments (US$35M pre-tax); major corporate restructures (US$28M pre-tax); profit associated with earnings adjustments included in our equity accounted investments (EAI) (US$17M); exchange rate gains associated with the Group's non US dollar denominated net debt (US$34M pre-tax), and the tax expense for all pre-tax earnings adjustments and exchange rate variations on tax balances (US$84M). Further information on these earnings adjustments is included on page 37.

The Group's Underlying EBITDA declined by US$319M (or 13%) to US$2.2B, for an operating margin of 34%. Lower aluminium and thermal coal prices more than offset stronger prices for alumina, contributing to a US$275M reduction in Revenue, despite higher volumes. While the Group benefitted from weaker producer currencies and cost reduction initiatives across labour, energy and materials usage, total costs rose with higher production and the commencement of several improvement initiatives at Worsley Alumina to support a sustainable increase in production to nameplate capacity. Underlying EBIT decreased by US$334M (or 19%) to US$1.4B as depreciation and amortisation increased by a modest US$15M with the higher production volumes. Underlying earnings declined by US$335M (or 25%) to US$992M as a change in our geographic earnings mix and permanent differences led to an increase in our Underlying effective tax rate (ETR)(18).

Earnings analysis

The following key factors influenced Underlying EBIT in FY19, relative to FY18.

The reconciliation of movements in Underlying EBIT graph can be found within the National Storage Mechanism version of the release.

Net finance cost

The Group's Underlying net finance cost, excluding EAI, was US$118M in FY19, and largely reflects the unwinding of the discount applied to our closure and rehabilitation provisions (US$103M) and finance lease interest (US$47M), primarily at Worsley Alumina.

Tax expense

The Group's Underlying income tax expense, which excludes tax associated with EAI, was US$330M for an Underlying ETR of 37.8% in FY19. The increase in ETR reflects the differing tax rates that our operations are exposed to, the change in our geographic earnings mix, and the disproportionate effect of intragroup agreements and other permanent differences when margins are compressed or losses are incurred in specific jurisdictions. The primary corporate tax rates applicable to the Group for FY19 include: Australia 30%, South Africa 28%, Colombia 33%(23), Mozambique 0%(23) and Brazil 34%.

The Underlying income tax expense for our manganese EAI was US$338M, including royalty related taxation of US$92M at GEMCO (Australia Manganese), for an Underlying ETR of 42.2%.

Cash flow

The Group's free cash flow from operations, excluding EAI, declined by US$302M (or 35%) to US$571M as we increased our investment in our development projects and underground development at Illawarra Metallurgical Coal, with rates increasing ahead of a planned return to a three longwall configuration in the June 2020 quarter. 

Working capital increased by US$129M as we re-established inventories at Illawarra Metallurgical Coal and Cannington following improved performance at both operations during the year. Further, provisions and other liabilities declined following payment of previously recognised redundancy and restructuring charges as we simplified the Group's functional structures and continued to invest in concurrent rehabilitation at South Africa Energy Coal.

With no change to our payment terms we expect a portion of working capital to unwind in H1 FY20 as trade and other receivables reduce following receipt of the initial insurance progress payment for the Klipspruit dragline incident and the collection of receipts from June 2019 sales.

Total capital expenditure(24), excluding EAI, increased by US$274M to US$710M as Major project activity ramped up at the Klipspruit Life Extension (KPSX) project(25) (US$123M) and work progressed at the Hermosa project (US$85M) following the acquisition of Arizona Mining in August 2018. Sustaining capital expenditure increased by US$65M to US$433M with expenditure at Illawarra Metallurgical Coal rising by US$44M.

The increased spend on intangibles and the capitalisation of exploration expenditure reflects a greater rate of investment in technology to support our operations and US$28M of expenditure on exploration. This included US$18M at Hermosa to improve our knowledge of the Taylor deposit where we released a first time Mineral Resource estimate in accordance with the JORC Code (2012) guidelines(14) and commenced work on the broader, prospective land package(15). Total capital expenditure associated with our EAI increased by US$31M to US$96M during FY19 as we invested in additional tailings storage capacity at Australia Manganese.

We also received (net) distributions totalling US$458M from our manganese EAI, comprising dividends and capital returns of US$542M and a net drawdown in shareholder loans (-US$84M).

Balance sheet, dividends and capital management

While the Group generated US$1B in free cash flow from operations, including net distributions from our manganese EAI, our net cash balance decreased by US$1.5B to finish the period at US$504M. Our strong balance sheet and disciplined approach to capital allocation allowed us to return US$938M to shareholders during the period by way of dividends (US$657M) and the continuation of our on-market share buy-back program (US$281M). We also funded the Arizona Mining and Eagle Downs Metallurgical Coal transactions for a combined investment of US$1.5B out of our cash reserves.

Demonstrating our confidence in our financial position and consistent with our dividend policy, our Board resolved to pay a fully franked final dividend of US$140M, representing 40% of Underlying earnings in respect of H2 FY19. The Board has also exercised its discretion to increase and extend our approved capital management program by US$250M to US$1.25B, leaving US$264M to be returned by 4 September 2020, further demonstrating the disciplined and flexible approach we are taking.

With the declaration of our final dividend we will return US$2.5B to shareholders in respect of the last four year period, equivalent to 27% of our market capitalisation(26). Having established this strong track record, we will continue to return any excess capital to shareholders in a timely and efficient manner by monitoring our optimal financial position within the context of the prevailing macroeconomic environment and our capital management framework.

From 1 July 2019, the Group's adoption of AASB 16 Leases, which affects the accounting classification of leases, will result in an increase to our gross debt balance of approximately US$140M following the recognition of additional liabilities. The majority of the increase relates to the reclassification of existing operating leases which will continue to be captured in the aforementioned monitoring of our optimal financial position.

Consistent with our commitment to maintain an investment grade credit rating, Standard and Poor's and Moody's reaffirmed their respective BBB+ and Baa1 credit ratings for the Group.

South32 shareholders registered on the South African branch register will not be able to dematerialise or rematerialise their shareholdings between 11 and 13 September 2019 (both dates inclusive), nor will transfers to/from the South African branch register be permitted between 6 and 13 September 2019 (both dates inclusive).

Details of the currency exchange rates applicable for the dividend will be announced to the relevant stock exchanges. Further dividend information is available on our website (www.south32.net).

South32 American Depositary Receipts (ADRs) each represent five fully paid ordinary shares in South32 and ADR holders will receive dividends accordingly, subject to the terms of the Depositary Agreement.

Outlook

Production

The Group's production volumes are expected to rise by 3%(17) in FY20.

Costs and capital expenditure

Operating unit cost guidance

Stronger production volumes, lower support costs following simplification of the Group's functional structures that are on-track to deliver US$50M in annual savings, and the realisation of benefits from our labour, energy and materials usage are expected to combine with a stronger US dollar to lower Operating unit costs across the majority of our operations in FY20. While we don't provide unit cost guidance for our downstream processing operations, the lagged effect of a reduction in raw material prices during H2 FY19 is expected to provide some relief to the cost base of our aluminium smelters in FY20.

(a) FY20e Operating unit cost guidance includes royalties (where appropriate) and commodity price and foreign exchange rate forward curves or our internal expectation, as at June 2019 (refer to footnote 30 on page 25).

(b) US dollar per tonne of ore to kiln. Periodic movements in finished product inventory may impact Operating unit costs.

(c) US dollar per tonne of ore processed. Periodic movements in finished product inventory may impact Operating unit costs

Other expenditure guidance

Group and unallocated costs of US$90M are expected in FY20 as we increase functional support for our development projects and invest in technology to support our operations. We also expect to capitalise US$30M of expenditure on information technology systems.

Exploration guidance

Guidance for greenfield exploration expenditure to progress our early stage projects is US$30M (FY19: US$34M). We also expect to capitalise US$25M (FY19: US$18M) of exploration expenditure at Hermosa to further increase our knowledge of the Taylor deposit(14) and the greater Hermosa land package(15).

Depreciation and amortisation, and tax expense guidance

Depreciation and amortisation (excluding EAI) is expected to reduce to approximately US$735M (FY19: US$757M) following the recognition of impairment charges for South Africa Energy Coal during the period. Depreciation and amortisation of US$95M(FY19: US$87M) is expected for our EAI. Guidance includes the impact from adopting the new AASB 16 Leases accounting standard from 1 July 2019.

Our geographical earnings mix continues to have a significant bearing on our ETR given differing country tax rates, whilst the impact of permanent differences is magnified when margins are compressed. Although it is difficult to predict our ETR (excluding EAI), we do expect it to remain at elevated levels in FY20 (FY19: 37.8%) should the compressed margins within our African aluminium operations persist. In addition, the de-recognition of tax assets in South Africa Energy Coal will further increase the Group's ETR should the operation make losses in FY20.

Capital expenditure guidance

Sustaining capital expenditure, excluding EAI, is expected to rise by US$82M to US$515M as we further increase underground development rates and expenditure on infrastructure improvements at Illawarra Metallurgical Coal in support of a return to a three longwall configuration, continue to invest in tailings storage capacity across our portfolio and commence a major refurbishment of a furnace at Cerro Matoso. Sustaining capital expenditure associated with our EAI is expected to be largely unchanged at US$90M as we also continue to invest in additional tailings storage capacity at Australia Manganese.

Major project capital expenditure is expected to increase by US$37M to US$256M in FY20 as we increase activity at the Hermosa project and progress study work for the Eagle Downs Metallurgical Coal and Dendrobium Next Domain projects. South Africa Energy Coal's KPSX project, is approximately 72% complete and remains on schedule and budget for completion in FY21.

(a) The equity accounting adjustment reconciles the proportional consolidation of the South32 manganese operations to the treatment of the manganese operations on an equity accounted basis.

Operations analysis

A summary of the underlying performance of the Group's operations is presented below and more detailed analysis is presented on pages 14 to 23. Unless otherwise stated: all metrics reflect South32's share; Operating unit cost is Revenue less Underlying EBITDA excluding third party sales divided by sales volumes; and Operating cost is Revenue less Underlying EBITDA excluding third party sales.

(a) The equity accounting adjustment reconciles the proportional consolidation of the South32 manganese operations to the treatment of the manganese operations on an equity accounted basis (including third party product).

Worsley Alumina (86% share)

Volumes

Worsley Alumina saleable production increased by 1% (or 31kt) to 3.8Mt in FY19 as we opportunistically sold stockpiled hydrate at alumina equivalent prices during the year, offsetting the impact of additional calciner maintenance. Production is expected to reach nameplate capacity of 4.0Mt (4.6Mt 100% basis) in FY20 and FY21 as we continue to drawdown excess hydrate stock, ahead of realising the full benefit of initiatives to sustainably increase production.

Operating costs

Operating unit costs increased by 1% in FY19 to US$238/t as lower caustic soda prices (FY19: US$489/t, FY18: US$582/t) and consumption rates (FY19: 98kg/t, FY18: 103kg/t) were offset by additional calciner maintenance and the opportunistic drawdown of hydrate stocks.

We expect Operating unit costs to decrease by 3% to US$230/t in FY20 as we realise the benefit of increased production, lower energy costs following the renegotiation of legacy gas contracts, a weaker Australian dollar and lower caustic soda price assumptions. These benefits are expected to more than offset additional costs to support a sustainable increase in production to nameplate capacity. Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Financial performance

Underlying EBIT increased by 28% (or US$119M) in FY19 to US$541M as a 7% rise in the average realised price of alumina (+US$109M), a weaker Australian dollar (+US$51M) and lower caustic soda costs (price and consumption, +US$46M) were partially offset by initiatives to increase calciner availability (-US$42M) and a drawdown in inventory as a result of higher sales (-US$34M).

The average realised price for alumina sales in FY19 was a discount of approximately 5% to the Platts Alumina Index (PAX) on a volume weighted M-1 basis(33). This discount narrowed to 1% in the June 2019 half year and reflects the structure of specific legacy supply contracts with our Mozal Aluminium smelter that are linked to the LME aluminium price and the elevated alumina to aluminium price ratio in the spot market during FY19. All alumina sales to other customers were at market based prices.

Capital expenditure

Sustaining capital expenditure increased by US$5M in FY19 to US$57M as we invested in additional bauxite residue disposal and water catchment capacity. The level of expenditure is expected to remain elevated in FY20 (US$60M) as we continue to invest in additional bauxite residue disposal capacity.

Brazil Alumina (Alumina 36% share, Aluminium 40% share)

Volumes

Brazil Alumina saleable production decreased by 4% (or 49kt) to 1,255kt in FY19 as poor boiler performance and power outages impacted production. We have lowered our FY20 production guidance by 3% to 1.33Mt, as the ramp-up of package boilers installed in the June 2019 quarter is expected to delay the realisation of benefits from the De-bottlenecking Phase One project. Production is expected to increase to 1.37Mt in FY21 as these benefits are realised over a full year.

Operating costs

Operating unit costs increased by 7% in FY19 to US$270/t as poor boiler performance resulted in lower volumes and additional maintenance activity, while bauxite costs increased as we sourced additional third party material in the period and the cost of supply from Mineração Rio do Norte S.A (MRN) was reset in accordance with its linkage to alumina and aluminium.

Financial performance

Alumina Underlying EBIT increased by 10% (or US$15M) in FY19 to US$172M as an 11% increase in the average realised price of alumina (+US$56M) and a weaker Brazilian real (+US$21M) were partially offset by lower sales volumes (-US$42M), higher bauxite (-US$17M) and boiler maintenance (-US$9M) costs.

Aluminium Underlying EBIT increased by US$9M in FY19 to a loss of US$12M as an indirect legacy tax obligation was settled and our commitment to purchase electricity from Eletronorte was fulfilled during the prior period following termination of the contract in December 2015.

Capital expenditure

Sustaining capital expenditure increased by US$14M in FY19 to US$26M and is expected to increase by US$9M to US$35M in FY20 as we invest in additional bauxite residue disposal capacity and undertake further de-bottlenecking work at the refinery.

During the period the partners of MRN also agreed to undertake a pre-feasibility study for a project that has the potential to extend the life of the mine by more than 20 years at a relatively low capital cost. MRN has a substantial 503Mt(34) high grade bauxite Mineral Resource.

Hillside Aluminium (100%)

Volumes

Hillside Aluminium saleable production increased by 3kt to a record 715kt in FY19 as the smelter continued to test its maximum technical capacity, despite an increase in the frequency of load-shedding events. Production is expected to increase to a record 720kt in FY20 and FY21, subject to load-shedding.

Operating costs

Operating unit costs increased by 12% in FY19 to US$2,045/t as a rise in raw material input costs for alumina, coke, pitch and aluminium tri-fluoride, accounting for 58% of the smelter's cost base (FY18: 56%), more than offset lower aluminium price-linked electricity costs.

The smelter sources alumina from our Worsley Alumina refinery with prices linked to the Platts alumina index on an M-1 basis, while its power is sourced from Eskom under long-term contracts. The price of electricity supplied to potlines 1 and 2 is linked to the LME aluminium price and the South African rand/US dollar exchange rate. The price of electricity supplied to potline 3 is South African rand based. We are advancing discussions with Eskom to agree a path forward to extend and consolidate our power contracts.

While Operating unit cost guidance is not provided, the cost profile of Hillside Aluminium is expected to benefit from a restructure of the workforce concluded in the June 2019 quarter and the lagged effect of lower raw material input costs observed in the June 2019 half year, given its highly variable cost base.

Financial performance

Underlying EBIT decreased by 135% (or US$288M) in FY19 to a loss of US$75M as a 9% decrease in the average realised price of aluminium (-US$134M), higher raw material and cathode prices (-US$129M), an unfavourable movement in inventory (-US$35M) and additional pot relining costs (-US$11M) more than offset the benefits of a weaker South African rand (+US$34M) and lower aluminium price-linked power costs (+US$19M). 171 pots were relined at a cost of US$249k per pot during FY19 (FY18: 122 pots at US$220k per pot), while 79 pots are scheduled to be relined across FY20.

Capital expenditure

Sustaining capital expenditure decreased by US$9M in FY19 to US$19M. A modest increase in Sustaining capital expenditure to US$23M is expected in FY20.

Mozal Aluminium (47.1% share)

Volumes

Mozal Aluminium saleable production decreased by 1% (or 4kt) to 267kt in FY19 as the smelter's strong operating performance was impacted by an increase in the frequency of load-shedding events. Production is expected to increase to a record 273kt in FY20 and FY21 as we start to realise the benefits of the AP3XLE energy efficiency project.

Operating costs

Operating unit costs increased by 12% in FY19 to US$2,026/t as raw material input costs increased for alumina, coke, pitch and aluminium tri-fluoride, which combined account for 49% of the smelter's cost base (FY18: 49%).

The smelter sources alumina from our Worsley Alumina refinery with approximately 50% priced as a percentage of the LME aluminium index under a legacy contract and the remainder linked to the Platts alumina index on an M-1 basis, with caps and floors embedded within specific contracts.

Electricity requirements are largely met by hydroelectric power that is generated by Hidroeléctrica de Cahora Bassa (HCB).HCB delivers power into Eskom's South African grid and Mozal Aluminium sources electricity via the Mozambique Transmission Company (Motraco) under a long-term contract. The price of electricity is South African rand based with the rate of escalation linked to a South Africa domestic producer price index plus a margin.

While Operating unit cost guidance is not provided, the cost profile of Mozal Aluminium is expected to benefit from the lagged effect of lower raw material input costs observed in the June 2019 half year, given its highly variable cost base.

Financial performance

Underlying EBIT decreased by US$120M in FY19 to a loss of US$21M following lower average realised aluminium prices(-US$60M) and sales volumes (-US$13M), higher raw material and cathode prices (-US$27M), higher power costs (-US$5M) and additional pot relining costs (-US$4M). 103(35) pots were relined across FY19 at a cost of US$234k per pot (FY18: 60(35) pots at US$211k per pot), with 123(35) pots scheduled to be relined in FY20.

Capital expenditure

Sustaining capital expenditure increased by US$9M in FY19 to US$19M as the smelter commenced the roll out of the AP3XLE energy efficiency technology in its pot relining program ahead of schedule.

The project is expected to deliver a circa 5% (or 10kt pa) increase in annual production with no associated increase in power consumption, improving the smelter's global competitiveness. First incremental production is anticipated in FY20, with the full benefit to be realised by FY24. Sustaining capital expenditure of US$12M is expected in FY20.

South Africa Energy Coal (92% share(28))

Volumes

South Africa Energy Coal saleable production decreased by 8% (or 2,292kt) to 25.0Mt in FY19, despite a 10% improvement in the June 2019 quarter, as export sales volumes were impacted by an extended outage of the Klipspruit dragline following an incident in August 2018. Despite the improving trend, we have lowered our FY20 saleable coal production guidance to between 26.0 and 28.0Mt. This reflects the recovery of production from the dragline incident and a planned reduction in contractor activity at the WMC as we respond to the lower thermal coal price environment and adjust volumes to maximise margins.

Operating costs

Operating unit costs increased by 11% in FY19 to US$40/t as we completed concurrent rehabilitation work and added extra contractor capacity to recover lost dragline availability at Klipspruit. This impact was partially offset by an initial insurance progress payment awarded in June for the volume and cost impact of the dragline outage, and a weaker South African rand.

We expect Operating unit costs to decrease by up to 7% to between US$37/t and US$40/t in FY20 as a weaker South African rand and a planned reduction in contractor activity at the WMC more than offset general inflationary pressure. Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Financial performance

Underlying EBIT decreased by 117% (or US$322M) in FY19 to a loss of US$46M as lower sales volumes (-US$215M), average realised prices (-US$75M), and higher contractor mining (-US$75M) and concurrent rehabilitation (-US$37M) costs more than offset a favourable movement in inventory (+US$70M) and a weaker South African rand (+US$48M).

Capital expenditure

Sustaining capital expenditure decreased by US$12M in FY19 to US$90M despite incurring additional costs to recover from and mitigate the impact of the Klipspruit dragline incident, and our investment in new mining areas at the WMC returning to typical levels. Sustaining capital expenditure of US$90M is expected in FY20.

We also invested US$123M in Major project capital expenditure in FY19 to progress the KPSX project, which was approved by the Board in November 2017. The 8Mt per annum brownfield project extends the life of the colliery by more than 20 years(36). The project is approximately 72% complete and remains on schedule and budget. Major capital expenditure of US$115M is expected in FY20.

Illawarra Metallurgical Coal (100% share)

Volumes

Illawarra Metallurgical Coal saleable production increased by 57% (or 2,403kt) to 6.6Mt in FY19 as the Dendrobium and Appin longwalls continued to perform strongly and we successfully concluded the renegotiation of all major labour agreements. Saleable coal production is expected to increase 5% to 7.0Mt in FY20, before a further 14% increase to 8.0Mt in FY21, with the operation on-track to return to a three longwall configuration during the June 2020 quarter.

Operating costs

Operating unit costs decreased by 34% in FY19 to US$94/t as the operation benefitted from a substantial increase in sales volumes and a commercial agreement to relinquish a portion of its Mining Lease in the Appin area.

We expect Operating unit costs to increase 3% to US$97/t in FY20 as a further increase in volume and lower spend on maintenance is more than offset by the prior year's benefit from relinquishing a portion of its Mining Lease. Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Financial performance

Underlying EBIT increased by US$421M in FY19 to US$359M as stronger sales volumes (+US$449M), a weaker Australian dollar (+US$47M), and lower labour (+US$16M) and electricity (+US$15M) costs were partially offset by higher price-linked royalties (-US$31M). The volume related impact on costs (-US$80M) was tempered by the high fixed cost base of the operation.

Capital expenditure

Sustaining capital expenditure increased by US$44M in FY19 to US$133M as we increased underground development rates at Appin. Sustaining capital expenditure is expected to increase by US$52M in FY20 to US$185M as we further raise the level of spend on underground development to US$85M (FY19: US$75M) and invest in infrastructure improvements to support the planned return to a three longwall configuration.

We also invested US$5M in FY19 to progress studies for the Dendrobium Next Domain project, submitting our Environmental Impact Statement to the NSW Department of Planning and Environment during the June 2019 quarter. While still subject to necessary regulatory approvals, the project has the potential to extend the mine life of Dendrobium to approximately FY36, with a financial investment decision anticipated in H2 FY21. Major capital expenditure is expected to increase by US$16M in FY20 to US$21M as we undertake further study work and invest in additional ventilation capacity at the operation.

Australia Manganese (60% share)

Volumes

Australia Manganese saleable ore production decreased by 1% (or 47kwmt) to 3,349kwmt in FY19 as we maintained elevated production levels, operating our PC02 circuit at approximately 120% of its design capacity. We also set an ore sales record of 3,438kwmt in FY19 as we continued to take advantage of strong market conditions. Manganese alloy saleable production decreased by 7% (or 11kt) to 154kt in FY19.

Ore production guidance of 3,560kwmt in FY20 assumes we continue to operate the low cost PC02 circuit above nameplate capacity. As the PC02 product attracts a discount to our primary higher grade GEMCO ore, we will adjust production in response to market demand.

Operating costs

FOB manganese ore Operating unit costs decreased by 2% in FY19 to US$1.59/dmtu as record sales volumes and the optimisation of contractor usage mitigated an increase in strip ratio (FY19: 4.5, FY18: 4.0) and a temporary decline in product yield.

We expect Operating unit costs for manganese ore to remain largely unchanged at US$1.60/dmtu in FY20 as a weaker Australian dollar and continued equipment productivity improvements mitigate a further planned increase in strip ratio (FY20: 5.1). Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Manganese alloy Operating unit costs increased by 5% to US$947/t as raw material input costs rose and our TEMCO smelter produced lower volumes. We continue to review options for our manganese alloy smelters as changes in market dynamics have reduced the attractiveness of our exposure and we will update the market in due course.

Financial performance

Underlying EBIT decreased by 2% (or US$13M) in FY19 to US$638M as lower realised alloy prices (-US$18M) and a rise in diesel, coke and freight costs (-US$13M) were only partially offset by a weaker Australian dollar (+US$20M) and lower maintenance contractor costs at GEMCO (+US$6M).

Our average realised price for external sales of Australian ore was in-line with the high grade 44% manganese lump ore index(39) in FY19, despite the 40% grade PC02 product contributing 10% to the sales mix (FY18: 9%).

Capital expenditure

Sustaining capital expenditure increased by US$17M in FY19 to US$65M (including US$6M for alloys) and is expected to remain largely unchanged at US$64M (including US$4M for alloys) in FY20 as we continue to invest in additional tailings capacity.

South Africa Manganese (Ore 44.4% share, Alloy 60% share)

Volumes

South Africa Manganese saleable ore production increased by 2% (or 42kwmt) to 2,187kwmt in FY19 as productivity improvements at our high grade Wessels mine delivered an increase in premium material. Manganese alloy saleable production decreased by 13% (or 10kt) to 69kt in FY19.

Ore production guidance of 2,100kwmt in FY20 assumes we maintain sales of lower quality, fine grained material which has historically attracted grade and product-type discounts. Production will however be adjusted in response to market demand.

Operating costs

FOB manganese ore Operating unit costs increased by 6% in FY19 to US$2.69/dmtu. Higher price-linked royalties combined with an increase in workforce activity and the use of higher cost trucking to take advantage of strong market conditions, more than offset the effect of a weaker South African rand.

We expect Operating unit costs for manganese ore to decline by 9% to US$2.44/dmtu in FY20 reflecting a weaker South African rand and lower price-linked royalties which are expected to offset the impact of marginally lower production. Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Manganese alloy Operating Unit costs increased by 21% to US$1,178/t as an unfavourable movement in inventory and higher labour costs, more than offset higher sales volumes from our Metalloys smelter. We continue to review options for our manganese alloy smelters as changes in market dynamics have reduced the attractiveness of our exposure and we will update the market in due course.

Financial performance

Underlying EBIT increased by US$2M in FY19 to US$188M as higher ore sales volumes (+US$35M) and a weaker South African rand (+US$24M) were largely offset by lower realised alloy prices (-US$14M), an increase in costs associated with opportunistic trucking of ore (-US$10M), an unfavourable movement in alloy inventory (-US$10M), lower other income (-US$10M) and higher labour costs (-US$9M).

Our average realised price for external sales of South African ore reflects the medium grade 37% manganese lump ore index (FOB Port Elizabeth, South Africa)(44) in FY19 as we increased production of premium material, reducing the contribution of our lower quality fines product (FY19: 6%, FY18: 13%).

Capital expenditure

Sustaining capital expenditure increased by US$13M in FY19 to US$30M (including US$6M for alloys). A modest decrease to US$26M (including US$4M for alloys) is expected in FY20.

Cerro Matoso (99.9% share)

Volumes

Cerro Matoso payable nickel production decreased by 6% (or 2.7kt) to 41.1kt in FY19 following a planned increase in the contribution of lower grade stockpiled ore feed.

Production is expected to decrease to 35.6kt in FY20 as we undertake a major refurbishment of a furnace in the June 2020 quarter to broaden its operating window. Following the refurbishment, production is expected to increase by 5% to 37.4kt in FY21 as we further increase the contribution of lower grade stockpiled ore feed.

Operating costs

Operating unit costs increased by 9% in FY19 to US$3.99/lb. The impact of lower production, increased contractor and maintenance spend and costs arising from the Constitutional Court of Colombia ruling(50) more than offset a weaker Colombian peso and energy procurement and usage optimisations intended to partially mitigate inflationary cost pressure.

We expect Operating unit costs to remain largely unchanged in FY20 at US$4.00/lb as lower price-linked royalties and the continued benefit of our energy optimisation strategy offset the impact of lower production. Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Financial performance

Underlying EBIT decreased by US$80M in FY19 to US$40M as the lower average realised nickel price (-US$45M), sales volumes (-US$25M) and higher maintenance expenditure (-US$10M), were partially offset by a weaker Colombian peso (+US$18M).

Capital expenditure

Sustaining capital expenditure increased by US$10M in FY19 to US$32M and is expected to increase to US$55M in FY20 as we commence refurbishment of a furnace in the June 2020 quarter.

Cannington (100% share)

Volumes

Cannington payable zinc equivalent production(53) increased by 3% (or 6.4kt) to 193.6kt in FY19 as improved productivity underground supported higher mill throughput and zinc grades improved in accordance with our expectations.

We have increased our production guidance for Cannington with a 1% year on year increase in payable zinc equivalent production(27) now expected in FY20 (11.2Moz for silver, 104.0kt for lead and 59.0kt for zinc) before declining by 3% in FY21 (10.6Moz for silver, 103.0kt for lead and 57.0kt for zinc) as grade varies in accordance with the mine plan.

Operating costs

Operating unit costs decreased by 18% to US$123/t in FY19 as the adoption of AASB 15 Revenue from Contracts with Customers(22), which affects the accounting classification of treatment and refining charges, reduced costs by US$19/t. A weaker Australian dollar and lower power costs following the renegotiation of a supply contract provided a further benefit, offsetting additional haulage costs incurred as a result of significant floods in North Queensland during the March 2019 quarter.

We expect Operating unit costs to decrease by 3% to US$119/t in FY20 as mill throughput increases and we benefit from lower haulage costs. Exchange rate and price assumptions for FY20 Operating unit cost guidance are detailed on page 25, footnote 30.

Financial performance

Underlying EBIT decreased by 43% (or US$79M) in FY19 to US$104M as lower average realised prices (-US$107M)(a) and higher labour (-US$11M) and freight (-US$6M) costs were partially offset by an increase in sales volumes (+US$34M) and a weaker Australian dollar (+US$23M).

Capital expenditure

Sustaining capital expenditure increased by US$4M in FY19 to US$55M as underground development rates remained elevated and we invested in additional tailings storage capacity. Sustaining capital expenditure of US$55M is expected in FY20 as we continue this investment.

(a) Excludes the impact on revenue of the change in accounting treatment for treatment and refining charges (-US$44M). This impact is equally offset by a reduction in costs (+US$44M).

Notes

(1) Revenue includes revenue from third party products and services.

(2) FY19 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for FY19 (5,048 million).FY19 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for FY19.FY18 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for FY18 (5,159 million).FY18 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for FY18.

(3) FY19 ordinary dividends per share is calculated as HI FY19 ordinary dividend announced US$258M) divided by the number of shares on issue at 31 December 2018 (5,051 million) plus H2 FY19 ordinary dividend announced (US$140M) divided by the number of shares on issue at30 June 2019 (5,006 million).

(4) FY19 special dividends per share is calculated as FY19 special dividend announced (US$86M) divided by the number of shares on issue at31 December 2018 (5,051 million).

(5) Underlying EBIT is profit before net finance costs, tax and any earnings adjustment items, including impairments. Underlying EBIT is reported inclusive of South32's share of net finance costs and tax of equity accounted investments. Underlying EBITDA is Underlying EBIT, before depreciation and amortisation. Underlying earnings is Profit/(loss) after tax and earnings adjustment items. Underlying earnings is the key measure that South32 uses to assess the performance of the South32 Group, make decisions on the allocation of resources and assess senior management's performance. In addition, the performance of each of the South32 operations and operational management are assessed based on Underlying EBIT. In order to calculate Underlying earnings, Underlying EBIT and Underlying EBITDA, the following items are adjusted as applicable each period, irrespective of materiality:

·; Exchange rate (gains)/losses on restatement of monetary items;

·; Impairment losses/(reversals);

·; Net (gains)/losses on disposal and consolidation of interests in businesses;

·; Fair value (gains)/losses on non-trading derivative instruments and other investments;

·; Major corporate restructures; and

·; Earnings adjustments included in profit/(loss) of equity accounted investments.

In addition, items that do not reflect the underlying operations of South32, and are individually significant to the financial statements, are excluded to determine Underlying earnings. Significant items are detailed in the Financial Information.

(6) Comprises Underlying EBITDA excluding third party product EBITDA, divided by revenue excluding third party product revenue. Also referred to as operating margin.

(7) Comprises Underlying EBIT excluding third party product EBIT, divided by revenue excluding third party product revenue.

(8) Return on invested capital (ROIC) is a key measure that South32 uses to assess performance. ROIC is calculated as Underlying EBIT less the discount on rehabilitation provisions included in net finance cost, tax effected by the Group's Underlying effective tax rate (ETR), divided by the sum of fixed assets (excluding any rehabilitation asset, the impairment of South Africa Energy Coal and unproductive capital associated on Major projects) and inventories. Manganese is included in the calculation on a proportional consolidation basis.

(9) To ensure that incident classification definitions are applied uniformly across our workforce, we have adopted the Occupational Safety and Health Administration of the United States Department of Labor (OSHA) guidelines for the recording and reporting of occupational injuries and illnesses.

(10) Total Recordable Injury Frequency (TRIF): The sum of (fatalities + lost-time cases + restricted work cases + medical treatment cases) x 1,000,000÷ actual hours worked, for employees and contractors. Stated in units of per million hours worked.

(11) Based on revenue equivalent production which assumes average realised prices remain unchanged from FY18.

(12) Calculated using the number of shares on issue at 30 June 2019 (5,006 million) with the number of shares on issue at 26 March 2017 (5,324 million).

(13) Refer to exchange release on 13 August 2018 "South32 completes acquisition of Arizona Mining".

(14) The information that relates to the Mineral Resources of the Taylor Deposit was declared in the market announcement "Hermosa Project - Mineral Resource Declaration" dated 17 June 2019 (www.south32.net) based on information compiled by Matthew Readford, Competent Person. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original announcement. All material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

(15) The information that relates to estimates of Mineral Resources for the Clark Deposit (formerly the Central Deposit) of the Hermosa project is a foreign estimate under ASX Listing Rules and is not reported in accordance with the JORC Code. South32 is not in possession of any new information or data relating to that foreign estimate that materially impacts the reliability of the estimate or South32's ability to verify the foreign estimate as a Mineral Resource in accordance with the JORC Code. The supporting information contained in the clarifying statement in the market announcement 'South32 to acquire Arizona Mining in agreed all cash offer' dated 18 June 2018 continues to apply and has not materially changed. Competent Persons have not done sufficient work to classify the foreign estimate as a Mineral Resource or Ore Reserve in accordance with the JORC Code. It is uncertain that following evaluation and further exploration the foreign estimate will be able to be reported as a Mineral Resource or Ore Reserve in accordance with the JORC Code. During FY20 South32 will commence a work program to increase confidence in the resource to ensure that resources are reported in accordance with the JORC Code. 

(16) Refer to media release on 14 September 2018 "South32 completes acquisition of 50% interest in Eagle Downs and assumes operatorship".

(17) Based on revenue equivalent sales or production (where applicable) which assumes average realised prices remain unchanged from FY19.

(18) Underlying ETR is Underlying income tax expense, excluding royalty related tax, divided by Underlying profit before tax; both the numerator and denominator exclude equity accounted investments.

(19) Sales price variance reflects the revenue impact of changes in commodity prices, based on the current period's sales volume. Price-linked costs variance reflects the change in royalties together with the change in input costs driven by changes in commodity prices or market traded consumables. Foreign exchange reflects the impact of exchange rate movements on local currency denominated costs and sales. Volume variance reflects the revenue impact of sales volume changes, based on the comparative period's sales prices. Controllable costs variance represents the impact from changes in the Group's controllable local currency cost base, including the variable cost impact of production volume changes on expenditure, and period-on-period movements in inventories. The controllable cost variance excludes earnings adjustments including significant items.

(20) Underlying net finance cost and Underlying income tax expense are actual FY19 results, not year-on-year variances.

(21) South32's ownership share of operations are presented as follows: Worsley Alumina (86% share), Hillside Aluminium (100%), Mozal Aluminium (47.1% share), Brazil Alumina (Alumina 36% share, Aluminium 40% share), South Africa Energy Coal (100% share until Broad-Based Black Economic Empowerment (B-BBEE) vendor loans are repaid), Illawarra Metallurgical Coal (100%), Australia Manganese (60% share), South Africa Manganese (60% share), Cerro Matoso (99.9% share), Cannington (100%), Hermosa (100%) and Eagle Downs Metallurgical Coal (50% share).

(22) The FY19 results reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges (previously recognised on a gross basis with treatment and refining charges included as a separate expense). These changes result in lower realised prices and Operating unit costs, with no net impact to earnings. Prior periods have not been restated to reflect these changes.

(23) The Colombian corporate tax rate was 37% during CY18 and is 33% in CY19. The corporate tax rate will decrease on an annual basis by a percent each year, stabilising at 30% from 1 January 2022. The Mozambique operations are subject to a royalty on revenues instead of income tax.

(24) Total capital expenditure comprises Capital expenditure, the purchase of intangibles and capitalised exploration expenditure. Capital expenditure comprises Sustaining capital expenditure and Major projects capital expenditure. Sustaining capital expenditure comprises Stay-in-business (SIB), Minor discretionary and Deferred stripping (including underground development) capital expenditure.

(25) Refer to the market announcement "South32 approves Klipspruit Life Extension Project" dated 27 November 2017.

(26) Market capitalisation as at 16 August 2019. Calculated as the number of shares on issue (5,006 million), the South32 closing share price A$2.76, and an AUD:USD exchange rate of 0.68.

(27) Payable zinc equivalent (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY19 realised prices for zinc (US$2,122/t), lead (US$1,754/t) and silver (US$14.4/oz) have been used for FY19, FY20e and FY21e.

(28) South32's interest in South Africa Energy Coal is accounted at 100% until Broad-Based Black Economic Empowerment (B-BBEE) vendor loans are repaid.

(29) Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by sales volumes. Operating cost is Revenue less Underlying EBITDA excluding third party sales. Additional manganese disclosures are included in footnotes 41 and 46. 

(30) FY20 Operating unit cost guidance includes royalties (where appropriate) and the influence of exchange rates, and includes various assumptions for FY20, including: an alumina price of US$348/t; an average blended coal price of US$158/t for Illawarra Metallurgical Coal; a manganese ore price of US$5.64/dmtu for 44% manganese product; a nickel price of US$5.54/lb; a thermal coal price of US$69/t (API4) for South Africa Energy Coal; a silver price of US$15.82/troy oz; a lead price of US$1,921/t (gross of treatment and refining charges); a zinc price of US$2,483/t (gross of treatment and refining charges); an AUD:USD exchange rate of 0.70; a USD:ZAR exchange rate of 15.06; a USD:COP exchange rate of 3,112; and a reference price for caustic soda; all of which reflected forward markets as at June 2019 or our internal expectations.

(31) FY19 Third party products and services sold comprise US$57M for aluminium, US$2M for alumina, US$392M for coal, US$239M for freight services, US$116M for aluminium raw materials and US$9M for manganese. Underlying EBIT on third party products and services comprise nil for aluminium, US$2M for alumina, US$9M for coal, (US$5M) for freight services, (US$1M) for aluminium raw materials and nil for manganese. FY18 Third party products and services sold comprise US$206M for aluminium, US$49M for alumina, US$290M for coal, US$198M for freight services, US$124M for aluminium raw materials and US$3M for manganese. Underlying EBIT on third party products and services comprise US$11M for aluminium, US$2M for alumina, US$12M for coal, (US$1M) for freight services and US$1M for aluminium raw materials.

(32) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Realised sales price is calculated as sales Revenue divided by sales volume.

(33) The quarterly sales volume weighted average of the Platts Alumina Index (PAX) (FOB Australia) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$443/t in FY19.

(34) The information in this report that relates to Mineral Resource estimates for MRN was declared as part of South32's Annual Resource and Reserve declaration in the Annual Report 2018 (www.south32.net) issued on 7 September 2018 and prepared by M A H Monteiro in accordance with the requirements of the JORC Code. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original announcement. All material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

(35) Presented on a 100% basis.

(36) The information in this report that relates to Coal Reserve estimates for Klipspruit was declared as part of South32's Annual Resource and Reserve declaration in the Annual Report 2018 (www.south32.net) issued on 7 September 2018 and prepared by P Mulder in accordance with the requirements of the JORC Code. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original announcement. All material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

(37) South Africa Energy Coal Revenue includes domestic and export sales Revenue.

(38) Illawarra Metallurgical Coal Revenue includes metallurgical coal and energy coal sales Revenue.

(39) The quarterly sales volume weighted average of the Metal Bulletin 44% manganese lump ore index (CIF Tianjin, China) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$6.74/dmtu in FY19.

(40) Volumes and realised prices do not include any third party trading that may be undertaken independently of equity production. Realised ore prices are calculated as external sales Revenue less freight and marketing costs, divided by external sales volume. Realised alloy prices are calculated as sales Revenue, including sinter Revenue, divided by alloy sales volume. Ore converted to sinter and alloy, and sold externally, is eliminated as an intracompany transaction.

(41) Manganese Australia FY19 average manganese content of external ore sales was 45.9% on a dry basis (FY18: 45.7%). 95% of FY19 external manganese ore sales (FY18: 94%) were completed on a CIF basis. FY19 realised FOB ore prices and Operating unit costs have been adjusted for freight and marketing costs of US$47M (FY18: US$43M), consistent with our FOB cost guidance.

(42) FOB ore operating unit cost is Revenue less Underlying EBITDA, freight and marketing costs, divided by ore sales volume. Alloy operating unit cost is Revenue less Underlying EBITDA divided by alloy sales volumes and includes costs associated with sinter sold externally.

(43) Revenues associated with sales from GEMCO to TEMCO are eliminated as part of the consolidation.

(44) The quarterly sales volume weighted average of the Metal Bulletin 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$5.61/dmtu in FY19.

(45) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Realised ore prices are calculated as external sales Revenue less freight and marketing costs, divided by external sales volume. Realised alloy prices are calculated as sales Revenue, divided by alloy sales volume. Ore converted to sinter and alloy, and sold externally, is eliminated as an intracompany transaction. Manganese ore sales are grossed-up to reflect a 60% accounting effective interest.

(46) Manganese South Africa FY19 average manganese content of external ore sales was 40.5% on a dry basis (FY18: 39.9%). 74% of FY19 external manganese ore sales (FY18: 70%) were completed on a CIF basis. FY19 realised FOB ore prices and Operating unit costs have been adjusted for freight and marketing costs of US$40M (FY18: US$33M), consistent with our FOB cost guidance.

(47) FOB ore operating unit cost is Revenue less Underlying EBITDA, freight and marketing costs, divided by ore sales volume. Alloy operating unit cost is Revenue less Underlying EBITDA divided by alloy sales volumes.

(48) Revenues associated with sales from Hotazel Manganese Mines (HMM) to Metalloys are eliminated as part of the consolidation.

(49) Consistent with the presentation of South32's segment information, South Africa Manganese ore production and sales have been reported at 60%. South32 has a 44.4% ownership interest in HMM. 26% of HMM is owned by a B-BBEE consortium comprising Ntsimbintle Mining (9%), NCAB Resources (7%), Iziko Mining (5%) and HMM Education Trust (5%). The interest owned by NCAB Resources, Iziko Mining and HMM Education Trust were acquired using vendor finance with the loans repayable via distributions attributable to these parties, pro rata to their share in HMM. Until these loans are repaid, South32's interest in HMM is accounted at 54.6%.

(50) On 24 September 2018, we announced that the Constitutional Court of Colombia had issued its final ruling on our application to annul its decision regarding the alleged health and environmental impacts of our Cerro Matoso operation on the surrounding communities. The Court annulled those orders requiring Cerro Matoso to pay direct financial compensatory damages to community members and establish an ethnic development fund. The orders requiring Cerro Matoso to provide ongoing health care to community members alleging health impacts, and to submit to a new consultative environmental licensing process, were not annulled.

(51) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Cerro Matoso realised nickel sales price is inclusive of by-products. Realised sales price is calculated as sales Revenue divided by sales volume.

(52) Cerro Matoso Operating unit cost per tonne is Revenue less Underlying EBITDA divided by ore processed. Periodic movements in finished product inventory may impact operating unit costs as related marketing costs may change.

(53) Payable zinc equivalent (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY18 realised prices for zinc (US$3,185/t), lead (US$2,463/t) and silver (US$16.6/oz) have been used for FY18 and FY19.

(54) Cannington Operating unit cost is Revenue less Underlying EBITDA divided by ore processed. Periodic movements in finished product inventory may impact operating unit costs as related marketing costs may change.

Figures in Italics indicate that an adjustment has been made since the figures were previously reported. The denotation (e) refers to an estimate or forecast year.

The following abbreviations may be used throughout this report: US$ million (US$M); US$ billion (US$B); financial year (FY19); calendar year (CY); grams per tonne (g/t); tonnes (t); thousand tonnes (kt); thousand tonnes per annum (ktpa); million tonnes (Mt); million tonnes per annum (Mtpa); ounces (oz); thousand ounces (koz); million ounces (Moz); thousand wet metric tonnes (kwmt); million wet metric tonnes (Mwmt); million wet metric tonnes per annum (Mwmt pa); thousand dry metric tonnes (kdmt); dry metric tonne unit (dmtu); pound (lb); megawatt (MW); Australian Securities Exchange (ASX); London Stock Exchange (LSE); Johannesburg Stock Exchange (JSE); equity accounted investments (EAI); and American Depositary Receipts (ADR).

South32 Financial Information

For the year ended 30 June 2019

BASIS OF PREPARATION

The financial information included in this document for the year ended 30 June 2019 is unaudited. The financial information does not constitute the South32 Group's (the Group) full financial statements for the year ended 30 June 2019, which will be approved by the Board, reported on by the auditors, and filed with the Australian Securities and Investments Commission. The Group's full financial statements will be prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of 7the Australian Accounting Standards Board.

The financial information set out on pages 29 to 40 for the year ended 30 June 2019 has been prepared on the basis of accounting policies and methods of computation consistent with those applied in the 30 June 2018 financial statements contained within the Annual Report of the Group, except for new accounting standards (AASB 9 Financial Instruments and AASB15 Revenue from Contracts with Customers) which became effective from 1 July 2018 without restatement of prior years. The impact of adopting the new accounting standards have been disclosed in the Group's 31 December 2018 half-year financial statements and does not materially impact the Group.

As required, and unless otherwise stated, comparative financial information for the Group has been presented.

All amounts are expressed in US dollars unless otherwise stated. The Group's presentation currency and the functional currency of the majority of its operations is US dollars as this is the principal currency of the economic environment in which it operates.

Amounts in this financial information have, unless otherwise indicated, been rounded to the nearest million dollars (US$M or US$ million).

CONSOLIDATED INCOME STATEMENT

for the year ended 30 June 2019

The accompanying notes form part of this financial information.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 June 2019

The accompanying notes form part of this financial information.

CONSOLIDATED BALANCE SHEET

as at 30 June 2019

The accompanying notes form part of this financial information.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 30 June 2019

The accompanying notes form part of this financial information.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 June 2019