South32 Regulatory News (S32)

14 February 2019

South32 Limited

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

(ACN 093 732 597)

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

ISIN: AU000000S320

South32 Limited

Financial Results and Outlook Half Year ended 31 December 2018

South32 delivers earnings growth, reshapes portfolio and continues shareholder returns

"Record production at Australia Manganese, strong operating performance more broadly and higher commodity prices delivered a 17 per cent increase in Profit after tax for the half year, while Underlying earnings per share grew by 20 per cent as we continued to benefit from our on-market share buy-back program.

"Our strong start to the year means that our production guidance is unchanged for all of our operations with the exception of Illawarra Metallurgical Coal where we have upgraded guidance by 7 per cent. We have also lowered our unit cost guidance as we have maintained operating discipline and benefited from a stronger US dollar.

"We continued to reshape our portfolio by acquiring the high-grade Hermosa resource and a 50% interest in and operatorship of the Eagle Downs Metallurgical Coal project during the period. We are also progressing our early stage exploration projects and remain on track to divest South Africa Energy Coal with binding bids expected by 30 June 2019.

"We are well positioned for the second half of the year, with a net cash balance of US$678M and an improving outlook for production and costs. This strong position has allowed us to return US$511M to shareholders in respect of the period with today's declaration of a US$258M fully franked interim dividend and an US$86M fully franked special dividend.

"Having established a strong track record, we will continue to return any excess capital to shareholders in a timely and efficient manner by monitoring our financial position within the context of the prevailing macro-economic environment and our capital management framework. This will involve the continuation of our existing US$1B capital management program with the recommencement of our on-market share buy-back following release of our financial results."

 Graham Kerr, South32 CEO

Safety

We are working hard to create a workplace where we can guarantee that everyone goes home safe and well at the end of every shift. In order to make this breakthrough we are creating an inclusive workplace where all work is well-designed and we continuously improve and learn. Our Total Recordable Injury Frequency (TRIF)(9)(10) declined from 5.1 to 4.8 per million hours worked in H1 FY19.

Performance summary

The Group's statutory profit after tax increased by 17% to US$635M in H1 FY19, Underlying earnings increased by 18% (or US$98M) to US$642M and basic Underlying earnings per share increased by 20% to US12.6 cents per share as we benefitted from our on-market share buy-back program. This significant increase in profitability was driven by strong production, higher commodity prices and disciplined cost control.

Following our strong start to the year and a favourable movement in currency markets, we have lowered FY19 Operating unit cost guidance for the majority of operations, while production guidance for Illawarra Metallurgical Coal has been increased by 7% to 6.5Mt.We have also lowered Capital expenditure(11) guidance, including equity accounted investments (EAI), by 9% to US$762M to reflect the reclassification of US$20M of planned exploration expenditure at Hermosa to capitalised exploration, the appreciation of the US dollar and a lower rate of spend in H1 FY19 (US$349M).

Specific highlights included:

Subsequent to period end we also elected to maintain our option with Trilogy Metals Inc. (TSX:TMQ) for the third and final year, which retains our right to earn a 50% interest in the Upper Kobuk Mineral projects in Alaska by committing approximately US$150M to a 50:50 joint venture by 31 January 2020.

We finished the period with a net cash balance of US$678M having generated free cash flow from operations, including distributions from our manganese EAI, of US$718M. Our strong financial position and disciplined approach to capital management has allowed us to return US$511M to shareholders in respect of the period, including:

With payment of this special dividend we will have completed 87% of our US$1B capital management program with the remaining US$127M scheduled to be returned to shareholders by 10 April 2019, depending on market liquidity and value. Having established a strong track record, we will continue to return any excess capital to shareholders in a timely and efficient manner by monitoring our financial position within the context of the prevailing macroeconomic environment and our capital management framework.

Earnings

The Group's statutory profit after tax increased by US$92M (or 17%) to US$635M in H1 FY19. Consistent with our accounting policies, various items are excluded from the Group's statutory profit to derive Underlying earnings including: losses on fair value movements of non-trading derivative instruments and other investments (US$28M pre-tax); exchange rate gains associated with the Group's non US dollar denominated net debt (US$21M pre-tax); the tax expense for all pre-tax earnings adjustments and exchange rate variations on tax balances (US$11M), and profit associated with earnings adjustments included in our EAI (US$11M). Further information on these earnings adjustments is included further on.

On this basis, the Group generated Underlying EBITDA of US$1.3B for an operating margin of 38% as stronger volumes, primarily at Illawarra Metallurgical Coal, and higher average realised prices underpinned a US$300M increase in sales revenue, excluding third party products. The Group's Operating unit costs also benefitted from weaker producer currencies, however total costs rose with higher production and price-linked royalties, elevated raw material costs across our aluminium value chain and an increase in maintenance costs at Worsley Alumina. Depreciation and amortisation also increased by a modest US$17M to US$380M, meaning that Underlying EBIT increased by US$201M (or 28%) to US$925M. This higher level of profitability, a change in our geographic earnings mix and permanent differences led to a US$103M (or 85%) increase in our Underlying income tax expense to US$224M. As a result, Underlying earnings increased by US$98M (or 18%) to US$642M.

Earnings analysis

The following key factors influenced Underlying EBIT in H1 FY19, relative to H1 FY18.

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

Net finance cost

The Group's Underlying net finance cost, excluding EAI, was US$59M in H1 FY19, which primarily reflects the unwinding of the discount applied to our closure and rehabilitation provisions (US$52M), finance lease interest (US$25M) and interest on our net cash balances (US$22M).

Tax expense

The Group's Underlying income tax expense, which excludes tax associated with EAI, was US$224M for an Underlying effective tax rate(20) (ETR) of 37.3% in H1 FY19 (H1 FY18: 28.0%). The increase in ETR reflects the differing tax rates that our operations are exposed to and the change in our geographic earnings mix, and the disproportionate effect of intragroup agreements and other permanent differences when margins are compressed or losses are incurred in specific jurisdictions. The primary corporate tax rates applicable to the Group for H1 FY19 include: Australia 30%, South Africa 28%, Colombia 37%(21), Mozambique 0%(21) and Brazil 34%.

The Underlying income tax expense for our manganese EAI was US$172M, including royalty related taxation of US$42M at GEMCO (Australia Manganese), for an Underlying ETR of 38.8% (H1 FY18: 36.2%).

Cash flow

The Group's free cash flow from operations, excluding EAI, was US$456M in H1 FY19. Working capital increased by US$93M as we established inventories at Illawarra Metallurgical Coal ahead of two longwall moves in Q3 FY19 and the timing of shipments impacted sales at Mozal Aluminium. Provisions and other liabilities also declined as we continued to invest in progressive rehabilitation at South Africa Energy Coal. These impacts were partially offset by movements in receivables and payables, with no change to our payment terms with customers or suppliers. Our debtor days remained broadly unchanged at 22.

Total capital expenditure(11), excluding EAI, increased by US$104M to US$306M in H1 FY19 as Major project activity ramped up at the Klipspruit Life Extension (KPSX) project(22) and preliminary work was undertaken to progress the Hermosa project following the acquisition of Arizona Mining in August 2018. Total capital expenditure included:

The purchase of intangibles and the capitalisation of exploration expenditure accounted for a further US$10M (H1 FY18: US$3M).

Total capital expenditure associated with EAI increased by US$24M to US$53M during H1 FY19 as we invested in additional tailings storage capacity at Australia Manganese.

Total capital expenditure, including EAI, in H1 FY19 was US$359M (H1 FY18: US$231M).

We also received (net) distributions totalling US$262M from our manganese EAI in H1 FY19, comprising dividends and capital returns totalling US$286M and a modest drawdown in shareholder loans (-US$24M).

Balance sheet, dividends and capital management

While the Group generated free cash flow from operations, including net distributions from EAI, of US$718M (H1 FY18: US$290M), our net cash balance decreased by US$1.4B to US$678M at 31 December 2018 (30 June 2018: US$2.0B) as we funded the Arizona Mining and Eagle Downs Metallurgical Coal transactions out of our cash reserves for a combined investment of US$1.5B. We also paid our final shareholder dividend in respect of FY18 of US$316M and directed US$167M towards our on-market share buy-back program as we purchased 68M shares at an average price of A$3.39 per share.

Demonstrating the disciplined and flexible approach we are taking to our capital management program, our Board resolved to pay a fully franked interim dividend of US$258M, representing 40% of Underlying earnings in H1 FY19, and a fully franked special dividend of US$86M. With payment of this special dividend we will have completed 87% of our US$1B capital management program with the remaining US$127M scheduled to be returned to shareholders by 10 April 2019, depending on market liquidity and value.

Our capital management framework remains unchanged and we continue to believe that a combination of high operating leverage and undue financial leverage delivers a sub-optimal outcome for shareholders. With the declaration of our interim and special dividends, this approach will allow us to return US$2.4B to shareholders in respect of the last three year period, equivalent to 20% of our market capitalisation(23). Having established this strong track record, we will continue to return any excess capital to shareholders in a timely and efficient manner by monitoring our financial position within the context of the prevailing macroeconomic environment and our capital management framework.

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

South32 shareholders registered on the South African branch register will not be able to dematerialise or rematerialise their shareholdings between 6 and 8 March 2019 (both dates inclusive), nor will transfers to/from the South African branch register be permitted between 28 February and 8 March 2019 (both dates inclusive).

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

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

Outlook

Production

The Group's production volumes are expected to rise by 5%(24) in FY19, or 7%(24) on a per share basis as we benefit from our ongoing on-market share buy-back program.

The denotation (e) refers to an estimate or forecast year.

Costs and capital expenditure

Operating unit cost performance

Broad appreciation of the US dollar and robust operating performance ensured that Operating unit costs were well controlled at the majority of our upstream operations in H1 FY19, however underlying inflationary pressure from raw materials continued to impact our aluminium value chain with the greatest pressure being felt at our smelters.

(a) H1 FY19 adjusted is restated to reflect price and foreign exchange rate assumptions used for FY19 prior guidance (refer to footnote 28).

(b) FY19 prior guidance includes commodity price and foreign exchange rate forward curves or our internal expectations (refer to footnote 28).

(c) US dollar per tonne of ore to kiln.

(d) US dollar per tonne of ore processed. Periodic movements in finished product inventory may impact Operating unit costs as related marketing costs may change. The H1 FY19 results reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges (previously recognised on a gross basis with treatment and refining charges included as a separate expense). These changes result in lower realised prices and Operating unit costs, with no net impact to earnings. FY19 prior guidance has been adjusted from US$147/t to US$131/t to reflect these changes. Prior periods have not been restated to reflect these changes.

Operating unit cost guidance

Updated FY19 Operating unit cost guidance primarily reflects revised currency and price assumptions as production guidance has been maintained for the majority of our operations. Illawarra Metallurgical Coal is the exception as an improvement in longwall performance has underpinned a 7% increase to prior production guidance. That being said, the relative skew in production to either H1 FY19 or H2 FY19 for a number of operations will have a meaningful impact on half-on-half unit cost performance. Separately, Operating unit costs at our refineries will benefit from lower raw material costs in H2 FY19 as higher priced material that was held in inventory was consumed in H1 FY19.

(a) FY19 prior guidance includes commodity price and foreign exchange rate forward curves or our internal expectations (refer to footnote 28).

(b) FY19 adjusted guidance is FY19 prior guidance, restated to reflect price and foreign exchange rate assumptions used for FY19 new guidance (refer to footnote 29).

(c) FY19 new guidance includes commodity price and foreign exchange rate forward curves or our internal expectations for the remainder of FY19, as at January 2019 (refer to footnote 29).

(d) US dollar per tonne of ore to kiln.

(e) US dollar per tonne of ore processed. Periodic movements in finished product inventory may impact Operating unit costs as related marketing costs may change. FY19 Prior guidance has been adjusted from US$147/t to US$131/t to reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges (previously recognised on a gross basis with treatment and refining charges included as a separate expense). These changes result in lower realised prices and Operating unit costs, with no net impact to earnings.

Other expenditure guidance

FY19 guidance for Group and unallocated costs, excluding greenfield exploration, is unchanged at US$80M (H1 FY19: US$40M). While guidance for greenfield exploration expenditure to progress our early stage projects also remains unchanged at US$41M (H1 FY19: US$8M), we do expect to capitalise US$20M (H1 FY19: US$7M) of exploration expenditure to increase our knowledge of the Hermosa resource(14).

Depreciation and amortisation, and tax expense

Depreciation and amortisation guidance for FY19 is unchanged at approximately US$750M (H1 FY19: US$380M), excluding EAI, and US$85M (H1 FY19: US$44M) for our EAI. From a taxation perspective, our geographic earnings mix will have a significant bearing on our ETR given differing country tax rates, while the impact of intragroup agreements and other permanent differences will continue to be magnified when margins are compressed or losses are incurred in specific jurisdictions. Whilst it is therefore difficult to predict our ETR (excluding EAI), we do expect it to decline in H2 FY19, particularly if the alumina to aluminium price ratio falls. 

Capital expenditure guidance

We have lowered FY19 guidance for Sustaining capital expenditure, including EAI, by US$30M to US$545M. This adjustment primarily reflects appreciation of the US dollar, the lower rate of underground development at Illawarra Metallurgical Coal in H1 FY19 and additional expenditure incurred to recover from and mitigate the impact of the Klipspruit dragline incident at South Africa Energy Coal. This incident has been confirmed as an insurable event and we are working through the claim to assess the quantum and timing of any recovery.

Major project capital expenditure guidance for FY19 has been lowered by US$48M to US$217M. This reduction primarily reflects the reclassification of US$20M of expenditure to capitalised exploration at Hermosa, the timing of activity at South Africa Energy Coal's KPSX project and appreciation of the US dollar. The modest reduction in underlying activity at Hermosa from Arizona Mining's preliminary estimate is not expected to have a bearing on the development schedule as the deferral of activity to progress the twin exploration declines does not impact the critical path. Capital expenditure required to progress the Eagle Downs Metallurgical Coal project (US$7M) is also included within guidance for the first time as the transaction was concluded in the period. Major project capital expenditure guidance does not account for the potential progression of the Dendrobium next domain project at Illawarra Metallurgical into final feasibility in H2 FY19.

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

Operations analysis

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

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

Worsley Alumina (86% share)

Volumes

Worsley Alumina saleable production increased by 2% (or 41kt) in H1 FY19 to 1,906kt as the refinery benefitted from improved calciner availability in Q2 FY19 and three shipments of stockpiled hydrate were sold opportunistically at alumina equivalent rates. FY19 production guidance remains unchanged at 3,965kt with calciner maintenance scheduled for Q3 FY19.

Operating costs

Operating unit costs increased by 4% in H1 FY19 to US$233/t as additional calciner maintenance was undertaken and the cost of caustic soda increased as higher priced inventory was consumed (H1 FY19: US$535/t, H1 FY18: US$516/t), which more than offset the impact of a weaker Australian dollar.

We have lowered FY19 Operating unit cost guidance by US$3/t to US$227/t with revised exchange rate and raw material price assumptions partially offset by additional maintenance activity that is designed to improve calciner performance and sustainably achieve nameplate capacity. Conversely, caustic soda costs are expected to decline in H2 FY19 as we benefit from the recent reduction in market prices and a fall in consumption rates as the contribution of West Marradong feed rises. Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in, footnote 29.

Financial performance

Underlying EBIT increased by 110% (or US$180M) in H1 FY19 to US$344M. A 29% rise in the average realised price of alumina (+US$188M) and a weaker Australian dollar (+US$23M) were partially offset by additional maintenance costs (-US$10M) and an increase in the price of caustic soda (-US$4M).

The average realised price for alumina sales in H1 FY19 reflected a discount of 9% to the Platts Alumina Index (PAX) on a volume weighted M-1 basis. This discount reflects the structure of specific legacy supply contracts with our Mozal Aluminium smelter that are linked to the LME aluminium price and the elevated alumina to aluminium price ratio in the spot market. All alumina sales to other customers were at market based prices.

Capital expenditure

Sustaining capital expenditure increased by US$3M in H1 FY19 to US$25M and is expected to increase to US$60M in FY19 as we commence several improvement initiatives to support a sustainable increase in production to nameplate capacity of 4.6Mt (100% basis) and continue to invest in additional bauxite residue disposal capacity.

(a) H1 FY18 reflects balance as at 30 June 2018.

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

Volumes

Brazil Alumina saleable production decreased by 6% (or 40kt) in H1 FY19 to 636kt as unplanned maintenance and power outages impacted performance. FY19 production is expected to approach guidance of 1,355kt with the addition of package boilers designed to support the ramp-up of the De-bottlenecking Phase One project.

Operating costs

Operating unit costs increased by 24% in H1 FY19 to US$291/t as additional maintenance costs were incurred, higher priced caustic soda inventory was consumed and the cost of bauxite supplied by MRN increased as the price reset to reflect the movement in alumina and aluminium prices on a trailing basis.

While specific Operating unit cost guidance is not provided as we are not the operator of the refinery, we do expect some relief from recent inflationary pressure in H2 FY19 given an expected reduction in bauxite and caustic soda costs.

Financial performance

Alumina Underlying EBIT increased by 76% (or US$45M) in H1 FY19 to US$104M as a 36% increase in the average realised price of alumina (+US$84M) was partially offset by lower sales volumes (-US$11M), additional maintenance (-US$4M) and higher bauxite (-US$12M) and caustic soda (-US$8M) costs.

Aluminium Underlying EBIT increased by US$5M in H1 FY19 to a loss of US$7M as an indirect legacy tax obligation was settled and our commitment to purchase electricity from Eletronorte was fulfilled during the prior period following termination of the contract in December 2015.

Capital expenditure

Sustaining capital expenditure increased by US$6M in H1 FY19 to US$16M and is expected to increase to US$32M in FY19 as we invest in additional bauxite residue disposal capacity.

The partners of MRN also agreed to undertake a pre-feasibility study for a project that has the potential to extend the life of the mine by more than 20 years at a relatively low capital cost. MRN has a substantial 503Mt(12) high grade bauxite resource.

(a) H1 FY18 reflects balance as at 30 June 2018.

Hillside Aluminium (100%)

Volumes

Hillside Aluminium saleable production increased by 1% (or 2kt) in H1 FY19 to 360kt as the smelter continued to test its maximum technical capacity, despite an increase in the frequency of load-shedding events. FY19 production guidance remains unchanged at 720kt, but remains subject to load-shedding.

Operating costs

Operating unit costs increased by 29% in H1 FY19 to US$2,161/t as a significant rise in raw material costs created inflationary pressure across the aluminium industry. Alumina, coke, pitch and aluminium price-linked electricity accounted for 71% of the smelter's cost base in H1 FY19 (H1 FY18: 69%). 108 pots were also relined at a cost of US$233k per pot (H1 FY18: 44 pots at US$196k per pot), while 177 pots are scheduled to be relined across FY19 as we reach a peak in the relining cycle.

While Operating unit cost guidance is not provided, the cost profile of Hillside Aluminium will continue to be heavily influenced by the price of power and raw material inputs, given its highly variable cost base. The smelter sources alumina from our Worsley Alumina refinery with prices linked to the Platts alumina index on an M-1 basis, while its power is sourced from Eskom under long-term contracts. The price of electricity supplied to potlines 1 and 2 is linked to the LME aluminium price and the South African rand/US dollar exchange rate. The price of electricity supplied to potline 3 is South African rand based.

Financial performance

Underlying EBIT decreased by 133% (or US$159M) in H1 FY19 to a loss of US$39M as stronger sales volumes (+US$35M) and lower aluminium price-linked power costs (+US$5M) were more than offset by higher raw material input costs (-US$136M), an increase in pot relining costs (-US$16M) and an unfavourable movement in inventory (-US$50M).

Capital expenditure

Sustaining capital expenditure remained largely unchanged in H1 FY19 at US$12M and is expected to increase to US$18M in FY19.

(a) H1 FY18 reflects balance as at 30 June 2018.

Mozal Aluminium (47.1% share)

Volumes

Mozal Aluminium saleable production decreased by 1% (or 2kt) in H1 FY19 to 135kt as the smelter's operating performance was impacted by an increase in the frequency of load-shedding events. FY19 production guidance remains unchanged at 269kt, subject to load-shedding, whilst the shortfall in sales volumes in H1 FY19 simply reflects timing differences.

Operating costs

Operating unit costs increased by 14% in H1 FY19 to US$1,938/t as a significant rise in raw material input costs created inflationary pressure across the aluminium industry. Alumina, coke and pitch accounted for 53% of the smelter's cost base in H1 FY19 (H1 FY18: 48%). 40(33) pots were also relined across H1 FY19 at a cost of US$219k per pot (H1 FY18: 34(33) pots at US$191k per pot), with 103(33) pots scheduled to be relined in FY19 as we reach a peak in the relining cycle.

While Operating unit cost guidance is not provided, the cost profile of Mozal Aluminium will continue to be heavily influenced by the price of power and raw material inputs, given its highly variable cost base. The smelter sources alumina from our Worsley Alumina refinery with approximately 50% priced as a percentage of the LME aluminium index under a legacy contract and the remainder linked to the Platts alumina index on an M-1 basis, with caps and floors embedded within specific contracts. Its electricity requirements are largely met by hydroelectric power that is generated by Hidroeléctrica de Cahora Bassa (HCB). HCB delivers power into Eskom's South African grid and Mozal Aluminium sources electricity via the Mozambique Transmission Company (Motraco) under a long-term contract. The price of electricity is South African rand based with the rate of escalation linked to a South Africa domestic producer price index.

Financial performance

Underlying EBIT decreased by 78% (or US$47M) in H1 FY19 to US$13M as lower sales volumes (-US$40M) and higher raw material costs (-US$29M) were partially offset by a build in finished goods (+US$28M).

Capital expenditure

Sustaining capital expenditure was unchanged in H1 FY19 at US$8M as the US$18M AP3XLE energy efficiency project commenced the roll out of its pot relining program ahead of schedule. The project is expected to deliver a circa 5% (or 10kt pa) increase in annual production with no associated increase in power consumption. First incremental production is anticipated in FY20, with the full benefit to be realised by FY24. Sustaining capital expenditure of US$20M is anticipated in FY19.

(a) H1 FY18 reflects balance as at 30 June 2018.

South Africa Energy Coal (92% share(25))

Volumes

South Africa Energy Coal saleable production decreased by 9% (or 1,252kt) in H1 FY19 to 12.2Mt as export production was impacted by the dragline incident at Klipspruit in August 2018. Conversely, domestic production benefitted from the commencement of a contract to sell lower quality stockpiled product in Q1 FY19.

FY19 production guidance remains unchanged at 29Mt (17.5Mt domestic, 11.5Mt export), with the recommissioning of the Klipspruit dragline in January 2019 underpinning an increase in export volumes in H2 FY19. Domestic volumes are also expected to benefit from a further increase in the sale of lower quality stockpiled product and the implementation of a new shift pattern at Khutala.

Operating costs

Operating unit costs increased by 6% in H1 FY19 to US$38/t as the impact of the extended dragline outage more than offset a weaker South African rand.

We have lowered FY19 Operating unit cost guidance by US$3/t to US$38/t to reflect the dragline's return to service ahead of schedule and revised exchange rate and price assumptions. Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in footnote 29.

Financial performance

Underlying EBIT decreased by 88% (or US$101M) in H1 FY19 to US$14M as lower sales volumes (-US$134M), a drawdown in inventory associated with the extended dragline outage (-US$10M), higher depreciation (-US$10M) and general inflation (-US$24M) were only partially offset by higher average realised prices (+US$39M), a volume related reduction in rail costs (+US$22M) and a weaker South African rand (+US$18M).

Capital expenditure

Sustaining capital expenditure decreased by US$20M in H1 FY19 to US$48M. FY19 guidance has been increased by US$34M to US$100M as additional expenditure has been incurred to recover from and mitigate the impact of the Klipspruit dragline incident. This incident has been confirmed as an insurable event and we are working through the claim to assess the quantum and timing of any recovery.

We also invested US$55M in Major project capital expenditure in H1 FY19 to progress the 4.3B(22) South African rand KPSX project, which was approved by the Board in November 2017. The 8Mt per annum brownfield project extends the life of the colliery by more than 20 years(34). The project is approximately 33% complete and remains on schedule and budget, with first production expected in H2 FY19. Major project expenditure of US$140M is expected in FY19.

(a) H1 FY18 reflects balance as at 30 June 2018.

Illawarra Metallurgical Coal (100% share)

Volumes

Illawarra Metallurgical Coal saleable production increased by 106% (or 1,980kt) in H1 FY19 to 3.8Mt as the Dendrobium and Appin longwalls performed strongly. Metallurgical coal stockpiles were also established during H1 FY19 in advance of the two longwall moves scheduled in Q3 FY19. FY19 production guidance has been increased by 7% to 6.5Mt to reflect the strong start to the year.

We also reached agreement with employees covered by the Dendrobium Coal Prep Plant Enterprise Agreement in January 2019, having previously reached agreement with the Dendrobium mine's trades and operators, and Appin deputies during H1 FY19. We continue to renegotiate the remaining labour agreements at Illawarra Metallurgical Coal.

Operating costs

Operating unit costs decreased by 42% in H1 FY19 to US$87/t as the operation benefitted from a substantial increase in sales volumes.

We have lowered FY19 Operating unit cost guidance by US$8/t to US$97/t to reflect the increase in production guidance and revised exchange rate and price assumptions. Notwithstanding this reduction in FY19 guidance, costs are expected to increase in H2 FY19 as a result of the planned longwall moves. Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in footnote 29.

Financial performance

Underlying EBIT increased by US$279M in H1 FY19 to US$195M as stronger sales volumes (+US$327M) and a weaker Australian dollar (+US$20M) were partially offset by an increase in price-linked royalties (-US$22M) and depreciation (-US$18M). The volume related impact on costs (-US$41M) was tempered by the high fixed cost base of the operation.

Capital expenditure

Sustaining capital expenditure increased by US$16M in H1 FY19 to US$56M as underground development progressively recovered at Appin, albeit at a slower rate than planned. A substantial uplift in development rates is required to sustain the operation of two longwalls in parallel from H2 FY20.

Sustaining capital expenditure guidance for FY19 has been reduced by US$42M to US$128M, including underground development of US$75M (US$97M previously).

(a) H1 FY18 reflects balance as at 30 June 2018.

Australia Manganese (60% share)

Volumes

Australia Manganese achieved record ore performance in H1 FY19, increasing saleable ore production by 6% (or 110kwmt) to 1,811kwmt. The primary circuit continued to achieve high utilisation rates, while the PC02 circuit operated at approximately 120% of its design capacity, contributing 9% of total production. FY19 production guidance remains unchanged at 3,350kwmt, with the wet season expected to impact production across H2 FY19.

Saleable manganese alloy production decreased by 7% (or 6kt) in H1 FY19 to 76kt as a result of an unplanned outage at one of the four furnaces during Q2 FY19. While the furnace has subsequently returned to service, additional maintenance is planned for H2 FY19.

Operating costs

FOB manganese ore Operating unit costs decreased by 3% in H1 FY19 to US$1.51/dmtu as record performance mitigated a further increase in strip ratio (H1 FY19: 4.1, H1 FY18: 3.6).

We have lowered FY19 Operating unit cost guidance by US$0.06/dmtu to US$1.57/dmtu to reflect the continued improvement in equipment productivity and revised exchange rate and price assumptions. Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in footnote 29.

Financial performance

Underlying EBIT increased by 18% (or US$53M) in H1 FY19 to US$352M as higher realised ore prices (+US$45M), an increase in ore sales volumes (+US$28M) and a weaker Australian dollar (+US$9M) were only partially offset by lower realised alloy prices (-US$9M) and a rise in raw material and freight costs (-US$10M).

Our average realised price for external ore sales in H1 FY19 reflected the high grade 44% manganese lump ore index (CIF China) on a FOB adjusted, volume weighted M-1 basis(37), despite the higher contribution of 40% grade PC02 product to the sales mix.

Capital expenditure

Sustaining capital expenditure increased by US$15M in H1 FY19 to US$36M as we invested in additional tailings capacity. Sustaining capital expenditure of US$65M is anticipated in FY19.

(a) H1 FY18 reflects balance as at 30 June 2018.

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

Volumes

South Africa Manganese saleable ore production decreased by 5% (or 54kwmt) in H1 FY19 to 1,075kwmt as an increase in higher quality premium material was more than offset by a decline in fine grained secondary products. While FY19 production guidance remains unchanged at 2,050kwmt, we will continue to monitor market demand and optimise the use of higher cost trucking.

Saleable manganese alloy production decreased by 8% (or 3kt) in H1 FY19 to 33kt as a planned furnace shutdown was completed.

Operating costs

FOB manganese ore Operating unit costs increased by 14% in H1 FY19 to US$2.63/dmtu as we continued to utilise higher cost trucking as an additional route to market and the contribution of premium ore from our underground Wessels mine increased.

FY19 Operating unit cost guidance is unchanged at US$2.56/dmtu. Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in footnote 29.

Financial performance

Underlying EBIT increased by 16% (or US$14M) in H1 FY19 to US$100M as higher realised ore prices (+US$43M) and a weaker South African rand (+US$6M) were partially offset by lower realised alloy prices (-US$8M), a reduction in other income (-US$11M) and general inflation (-US$5M).

Our lower quality fine grained material, which accounted for 10% of sales across H1 FY19 (15% H1 FY18; 13% FY18), receives a product discount when referenced to index prices. Notwithstanding the contribution of this secondary material to our sales mix, our average realised price for external sales of South African ore achieved the medium grade 37% manganese lump ore index price (FOB Port Elizabeth, South Africa) on a volume weighted M-1 basis(42).

Capital expenditure

Sustaining capital expenditure increased by US$9M in H1 FY19 to US$17M and is expected to increase to US$30M in FY19.

(a) H1 FY18 reflects balance as at 30 June 2018.

Cerro Matoso (99.9% share)

Volumes

Cerro Matoso payable nickel production decreased by 3% (or 0.7kt) in H1 FY19 to 21.1kt following a planned increase in the contribution of lower grade stockpiled ore feed. FY19 production guidance remains unchanged at 40.5kt.

Operating costs

Operating unit costs increased by 19% in H1 FY19 to US$4.05/lb, primarily as a result of higher price-linked royalties and energy costs.

We have lowered FY19 Operating unit cost guidance by US$0.09/lb to US$4.12/lb to primarily reflect the benefit of revised exchange rate and price assumptions, which are partially offset by costs arising from the Constitutional Court of Colombia ruling(30). Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in footnote 29.

Financial performance

Underlying EBIT decreased by US$31M in H1 FY19 to US$10M as higher price-linked royalties (-US$8M), energy costs (-US$8M), general inflation (-US$4M) and throughput (-US$3M) were partially offset by a weaker Colombian peso (+US$3M).

Finalisation adjustments and the provisional pricing of Nickel sales decreased Underlying EBIT by US$16M in H1 FY19 (+US$19M FY18; +US$5M H1 FY18). Outstanding Nickel sales (3.3kt of nickel) were revalued at 31 December 2018. The final price of these sales will be determined in H2 FY19.

Capital expenditure

Sustaining capital expenditure increased marginally to US$13M in H1 FY19 and is expected to increase to US$37M in FY19 as we prepare for the planned furnace refurbishment in FY20.

(a) H1 FY18 reflects balance as at 30 June 2018.

Cannington (100% share)

Volumes

Cannington payable zinc equivalent(26) production increased by 11% (or 9.8kt) in H1 FY19 to 95.2kt as silver and zinc grades improved and mill throughput tracked to plan. FY19 zinc equivalent production guidance is unchanged at 188.1kt (silver 11,750koz, lead 98.0kt and zinc 51.0kt), but remains subject to review pending our assessment of the impact to logistics infrastructure resulting from the floods in North Queensland.

Operating costs

Operating unit costs decreased by 29% to US$120/t in H1 FY19 as the adoption of AASB 15 Revenue from Contracts with Customers(19), which affects the accounting classification of treatment and refining charges, reduced costs by US$21/t. A temporary build in finished goods inventory and stronger throughput rates provided a further benefit.

We have lowered FY19 Operating unit cost guidance by US$2/t to US$129/t(a) to reflect the benefit of revised exchange rate and price assumptions, which are partially offset by an increase in mining and rehabilitation activity. Exchange rate and price assumptions for FY19 Operating unit cost guidance are detailed in footnote 29.

Financial performance

Underlying EBIT decreased by 35% (or US$25M) in H1 FY19 to US$47M as lower average realised prices (-US$61M)(b) were partially offset by inventory movements (+US$13M), a weaker Australian dollar (+US$10M) and higher sales volumes (+US$8M).

Finalisation adjustments and the provisional pricing of Cannington concentrates decreased Underlying EBIT by US$9.8M in H1 FY19 (US$0.1M FY18; US$5.5M H1 FY18). Outstanding concentrate sales (containing 2Moz of silver, 25.3kt of lead and 6.2kt of zinc) were revalued at 31 December 2018. The final price of these sales will be determined in H2 FY19.

Capital expenditure

Sustaining capital expenditure increased by US$5M in H1 FY19 to US$28M and is expected to increase to US$55M in FY19.

(a) FY19 Prior guidance has been adjusted from US$147/t to US$131/t to reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges (previously recognised on a gross basis with treatment and refining charges included as a separate expense). These changes result in lower realised prices and Operating unit costs, with no net impact to earnings. Prior periods have not been restated to reflect the changes.

(b) Excludes the impact of the change in accounting treatment for treatment and refining charges on revenue (-US$20M). This impact is equally offset by a reduction in costs (+US$20M).

(c) H1 FY18 reflects balance as at 30 June 2018.

Notes

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

(2) H1 FY19 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for H1 FY19 (5,079 million).

H1 FY19 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for H1 FY19.

H1 FY18 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for H1 FY18 (5,191 million).

H1 FY18 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for H1 FY18.

(3) H1 FY19 ordinary dividends per share is calculated as H1 FY19 ordinary dividend announced (US$258M) divided by the number of shares on issue at 31 December 2018 (5,051 million).

(4) H1 FY19 special dividends per share is calculated as H1 FY19 special dividend announced (US$86M) divided by the number of shares on issue at 31 December 2018 (5,051 million). Paragraph 16.26(i) of the Johannesburg Stock Exchange (JSE) listing rules states that the requisite exchange control authority from the Financial Surveillance Department of the South African Reserve Bank (SARB) is required to be provided to the JSE before the JSE can approve payment of special dividends to South African shareholders.

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

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

· Impairment losses/(reversals);

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

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

· Major corporate restructures; and

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

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

(6) Comprises Underlying EBITDA excluding third party product EBITDA, divided by revenue excluding third party product revenue.

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

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

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

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

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

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

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

(14) The information that relates to estimates of Mineral Resources for the Hermosa Project are qualifying foreign estimates under ASX Listing Rules and reference should be had to the clarifying statement on Mineral Resources in the market announcement 'South32 to acquire Arizona Mining in agreed all cash offer' dated 18 June 2018, in accordance with ASX Listing Rule 5.12. South32 is not in possession of any new information or data relating to the foreign estimate that materially impacts on the reliability of the estimates. South32 confirms that the information contained in the clarifying statement in the 18 June 2018 market announcement continues to apply and has not materially changed. The estimates of Mineral Resources are not reported in accordance with the JORC Code. Competent persons have not done sufficient work to classify the foreign estimates as Mineral Resources in accordance with JORC Code. It is uncertain that following evaluation and further exploration that the foreign estimates will be able to be reported as Mineral Resources or Ore Reserves in accordance with the JORC Code.

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

(16) 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.

(17) Underlying net finance cost and Underlying income tax expense are actual H1 FY19 results, not half-on-half variances.

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

(19) The H1 FY19 results reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges (previously recognised on a gross basis with treatment and refining charges included as a separate expense). These changes result in lower realised prices and Operating unit costs, with no net impact to earnings. Prior periods have not been restated to reflect these changes.

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

(21) The Colombian corporate tax rate was 40% during CY17, 37% during CY18 and is 33% in CY19. The corporate tax rate will decrease on an annual basis by a percent each year, stabilising at 30% from 1 January 2022. The Mozambique operations are subject to a royalty on revenues instead of income tax.

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

(23) Market capitalisation as at 31 December 2018. Calculated as the number of shares on issue (5,051 million), the South32 closing share price A$3.35, and an AUD:USD exchange rate of 0.71.

(24) Based on revenue equivalent sales or production (where applicable) which assumes average realised prices remain unchanged from FY18. Figures are converted to per share basis by dividing FY18 and FY19e revenue equivalent sales or production (where applicable) by the weighted average number of shares for FY18 (5,159 million) and H1 FY19 (5,079 million) respectively.

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

(26) Payable zinc equivalent (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY18 realised prices for zinc (US$3,185/t), lead (US$2,463/t) and silver (US$16.6/oz) have been used for FY18, FY19e and FY20e. Zinc equivalent is used to compare Cannington with the recently acquired Hermosa project which is currently reported in zinc equivalent terms.

(27) 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 39 and 44.

(28) FY19 prior Operating unit cost guidance included royalties (where appropriate) and the influence of exchange rate assumptions, and were predicated on various assumptions for FY19, including: an alumina price of US$411/t; an average blended coal price of US$149/t for Illawarra Metallurgical Coal; a manganese ore price of US$6.20/dmtu for 44% manganese product; a nickel price of US$6.92/lb; a thermal coal price of US$93/t (API4) for South Africa Energy Coal; a silver price of US$17.58/troy oz; a lead price of US$2,406/t; a zinc price of US$3,066/t; an AUD:USD exchange rate of 0.76; a USD:ZAR exchange rate of 13.43; a USD:COP exchange rate of 2,927; and a reference price for caustic soda; all of which reflected forward markets as at June 2018 or our internal expectations.

(29) FY19 new Operating unit cost guidance includes royalties (where appropriate) and the influence of exchange rates, and includes various assumptions for FY19, including: an alumina price of US$443/t; an average blended coal price of US$173/t for Illawarra Metallurgical Coal; a manganese ore price of US$6.58/dmtu for 44% manganese product; a nickel price of US$5.47/lb; a thermal coal price of US$92/t (API4) for South Africa Energy Coal; a silver price of US$15.06/troy oz; a lead price of US$2,023/t (gross of treatment and refining charges); a zinc price of US$2,587/t (gross of treatment and refining charges); an AUD:USD exchange rate of 0.72; a USD:ZAR exchange rate of 14.02; a USD:COP exchange rate of 3,096; and a reference price for caustic soda; all of which reflected forward markets as at January 2019 or our internal expectations.

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

(31) Third party products and services sold comprise US$33M for aluminium, US$16M for alumina, US$241M for coal, US$129M for freight services, US$61M for aluminium raw materials and US$7M for manganese. Underlying EBIT on third party products comprise nil for aluminium, US$3M for alumina, US$27M for coal, (-US$3M) for freight services, US$1M for aluminium raw materials and nil for manganese.

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

(33) Presented on a 100% basis.

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

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

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

(37) The quarterly sales volume weighted average of the Metal Bulletin 44% manganese lump ore index (CIF Tianjin, China) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$6.98/dmtu in H1 FY19.

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

(39) Manganese Australia H1 FY19 average manganese content of external ore sales was 45.8% on a dry basis (H1 FY18: 46.1%). 95% of H1 FY19 external manganese ore sales (H1 FY18: 94%) were completed on a CIF basis. H1 FY19 realised FOB ore prices and Operating unit costs have been adjusted for freight and marketing costs of US$25M (H1 FY18: US$21M), consistent with our FOB cost guidance.

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

(41) Revenues associated with sales from GEMCO to TEMCO are eliminated as part of the consolidation. Internal sales occur on a commercial basis.

(42) The quarterly sales volume weighted average of the Metal Bulletin 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$5.91/dmtu in H1 FY19.

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

(44) Manganese South Africa H1 FY19 average manganese content of external ore sales was 40.3% on a dry basis (H1 FY18: 40.3%). 71% of H1 FY19 external manganese ore sales (H1 FY18: 68%) were completed on a CIF basis. H1 FY19 realised FOB ore prices and operating costs have been adjusted for freight and marketing costs of US$20M (H1 FY18: US$16M), consistent with our FOB cost guidance.

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

(46) Revenues associated with sales from Hotazel Manganese Mines (HMM) to Metalloys are eliminated as part of the consolidation. Internal sales occur on a commercial basis.

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

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

(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 following abbreviations may be used throughout this report: US$ million (US$M); US$ billion (US$B); December half year (H1 FY19); calendar year (CY); grams per tonne (g/t); tonnes (t); thousand tonnes (kt); thousand tonnes per annum (ktpa); million tonnes (Mt); million tonnes per annum (Mtpa); ounces (oz); thousand ounces (koz); million ounces (Moz); thousand wet metric tonnes (kwmt); million wet metric tonnes (Mwmt); million wet metric tonnes per annum (Mwmt pa); thousand dry metric tonnes (kdmt); dry metric tonne unit (dmtu); pound (lb); megawatt (MW); Australian Securities Exchange (ASX); London Stock Exchange (LSE); Johannesburg Stock Exchange (JSE); equity accounted investments (EAI); and American Depositary Receipts (ADR).

South32 Financial Information

For the half year ended 31 December 2018

CONSOLIDATED INCOME STATEMENT

for the half year ended 31 December 2018

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the half year ended 31 December 2018

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

CONSOLIDATED BALANCE SHEET

as at 31 December 2018

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

CONSOLIDATED CASH FLOW STATEMENT

for the half year ended 31 December 2018

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the half year ended 31 December 2018