South32 Regulatory News (S32)

19 August 2021

South32 Limited

(Incorporated in Australia under the Corporations Act 2001 (Cth))

(ACN 093 732 597)

ASX, LSE, JSE Share Code: S32 ADR: SOUHY

ISIN: AU000000S320

South32 Limited

Financial Results and Outlook Year Ended 30 June 2021

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

"We delivered a strong operating result, despite the ongoing challenges of COVID-19, achieving record production at Worsley Alumina, Brazil Alumina and Australia Manganese. We also exceeded our initial production guidance at South Africa Manganese, Cerro Matoso and Cannington.

"During the year, we made substantial progress reshaping our portfolio, completing the divestments of South Africa Energy Coal, the TEMCO manganese alloy smelter, and a portfolio of non-core precious metals royalties. This simplifies our business, reduces capital intensity and will improve our underlying operating margin.

"At Hermosa we continue to progress studies for the Taylor and Clark deposits. We have also commenced the summer field season drilling program at the Ambler Metals Joint Venture in Alaska.

"Reflecting our strong financial position and disciplined approach to capital management, the Board has resolved to pay a US$164 million fully franked final ordinary dividend in respect of H2 FY21 and a US$93 million fully franked special dividend. The Board has also resolved to further expand our capital management program by US$120 million to US$2 billion, leaving US$252 million to be returned to shareholders by 2 September 2022.

"Looking ahead, we expect to see strong volumes at our base metals operations - Mozal Aluminium, Cerro Matoso and Cannington - following investment in improvement projects that are designed to increase production into favourable markets. At the same time, we continue to pursue cost and volume efficiencies to offset stronger producer currencies and cyclical inflation.

"In May, we announced our medium-term target to halve our operational carbon emissions by 2035 from our 2021 baseline. To achieve this we are investing in efficiency projects, shifting to low-carbon energy, applying low-carbon design principles and adopting new technologies. At the same time, we are increasing our exposure to the base metals required for a low-carbon future."

Graham Kerr, South32 CEO

SAFETY

Sadly on 12 May 2021 we lost our colleague, Petros Sibeko, a contractor who was fatally injured while working on the construction of a workshop at the Klipspruit Life Extension Project at South Africa Energy Coal. We express our deepest sympathies to Mr Sibeko's family and colleagues to whom we provided counselling and support. An investigation into the incident was immediately carried out and the learnings have been shared across our operations and with South Africa Energy Coal's new owners.

Since FY20 we have committed to disclosing fatalities that occur as part of activities associated with our operations, where we seek to influence safety performance, but which occur in locations where we do not have operational control. In FY21 an employee from a company contracted by Cerro Matoso, tragically lost their life while carrying out road paving activities on the public road between the municipality of Planeta Rica and our Q&P Project. We immediately responded to provide appropriate support to the contractor company. We are implementing improvements in the way we manage our contractor relationships to prevent incidents and drive a step change in our health and safety performance.

Our Total Recordable Injury Frequency (TRIF)(11)(12) increased by 2% to 4.3 per million hours worked in FY21, despite a reduction in recordable injuries and four operations reporting their lowest TRIF to date. TRIF was adversely affected by a reduction in the total number of hours worked following portfolio changes, and an increase in home-based working across multiple locations.

OUR RESPONSE TO COVID-19

Our response to the COVID-19 pandemic continued throughout FY21 and critical controls remain in place at all our operations, offices and projects, as waves of coronavirus infections continue in some of the locations where we operate. We are actively engaged with governments and health authorities on their vaccine roll-out plans and have offered the use of our facilities and logistics support.

PERFORMANCE SUMMARY

The Group's statutory profit after tax declined by US$130M to a loss of US$195M in FY21 following the recognition of impairment charges totalling US$728M (US$510M post-tax) in relation to Illawarra Metallurgical Coal and a loss on sale of US$159M following our divestment of South Africa Energy Coal. Excluding these one-off charges, strong operating performance and higher prices for most of our commodities translated into a 153% increase in Underlying earnings to US$489M. Our production performance, including three records, partially offset cyclical inflation and stronger producer currencies. Accordingly, our cost base(13) remained largely unchanged and our Operating margin increased to 26% with Underlying EBITDA improving by 32% to US$1.6B.

Specific highlights for FY21 included:

We finished the period with net cash of US$406M, having generated free cash flow from operations, including distributions from our manganese equity accounted investments (EAI), of US$825M. Reflecting our strong financial position and demonstrating the continuation of the disciplined and flexible approach we are taking to our capital management program, we returned US$670M to our shareholders in respect of FY21 comprised of:

Having returned 7%(16) of our market capitalisation to shareholders in respect of FY21, and having also established a strong track record of returning excess capital in a timely and efficient manner, the Board has today further expanded our capital management program by US$120M to US$2B, leaving US$252M to be returned by 2 September 2022.

EARNINGS

The Group's statutory profit after tax declined by US$130M to a loss of US$195M in FY21. Consistent with our accounting policies, various items are excluded from the Group's statutory profit to derive Underlying earnings including: impairment losses (US$764M pre-tax) primarily at Illawarra Metallurgical Coal; net losses on the disposal of our interest in South Africa Energy Coal (US$159M pre-tax); exchange rate losses on restatement of monetary items (US$69M pre-tax); gains made from the sale of a portfolio of non-core precious metals royalties (US$55M pre-tax); gains on non-trading derivative instruments and other investments measured at fair value through profit or loss (US$37M pre-tax); major corporate restructures (US$23M pre-tax); loss associated with earnings adjustments included in our EAI (US$15M pre-tax); exchange rate losses associated with the Group's non US dollar denominated net debt (US$52M pre-tax); and the tax expense for all pre-tax earnings adjustments and exchange rate variations on tax balances (US$306M). Further information on these earnings adjustments can be found in the 'Earnings Adjustments' section of the South32 Financial Information For the year ended 30 June 2021.

The Group's Underlying EBITDA increased by US$379M (or 32%) to US$1.6B in FY21, with Revenue 4% higher, as sales volumes increased and our realised prices for aluminium, silver, zinc and nickel all improved. Higher base metals prices were partially offset by lower realised prices for our bulk commodities, with metallurgical coal and manganese ore prices declining.

Our strong operating result and higher prices translated into an improved Group operating margin of 26%. Our cost base(13) remained largely unchanged, despite higher power costs at Hillside Aluminium and the inflationary impact of global freight rates and stronger producer currencies. Savings in our corporate spend and inventory movements meant our controllable cost base reduced, offsetting the impact of the cyclical cost pressures.

Underlying EBIT increased by US$398M (or 89%) to US$844M as depreciation and amortisation decreased by US$19M to US$720M. Underlying earnings increased by US$296M (or 153%) to US$489M despite the de-recognition of tax assets at South Africa Energy Coal associated with its divestment, meaning our Underlying effective tax rate (ETR)(17) remained elevated in FY21. The divestment of South Africa Energy Coal was completed on 1 June 2021, with the operation contributing an Underlying earnings loss of US$194M to the Group's result for FY21 (FY20: US$208M loss).

EARNINGS ANALYSIS

The following key factors influenced Underlying EBIT in FY21, relative to FY20.

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

Operating unit cost performance for continuing operations

Our strong operating result, including three production records and a continued focus on extracting cost efficiencies across our business, helped to partially offset the impact of cyclically higher producer currencies on our Operating unit cost performance.

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

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

Net finance costs

The Group's Underlying net finance costs, excluding EAI and discontinued operation, of US$109M in FY21, largely reflects the unwinding of the discount applied to our closure and rehabilitation provisions (US$59M) and interest on our lease liabilities (US$55M), primarily at Worsley Alumina. Costs for our discontinued operation (US$43M) are mostly related to the unwind of the discount applied to our closure and rehabilitation provisions at South Africa Energy Coal.

Tax expense

The Group's Underlying income tax expense, which excludes tax associated with EAI, was US$203M for an Underlying ETR of 37.3% in FY21. While a significant reduction from the prior year, the ETR remained elevated during FY21 due to the de-recognition of tax assets associated with losses at South Africa Energy Coal prior to its divestment. From FY22 we expect the rate to more closely reflect the corporate tax rates of the geographies where the Group operates which include: Australia 30%, South Africa 28%, Colombia 31%(22), Mozambique 0%(22) and Brazil 34%. We continue to monitor for potential changes to tax legislation in these geographies.

The Underlying income tax expense for our manganese EAI was US$177M, including royalty related taxation of US$53M at GEMCO (Australia Manganese), for an Underlying ETR of 51.9% (FY20: 43.7%). The temporary increase in the Underlying ETR was driven by the de-recognition of certain deferred tax assets in our Australian business during FY21.

CASH FLOW

The Group's free cash flow from operations, excluding EAI, increased by US$369M to US$639M in FY21, following a 24% reduction in capital expenditure and lower cash tax payments that tend to lag an improvement in profitability. We also received (net) distributions of US$186M from our manganese EAI(23) (FY20:US$313M) as our two ore producing operations continued to perform strongly, while the alloy business incurred one-off costs associated with the suspension of Metalloys and sale of TEMCO. Cash generated from our Group operations was largely unchanged (+US$37M to US$1.4B) as strong operating performance and a broad based price recovery across our commodities more than offset the prior period's benefit of a substantial unwind in working capital (US$287M).

Although lower than the prior period, working capital unwound by a further US$61M with provisions increasing by US$95M, and trade and other payables by US$264M. The latter driven by higher raw material input costs and the accrual of additional power charges under our new pricing agreement for our Hillside Aluminium smelter (US$83M). The accrual reflects the increase in the smelter's new tariff for the period 1 August 2020 to 30 June 2021 and is expected to unwind as payments are made across 24 months. These movements were partially offset by increases in trade and other receivables (US$156M) and inventories (US$142M), reflecting higher commodity prices. Our debtor days remained broadly unchanged at 24 (FY20: 23 days).

Total capital expenditure(24), excluding EAI, decreased by US$179M to US$566M as:

Total capital expenditure associated with our manganese EAI declined by US$19M to US$72M as we completed non-processing infrastructure upgrades at GEMCO and divested TEMCO.

BALANCE SHEET, DIVIDENDS AND CAPITAL MANAGEMENT

The Group's generation of free cash flow from operations, including net distributions from our manganese EAI, of US$825M supported a US$108M increase in the Group's net cash balance to US$406M at 30 June 2021, after we funded the return of a further US$460M to shareholders in the period. Our lease and other interest bearing liabilities increased by US$190M primarily due to recognition of our commitment to fund rehabilitation activity at South Africa Energy Coal operations by way of 10 annual instalments totalling US$200M.

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

Reflecting our strong financial position and demonstrating the disciplined and flexible approach we are taking to our capital management program, we recommenced our on-market share buy-back in October 2020 as COVID-19 related operational risks subsided, returning US$346M during the period in addition to paying US$115M in ordinary dividends. In accordance with our ordinary dividend policy, the Board has resolved to pay a fully franked ordinary dividend of US 3.5 cents per share (US$164M), representing 46% of Underlying earnings in respect of H2 FY21.

Our capital management framework is designed so excess capital competes for allocation, while our capital management program seeks to return capital to shareholders in a timely and efficient manner. Following the aforementioned return of US$346M to shareholders in FY21, our capital management program had US$225M remaining to be returned to shareholders as at 30 June 2021. Consistent with the flexible approach we are taking to the execution of our program, the Board has resolved to pay a fully franked special dividend of US 2.0 cents per share (US$93M) and to increase the amount committed under the program by US$120M. This increases the total amount to be returned under our capital management program to US$2B since its commencement, with US$252M remaining to be returned by 2 September 2022.

South32 shareholders registered on the South African branch register will not be able to dematerialise or rematerialise their shareholdings between 8 and 10 September 2021 (both dates inclusive), nor will transfers to/from the South African branch register be permitted between 3 and 10 September 2021 (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

In FY21 we achieved record production at Worsley Alumina, Brazil Alumina and Australia Manganese while beating our initial market guidance at South Africa Manganese, Cerro Matoso and Cannington. While remaining subject to further potential impacts from COVID-19, FY22 guidance is unchanged with the exception of non-operated Brazil Alumina and our underground base metals operation Cannington. Separately volumes at Mozal Aluminium and Cerro Matoso are expected to lift from FY21 following our investment in high returning improvement projects that will increase production into currently favourable markets for aluminium and nickel.

COSTS AND CAPITAL EXPENDITURE

Operating unit cost guidance

We continue to pursue cost and volume efficiencies across our business to offset the impact of stronger producer currencies and cyclical inflation in labour, price-linked royalties and raw materials. While these factors are expected to have an effect on unit costs, steepening industry cost curves, our business is well placed to realise volume improvements and pursue productivity benefits to partially offset their impact, and capture additional margins from improved market conditions. Although Operating unit cost guidance is not provided for our aluminium smelters, their cost profile will continue to be influenced by the South African rand and the price of raw material inputs.

Other expenditure guidance

Group and unallocated costs, excluding greenfield exploration, are expected to reduce by US$13M to US$100M in FY22 following the recognition of one-off charges in H2 FY21. We remain on-track to deliver US$50M in annualised savings from FY22 (compared to FY20), as we further simplify the Group's functional structures and footprint.

Depreciation and amortisation (excluding EAI) is expected to reduce by US$90M to approximately US$630M in FY22 following our divestment of South Africa Energy Coal and the recognition of an impairment to our Illawarra Metallurgical Coal operation. Depreciation and amortisation for our manganese EAI is expected to increase by US$15M to US$113M.

Underlying net finance costs (excluding EAI) are expected to decrease by US$42M to ~US$110M in FY22 following our divestment of South Africa Energy Coal and resultant reduction in the Group's closure and rehabilitation provisions.

From FY22 we expect our Underlying ETR to more closely reflect the corporate tax rates of the geographies where the Group operates which include: Australia 30%, South Africa 28%, Colombia 31%(22), Mozambique 0%(22) and Brazil 34%.

We have a prospective portfolio of greenfield exploration partnerships targeting base metals in Australia, the Americas and Europe. FY22 guidance for greenfield exploration expenditure to progress these early stage projects is US$26M (FY21: US$18M). In addition, we expect to capitalise US$44M of exploration expenditure in FY22 (FY21: US$30M), including US$25M at our Hermosa project (FY21: US$16M).

Capital expenditure guidance (excluding exploration and intangibles)

Our investment in Safe and reliable capital expenditure, excluding EAI, is expected to increase by US$62M to US$410M as we upgrade coal clearance and ventilation infrastructure at Illawarra Metallurgical Coal's Appin mine and establish additional bauxite residue disposal capacity at Brazil Alumina.

Improvement and life extension capital expenditure, excluding EAI, is expected to decrease by US$46M to US$70M reflecting a reduction in spend attributable to South Africa Energy Coal (US$53M) following its divestment. While we expect to maintain some activity at our DND project in FY22, this is expected to be lower than our rate of spend in FY21. Partially offsetting these reductions, we expect to increase our investment in decarbonisation projects, processing improvements and new mining area access at Worsley Alumina and projects at Cerro Matoso to further lift volumes beyond FY23.

Growth capital expenditure of US$45M is expected at our Hermosa project in H1 FY22 as we progress the Taylor pre-feasibility study. Guidance excludes our expectation for investment in orebody dewatering and other critical path activities for the potential development of the Taylor Deposit in FY22 that remain subject to internal approvals.

Capital expenditure at our Manganese operations is expected to increase by US$24M to US$95M in FY22 as we invest in mine life extension projects at GEMCO's Eastern Leases and rail infrastructure upgrades in South Africa.

OPERATIONS ANALYSIS

A summary of the underlying performance of the Group's operations is presented below and more detailed analysis is presented the 'Operations Analysis' section. 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; Operating cost is Revenue less Underlying EBITDA excluding third party sales; and Realised sales price is calculated as sales Revenue excluding third party sales divided by sales volume.

WORSLEY ALUMINA

(86% SHARE)

Volumes

Worsley Alumina saleable production increased by 2% (or 77kt) to a record of 3,963kt in FY21, with the refinery finishing the year strongly, setting a quarterly record and operating above nameplate capacity of 4.6Mtpa (100% basis). The refinery's record performance in FY21 was enabled by improvement initiatives in the calcination circuit and record alumina hydrate production. The refinery is expected to maintain nameplate capacity in FY22 with production of 3,965kt ahead of creeping volumes to 4,000kt in FY23.

Operating costs

Operating unit costs increased by 2% in FY21 to US$214/t as the benefits of record production volumes, lower caustic soda prices (FY21: US$302/t, FY20: US$366/t) and reduced contractor spend were more than offset by a stronger Australian dollar and a planned increase in our caustic usage rates (FY21: 102kg/t, FY20: 93kg/t).

We expect FY22 Operating unit costs to increase by 13% to US$241/t with a substantial rise in our assumption for caustic soda prices and higher price-linked freight rates accounting for more than 50% of the increase. Separately, the transition to a higher cost mining area is expected to more than offset the benefit of maintaining our production volumes. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 26.

Financial performance

Underlying EBIT decreased by 11% (or US$17M) in FY21 to US$143M as a 1% decline in the average realised price of alumina (-US$10M), a stronger Australian dollar (-US$58M) and a drawdown of finished goods (-US$29M) were partially offset by increased sales volumes (+US$65M), a reduction in contractor and consultant spend (+US$12M) and lower expenditure on caustic soda (+US$9M).

We realised a modest premium to the Platts Alumina Index(28) (PAX) on a volume weighted M-1 basis for alumina sales in FY21, due to the structure of legacy supply contracts with our Mozal Aluminium smelter. Contracts with the smelter are linked to the LME aluminium price and alumina indices on an M-1 basis, with caps and floors embedded within specific contracts that reset every calendar year. All other alumina sales were at market based prices.

Capital expenditure

Capital expenditure increased by US$7M in FY21 to US$55M and is expected to increase to US$61M in FY22 as we continue to invest in additional bauxite residue disposal capacity, decarbonisation projects, further improvements in processing infrastructure that will support production creep and initial works to support the development of new mining areas.

BRAZIL ALUMINA

(ALUMINA 36% SHARE, ALUMINIUM 40% SHARE)

Volumes

Brazil Alumina saleable production increased by 1% (or 15kt) to a record 1,398kt in FY21 as the refinery continued to benefit from strong plant availability, realising the benefits of the De-bottlenecking Phase One project.

Subsequent to the end of the period, one of the two bauxite ship unloaders at the refinery sustained damage which is expected to impact production in H1 FY22 while repair work is undertaken. As a result, production guidance in FY22 has been reduced by 6% to 1,300kt. Production is expected to increase back to 1,395kt in FY23 as the refinery returns to normalised rates.

Operating costs

Operating unit costs decreased by 17% in FY21 to US$203/t as the refinery achieved record output, combined with lower bauxite usage rates and pricing during the period. The operation also recognised one-off historical tax credits that provided a benefit to unit costs of US$12/t.

While guidance is not provided for this non-operated facility, FY22 Operating unit costs are expected to increase with lower planned sales volumes, a higher caustic soda price, and the impact of the prior year's one-off tax credit benefit. Further, the cost of supply from Mineração Rio do Norte S.A (MRN) will reset in accordance with its annual linkage to alumina and aluminium market prices.

Financial performance

Alumina Underlying EBIT increased by US$71M in FY21 to US$66M as the refinery benefitted from lower bauxite costs (price and consumption, US$26M), a weaker Brazilian real (+US$16M), lower depreciation (+US$14M) and the recognition of historical tax credits (+US$16M).

Aluminium Underlying EBIT improved by US$7M in FY21 to a loss of US$3M as we continued to incur costs to maintain the smelter on care and maintenance.

Capital expenditure

Capital expenditure decreased by US$9M to US$25M in FY21 as our rate of investment in bauxite residue disposal capacity reduced. Capital expenditure is expected to increase to US$55M in FY22 as we significantly step up this rate of investment.

Together with our partners at MRN we continue to progress the bauxite operation's life extension pre-feasibility study. The project 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 481Mt(29) high grade bauxite Mineral Resource, with the pre-feasibility study expected to be completed in H1 FY22.

HILLSIDE ALUMINIUM

(100% SHARE)

Volumes

Hillside Aluminium saleable production decreased by 1kt to 717kt in FY21 as the smelter continued to test its maximum technical capacity, despite the impact to production from increased load-shedding. Production is expected to increase to a record 720kt in FY22 and FY23, subject to load-shedding.

Operating costs

Operating unit costs increased by 7% in FY21 to US$1,631/t as the benefit of lower raw material input costs was more than offset by higher charges from a new power agreement for the smelter that has been operating under an interim arrangement since 1 August 2020. Subsequent to the end of the period, we finalised the new agreement with Eskom which secures the smelter's energy supply until 2031. The new tariff is South African rand based, with a rate of escalation linked to the South Africa Producer Price Index.

The smelter sources its alumina from our Worsley Alumina refinery with prices linked to the PAX on an M-1 basis, with alumina, coke, pitch and aluminium tri-fluoride accounting for 50% of the smelter's cost base in FY21 (FY20: 54%).

While Operating unit cost guidance is not provided, the cost profile of the smelter will continue to be heavily influenced by the South African rand, the price of raw material inputs, and a planned increase in pot relining activity.

Financial performance

Underlying EBIT increased by 184% (or US$190M) in FY21 to US$293M as a 21% increase in the average realised price of aluminium (+US$262M) and lower raw material input costs (+US$44M) more than offset an increase in costs from the new power agreement (-US$100M). Pot relining activity also increased (-US$12M) at the smelter in FY21, with 120 pots relined at a cost of US$244k per pot (FY20: 65 pots at US$248k per pot). 186 pots are scheduled to be relined across FY22.

Capital expenditure

Capital expenditure increased by US$4M in FY21 to US$17M and is expected to increase to US$29M in FY22 as we commence roll-out of the AP3XLE energy efficiency technology during the period and replace our trucking fleet for the transport of liquid hot metal.

MOZAL ALUMINIUM

(47.1% SHARE)

Volumes

Mozal Aluminium saleable production decreased by 1% (or 3kt) to 265kt in FY21, with the smelter performing strongly in Q4 FY21, despite the impact of increased load-shedding. The strong finish to the year followed COVID-19 workforce restrictions that impacted operations during Q3 FY21.

Production is expected to increase by 3% to a record 273kt in FY22 and FY23 (subject to load-shedding), as the benefits of our investment in the AP3XLE energy efficiency project are realised.

Operating costs

Operating unit costs decreased by 5% in FY21 to US$1,702/t as raw material input costs decreased for alumina, coke, pitch and aluminium tri-fluoride, which combined to account for 42% of the smelter's cost base (FY20: 46%).

The smelter sources its 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 PAX on an M-1 basis, with caps and floors embedded within specific contracts that reset each calendar year.

While Operating unit cost guidance is not provided, the cost profile of the smelter will continue to be heavily influenced by the South African rand and the price of raw material inputs, given its highly variable cost base.

Financial performance

Underlying EBIT increased by US$122M in FY21 to US$98M following a loss in FY20. The smelters return to profitability was enabled by a 21% increase in the average realised price of aluminium (+US$101M), favourable movements in finished goods inventory (+US$48M) and lower raw material input prices (+US$20M) that were partially offset by lower sales volumes (-US$31M). 134(30) pots were relined across FY21 at a cost of US$252k per pot (FY20: 112(30) pots at US$278k per pot), with 121(30) pots scheduled to be relined in FY22.

Capital expenditure

Capital expenditure was unchanged at US$11M in FY21 and is expected to remain at US$11M in FY22 as the smelter continues to roll out the AP3XLE energy efficiency technology in its pot relining program. The project is on budget and expected to deliver incremental production from FY22, before realising a circa 5% (or 10ktpa to 277ktpa) increase in annual production by FY24 with no associated increase in power consumption.

SOUTH AFRICA ENERGY COAL

(100% SHARE DIVESTED)

Financial performance

South Africa Energy Coal was divested on 1 June 2021 with a loss on sale of US$159M recorded. This amount was excluded from our Underlying Earnings. Prior to the divestment, the operation also realised an EBIT loss of US$150M in FY21 as Operating unit costs increased by 14% to US$48/t. Capital expenditure decreased by US$88M in FY21 to US$76M as the substantial investment of recent periods to ensure the operation's sustainability under Seriti's ownership continued, and the Klipspruit Life Extension project was completed.

ILLAWARRA METALLURGICAL COAL

(100% SHARE)

Volumes

Illawarra Metallurgical Coal production increased by 9% (or 639kt) to 7.6Mt in FY21 as the operation's return to a three longwall configuration delivered greater efficiencies through the use of alternate dual longwalls at the Appin mine, and we monetised low-margin coal wash.

While total saleable coal production is expected to decline by 0.3Mt to 7.3Mt in FY22, with three longwall moves scheduled across the year, metallurgical coal production is expected to increase by 2% to 6.3Mt. The complex is then expected to produce 7.5Mt in FY23 with metallurgical coal production increasing by a further 5% to 6.6Mt.

Operating costs

Operating unit costs decreased by 6% in FY21 to US$87/t as the operation benefitted from increased sales volumes, including the monetisation of low-margin coal wash material, and a favourable movement in finished goods inventory that more than offset a stronger Australian dollar.

We expect FY22 Operating unit costs to increase by 16% to US$101/t as additional longwall moves and maintenance activity impact productivity, and fewer planned sales of low-margin coal wash material are anticipated. Further cost pressure is expected from a stronger Australian dollar and higher price-linked royalties, associated with the recent significant rebound in metallurgical coal prices. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 26.

Financial performance

Underlying EBIT decreased by US$155M in FY21 to a loss of US$103M as lower average realised prices (-US$205M) and a stronger Australian dollar (-US$56M), more than offset the benefits of a favourable movement in finished goods inventory (+US$70M) and increased sales volumes (+US$39M).

Capital expenditure

Safe and reliable capital expenditure decreased by US$30M in FY21 to US$151M as our rate of spend on underground development (FY21: US$77M) and the substantial investment made to support a return to a three longwall configuration returned to historical levels. Safe and reliable capital expenditure is expected to increase by US$64M in FY22 to US$215M as we invest in additional coal clearance and ventilation infrastructure to support the transition to a single longwall mine plan at our Appin mine from FY25.

Improvement and life extension capital expenditure increased by US$19M to US$37M as we incurred pre-commitment spend on studies and critical path items for the DND project. During Q3 FY21 the NSW Independent Planning Commission refused our application for the DND project and we scaled back our activity. We expect to provide a further update before the end of the calendar year, with improvement and life extension capital expenditure expected to decrease to US$15M in FY22 as we slow our activity on the project.

AUSTRALIA MANGANESE

(ORE 60% SHARE, ALLOY 60% SHARE DIVESTED)

Volumes

Australia Manganese saleable ore production increased by 2% (or 59kwmt) to a record 3,529kwmt in FY21 despite the impact of higher than average rainfall during the wet season. The primary concentrator continued to achieve strong output as we drew down previously established run of mine stocks, while output from the PC02 circuit remained above nameplate capacity, contributing 10% of total production (FY20: 12%).

Manganese alloy saleable production decreased by 54% (or 59kt) to 51kt in FY21 as we completed the divestment of our TEMCO manganese alloy smelter. The effective completion date of the sale for accounting purposes was 31 December 2020.

Our ore production guidance of 3,500kwmt in FY22 and 3,400kwmt in FY23 assumes we continue to operate the low cost PC02 circuit above its nameplate capacity, supporting secondary product volumes.

Operating costs

FOB manganese ore Operating unit costs decreased by 2% in FY21 to US$1.52/dmtu as the operation benefitted from higher sales volumes due to improved equipment productivity and lower planned maintenance, that more than offset the impact of a stronger Australian dollar.

We expect FY22 Operating unit costs to increase 11% to US$1.68/dmtu as a planned increase in the operation's strip ratio (FY22: 5.9, FY21: 5.4) and an expected decline in yield, due to ore characteristics, combine with a higher Australian dollar, to more than offset further strong production volumes and efficiencies. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 26.

Financial performance

Manganese ore Underlying EBIT decreased by 6% (or US$21M) in FY21 to US$308M as a stronger Australian dollar (-US$21M), lower realised prices (-US$21M) and higher customer freight rates (US$11M) were partially offset by increased sales volumes (+US$40M) and reduced maintenance expenditure (+US$3M).

Manganese alloy Underlying EBIT decreased by US$3M in FY21 to a loss of US$4M as we completed the divestment of TEMCO.

Capital expenditure

Capital expenditure decreased by US$12M in FY21 to US$55M as we completed non-processing infrastructure upgrades at GEMCO and divested TEMCO during the year. Capital expenditure is expected to be largely unchanged in FY22 (US$57M) as we continue to invest in additional tailings storage capacity and progress our feasibility study for the Eastern Leases mine life extension project.

SOUTH AFRICA MANGENESE

(ORE 44.4% SHARE, ALLOY 60% SHARE)

Volumes

South Africa Manganese saleable ore production increased by 21% (or 386kwmt) to 2,264kwmt in FY21 as the operation recovered from an extended shutdown in response to COVID-19 restrictions and subdued market conditions in the prior year.

We did not produce any manganese alloy in FY21 as our Metalloys manganese alloy smelter remained on care and maintenance.

Ore production guidance of 2,200kwmt in FY22 assumes market conditions remain attractive for the sale of lower quality fines product and the use of higher cost trucking. Ore production guidance for FY23 is not provided with volumes from the operation to be optimised subject to market demand.

Operating costs

FOB manganese ore Operating unit costs increased by 10% in FY21 to US$2.48/dmtu as the operation lifted volumes, increasing its use of higher cost trucking in response to market demand. Prior period costs had benefitted from the impact of a one-off royalty tax credit settled in FY20.

We expect FY22 Operating unit costs for manganese ore to increase by 4% to US$2.57/dmtu with a stronger South African rand, local inflation and the further use of higher cost trucking, expected to more than offset labour efficiencies. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 26.

Financial performance

Manganese ore Underlying EBIT decreased by 15% (or US$13M) in FY21 to US$75M as a 6% reduction in average realised prices (US$14M), higher customer freight rates (-US$43M) and the prior periods recognition of a royalty tax credit (-US$13M) were partially offset by increased sales volumes (+US$84M).

Manganese alloy Underlying EBIT improved by US$14M in FY21, to a loss of US$20M, as we incurred one-off costs associated with the smelter's placement on care and maintenance.

Notwithstanding the decline in index prices, our average realised price for external sales of South African ore was a 2% premium to the medium grade 37% manganese lump ore index (FOB Port Elizabeth, South Africa)(37) in FY21. This followed adjustments to our product mix, with our lower quality fines product making up a smaller proportion of total sales (FY21: 7%, FY20: 13%).

Capital expenditure

Safe and reliable capital expenditure decreased by US$6M in FY21 to US$16M. Our spend is expected to increase to US$18M in FY22 as we invest to extract the boundary pillar at our Mamatwan mine, accessing previously sterilised ore.

Improvement and life extension capital expenditure is expected to increase to US$20M in FY22 as we invest in opening up new mining areas and upgrades to our rail infrastructure.

CERRO MATOSO

(99.9% SHARE)

Volumes

Cerro Matoso payable nickel production decreased by 16% (or 6.5kt) to 34.1kt in FY21 following a major furnace refurbishment in Q2 and Q3 FY21.

Production is expected to increase by 28% to 43.8kt in FY22, and remain steady at 43.5kt in FY23, as the operation benefits from the furnace refurbishment and receives its first full year of ore from the Q&P project. The Q&P project is a high returning, low capital option that is expected to contribute to higher average ore grades over the next six years(43).

Operating costs

Operating unit costs increased by 9% in FY21 to US$4.01/lb despite a weaker Colombian peso, as the furnace refurbishment contributed to a 17% decline in sales volumes.

We expect FY22 Operating unit costs to increase by 3% to US$4.12/lb with a lift in sales volumes being more than offset by higher price-linked royalties and an increase in electricity prices. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 26.

Financial performance

Underlying EBIT increased by 14% (or US$15M) in FY21 to US$122M, with the extended furnace shut lowering sales volumes (-US$91M), more than offset by a 15% rise in the average realised nickel price (+US$65M), lower energy usage (+US$16M), a weaker Colombian peso (+$7M) and lower depreciation (+US$7M).

Capital expenditure

Safe and reliable capital expenditure was unchanged in FY21 at US$30M and is expected to decrease to US$23M in FY22 with reduced activity following successful completion of the furnace refurbishment.

Improvement and life extension capital expenditure increased by US$6M to US$15M in FY21 and is expected to increase further to US$20M in FY22 as we invest in the Q&P and Ore Sorting and Mechanical Ore Concentration (OSMOC) projects. The OSMOC project, which was approved into execution in Q3 FY21, is expected to maintain payable nickel production by offsetting natural grade decline beyond FY23. This will be achieved through expanded processing capacity and improvements to the upgrading circuit that will lift average ore grades(43).

CANNINGTON

(100% SHARE)

Volumes

Cannington payable zinc equivalent production increased by 14% (or 47.6kt) to 380.2kt in FY21. Strong underground mine performance supported the acceleration of a higher-grade mining sequence, which was extracted in Q4 FY21.

We expect to transition the underground mine to a truck haulage operation, from its current truck/shaft configuration from Q4 FY22.

Accordingly, we have increased our FY22 payable zinc equivalent production(25) guidance by 10% (11.6Moz for silver, 112.6kt for lead and 63.9kt for zinc). Production is expected to increase by a further 13% in FY23 (13.5Moz for silver, 122.0kt for lead and 72.0kt for zinc) as we transition to 100% truck haulage and bring forward further higher-grade material.

Operating costs

Operating unit costs increased by 10% to US$124/t in FY21 as a stronger Australian dollar, and lower mill throughput following the prior period's draw down of inventory, were partially offset by efficiencies in consumables usage and energy spend.

We expect FY22 Operating unit costs to decrease by 2% to US$121/t with higher throughput, production efficiencies and the impact of inventory movements expected to offset a stronger Australian dollar. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 26.

Financial performance

Underlying EBIT increased by 233% (or US$245M) in FY21 to US$350M as higher average realised prices (+US$215M), increased sales volumes (+US$66M), and efficiencies in consumables usage and energy spend (+US$7M), were partially offset by a stronger Australian dollar (-US$28M) and higher price-linked royalties (-US$12M).

Capital expenditure

Capital expenditure decreased by US$9M in FY21 to US$43M as we lowered our rate of investment in underground development and additional tailings storage capacity in accordance with our capital plan for the operation. Capital expenditure is expected to remain largely unchanged at US$45M in FY22 as we invest in the underground mine's transition to 100% truck haulage.

NOTES

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 (FY21); 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 2021

BASIS OF PREPARATION

The financial information included in this document for the year ended 30 June 2021 is unaudited. The financial information does not constitute the South32 Group's (the Group) full financial statements for the year ended 30 June 2021, 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 the Australian Accounting Standards Board.

The financial information set out below for the year ended 30 June 2021 has been prepared on the basis of accounting policies and methods of computation consistent with those applied in the 30 June 2020 financial statements contained within the Annual Report of 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 2021

(1) Refer to Discontinued operation.

The accompanying notes form part of the financial information.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 June 2021

The accompanying notes form part of the financial information.

CONSOLIDATED BALANCE SHEET

as at 30 June 2021

The accompanying notes form part of the financial information.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 30 June 2021