South32 Regulatory News (S32)

17 February 2022

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 accelerates portfolio transformation and delivers increased returns to shareholders

"We achieved a record operating margin of 44% and a significant improvement in our Underlying earnings to US$1.0B in the half, following a broad recovery in commodity prices, while also making substantial progress reshaping our portfolio.

"A number of our operations delivered strong production results during the half. We achieved record quarterly production at Brazil Alumina and South Africa Manganese during the period, while Worsley Alumina continued to operate above nameplate capacity. 

"Production guidance at Cannington has been revised higher by five per cent as the operation prepares to transition to 100 percent truck haulage in the June 2022 quarter, which is expected to bring forward access to higher grade material. 

"This performance, together with our strong financial position is enabling us to invest in our business, grow base metals production and substantially increase our returns to shareholders, with the Board resolving to pay a record US$405 million fully franked ordinary dividend in respect of the period. The Board has also resolved to expand our capital management program by US$110M to US$2.1B, leaving US$302M to be returned. 

"Our business is in excellent financial health and we have continued to reshape our portfolio, with the planned acquisition of a 45 per cent stake in the Sierra Gorda copper mine, and further investment in green aluminium.

"In January we also published a pre-feasibility study for the zinc-lead-silver Taylor Deposit, confirming its potential to be a sustainable and highly productive underground mine in the industry's first cost quartile. We are excited to progress Taylor as the first development option at our Hermosa project, while continuing our work at other opportunities across our landholding, including exploration targeting copper, and studies to confirm the potential for the Clark Deposit to develop a battery-grade manganese product.

"Looking ahead, we are well positioned to capitalise on current market conditions as countries continue their economic recovery from COVID-19, and into the future as they invest in new infrastructure that is expected to see continued growth in demand for the metals critical for a low carbon future."

Graham Kerr, South32 CEO

SAFETY

On 30 November 2021 we tragically lost one of our colleagues, Mr Desmin Mienies, a contractor with Elektra Mining, who was fatally injured while undertaking electrical work at our Wessels mine at South Africa Manganese. Our deepest sympathies are with Mr Mienies' family and colleagues to whom we have provided our support and counselling. An investigation into the incident has been completed and key learnings from the event are being shared across our organisation.

Our Total Recordable Injury Frequency (TRIF)(13)(14) decreased by 18% to 4.9 per million hours worked in H1 FY22 from our adjusted FY21 baseline(15) of 6.0. The improvement in TRIF was largely driven by Illawarra Metallurgical Coal where we are undertaking a targeted program to eliminate injuries. Lower TRIF rates were also observed at Australia Manganese and Cerro Matoso.

In H1 FY22 we initiated the Safety System of Work, a multi-year global program designed to achieve a step-change in our safety performance. In the first phase of the program, we partnered with a leading safety consultant to undertake diagnostic work across the business and identify areas for improvement.

OUR RESPONSE TO COVID-19

The COVID-19 pandemic continues to impact our operations and supply chains across our global portfolio. During H1 FY22, we have seen periods of elevated case numbers and workforce restrictions in most of the jurisdictions in which we operate. Our focus remains on keeping our people well, maintaining safe and reliable operations, and supporting our communities, as we continue to tailor our controls to help protect the health of our employees and contractors.

PERFORMANCE SUMMARY

The Group's statutory profit after tax increased by US$979M to US$1,032M in H1 FY22 as we benefited from portfolio changes completed in FY21, and a broad recovery in commodity prices. Strong production results across a number of operations and our high operating leverage translated into an improved operating margin of 44% (H1 FY21: 24%), as we maintained our cost focus, holding increases in controllable costs to less than 3% of the Group's cost base(16), despite significant external pressure. Underlying earnings increased by US$868M to US$1,004M. 

Specific highlights for H1 FY22 included:

We generated a substantial improvement in free cash flow from operations, including distributions from our manganese EAI, of US$942M. This was achieved despite a US$333M build in working capital caused by logistics congestion, and rising commodity prices, predominantly in our aluminium value chain. We finished the period with net cash of US$975M.

This strong improvement in financial performance and the disciplined application of our capital management framework has allowed us to invest in our business, increase our exposure to the metals critical for a low carbon future and substantially increase returns to shareholders.

We will return US$465M to our shareholders in respect of H1 FY22 comprised of:

We have successfully established a strong track record of returning excess cash to shareholders in a timely and efficient manner, buying back 13% of our shares on issue since commencing our capital management program in April 2017. Reflecting our confidence in the outlook for our business, the Board has today further expanded our capital management program by US$110M to US$2.1B, leaving US$302M to be returned by 2 September 2022.

Following the completion of our South Africa Energy Coal divestment in late FY21, we have taken significant steps forward to increase our portfolio's exposure to the metals critical for a low carbon future. Milestones announced since the start of FY22 include:

BASIS OF UNDERLYING FINANCIAL RESULTS

The basis of the Group's underlying financial results has been updated from H1 FY22. Our material EAI are now included in our Underlying financial results on a proportionally consolidated 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 planned 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%) reflecting the proposed divestment of our 60% interest in the Metalloys manganese alloy smelter and aligning with our interest in Hotazel Manganese Mines(2). H1 FY21 comparative information has been updated to reflect these changes, which included restating information for Underlying revenue, Underlying EBITDA and Underlying EBIT. There is no change to the Group's statutory reporting.

EARNINGS

The Group's statutory profit after tax increased by US$979M to US$1,032M in H1 FY22. Consistent with our accounting policies, various items are excluded from the Group's statutory profit to derive Underlying earnings including: recognition of indirect tax assets associated with our decision to restart the smelter at Brazil Aluminium (US$77M pre-tax); manganese joint venture adjustments to Underlying EBIT (US$79M pre-tax); exchange rate gains on the restatement of monetary items (US$32M pre-tax); a net non-cash impairment charge (US$37M pre-tax) in relation to Eagle Downs Metallurgical Coal partially offset by an impairment reversal at Brazil Aluminium; losses on non-trading derivative instruments and other investments measured at fair value through profit/(loss) (US$5M pre-tax); manganese joint venture adjustments to Underlying net finance costs (US$11M pre-tax); exchange rate gains associated with the Group's non-US dollar denominated net debt (US$11M pre-tax); and the tax benefit for all pre-tax earnings adjustments, manganese joint venture adjustments and exchange rate variations on tax balances (US$18M). Further information on these earnings adjustments is included in Note 3 (b) (i).

The Group's Underlying EBITDA increased by US$1,085M (or 138%) to US$1,871M in H1 FY22. Higher prices for the majority of our commodities gave rise to a 32% increase in Underlying revenue. Our Group operating margin increased to 44% and we delivered a very strong Return on invested capital (ROIC)(12) of 25%, as we minimise the increase to our cost base(16) from controllable costs to 3%. Our total cost base(16) reduced by US$117M (or 5%) in H1 FY22, primarily related to the divestment of South Africa Energy Coal on 1 June 2021. The divestment of lower returning businesses, South Africa Energy Coal, TEMCO and Metalloys is expected to sustainably lift the Group's operating margin into the future.

Underlying EBIT increased by US$1,124M (or 288%) to US$1,514M, further benefitting from a reduction in Underlying depreciation and amortisation of US$39M to US$357M following the recognition of a non-cash impairment charge for Illawarra Metallurgical Coal in FY21. Underlying earnings increased by US$868M (or 638%) to US$1,004M and our Underlying effective tax rate (ETR)(20) normalised (31%) following our divestment of South Africa Energy Coal.

EARNINGS ANALYSIS

The following key factors influenced Underlying EBIT in H1 FY22, relative to H1 FY21.

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

Net finance costs

The Group's Underlying net finance costs, including discontinued operations, reduced by US$8M (or 11%) to US$62M in H1 FY22. The successful divestment of South Africa Energy Coal in late FY21 is expected to support a lower unwind of the discount applied to our closure and rehabilitation provisions going forward (H1 FY22: US$39M, H1 FY21 US$63M, including discontinued operations). Interest on our lease liabilities (US$26M), relates primarily to our multi-fuel co-generation facility at Worsley Alumina.

Tax expense

The Group's H1 FY22 Underlying income tax expense was US$448M for an Underlying ETR(20) of 30.9%, following the prior period's elevated rate (H1 FY21: 56.1%) caused by the de-recognition of tax assets associated with the divestment of South Africa Energy Coal. The H1 FY22 Underlying ETR reflects the corporate tax rates of the jurisdictions in which we operate(25), as well as the inclusion of the manganese business in Underlying earnings on a proportionally consolidated basis (including a royalty related tax for Australia Manganese). The Underlying ETR for our manganese business was 42.9% in H1 FY22, including the royalty related tax(26).

CASH FLOW

The Group delivered a US$704M increase in free cash flow from operations, excluding EAI, to US$840M, as a broad recovery in commodity prices and our portfolio's operating leverage combined to more than offset a US$333M build in working capital, primarily caused by higher prices for our products and temporary supply chain impacts, most notably at our aluminium smelters in Southern Africa. Increasing profitability also gave rise to a significant increase in income tax payments during the period (+US$206M to US$234M), excluding tax paid within equity accounted investments.

In addition to free cashflow from operations, the Group also received (net) distributions of US$102M from our manganese EAI(27) (H1 FY21: US$52M) as our operations in Australia and South Africa continued to generate strong cashflow.

Within working capital, inventory rose by US$153M, most notably at our aluminium smelters in Southern Africa, as port congestion and tight global freight conditions temporarily slowed our ability to move finished goods. While the build in aluminium inventory is expected to persist in the near term, we have and continue to establish alternative shipping solutions and points of dispatch to minimise the impact. Although we expect this inventory build to unwind once we realise the full benefit of our initiatives, and port congestion and general freight tightness is alleviated, our restart of the Brazil Aluminium smelter is expected to require the establishment of working capital.

Trade and other receivables increased by US$145M as a result of higher prices and the timing of receipts at period end, with debtor days at the end of the half unchanged at 21 days (FY21: 21 days). Provisions also reduced by US$88M with a weakening Australian dollar, further contributing to the build in working capital. These movements were partially offset by a modest increase in trade and other payables of US$53M, relating to the timing of payments.

The Group's Total capital expenditure, excluding EAI, decreased by US$36M to US$254M in H1 FY22, following the divestment of South Africa Energy Coal (H1 FY21: US$45M) in June 2021. Excluding the impact of divested operations and EAI, Total capital expenditure(28) increased by US$9M (or 4%) to US$254M with:

Total capital expenditure associated with our manganese EAI, excluding divested operations, increased by US$7M (or 18%) to US$45M as we continued our investment in additional tailings storage facility capacity at Australia Manganese.

BALANCE SHEET, DIVIDENDS AND CAPITAL MANAGEMENT

The Group's net cash balance increased by US$569M to finish the period at US$975M after US$316M was returned to shareholders by way of ordinary dividends (US$163M) and our ongoing capital management program. As at 31 December 2021, we had completed US$1.8B of our approved US$2.0B capital management program having paid a US$93M special dividend in October 2021 and bought back a further 25M shares, spending US$60M across H1 FY22.

Our strong net cash position ensures we are well placed to:

Payment for the Sierra Gorda acquisition is expected to be via a combination of cash on hand and an underwritten US$1B acquisition debt facility that maintains our balance sheet strength and flexibility. We retain access to significant additional liquidity, having refinanced our multicurrency revolving credit facility, securing US$1.4B of commitments for a five-year term to 2026, with options to extend for up to a further two years by mutual agreement. The facility has been established as a sustainability-linked loan with measures linked to our ongoing commitment to emissions reduction and improving energy and water use efficiency.

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.

As well as promoting competition for capital and investment in high returning options, our capital management framework is designed to reward shareholders as financial performance improves. Consistent with our dividend policy, the Board has resolved to pay a fully franked ordinary dividend of US 8.7 cents per share (US$405M), representing 40% of Underlying earnings in respect of H1 FY22.

Having established a strong track record of returning excess cash to shareholders in a timely and efficient manner, and reflecting our confidence in the outlook for the business, the Board has today further expanded our capital management program by US$110M to US$2.1B, leaving US$302M 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 9 and 11 March 2022 (both dates inclusive), nor will transfers to/from the South African branch register be permitted between 3 and 11 March 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

We achieved a number of strong production results across our portfolio in H1 FY22, despite higher COVID-19 case numbers and workforce restrictions in many of the jurisdictions in which we operate. We have, however, revised FY22 guidance lower for Australia Manganese and Illawarra Metallurgical Coal, which reflects ongoing COVID-19 impacts. Separately, FY22 guidance for Cannington has been increased in anticipation of further strong underground mine performance and higher average grades.

New guidance is provided for Brazil Aluminium, following our decision to participate in the restart of the smelter. We expect to update production guidance for Mozal Aluminium following completion of our agreed acquisition of an additional shareholding.

(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 performance and guidance

Industry wide raw material input cost inflation, most notably in our aluminium value chain, and a broad based recovery in commodity prices, leading to higher royalties at Illawarra Metallurgical Coal and Cerro Matoso, were the primary drivers of an increase in our H1 FY22 Operating unit costs across the majority of our operations.

While FY22 guidance has been revised higher at the majority of our operations, H2 FY22 Operating unit costs are primarily expected to remain flat or decline. This reflects both the benefit of higher planned volumes and our revised currency and price assumptions. The cost profile of our Southern African aluminium smelters will continue to be heavily influenced by the South African rand, and the price of raw materials and energy.

(a) FY22 prior guidance includes commodity price and foreign exchange rate forward curves or our internal expectations (refer to footnote 31).

(b) FY22 new guidance includes commodity price and foreign exchange rate forward curves or our internal expectations for the remainder of FY22, as at January 2022 (refer to footnote 32).

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

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

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

Other expenditure guidance

Group and unallocated cost guidance has been revised upwards to US$125M, following the recognition of one-off charges in H1 FY22. Notwithstanding, we remain on-track to deliver US$50M in annualised savings across the Group from FY22 (compared to FY20), as we realise the benefits of simplifying the Group's functional structures and footprint.

Other expenditure items (excluding capitalised exploration) have been updated to include our manganese business on a proportionally consolidated basis.

(a) All guidance is subject to further potential impacts from COVID-19.

Capital expenditure guidance (excluding exploration and intangibles)

Guidance for our FY22 safe and reliable capital expenditure (excluding EAI) has been revised down by US$10M to US$400M with lower spend at Illawarra Metallurgical Coal as COVID-19 restrictions slow the completion of work. Safe and reliable capital expenditure guidance for our EAI has been revised to US$71M (from US$63M) with additional investment in non-processing infrastructure at Australia Manganese.

Improvement and life extension capital expenditure (excluding EAI) has been revised down by US$2M to US$68M as we scale back activity on the DND project at Illawarra Metallurgical Coal and invest to restart the Brazil Aluminium smelter. Guidance for our EAI has been revised to US$19M (from US$28M) with investment in new mining areas at South Africa Manganese now expected to be completed in FY23.

Guidance for growth capital expenditure has been increased to US$115M (from US$45M) with the first time inclusion of H2 FY22 expenditure at our Hermosa project, following the completion of the Taylor Deposit PFS. This includes approximately US$50M for critical path items including construction and installation of infrastructure to support orebody dewatering in H2 FY22.

operations analysis

A summary of the underlying performance of the Group's operations is presented below and more detailed analysis is presented in the following pages. 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.

(a) Group and unallocated Underlying EBIT includes Hermosa -US$7M (H1 FY21 -US$4M).

Worsley alumina

(86% share)

Volumes

Worsley Alumina saleable production decreased by 2% (or 31kt) to 1,979kt in H1 FY22. We remain on-track to achieve production guidance at the refinery's nameplate capacity of 3,965kt in FY22 with calciner maintenance scheduled for Q3 FY22. FY23 production guidance is unchanged with creep beyond nameplate to 4,000kt expected as we continue to implement improvement initiatives across the operation.

Operating costs

Operating unit costs increased by 25% (or US$52/t) to US$256/t with higher caustic soda prices (H1 FY22: US$474/t, H1 FY21: US$308/t) and price-linked freight rates adding to increases in caustic consumption (H1 FY22: 112 kg/t, H1 FY21: 97 kg/t).

Our operating margin increased to 34% (H1 FY21: 27%) as a 40% increase in the average realised price of alumina more than offset higher costs. Our average realised alumina price of US$389/t was a circa 8% premium to the Platts Alumina Index(34) (PAX) on a volume weighted M-1 basis, reflecting the impact of higher price-linked freight rates in our prices and the structure of legacy supply contracts to our Mozal Aluminium smelter.

We have revised our FY22 Operating unit cost guidance to US$257/t (previously US$241/t) with H2 FY22 costs expected to be largely unchanged (from H1 FY22). Elevated caustic soda prices and price-linked freight rates are expected to persist, more than offsetting the benefit of a weaker Australian dollar. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 32.

Financial performance

Underlying EBIT increased by 140% (or US$98M) to US$168M as higher realised alumina prices (+US$216M) more than offset higher caustic prices and consumption (-US$45M), higher price-linked freight rates (-US$25M) and lower sales volumes (-US$37M).

Capital expenditure

Safe and reliable capital expenditure decreased by US$7M to US$20M in H1 FY22. FY22 guidance of US$43M is unchanged as we continue our investment in additional bauxite residue disposal capacity.

Improvement and life extension capital expenditure increased by US$3M to US$4M in H1 FY22. FY22 guidance of US$18M is unchanged as we progress refinery decarbonisation projects and commence work to access new bauxite mining areas.

(a) H1 FY21 reflects balance as at 30 June 2021.

BRAZIL ALUMINA

(36% SHARE)

Volumes

Brazil Alumina saleable production decreased by 11% (or 75kt) to 631kt in H1 FY22, following damage to one of the two bauxite unloaders at the operation in July 2021. Production was restored to nameplate capacity in October 2021 and the refinery achieved record quarterly production in Q2 FY22. Production guidance of 1,300kt for FY22 and 1,395kt for FY23 is unchanged.

Operating costs

Operating unit costs increased by 27% to US$262/t due to higher raw material input and energy prices, lower volumes and one-off costs to recover from the bauxite unloader damage.

Our operating margin increased to 32% (H1 FY21: 26%) as a 40% increase in the average realised price for alumina more than offset higher costs.

While guidance is not provided for this non-operated facility, Operating unit costs will be influenced by the price of raw materials and an expected improvement in volumes in H2 FY22.

Financial performance

Underlying EBIT increased by 96% (or US$24M) to US$49M as higher realised alumina prices (+US$69M) more than offset higher raw material, energy and freight costs (-US$17M), lower sales volumes (-US$13M) and one-off maintenance and demurrage costs related to the bauxite unloader outage (-US$8M).

Capital expenditure

Safe and reliable capital expenditure increased by US$16M to US$31M in H1 FY22. FY22 guidance of US$54M is unchanged as we continue our investment in additional bauxite residue disposal capacity.

During the period, we agreed to acquire an additional 18.2% interest in the MRN bauxite mine, which would take our ownership to 33%. The acquisition is expected to close in H2 FY22, subject to the satisfaction of conditions.

Our increased ownership of MRN will secure and align our Brazilian bauxite supply requirements and is an important step as we work with our partners to complete a pre-feasibility study for the MRN life extension project. The project has the potential to extend the life of the mine by more than 20 years at a relatively low capital cost(35). The pre-feasibility study is expected to be completed in mid CY22. 

(a) H1 FY21 reflects balance as at 30 June 2021.

BRAZIL ALUMINIUM

(40% SHARE)

Volumes

Following the end of the period, we announced our participation in the restart of the Alumar aluminium smelter (40% South32 share), together with our joint venture partner Alcoa(18). 

First production is expected in Q4 FY22, with full capacity of 447ktpa (100% basis) (179ktpa, 40% basis) in Q3 FY23.

We have secured cost efficient renewable power for our share of production, while our alumina supply will be sourced from the co-located Brazil Alumina refinery.  

Financial performance

Underlying EBIT was a loss of US$1M in H1 FY22 as we incurred costs to maintain the smelter, ahead of its planned restart.

Restart expenditure

We expect to spend approximately US$70M across FY22 and FY23 to support the smelter's restart, including approximately US$10M in capital expenditure.

(a) H1 FY21 reflects balance as at 30 June 2021.

hillside aluminium

(100% SHARE)

Volumes

Hillside Aluminium saleable production decreased by 1% (or 3kt) to 358kt in H1 FY22, as the smelter continued to test its maximum technical capacity, despite the impact from higher load-shedding. Production guidance of 720kt for FY22 and FY23 is unchanged, subject to load-shedding.

Operating costs

Operating unit costs increased by 26% to US$1,935/t reflecting the impact of higher raw material input prices, a stronger South African rand and higher power costs.

Our operating margin increased to 34% (H1 FY21: 18%) as a 57% increase in the average realised price of aluminium more than offset higher costs.

While Operating unit cost guidance is not provided, the cost profile of the smelter will continue to be heavily influenced by raw material input prices, including the price of alumina supplied by our Worsley Alumina refinery (with prices linked to the PAX on an M-1 basis), and other external factors including the South African rand and South Africa Producer Price Index (which impacts power costs).

During the period, we made a final investment decision for the AP3XLE energy efficiency project. We expect to roll the technology out as part of the smelter's pot relining program starting in FY23, bringing both volume and efficiency benefits, while reducing carbon intensity. We expect to spend approximately US$18M over 5 years to install AP3XLE at Hillside Aluminium in addition to our normal pot relining activity.  

Financial performance

Underlying EBIT increased by 257% (or US$224M) to US$311M as higher aluminium prices (+US$360M) more than offset higher raw material input prices (-US$95M), power costs (-US$19M) and a stronger South African rand (-US$24M).

The cost of pot relining at the smelter increased by US$6M in H1 FY22, with 70 pots relined at a cost of US$259k per pot (H1 FY21: 50 pots at US$238k per pot). Pot relining activity is expected to increase in H2 FY22, with 181 pots scheduled to be relined across FY22.

Capital expenditure

Capital expenditure increased by US$4M to US$10M in H1 FY22. FY22 guidance has been revised to US$31M (from US$29M) as we replace our trucking fleet for the transport of liquid hot metal and commence activity on the AP3XLE project.

(a) H1 FY21 reflects balance as at 30 June 2021.

Mozal aluminium

(47.1% SHARE)

Volumes

Mozal Aluminium saleable production increased by 1% (or 1kt) to 136kt in H1 FY22 as the volume benefit of our AP3XLE energy efficiency project more than offset the impact from higher load-shedding. Production guidance remains unchanged at 273kt for FY22 and FY23, subject to load-shedding.

We expect to update our production guidance following the completion of our acquisition of an additional shareholding in Mozal Aluminium(17) that is expected to complete in Q3 FY22. At completion our shareholding will increase by a minimum of 16.6% to 63.7%.

Operating costs

Operating unit costs increased by 27% to US$2,008/t, reflecting the impact of higher raw material input prices and a stronger South African rand.

Our operating margin increased to 34% (H1 FY21: 19%) as a 57% increase in the average realised price of aluminium more than offset higher costs.

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

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 255% (or US$79M) to US$110M as higher aluminium prices (+US$135M) more than offset higher raw material input prices (-US$53M) and a stronger South African rand (-US$4M).

The cost of pot relining at the smelter increased by US$1M in H1 FY22, with 75(36) pots relined at a cost of US$245k per pot (H1 FY21: 61(36) pots at US$258k per pot). Pot relining activity is expected to reduce in H2 FY22, with 121(36) pots scheduled to be relined across FY22.

Capital expenditure

Capital expenditure of US$6M in H1 FY22 was unchanged. FY22 guidance of US$11M is unchanged with the smelter continuing to roll out the AP3XLE energy efficiency technology. The project is expected to deliver incremental production from FY22, before realising a circa 5% increase in annual production by FY24 with no associated increase in power consumption.

(a) H1 FY21 reflects balance as at 30 June 2021.

illawaRRa metallurgical coal

(100% SHARe)

Volumes

Illawarra Metallurgical Coal saleable production decreased by 23% (or 951kt) to 3.1Mt in H1 FY22 as we completed an extended longwall move at the Dendrobium mine in Q2 FY22. Metallurgical coal production declined 15% to 2.8Mt, while energy coal declined by 55% to 0.4Mt.

FY22 production guidance has been revised lower by 7% to 6.8Mt due to the extended longwall move and the impact of additional COVID-19 restrictions. FY23 production is expected to increase by 9% despite being revised lower by 0.1Mt (or 1%) to 7.4Mt. FY24 production is expected to be ~5.5Mt as the mine plan moves into a new mining area at Dendrobium(37). Production is expected to increase in FY25, consistent with the plan to transition to a single longwall operation at Appin.

Operating costs

Operating unit costs increased by 60% to US$123/t due to the lower volumes, increased contractor and maintenance activity, and higher price-linked royalties. The average realised prices for metallurgical coal and energy coal increased 183% to US$303/t, and 248% to US$108/t, respectively.

Our operating margin increased to 56% (H1 FY21: 15%) as the significant increase in our average realised prices more than offset higher costs.

We have revised our FY22 Operating unit cost guidance to US$115/t (previously US$101/t) with H2 FY22 costs expected to decline from H1 FY22 as we increase volumes and assume a weaker Australian dollar. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 32.

Financial performance

Underlying EBIT increased by US$499M to US$458M, as the operation benefitted from higher realised prices (+US$591M), partially offset by lower sales volumes (-US$44M), higher price-linked royalties (-US$33M) and a drawdown of inventory (-US$35M). Contractor and maintenance costs also increased by US$35M as planned work on longwall changeouts and infrastructure upgrades was undertaken, while depreciation decreased by US$41M to US$54M following a non-cash impairment of the operation's carrying value in H2 FY21.

Capital expenditure

Safe and reliable capital expenditure increased by US$7M in H1 FY22 to US$82M as we lifted our rate of underground development. FY22 guidance has been lowered by US$15M to US$200M with COVID-19 restrictions slowing the completion of work. A range of US$300M-US$360M is expected in FY23, as we maintain higher rates of development and progress upgrades to coal clearance and ventilation infrastructure ahead of Appin's transition to a single longwall. The transition to longer panels is expected to bring capital and operating cost efficiencies beyond FY25.

Improvement and life extension capital expenditure decreased by US$17M to US$6M as we scaled back activity on the DND project. FY22 guidance has been revised to US$10M as we work toward the completion of an alternative mine plan and the submission of an environmental impact statement in Q3 FY22.

(a) H1 FY21 reflects balance as at 30 June 2021.

australia manganese

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

Volumes

Australia Manganese saleable ore production decreased by 7% (or 130kwmt) to 1,704kwmt in H1 FY22 with lower planned yield at the primary concentrator. Separately the PC02 circuit continued to operate above its nameplate capacity, contributing 13% of total production(H1 FY21: 10%).

FY22 production guidance has been revised lower by 9% to 3,200kwmt with wet weather disruptions and additional COVID-19 workforce restrictions in the Northern Territory preventing the re-build of stockpiles ahead of the wet season, resulting in sequentially lower production during H2 FY22. FY23 production guidance is unchanged and is expected to increase by 6% to 3,400kwmt with the re-establishment of stockpiles.

The TEMCO manganese alloy smelter was divested during FY21 with an effective completion date of 31 December 2020.

Operating costs

Operating unit costs increased by 29% to US$1.79/dmtu as disruptions from wet weather and COVID-19 added to our expectation for rising costs in FY22 from a planned decline in yield.

Our operating margin increased to 54% (H1 FY21: 50%) benefitting from a 17% increase in the average realised price of manganese ore and the divestment of TEMCO. Our average realised price of US$4.59/dmtu, FOB was in-line with the high grade 44% manganese lump ore index(39) despite the higher contribution to sales from our low-cost PC02 product that has seen a narrowing gap in discounts to the index.

We have revised our FY22 Operating unit cost guidance to US$1.81/dmtu (previously US$1.68/dmtu), with H2 FY22 costs expected to be largely unchanged (from H1 FY22) despite a planned reduction in volumes, as we benefit from a weaker Australian dollar. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 32.

Financial performance

Manganese ore Underlying EBIT increased by 7% (or US$11M) to US$162M as higher realised prices (+US$99M) were partially offset by lower sales volumes (-US$25M), higher freight rates (-US$22M) and diesel prices (-US$5M), inventory movements (-US$8M) and costs directly attributable to our COVID-19 response(-US$4M).

Capital expenditure

Safe and reliable capital expenditure increased by US$3M to US$32M in H1 FY22 as we invested in tailings storage facility capacity. FY22 guidance has been revised to US$55M (from US$47M) to reflect additional investment in non-processing infrastructure. Improvement and life extension capital expenditure increased by US$2M in H1 FY22. FY22 guidance of US$10M is unchanged as we progress a feasibility study for the Eastern Leases mine life extension project.

(a) H1 FY21 reflects balance as at 30 June 2021.

south africa manganese

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

Volumes

South Africa Manganese saleable ore production increased by 7% (or 65kwmt) to 1,053kwmt in H1 FY22 as we delivered higher volumes of premium material from our Mamatwan mine and planned maintenance was completed.

FY22 production guidance has been restated at 2,000kwmt to reflect a 54.6% interest(2). While we continue to monitor market conditions and our use of higher cost trucking, our expectation for total output (100% share) from the operation is unchanged.

Our Metalloys manganese alloy smelter remained on care and maintenance during H1 FY22. On 29 November 2021 we entered into a binding agreement to sell the smelter, which is subject to the satisfaction of conditions.

Operating costs

Operating unit costs increased by 15% to US$2.63/dmtu as we increased our use of higher cost trucking to lift sales volumes of premium product, and the South African rand strengthened.

Our operating margin declined to 15% (H1 FY21: 22%) as the benefit of our strategy to target additional volumes of premium product was more than offset by a stronger South African rand. Notwithstanding, our average realised price was a premium of 11% to the medium grade 37% manganese lump ore index(43), as we maximised our revenue by optimising our sales mix.

We have revised our FY22 Operating unit cost guidance to US$2.51/dmtu (previously US$2.57/dmtu) with H2 FY22 costs expected to decline (from H1 FY22) with the benefit of a weaker South African rand. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 32.

Financial performance

Manganese ore Underlying EBIT decreased by 37% (or US$14M) to US$24M as the benefit of increased trucking activity to deliver higher sales volumes of premium material (+US$9M) was more than offset by volume related distribution and inventory costs (-US$8M) and a stronger South African rand (-US$8M).

Manganese alloy Underlying EBIT was a loss of US$5M while the Metalloys smelter remained on care and maintenance.

Capital expenditure

Safe and reliable capital expenditure decreased by US$1M to US$8M in H1 FY22 as we extracted the boundary pillar at our Mamatwan mine, accessing previously sterilised ore. FY22 guidance is restated at US$16M, reflecting a 54.6% interest(2).

Improvement and life extension capital expenditure was US$2M in H1 FY22. FY22 guidance has been revised lower to US$9M (from US$18M) with investment in new mining areas now expected to be completed in FY23.

(a) H1 FY21 reflects balance as at 30 June 2021.

cerro matoso

(99.9% SHARE)

Volumes

Cerro Matoso payable nickel production increased by 26% (or 4.2kt) to 20.3kt in H1 FY22 following the completion of a major plant refurbishment in FY21. Average processed nickel grades improved to 1.73% (H1 FY21: 1.57%) with the inclusion of higher-grade material from the Q&P project.

Production guidance remains unchanged at 43.8kt for FY22 and 43.5kt for FY23 with additional higher-grade volumes expected from the Q&P project.

Operating costs

Operating unit costs increased by 8% to US$4.11/lb as higher nickel prices resulted in higher price-linked royalties. Excluding the impact of royalties, costs were largely unchanged.

Our operating margin increased to 51% (H1 FY21: 40%) as a 33% increase in the average realised price of nickel and higher volumes more than offset our additional costs. Product discounts for our ferronickel sales narrowed to 5% of the LME Nickel index (FY21: 9%) in H1 FY22, reflecting tighter market conditions.

We have revised FY22 Operating unit cost guidance to US$4.17/lb (previously US$4.12/lb) as higher contractor rates in support of planned Q&P volumes more than offset the benefit of a weaker Colombian peso. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 32.

Financial performance

Underlying EBIT increased by 216% (or US$108M) to US$158M as higher realised nickel prices (+US$93M) and sales volumes (+US$50M) more than offset higher price-linked royalties (-US$16M), energy costs (-US$12M) associated with the increase in plant availability and the cost of contractors (-US$9M) to support the Q&P project.

Capital expenditure

Safe and reliable capital expenditure decreased by US$7M to US$6M in H1 FY22 following the prior period's major plant refurbishment. FY22 guidance of US$23M is unchanged as we complete planned upgrades to our mobile mining fleet.

Improvement and life extension capital expenditure increased by US$6M to US$8M in H1 FY22. FY22 guidance of US$20M is unchanged as we commence the Ore Sorting and Mechanical Ore Concentration (OSMOC) project. The OSMOC project 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(46). Mechanical completion of the OSMOC project is expected in Q4 FY22.

(a) H1 FY21 reflects balance as at 30 June 2021.

cannington

(100% SHARE)

Volumes

Cannington payable zinc equivalent production increased by 9% (or 12kt) to 152.5kt in H1 FY22 as higher grades and continued strong underground performance lifted metal output.

Reflecting the strong start to the year, FY22 production guidance has been revised higher by 5% (silver 12,283koz, lead 117.9kt and zinc 66.7kt, for 292.2kt of payable zinc equivalent production) with the operation on-track to transition to 100% truck haulage from Q4 FY22.FY23 guidance is unchanged with payable zinc equivalent production expected to increase a further 7% to 313.9kt (silver 13,500koz, lead 122.0kt and zinc 72.0kt).

Operating costs

Operating unit costs increased by 3% to US$128/t as the benefit of higher throughput was more than offset by an increase in the cost of freight and higher price-linked royalties.

Our operating margin was unchanged at 53%.

We have revised FY22 Operating unit cost guidance to US$120/t (previously US$121/t) with the operation expected to benefit from continued strong underground mine performance and a weaker Australian dollar. Exchange rate and price assumptions for FY22 Operating unit cost guidance are detailed in footnote 32.

Financial performance

Underlying EBIT increased by 5% (or US$8M) to US$162M as higher average realised prices (+US$23M) and sales volumes (+US$13M) more than offset an increase in freight rates (-US$6M) and higher price-linked royalties (-US$3M). Depreciation increased by US$13M in H1 FY22 to US$39M with accelerated depreciation of the hoist infrastructure, ahead of the operation's transition to 100% truck haulage.

Capital expenditure

Safe and reliable capital expenditure decreased by US$11M to US$17M in H1 FY22 with lower planned rates of underground development. FY22 guidance of US$43M is unchanged with an increase in activity to execute the transition to 100% truck haulage.

(a) H1 FY21 reflects balance as at 30 June 2021.

notes

(1) Refer to market release "South32 to acquire a 45% interest in the Sierra Gorda copper mine" dated 14 October 2021. The acquisition is expected to close inFebruary 2022. The estimates indicated in the original announcement are qualifying foreign estimates and are not reported in accordance with the JORC Code. A Competent Person has not done sufficient work to classify foreign estimates as Mineral Resources or Ore Reserves in accordance with the JORC Code. It is uncertain that following evaluation and/or further work that the foreign estimates will be reported as Mineral Resources or Ore Reserves in accordance with the JORC Code.

(2) South Africa Manganese ore has been reported as a 54.6% interest (previously 60%) reflecting the proposed divestment of our 60% interest in the Metalloys manganese alloy smelter and aligning with our interest in Hotazel Manganese Mines (HMM). South32 has a 44.4% ownership interest in HMM. 26% of HMM is owned by a B-BBEE consortium comprising Ntsimbintle Mining (9%), NCAB Resources (7%), Iziko Mining (5%) and HMM Education Trust (5%). The interests owned by NCAB Resources, Iziko Mining and HMM Education Trust were acquired using vendor finance with the loans repayable via distributions attributable to these parties, pro rata to their share in HMM. Until these loans are repaid, South32's interest in HMM is accounted at 54.6%.

(3) Net tangible assets as at 31 December 2021 includes all right-of-use assets and lease liabilities, in accordance with AASB 16 Leases.

(4) During the current financial reporting period the internal reporting of the Group's consolidated financial results was changed. The underlying information reflects the Group's interest in material equity accounted joint ventures and is presented on a proportional consolidation basis, which is the measure used by the Group's Board and management to assess their performance. H1 FY21 comparative information has been restated to reflect this change.

(5) H1 FY21 includes TEMCO and discontinued operation South Africa Energy Coal.

(6) H1 FY22 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for H1 FY22 (4,657 million).H1 FY22 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for H1 FY22.H1 FY21 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for H1 FY21 (4,815 million).H1 FY21 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for H1 FY21.

(7) H1 FY22 ordinary dividends per share is calculated as H1 FY22 ordinary dividend announced (US$405M) divided by the number of shares on issue at31 December 2021 (4,650 million).

(8) Underlying revenue includes revenue from third party products and services.

(9) The underlying information reflects the Group's interest in material equity accounted joint ventures and is presented on a proportional consolidation basis. Underlying EBIT is profit before net finance costs, tax and any earnings adjustments, including impairments. Underlying EBITDA is Underlying EBIT before underlying depreciation and amortisation. Underlying earnings is Profit/(loss) after tax and earnings adjustment items. Underlying earnings is the key measure that South32 uses to assess the performance of the South32 Group, make decisions on the allocation of resources and assess senior management's performance. In addition, the performance of each of the South32 operations and operational management is assessed based on Underlying EBIT. In order to calculate Underlying earnings, Underlying EBIT and Underlying EBITDA, the following items are adjusted as applicable each period, irrespective of materiality:

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

· Impairment losses/(reversals);

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

· (Gains)/losses on non-trading derivative instruments and other investments measured at fair value through profit or loss;

· Major corporate restructures;

· Manganese joint venture adjustments;

· Exchange rate variations on net debt; and the

· Tax effect of earnings adjustments.

In addition, items that do not reflect the underlying operations of South32, and are individually, or in combination with other related earnings adjustments, significant to the financial statements, are excluded to determine Underlying earnings. When applicable, significant items are detailed in the Financial Information.

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

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

(12) Return on invested capital (ROIC) is a key measure that South32 uses to assess performance. ROIC is calculated as Underlying EBIT less the discount on rehabilitation provisions included in net finance costs, tax effected by the Group's Underlying effective tax rate (ETR) including our manganese EAI on a proportional consolidated basis, divided by the sum of fixed assets (excluding any rehabilitation asset, the impairment of Eagle Downs Metallurgical Coal and Illawarra Metallurgical Coal, the impairment reversal of Brazil Aluminium, and unproductive capital associated with Growth and Life Extension projects) and inventories. Our manganese EAI are included in the calculation on a proportional consolidation basis.

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

(14) Total Recordable Injury Frequency (TRIF): (The sum of recordable injuries) x 1,000,000 ÷ exposure hours. This is stated in units of per million hours worked for employees and contractors.

(15) Our FY21 TRIF baseline has been adjusted to remove divested operations South Africa Energy Coal and TEMCO.

(16) Cost base excluding third party product cost and ceased and sold operations.

(17) Refer to market release "South32 to acquire up to an additional 25% of Mozal Aluminium" dated 30 September 2021.

(18) Refer to market release "Restart of Brazil Aluminium using renewable power" dated 6 January 2022.

(19) Refer to market release "Hermosa project update" dated 17 January 2022.

(20) Underlying ETR is Underlying income tax expense, including royalty related tax, divided by Underlying profit before tax.

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

(22) Underlying net finance costs and Underlying income tax expense are actual H1 FY22 results, not half-on-half variances.

(23) South32's ownership shares of operations are presented as follows: Worsley Alumina (86% share), Hillside Aluminium (100%), Mozal Aluminium (47.1% share), Brazil Alumina (36% share), Brazil Aluminium (40% share), Illawarra Metallurgical Coal (100%), Australia Manganese (60% share), South Africa Manganese ore (54.6% share), South Africa Manganese alloy (60% share), Cerro Matoso (99.9% share), Cannington (100%), Hermosa (100%) and Eagle Downs Metallurgical Coal (50% share).

(24) The underlying information reflects the Group's interest in material equity accounted joint ventures and is presented on a proportional consolidation basis, which is the measure used by the Group's management to assess their performance. The joint venture adjustments reconcile the underlying proportional consolidation to the equity accounting position included in the Group's half year consolidated financial statements.

(25) The corporate tax rates of the geographies where the Group operates include: Australia 30%, South Africa 28%, Colombia 31%, Mozambique 0% and Brazil 34%. The Colombian corporate tax rate increased to 35% from 1 January 2022. The Mozambique operations are subject to a royalty on revenues instead of income tax.

(26) Australia Manganese is subject to a royalty related tax equal to 20% of adjusted EBIT which is included in Underlying tax expense.

(27) H1 FY22 net distributions from our manganese EAI comprise dividends and capital returns (US$79M) and a net repayment of shareholder loans (US$23M).

(28) Total capital expenditure comprises Capital expenditure, evaluation expenditure, the purchase of intangibles and capitalised exploration expenditure. Capital expenditure comprises Safe and reliable capital expenditure (Deferred stripping, Regulatory compliance, Risk reduction and Sustained performance), Improvement (Decarbonisation) and Life extension capital expenditure, and Growth (development of our current and future greenfield growth) capital expenditure.

(29) Payable zinc equivalent (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY21 realised prices for zinc (US$2,357/t), lead (US$1,862/t) and silver (US$25.4/oz) have been used for FY21, H1 FY22, FY22e and FY23e.

(30) Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by sales volumes. Operating cost is Revenue less Underlying EBITDA excluding third party sales. Additional manganese disclosures are included in footnotes 41 and 45.

(31) FY22 prior Operating unit cost guidance includes royalties (where appropriate) and the influence of exchange rates, and includes various assumptions for FY22, including: an alumina price of US$289/t; an average blended coal price of US$140/t for Illawarra Metallurgical Coal; a manganese ore price of US$4.79/dmtu for 44% manganese product; a nickel price of US$7.93/lb; a silver price of US$25.84/troy oz; a lead price of US$2,165/t (gross of treatment and refining charges); a zinc price of US$2,846/t (gross of treatment and refining charges); an AUD:USD exchange rate of 0.75; a USD:ZAR exchange rate of 15.00; a USD:COP exchange rate of 3,650; and a reference price for caustic soda; all of which reflected forward markets as at June 2021 or our internal expectations.

(32) FY22 new Operating unit cost guidance includes royalties (where appropriate) and the influence of exchange rates, and includes various assumptions for FY22, including: an alumina price of US$378/t; an average blended coal price of US$244/t for Illawarra Metallurgical Coal; a manganese ore price of US$5.42/dmtu for 44% manganese product; a nickel price of US$8.83/lb; a silver price of US$24.57/troy oz; a lead price of US$2,329/t (gross of treatment and refining charges); a zinc price of US$3,179/t (gross of treatment and refining charges); an AUD:USD exchange rate of 0.72; a USD:ZAR exchange rate of 15.47; a USD:COP exchange rate of 3,930; and a reference price for caustic soda; all of which reflected forward markets as at January 2022 or our internal expectations.

(33) H1 FY22 Third party products and services sold comprise US$64M for aluminium, US$22M for alumina, US$30M for coal, US$20M for manganese, US$167M for freight services and US$72M for raw materials. Underlying EBIT on third party products and services comprise US$6M for aluminium, US$2M for alumina, US$1M for manganese and US$4M for freight services. H1 FY21 Third party products and services sold comprise US$18M for aluminium, US$15M for alumina, US$14M for coal, US$18M for manganese, US$83M for freight services and US$35M for raw materials. Underlying EBIT on third party products and services comprise US$2M for aluminium, (US$1M) for alumina, US$1M for coal, nil for manganese, nil for freight services and raw materials.

(34) The quarterly sales volume weighted average of the Platts Alumina Index (FOB Australia) on the basis of a one month lag to published pricing (Month minus one or "M-1") for Worsley Alumina was US$360/t in H1 FY22.

(35) Production Target Cautionary Statement: The information in this announcement that refers to the Production Target and forecast financial information for MRN is based on Measured (63%), Indicated (9%) and Inferred (28%) Mineral Resources. The Mineral Resources underpinning the Production Target have been prepared by a Competent Person in accordance with the JORC Code and is available to view in South32's FY21 annual report (www.south32.net) published on 3 September 2021. There is low level of geological confidence associated with the Inferred Mineral Resources and there is no certainty that further exploration work will result in the determination of Indicated Mineral Resources or that the Production Target will be realised. The stated Production Target is based on South32's current expectations of future results or events and should not be solely relied upon by investors when making investment decisions. Further evaluation work and appropriate studies are required to establish sufficient confidence that this target will be met. South32 confirms that inclusion of 28% Inferred Mineral Resource tonnage is not the determining factor of the project viability and the project forecasts a positive financial performance when using 72% tonnage (63% Measured and 9% Indicated Mineral Resources). South32 is satisfied, therefore, that the use of Inferred Mineral Resources in the Production Target and forecast financial information reporting is reasonable.

(36) Presented on a 100% basis.

(37) Production Target Cautionary Statement: The information in this announcement that refers to the Production Target and forecast financial information forIllawarra Metallurgical Coal is based on Proved (4%) and Probable (93%) Coal Reserves, and Inferred (3%) Coal Resources. The Coal Reserves and Coal Resources underpinning the Production Target have been prepared by a Competent Person in accordance with the JORC Code and is available to view in South32's FY21 annual report (www.south32.net) published on 3 September 2021. There is low level of geological confidence associated with the Inferred Coal Resources and there is no certainty that further exploration work will result in the determination of Indicated Coal Resources or that the Production Target will be realised. The stated Production Target is based on South32's current expectations of future results or events and should not be solely relied upon by investors when making investment decisions. Further evaluation work and appropriate studies are required to establish sufficient confidence that this target will be met. South32 confirms that inclusion of 3% Inferred Coal Resource tonnage is not the determining factor of the project viability and the project forecasts a positive financial performance when using 97% tonnage (4% Proved and 93% Probable Coal Reserves). South32 is satisfied, therefore, that the use of Inferred Coal Resources in the Production Target and forecast financial information reporting is reasonable.

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

(39) The quarterly sales volume weighted average of the Metal Bulletin 44.4% manganese lump ore index (CIF Tianjin, China) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$5.33/dmtu in H1 FY22.

(40) Realised ore prices are calculated as external sales Revenue less freight and marketing costs, divided by external sales volume. Ore converted to sinter and alloy, and sold externally, is eliminated as an intracompany transaction.

(41) Manganese Australia H1 FY22 average manganese content of external ore sales was 44.2% on a dry basis (H1 FY21: 44.4%). 96% of H1 FY22 external manganese ore sales (H1 FY21: 96%) were completed on a CIF basis. H1 FY22 realised FOB ore prices and Operating unit costs have been adjusted for freight and marketing costs of US$49M (H1 FY21: US$25M), consistent with our FOB cost guidance.

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

(43) The quarterly sales volume weighted average of the Metal Bulletin 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$3.12/dmtu in H1 FY22.

(44) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Realised ore prices are calculated as external sales Revenue less freight and marketing costs, divided by external sales volume.

(45) Manganese South Africa H1 FY22 average manganese content of external ore sales was 39.4% on a dry basis (H1 FY21: 39.9%). 78% of H1 FY22 external manganese ore sales (H1 FY21: 74%) were completed on a CIF basis. H1 FY22 realised FOB ore prices and Operating unit costs have been adjusted for freight and marketing costs of US$49M (H1 FY21: US$20M), consistent with our FOB cost guidance.

(46) The information in this report that relates to the production target is based on Proved and Probable Ore Reserves (87%), Measured (12%) and Indicated (1%) Mineral Resources for Cerro Matoso. Mineral Resources and Ore Reserve estimates for Cerro Matoso was declared as part of South32's Annual Resource and Reserve declaration in the Annual Report 2021 (www.south32.net) issued on 3 September 2021 and prepared by I Espitia (MAusIMM) and N Monterroza (MAusIMM) in accordance with the requirements of the JORC Code. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original announcement. All material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement. Payable nickel is calculated using long term consensus metal prices and relative metallurgical recoveries.

(47) Cerro Matoso realised nickel sales price is inclusive of by-products. Realised sales price is calculated as sales Revenue divided by sales volume.

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

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

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

The following abbreviations may be used throughout this report: US$ million (US$M); US$ billion (US$B); December half year (H1 FY22); financial year (FY22); calendar year (CY); copper equivalent (CuEq); 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 half year ended 31 December 2021

consolidated income statement

for the half year ended 31 December 2021

(1) Refer to note 8 Discontinued operation.

The accompanying notes form part of the half year consolidated financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the half year ended 31 December 2021

The accompanying notes form part of the half year consolidated financial statements.

CONSOLIDATED BALANCE SHEET

as at 31 December 2021

The accompanying notes form part of the half year consolidated financial statements.

CONSOLIDATED CASH FLOW STATEMENT

for the half year ended 31 December 2021