South32 Regulatory News (S32)

25 August 2022

South32 Limited

(Incorporated in Australia under the Corporations Act 2001)

(ACN 093 732 597)

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

ISIN: AU000000S320

south32.net

SOUTH32 LIMITED

FINANCIAL RESULTS AND OUTLOOK YEAR ENDED 30 JUNE 2022

South32 accelerates portfolio transformation and delivers record earnings, cash flow and shareholder returns

· Underlying earnings of US$2.6B and free cash flow from operations (including EAI distributions) of US$2.6B

· Record shareholder returns in respect of FY22 of US$1.3B equal to 10% of our market capitalisation4

· Group copper equivalent production5 expected to increase by 14% in FY23

"We delivered record earnings and cash flow in FY22 as our stable operating performance and recent portfolio improvements enabled us to capitalise on the significant tailwind of commodity prices.

"We achieved record production at Worsley Alumina, while Hillside Aluminium and Mozal Aluminium continued to test maximum technical capacity. At Cannington we exceeded production guidance as we transitioned to a new mine configuration, bringing forward higher-grade material and at Cerro Matoso we achieved a 22% increase in nickel production.

"We made significant progress transforming our portfolio, increasing our exposure to the metals critical to a low-carbon future. We added copper to our portfolio through the acquisition of a 45 per cent interest in Sierra Gorda and doubled our low-carbon aluminium capacity with an additional shareholding in the hydro-powered Mozal Aluminium smelter and the restart of our 100% renewable powered Brazil Aluminium smelter. 

"At Hermosa, we completed a pre-feasibility study for the zinc-lead-silver Taylor Deposit, which demonstrated its potential to be a globally significant producer of base metals, and advanced our study of options for the battery-grade manganese Clark Deposit.

"Reflecting our strong financial performance and disciplined approach to capital management, the Board has resolved to pay a US$648 million fully-franked final dividend in respect of H2 FY22 and a US$139 million fully-franked special dividend, taking shareholder returns to a record US$1.3 billion in respect of the 2022 financial year. The Board has also resolved to further expand our capital management program by US$156 million to US$2.3 billion, leaving US$250 million to be returned to shareholders by 1 September 2023.

"Looking forward, we are well positioned to navigate the current economic uncertainty. We have a strong balance sheet with net cash of US$538 million after funding our new investments during the year, while our ongoing focus on cost management and an expected 14% increase in production will mitigate industry-wide cost inflation. We have repositioned our portfolio toward metals critical for a low-carbon future, having already established a pipeline of high-quality development options."

Graham Kerr, South32 CEO

SAFETY

We are deeply saddened by the loss of one of our colleagues, Mr Desmin Mienies, a contractor who was fatally injured while undertaking electrical work at our Wessels Mine at South Africa Manganese on 30 November 2021. Our deepest sympathies are with Mr Mienies' family, friends and colleagues. We provided them with our support following the tragic incident and undertook a detailed investigation to understand what happened. Learnings from the investigation were shared across our organisation.

We recognise that we must continue to improve our safety performance. During the first half of FY22, we partnered with a leading safety consultant to undertake a review of our safety performance and identify areas for improvement. This formed the foundation for our Safety Improvement Program, a three-year global program of work designed to achieve a step-change in our safety performance. Consistent with the review findings, in March 2022 we published our revised internal safety standard - an important element in the implementation of our Safety Improvement Program.

Contractors make up a significant proportion of our workforce and over the last two years we have undertaken a substantial work program to improve contractor safety. In FY22 we developed our internal contractor management standard, which describes the end-to-end process, core components and related performance requirements of our Contractor Management System of Work. It defines the key phases of the contractor management value chain and outlines the performance requirements for each phase, including how we support our contractors to undertake work safely.

Our Total Recordable Injury Frequency (TRIF)(15)(16) decreased by 12% to 5.3 per million hours worked in FY22 compared to the FY21 baseline(17) of 6.0, however we did not meet our target of a 20% reduction. Performance highlights in FY22 included a 51% reduction in TRIF at Cerro Matoso and a 16% reduction at Illawarra Metallurgical Coal.

OUR RESPONSE TO COVID-19

COVID-19 continued to affect our people, operations, projects and offices, and we experienced periods of elevated case numbers and restrictions across all our locations. We support the use of regulatory approved vaccines and actively encourage vaccination for all our employees and contractors. Where possible we have worked with local authorities for our employees and contractors, their families and our communities to access vaccines.

BASIS OF UNDERLYING FINANCIAL RESULTS

The basis of the Group's underlying financial results has been updated from FY22, with these changes also reflected in the FY21 comparative information. There is no change to the Group's statutory reporting. Our material Equity Accounted Investments (EAIs) are now included in our underlying financial results on a proportional consolidation basis, consistent with how their performance is assessed by the Group's Board and management, and reflecting their increased contribution to the Group's financial results with the acquisition of a 45% interest in Sierra Gorda(1). In addition, South Africa Manganese ore has been reported as a 54.6% interest (previously 60%) aligning with our interest in Hotazel Manganese Mines(2) and reflecting our Metalloys manganese alloy smelter (60% interest) having been placed on care and maintenance.

PERFORMANCE SUMMARY

The Group's statutory profit after tax increased by US$2,864M to a record US$2,669M in FY22 as our stable operating performance and portfolio changes that increased our exposure to higher margin businesses enabled us to capitalise on the significant tailwind of commodity prices. Underlying earnings increased by US$2,113M to a record US$2,602M in FY22. A reconciliation of statutory to Underlying earnings is set out on page 6.

Underlying revenue increased by 45% to US$10,630M as we implemented innovative logistics solutions to mitigate challenging freight and third-party port performance to deliver volumes into favourable markets, capturing the benefit of higher prices. This translated to a record operating margin of 47% (FY21: 26%), as we held increases in controllable costs to less than 2% of the Group's total cost base for the year(18). Underlying EBITDA increased by US$2,899M to a record US$4,755M and Underlying EBIT increased by US$2,928M to a record US$3,967M as the Group delivered a 30.1% Return on Invested Capital (ROIC)(14).

We generated record free cash flow from operations of US$2,561M, including distributions from our manganese and Sierra Gorda EAIs. Our strong financial performance supported our continued investment in our business and portfolio changes, that have increased our exposure to metals critical for a low-carbon future, while delivering record returns to shareholders. We finished the period with net cash of US$538M having executed our inaugural US dollar bond during the period, issuing US$700M in Senior Unsecured Notes (Notes) to support the funding of our Sierra Gorda acquisition.

Specific highlights for FY22 included:

We will return a record US$1,320M to our shareholders in respect of FY22 comprising:

From day one we have established a successful track record for disciplined capital allocation and returning excess cash to shareholders in both a timely and efficient manner, buying back 13% of our shares on issue since commencing our capital management program at an average price of A$2.93 per share. Reflecting our strong financial position and disciplined approach to capital management, the Board has today further expanded our capital management program by US$156M to US$2,266M, leaving US$250M to be returned by 1 September 2023.

In FY22, we made substantial progress reshaping our portfolio toward metals critical for a low-carbon future by:

Subsequent to the end of the year we:

EARNINGS reconciliation

The Group's statutory profit after tax increased by US$2,864M from a loss of US$195M to a record US$2,669M in FY22.

Consistent with our accounting policies, various items are excluded from the Group's statutory profit/(loss) to derive Underlying earnings. The total adjustments to derive Underlying EBIT (US$243M) shown in the table below include the recognition of indirect tax assets following the restart of the Brazil Aluminium smelter (US$77M pre-tax) and a net impairment loss of non-financial assets (US$145M pre-tax) primarily related to our Eagle Downs Metallurgical Coal development option (US$183M pre-tax), partially offset by an impairment reversal for Brazil Aluminium (US$42M pre-tax). Further information on these earnings adjustments is included on page 41. 

The Group's Underlying EBITDA increased by US$2,899M (or 156%) to a record US$4,755M as we benefitted from the significant tailwind of commodity prices (US$3,666M) and we limited increases in our controllable costs (US$114M or 2% of total our cost base(18)). Uncontrollable costs increased by US$839M with significantly higher price-linked royalties and industry-wide inflation, most notably in raw material prices and distribution costs. Portfolio changes, including the divestment of lower returning businesses South Africa Energy Coal and TEMCO, combined with the acquisition of our 45% interest in Sierra Gorda and additional shareholding in Mozal Aluminium had a positive US$211M impact on the result.

The Group also achieved record Underlying EBIT of US$3,967M in FY22, increasing by US$2,928M (or 282%) on the prior year as Underlying depreciation and amortisation reduced by US$29M to US$788M following the prior period impairment at Illawarra Metallurgical Coal.

EARNINGS ANALYSIS

The following key factors influenced Underlying EBIT in FY22, relative to FY21.

Net finance costs

The Group's FY22 Underlying net finance costs of US$155M comprise the unwinding of the discount applied to our closure and rehabilitation provisions (US$83M); interest on lease liabilities (US$54M) primarily at Worsley Alumina; interest and transaction costs associated with the Notes issue and refinancing of our revolving credit facility (US$14M) and our share of net finance costs for the Sierra Gorda joint venture (US$6M).

Tax expense

The Group's FY22 Underlying income tax expense increased by US$830M to US$1,210M for an Underlying ETR(29) of 31.7%. Our FY22 Underlying ETR has reduced significantly from the prior period's elevated rate (FY21: 43.3%), following the derecognition of tax assets associated with the divestment of South Africa Energy Coal in the prior period.

Our FY22 Underlying ETR reflects the corporate tax rates of the jurisdictions in which we operate(30), as well as the inclusion of the manganese business and Sierra Gorda in Underlying earnings on a proportional consolidation basis (including royalty related taxes for Australia Manganese and Sierra Gorda). The Underlying ETR for our manganese business was 45.8% in FY22, including the royalty related tax(31) and the derecognition of certain deferred tax assets.

Operating unit cost and operating margin performance

We achieved our updated FY22 Operating unit cost guidance at the majority of our operations, despite the impact of industry-wide cost inflation, higher price-linked royalties and a challenging operating environment influenced by adverse weather and COVID-19 related labour restrictions. Group operating margin increased to a record 47% (FY21: 26%) with our high operating leverage and stronger commodity prices translating into higher margins for the majority of our operations.

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

CASH FLOW

The Group generated record free cash flow from operations of US$2,240M and received US$321M in (net) distributions(34) from our manganese and Sierra Gorda EAIs in FY22. Our record result benefited from the implementation of innovative logistic solutions across multiple operations to mitigate the impact of ongoing port congestion, which contributed to our strong sales performance particularly during Q4 FY22. This reduced our inventory positions by the end of the period, with the working capital benefit expected to be realised in Group cash flow during Q1 FY23. Record profitability also gave rise to a significant increase in income tax payments made during the period (+US$705M to US$868M), excluding tax paid within our manganese and Sierra Gorda EAIs.

The working capital build of US$428M was mainly attributable to:

Capital expenditure

The Group's capital expenditure(35), excluding EAI, decreased by US$7M to US$559M in FY22, following the divestment of South Africa Energy Coal (FY21: US$76M) in June 2021:

In addition, capital expenditure associated with our share of our manganese and Sierra Gorda EAIs was US$164M with the inclusion of Sierra Gorda (US$81M) and our ongoing investment in further tailings storage capacity at Australia Manganese. Our spend at Sierra Gorda, following our acquisition of the 45% interest on 22 February 2022, was primarily directed towards deferred stripping activity and the continued execution of the plant's de-bottlenecking project.

BALANCE SHEET, DIVIDENDS AND CAPITAL MANAGEMENT

The Group's net cash balance increased by US$132M to US$538M as we generated record free cash flow from operations of US$2,240M, supporting our investment in acquisitions (US$1,534M) that have increased our portfolio's exposure to metals critical for a low-carbon future. We also returned US$788M to shareholders by way of ordinary dividends (US$567M), special dividends (US$93M) and our on-market share buy-back (US$128M, 46M shares across FY22).

Other interest bearing liabilities increased by US$657M to US$1,177M as we executed our inaugural US dollar bond during the period, issuing US$700M in Notes to support the funding of our Sierra Gorda acquisition. The Notes are due in 2032 and will pay interest at a rate of 4.35% per annum(36). Consistent with our commitment to maintain an investment grade credit rating, during the year both S&P Global Ratings and Moody's reaffirmed their respective BBB+ and Baa1 credit ratings for the Group, and assigned the same ratings to the Notes. We also retain access to significant liquidity, having successfully executed the refinancing of our undrawn US$1.4B revolving credit facility during the year as a Sustainability Linked Loan.

Our capital management framework is unchanged, and designed to promote competition for capital through investment in high returning options or to protect portfolio value, as well as to reward shareholders as our financial performance improves. Demonstrating this, the Board has resolved to pay a fully-franked ordinary dividend of US 14.0 cents per share (US$648M) in respect of H2 FY22 in-line with our dividend policy to return a minimum 40% of Underlying earnings every six months.

Having established a strong track record of returning excess cash to shareholders, and reflecting our strong financial position and our confidence in the outlook for the business, the Board has also resolved to pay a fully-franked special dividend of US 3.0 cents per share (US$139M) and further expanded our capital management program by US$156M to US$2.3B, leaving US$250M to be returned by 1 September 2023.

South32 shareholders registered on the South African branch register will not be able to dematerialise or rematerialise their shareholdings between 14 and 16 September 2022 (both dates inclusive), nor will transfers to/from the South African branch register be permitted between 9 and 16 September 2022 (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 majority of our operations delivered to revised plans in FY22, despite adverse impacts from weather and labour availability caused by the COVID-19 pandemic. While all guidance remains subject to further potential impacts from COVID-19, we expect Group copper equivalent production(5) to increase by 14% in FY23 as we benefit from our investments in efficiency and improvement projects and our acquisitions that will increase our production of metals critical to a low-carbon future.

(a) The denotation (e) refers to an estimate or forecast year. All guidance is subject to further potential impacts from COVID-19.

COSTS AND CAPITAL EXPENDITURE

Operating unit costs guidance

We continue to pursue cost efficiencies, having successfully delivered more than US$50M of annualised savings across the Group through the simplification of our functional structures and footprint (since FY20). This focus combined with an improvement in planned volumes and lower producer currencies is expected to provide partial relief from further upward pressure on our Operating unit costs in FY23, despite continuing industry-wide inflation in raw material input prices, labour and energy.

(a) FY23e Operating unit cost guidance includes royalties (where appropriate) and commodity price and foreign exchange rate forward curves or our internal expectations (refer to footnote 41 on page 30).

(b) The denotation (e) refers to an estimate or forecast year. All guidance is subject to further potential impacts from COVID-19.

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

Capital expenditure guidance (excluding exploration and intangibles)

Group safe and reliable capital expenditure is expected to increase by US$312M to US$785M in FY23 with a full year of spend from Sierra Gorda contributing US$169M (or 54%) of the increase. We expect our investment at Illawarra Metallurgical Coal to increase by US$86M to US$263M as we continue our work to support the return to a single longwall configuration at Appin from FY25(42), including projects not executed in FY22 due to adverse weather and COVID-19 related labour constraints.

Group improvement and life extension capital expenditure is expected to increase by US$56M to US$170M in FY23 as we invest in plant de-bottlenecking projects at Brazil Alumina and Sierra Gorda. At Worsley Alumina, we plan to invest US$44M as we commence multi-year programs to open up new bauxite mining areas, and advance decarbonisation projects at the refinery. At our manganese business, we plan to invest in the Eastern Leases mine life extension project (US$14M) for Australia Manganese and continue our mine and rail infrastructure upgrades (US$28M) at South Africa Manganese.

FY23 growth capital expenditure is expected to increase by US$193M to US$290M at our Hermosa project in Arizona as we invest in infrastructure to support critical path dewatering and progress study work for the Taylor Deposit, ahead of a planned final investment decision expected in mid CY23. Following the decision by the United States Government to invoke the Defense Production Act, supporting the production of critical metals including manganese, we are looking at different options to potentially accelerate the pre-feasibility study for the Clark Deposit.

(a) The denotation (e) refers to an estimate or forecast year. All guidance is subject to further potential impacts from COVID-19.

Other expenditure guidance

Underlying ETR is expected to reflect the composition of the corporate tax rates and earnings from the jurisdictions in which we operate, including the Australia Manganese and Sierra Gorda royalty related tax. All other expenditure guidance is provided in the table below. These items are on a proportional consolidation basis including our manganese and Sierra Gorda EAIs.

(a) The denotation (e) refers to an estimate or forecast year. All guidance is subject to further potential impacts from COVID-19.

OPERATIONS ANALYSIS

A summary of the underlying performance of the Group's operations is presented below and more detailed analysis is presented on pages 18 to 28. Unless otherwise stated: all metrics reflect South32's share; Operating unit cost is Underlying revenue less Underlying EBITDA excluding third party sales divided by sales volumes; Operating cost is Underlying revenue less Underlying EBITDA excluding third party sales; and Realised sales price is calculated as Underlying revenue excluding third party sales divided by sales volume.

Worsley alumina

(86% share)

Volumes

Worsley Alumina saleable production increased by 1% (or 28kt), to a record of 3,991kt in FY22, as the refinery delivered above its nameplate capacity (4.6Mtpa, 100% basis), realising the benefit of embedded improvements. The refinery is expected to sustain production above nameplate in FY23 and FY24 with 4,000kt per annum expected. Calciner maintenance is scheduled for Q1 and Q3 during FY23.

Operating costs

Operating unit costs increased by 24% (or US$51/t), to US$265/t, as the benefit of record volumes was more than offset by a significant rise in caustic soda prices (FY22: US$581/t, FY21: US$302/t) that accounted for more than 60% of the increase, and elevated global freight rates.

We expect FY23 Operating unit costs to rise by 12%, to US$296/t, as significantly higher caustic soda prices (an assumed 28% year-on-year increase) and an increase in planned consumption (FY23e: 106 kg/t, FY22: 102 kg/t), more than offset the benefit of a weaker Australian dollar. While global freight rates are expected to remain elevated, we will continue to also capture the impact in our realised prices. The refinery sources its power from a combination of coal and gas. While not currently expected to have an impact on our FY23 Operating unit costs, we continue to monitor the performance of our domestic third-party coal supply and our requirement to supplement it with potentially higher cost energy. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Underlying EBIT increased by 170% (or US$243M), to US$386M, as higher average realised alumina prices (+US$461M) more than offset higher caustic soda prices (-US$113M), price-linked freight rates (-US$47M) and energy costs (-US$18M).

Capital expenditure

Safe and reliable capital expenditure was US$47M in FY22 and is expected to be US$45M in FY23 as we continue our investment in additional bauxite residue disposal capacity.

Improvement and life extension capital expenditure was US$8M in FY22. We expect to spend US$44M in FY23 as we advance decarbonisation projects at the refinery (US$26M) and progress our work to access new bauxite mining areas (US$8M). 

In FY23 our decarbonisation program is focused on completing a feasibility study for the mud-washing project and progressing work on the conversion of our first coal-fired boiler to gas. The mud-washing project is expected to lower water and energy consumption at the refinery, with the goal of reducing Worsley Alumina's operational greenhouse gas emissions by approximately 295,000 tonnes per annum (or ~7%) and water consumption by ~6%, from FY21 levels.

BRAZIL ALUMINA

(36% SHARE)

Volumes

Brazil Alumina saleable production decreased by 7% (or 101kt) to 1,297kt in FY22 as the refinery returned to nameplate capacity (3.86Mtpa, 100% basis) from October 2021, following an incident in July 2021 that damaged one of the two bauxite ship unloaders at the operation.

Production is expected to increase by 8% to 1,395kt in FY23 as the refinery returns to normalised production rates, ahead of creeping volumes to 1,400kt in FY24.

Operating costs

Operating unit costs increased by 42% to US$288/t with lower volumes and additional costs to recover from the bauxite ship unloader outage adding to raw material and energy cost inflation that was particularly acute in H2 FY22.

While guidance is not provided for this non-operated facility, the refinery will continue to be influenced by energy and raw material input prices, including caustic soda.

Financial performance

Underlying EBIT increased by 35% (or US$23M), to US$89M, as higher average realised alumina prices (+US$151M) more than offset higher raw material and energy prices (-US$76M), lower sales volumes (-US$27M) and increased maintenance costs (-US$7M) due to the bauxite ship unloader incident.

Capital expenditure

Safe and reliable capital expenditure increased by US$26M, to US$51M in FY22, as we stepped-up our rate of investment in bauxite residue disposal capacity. We expect to spend US$50M in FY23 as we continue this investment. 

Improvement and life extension capital expenditure is expected to increase to US$19M in FY23 as we commence work on the refinery's De-bottlenecking Phase Two project. The project is expected to increase nameplate production rates by approximately 4% to 1.45Mt from H1 FY26, with anticipated capital expenditure of ~US$40M between FY23 and FY25.

Our acquisition of an additional 18.2% interest in MRN was completed on 29 April 2022. Our increased ownership of MRN secures and further aligns our bauxite supply requirements within our Brazilian value chain, and is an important step as we work with our partners to complete a pre-feasibility study for the MRN life extension project. The pre-feasibility study is now expected to be completed in late CY22.

(a) The increase in ownership in MRN has triggered a change in accounting treatment with the investment accounted for using the equity method (formerly classified as an investment in an equity instrument designated as fair value through other comprehensive income).

(b) Includes the recognition of indirect tax assets (US$103M pre-tax) following the restart of the Brazil Aluminium smelter (formerly reflected in the net operating assets of Brazil Aluminium as at 31 December 2021 (US$77M pre-tax)).

BRAZIL ALUMINIUM

(40% SHARE)

Volumes

Brazil Aluminium saleable production was 0.3kt in FY22 with first production achieved in Q4 FY22 following the successful restart of the smelter. With a slower than anticipated ramp-up associated with the need to stabilise the electrolytic bath, we have revised FY23 production guidance down by 29% to 100kt (40% basis) with nameplate capacity (179ktpa, 40% basis) now expected to be achieved in the Q4 FY23 (previously Q3 FY23). Production is then expected to increase to 179kt in FY24 as the smelter operates at nameplate capacity for the full year.

Operating costs

While cost guidance is not provided for this non-operated facility, we expect FY23 Operating unit costs to be influenced by the ramp-up profile for all three potlines and the price of raw material inputs. Once at nameplate capacity we expect the smelter to be in the second quartile of the global aluminium site cost curve, with our share of energy requirements secured under long-term, cost efficient, 100% renewable power contracts. Our alumina supply will be sourced from the co-located Brazil Alumina refinery with prices linked to the Platts index on a M-1 basis.

Financial performance

Underlying EBIT was a loss of US$44M as costs incurred to support the smelter's restart were expensed. With first sales to domestic customers completed in July 2022, no revenue was recognised in FY22.

Capital expenditure

Safe and reliable capital expenditure was US$1M in FY22. We expect to capitalise a further ~US$10M of expenditure on restart activities in FY23.

(a) Net operating assets as at 31 December 2021 reflected the recognition of indirect tax assets following the restart of the smelter (US$77M pre-tax). This item has been re-allocated to Brazil Alumina as at 30 June 2022.

hillside aluminium

(100% SHARE)

Volumes

Hillside Aluminium saleable production decreased by 3kt to 714kt in FY22 as the smelter continued to test its maximum technical capacity, despite the impact of increased load-shedding.

Production is expected to reach 720kt across both FY23 and FY24, subject to load-shedding.

Operating costs

Operating unit costs increased by 31%, to US$2,137/t, as a significant rise in raw material input costs created inflationary pressure across the aluminium industry. Alumina, coke, pitch and electricity accounted for 77% of the smelter's cost base in FY22 (FY21: 78%).

While Operating unit cost guidance is not provided, the cost profile of the smelter will continue to be heavily influenced by the price of raw material inputs, including alumina supplied by our Worsley Alumina refinery with prices linked to the PAX on a M-1 basis, and other external factors including the South African rand and inflation-linked energy costs.

Financial performance

Underlying EBIT increased by 127% (or US$373M), to US$666M, as stronger aluminium prices (+US$731M) more than offset higher raw material input prices (-US$234M), and power costs (-US$32M). While additional shipping costs (-US$25M) from higher freight rates and extended demurrage due to poor third-party port performance impacted earnings, the extent of those impacts was mitigated as we established alternative discharge and shipping options.

162 pots were relined at a cost of US$274k per pot (FY21: 120 pots at US$244k per pot) in FY22. Our first pots utilising the AP3XLE energy efficiency technology were relined during Q4 FY22, with 99 pots scheduled to be relined in FY23.

Capital expenditure

Capital expenditure increased by US$7M, to US$24M in FY22, and is expected to increase a further US$6M to US$30M in FY23 as we continue investment in a replacement trucking fleet for the transport of liquid hot metal and our roll-out of the AP3XLE technology.

The AP3XLE energy efficiency project is expected to reduce the smelter's energy consumption and in turn lower greenhouse gas emissions by approximately 150,000 to 200,000 tonnes per annum once fully deployed. Capital expenditure of approximately US$18M is expected between FY23 to FY28.

Mozal aluminium

(63.7% SHARE)(19)

Volumes

Mozal Aluminium saleable production increased by 5% (or 13kt) to 278kt in FY22 with the smelter benefitting from our roll-out of the AP3XLE energy efficiency technology, which partially offset the impact of increased load-shedding. Our equity share of production reflects the completion of our acquisition of an additional 16.6% shareholding in the smelter on 31 May 2022, taking our ownership to 63.7%.

Our share of production is expected to increase 33% to 370kt in FY23 and FY24 (subject to load-shedding), reflecting our new ownership and the volume benefits of our investment in the AP3XLE technology.

Operating costs

Operating unit costs increased by 32%, to US$2,243/t, as a significant rise in raw material input costs created inflationary pressure across the aluminium industry. Alumina, coke, pitch and electricity accounted for 74% of the smelter's cost base in FY22 (FY21: 73%).

While Operating unit cost guidance is not provided, the cost profile of the smelter will continue to be heavily influenced by the price of raw material inputs, including the price of alumina supplied by our Worsley Alumina refinery, and other external factors including the South African rand and inflation-linked energy costs.

Approximately 50% of the alumina supplied to the smelter is 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.

Financial performance

Underlying EBIT increased by 177% (or US$173M), to US$271M, as stronger realised aluminium prices (+US$297M) and the benefit of our increased ownership more than offset higher raw material input prices (-US$109M) and freight related costs (-US$11M).

127(44) pots were relined at a cost of US$266k per pot (FY21: 134(44) pots at US$252k per pot) in FY22. We expect 106(44) pots to be relined in FY23 as we continue our roll-out of the AP3XLE energy efficiency technology.

Capital expenditure

Capital expenditure of US$11M was unchanged in FY22 and is expected to increase to US$19M in FY23 as we invest in plant upgrades and continue our roll-out of the AP3XLE energy efficiency technology.

(a) Our underlying results reflect the completion of our acquisition of an additional 16.6% shareholding in the smelter on 31 May 2022, taking our ownership to 63.7%. Prior period numbers have not been restated for this change in ownership (presented on a 47.1% basis).

SIERRA GORDA

(45% SHARE)

Volumes

We completed our acquisition of a 45% interest in the Sierra Gorda copper mine on 22 February 2022. Our share of copper equivalent production(38) from the date of acquisition was 29.5kt (25.3kt of copper, 0.4kt of molybdenum, 9.6koz of gold and 253koz of silver).

Our FY23 production guidance of 89kt copper equivalent production(38) (copper 71.8kt, molybdenum 1.5kt, gold 29.9koz and silver 582koz) reflects our expectation for higher plant throughput as the benefits of the de-bottlenecking project are realised. FY24 production guidance is not provided for this non-operated mine.

Operating costs

Operating unit costs in our first period of ownership were US$14.6/t ore processed or US$1.61/lb CuEq(33)(a).

We expect FY23 Operating unit costs to be approximately US$14.8/t ore processed, with volume efficiencies from the plant's de-bottlenecking project, more than offset by higher diesel prices and labour costs. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Underlying EBIT was US$75M for the period from 22 February 2022 to 30 June 2022 as we recorded US$241M of revenue from the sale of 27.7kt of copper, 0.6kt of molybdenum, 9.9koz of gold and 282koz of silver.

Capital expenditure

Our share of safe and reliable capital expenditure for the period from acquisition to 30 June 2022 was US$36M. We expect our share to increase to US$205M in FY23, as the operation increases its rate of deferred stripping (US$114M) and invests in further tailings storage infrastructure (US$29M).

We also directed US$10M to improvement and life extension capital expenditure for the plant de-bottlenecking project in FY22 and expect to invest a further US$43M in FY23. The project remains on-track to sustainably lift throughput by 6% to ~50Mtpa (100% basis) by Q2 FY23.

Separately, FY22 improvement and life extension capital included US$35M paid to compensate for expenditure incurred for the brownfield oxide project prior to our acquisition. Our purchase price for Sierra Gorda was adjusted for this amount. 

(a) Realised sales prices and Operating unit costs presented in the table above reflect the period 1 March 2022 to 30 June 2022. Whereas production and sales numbers, and all Income Statement items reflect the period from first ownership (22 February 2022). Operating unit costs of US$1.42/lb CuEq and realised prices (copper of US$3.18/lb, molybdenum of US$18.73/lb, gold of US$1,776/oz and silver of US$20.65/oz) reflect the period from first ownership (22 February 2022).

CANNINGTON

(100% SHARE)

Volumes

Cannington payable zinc equivalent production(39) decreased by 6% (or 19.7kt), to 299.3kt in FY22, as we completed planned maintenance and built run of mine stocks during Q4 FY22 to support the operation's transition to 100% truck haulage.

FY23 zinc equivalent production(39) is expected to increase by 5% to 236.1kt (silver 13,500koz, lead 122.0kt and zinc 72.0kt) with the benefit of higher throughput across the year, despite reduced crushing capacity in H1 FY23 as we move the underground crusher to the surface. The operation's recent strong production performance is expected to continue into FY24 with zinc equivalent production(39) expected to be 233.4kt (silver 13,500koz, lead 124.0kt and zinc 68.0kt).

Operating costs

Operating unit costs increased by 7% (or US$9/t), to US$133/t, as we lowered volumes to complete scheduled maintenance and work to support the transition to 100% truck haulage.

We expect FY23 Operating unit costs to decrease by 3%, to US$129/t, as the benefit of higher throughput from the optimised mine plan and a weaker Australian dollar, more than offset higher energy prices. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Underlying EBIT decreased by 10% (or US$35M), to US$315M, as our reduced sales volumes (-US$49M) and higher freight rates (-US$6M) more than offset higher prices (+US$28M) and initiatives to reduce our spend on labour and consultant activity (+US$9M).

Capital expenditure

Capital expenditure increased by US$2M to US$45M in FY22 as we invested to support the operation's transition to 100% truck haulage. Capital expenditure is expected to increase to US$62M in FY23 as we complete planned upgrades to water and ventilation infrastructure and install additional tailings storage capacity.

cerro matoso

(99.9% SHARE)

Volumes

Cerro Matoso payable nickel production increased by 22% (or 7.6kt) to 41.7kt in FY22 as throughput recovered following completion of a major furnace refurbishment in FY21 and we added higher-grade ore from the Q&P pit, increasing average nickel grades by 6% (FY22: 1.73%; FY21: 1.63%). We expect production volumes to increase by a further 4%, to 43.5kt in FY23 and FY24, with plant availability returning to normalised levels post unplanned maintenance and weather-related impacts, and the commissioning of the OSMOC project, which is expected to mitigate grade decline.

Operating costs

Operating unit costs increased by 8%, to US$4.34/lb, as a significant increase in price-linked royalties and energy prices, along with costs to support processing of additional higher-grade Q&P volumes, were partially offset by volume benefits and a weaker Colombian peso. The operation also recognised a one-off benefit related to the reversal of a royalty provision.

We expect FY23 Operating unit costs to increase by 15%, to US$4.97/lb, with higher price-linked royalties and energy prices, together with the impact of the prior year's one-off reversal of a royalty provision, to more than offset the benefit of additional volumes. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Underlying EBIT increased by 280% (or US$341M), to US$463M, as higher realised nickel prices (+US$313M) and sales volumes (+US$122M) more than offset higher price-linked royalties (-US$31M), energy costs (-US$17M) and additional expenditure on labour and contractors to support mining from the Q&P pit (-US$7M).

Capital expenditure

Safe and reliable capital expenditure decreased by US$12M, to US$18M in FY22, following the prior period's completion of the major furnace refurbishment. Spend is expected to increase by US$22M, to US$40M in FY23, as we continue upgrades to the furnace and invest in the new mobile fleet.

Improvement and life extension capital expenditure increased by US$4M, to US$19M in FY22, and is expected to decline to US$4M in FY23 as we commission the OSMOC project. The OSMOC project is expected to maintain payable nickel production by offsetting natural grade decline beyond FY23(46). This is expected to be achieved through expanded processing capacity and improvements to the upgrading circuit.

We are working to extend the mining contract at Cerro Matoso by 15 years from 2029 to 2044 benefitting from the expanded processing capacity that is delivered by the OSMOC project. As part of the contract extension, we expect to make a payment of approximately US$44M to the National Mining Agency in Q3 FY23.

ILLAWARRA METALLURGICAL COAL

(100% SHARE)

Volumes

Illawarra Metallurgical Coal saleable production decreased by 15% (or 1,136kt) to 6,509kt in FY22 as we completed three longwall moves during the year and ceased sales of low-margin coal wash material. The impact of adverse weather and COVID-19 related labour restrictions also impacted the operation's ability to maintain budgeted development rates during the period.

We expect FY23 production volumes to increase by 14% to 7.4Mt with only two longwall moves planned and a recovery from wet weather in the prior period. Guidance is subject to maintaining labour productivity as Illawarra Metallurgical Coal is currently negotiating the Appin Enterprise Agreements.

FY24 production is expected to decline to 5.3Mt as we move into a new mining area at Dendrobium, followed by an average run-rate of ~5.5Mtpa to FY28 across the complex(40).

Operating costs

Operating unit costs increased by 45%, to US$126/t, with a significant increase in price-linked royalties, due to higher prices, accounting for 38% of the change. Lower volumes and increased contractor and maintenance activities were the other main drivers.

We expect FY23 Operating unit costs to decline by 8%, to US$116/t, with higher volumes and a weaker Australian dollar more than offsetting labour and energy cost inflation. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Underlying EBIT increased by US$1,491M, to US$1,388M, with higher realised prices (+US$1,635M), partially offset by higher price-linked royalties (-US$101M), lower sales volumes (-US$55M), and increased contractor and maintenance activity (-US$39M) to support the additional longwall moves.

Depreciation decreased by US$78M, to US$119M, following a non-cash impairment of the operation's carrying value in FY21.

Capital expenditure

Safe and reliable capital expenditure increased by US$26M, to US$177M in FY22, as we invested in additional coal clearance and ventilation infrastructure to support the transition to a single longwall at Appin. Notwithstanding the increase, FY22 expenditure was US$38M below our original guidance as adverse weather and COVID-19 related labour restrictions impacted the ability of the operation to complete planned work. FY23 guidance is expected to increase by US$86M to US$263M as we continue our investment at Appin(42), including the completion of delayed activity.

Improvement and life extension capital expenditure decreased by US$25M to US$12M in FY22 as we scaled back activity on the DND project.

Subsequent to the end of the period, we announced that we would not proceed with an investment in the DND project following our consideration of recently completed study work and extensive analysis of alternatives considered for the complex(40).

AUSTRALIA MANGANESE

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

Volumes

Australia Manganese saleable ore production decreased by 5% (or 166kwmt), to 3,363kwmt in FY22, as weather-related disruptions and COVID-19 workplace restrictions prevented the re-build of stockpiles ahead of the wet season. This contributed to adverse ore handling characteristics that resulted in a lower yield at the primary concentrator.

Production is expected to increase to 3,400kwmt across FY23 and FY24 with an improvement in yield at the primary concentrator, and the PC02 circuit continuing to operate above nameplate capacity supporting the higher volumes.

Operating costs

Operating unit costs increased by 22%, to US$1.86/dmtu, due to the lower volumes together with higher diesel prices and consumable costs.

We expect FY23 Operating unit costs to increase by 12%, to US$2.08/dmtu, with higher labour and contractor costs associated with an increase in activity due to a higher strip ratio (FY23e: 5.9, FY22: 5.1), combined with further expectations for an increase in diesel prices, to offset the benefit of a weaker Australian dollar. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Ore Underlying EBIT increased by 31% (or US$94M), to US$402M, as higher realised prices (+US$203M) more than offset the impact of lower sales volumes (-US$28M), higher freight rates (-US$35M), diesel prices (-US$13M) and consumable costs (-US$9M).

Our FY22 realised price improved year-on-year as we benefitted from improved market conditions and achieved the high grade 44% manganese lump ore index(50), despite our low-cost PC02 circuit operating above its design capacity, contributing 11% of total production (FY21: 10%).

Capital expenditure

Safe and reliable capital expenditure increased by US$3M, to US$56M in FY22, as we continued to invest in tailings storage capacity. FY23 capital expenditure is expected to decline by US$6M to US$50M as we continue this work.

Improvement and life extension capital expenditure increased by US$4M, to US$6M in FY22, and is expected to step-up to US$14M in FY23 as we progress the feasibility study for our Eastern Leases mine life extension project, ahead of a planned final investment decision in Q2 FY23.

south africa manganese

(ORE 54.6% SHARE(2), ALLOY 60% SHARE)

Volumes

South Africa Manganese saleable ore production was largely unchanged at 2,069kwmt in FY22 as we increased volumes of premium material from our Mamatwan mine during the year, more than offsetting the impact of planned maintenance.

FY23 production guidance of 2,000kwmt assumes we continue our use of higher cost trucking to optimise sales volumes of our premium products. We continue to swing our production to meet demand and accordingly FY24 guidance is not provided with volumes to be optimised subject to market conditions.

Our Metalloys manganese alloy smelter remains on care and maintenance as we assess future options for the smelter. On 7 March 2022, we announced that the sale of the smelter would not proceed following a failure to satisfy certain commercial conditions to the agreement(54).

Operating costs

Operating unit costs increased by 10%, to US$2.73/dmtu, as the operation increased its use of higher cost trucking (FY22: 35%, FY21: 31%) to deliver additional volumes of premium product and maximise cash flow.

We expect FY23 Operating unit costs to decrease by 3%, to US$2.66/dmtu, as we realise the benefit of drawing down previously built low-cost inventory from the barrier pillar project and a weaker South African rand. Exchange rate and price assumptions for FY23 Operating unit cost guidance are detailed on page 30, footnote 41.

Financial performance

Ore Underlying EBIT increased by 16% (or US$11M), to US$79M, as higher realised prices (+US$76M) and sales volumes (+US$13M) more than offset increased freight costs (-US$46M) and a stock drawdown as we optimised our sales mix of premium material (-US$15M).

Our realised sales price was a premium of ~18% to the medium grade 37% manganese lump ore index(55), as we maximised our revenue by optimising our sales mix with additional volumes of our premium products.

Manganese alloy Underlying EBIT was a loss of US$21M recognising an adjustment to the closure and rehabilitation provision with the Metalloys smelter remaining on care and maintenance.

Capital expenditure

Safe and reliable capital expenditure decreased by US$1M, to US$14M in FY22, with capital expenditure expected to be largely unchanged at US$15M in FY23.

Improvement and life extension capital expenditure increased to US$5M in FY22, and we expect a further step-up to US$28M in FY23 as we open up new mining areas at Mamatwan and upgrade our rail infrastructure to maximise flexibility in our logistics.

notes