South32 Regulatory News (S32)

17 January 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

Quarterly Report December 2018

"We achieved a strong quarter of production, maintaining full year guidance for all operations with the exception of Illawarra Metallurgical Coal where improved longwall performance has underpinned a seven per cent increase to our prior estimate.

"We achieved record production at Australia Manganese as our PC02 circuit continued to exceed its design capacity, delivering additional tonnes into a strong market.

"Our plans to transform the ownership of South Africa Energy Coal remain on track, with binding bids expected in the June 2019 half year.

"As we have benefitted from strong prices for our core commodities we have continued to return cash to shareholders. In the December 2018 half year we distributed US$316M in dividends and allocated US$167M to our on-market share buy-back."

Graham Kerr, South32 CEO

Corporate Update

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

Marketing Update

(a) H1 FY19 realised prices for Cannington reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges, which will no longer be treated as an expense item. These changes result in lower realised prices and Operating unit costs, with no net impact to earnings. Prior period realised prices have not been restated to reflect these changes.

Development and Exploration Update

Worsley Alumina

(86% share)

Worsley Alumina saleable production increased by 2% (or 41kt) to 1,906kt in the December 2018 half year as the refinery benefitted from improved calciner availability in the December 2018 quarter 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 the March 2019 quarter.

The average realised price for alumina sales in the December 2018 half year was a discount of approximately 10% to the Platts Alumina Index (PAX)[12] 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.

Brazil Alumina

(36% share)

Brazil Alumina saleable production decreased by 6% (or 40kt) to 636kt in the December 2018 half year as unplanned maintenance and power outages impacted performance. FY19 production is expected to approach guidance of 1,355kt with the refinery anticipated to creep production over the remainder of the year following the completion of the De-bottlenecking Phase One project in March 2018.

Hillside Aluminium

(100%)

Hillside Aluminium saleable production increased by 1% (or 2kt) to 360kt in the December 2018 half year 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.

Notwithstanding the smelter's strong operating performance, a reduction in aluminium prices and still elevated alumina, pitch and coke input costs are expected to result in a loss in the December 2018 half year.

Mozal Aluminium

(47.1% share)

Mozal Aluminium saleable production decreased by 1% (or 2kt) to 135kt in the December 2018 half year as the smelter's operating performance was impacted by an increase in the frequency of load-shedding events. Aluminium sales decreased by 12% with the scheduling of shipments between periods resulting in a temporary build of finished goods inventory during the December 2018 half year. FY19 production guidance remains unchanged at 269kt.

Notwithstanding the smelters strong operating performance, higher prices for alumina and still elevated prices for pitch and coke continue to impact its cost base and erode operating margin. The smelter sources alumina from our Worsley Alumina refinery with approximately 50% of its requirements priced as a percentage of the LME aluminium index, providing it with some relief during the December 2018 half year.

South Africa Energy Coal

(100%)

South Africa Energy Coal saleable production decreased by 9% (or 1,252kt) to 12.2Mt in the December 2018 half year. Export production was impacted by the dragline incident at Klipspruit in August 2018, while domestic production benefitted from the commencement of a contract to sell lower quality stockpiled product in the June 2018 quarter.

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

Illawarra Metallurgical Coal

(100%)

Illawarra Metallurgical Coal saleable production increased by 106% (or 1,980kt) to 3.8Mt in the December 2018 half year as the Dendrobium and Appin longwalls continued to perform strongly. Metallurgical coal stockpiles were also established during the period in advance of two longwall moves scheduled for the March 2019 quarter.

We reached agreement with employees covered by the Dendrobium Mine Trades and Operators Enterprise Agreement during the December 2018 quarter, having previously reached agreement with the Dendrobium and Appin Deputies. We continue to renegotiate the remaining labour agreements at Illawarra Metallurgical Coal and this process is being closely managed.

FY19 production guidance has been increased by 7% to 6.5Mt, however a substantial uplift in development rates at Appin is required to sustain the operation of two longwalls in parallel from H2 FY20. This uplift in production guidance is expected to result in a commensurate reduction in our FY19 Operating unit cost guidance, on the basis of constant currency and price assumptions.

Australia Manganese

(60% share)

Australia Manganese achieved record ore performance in the December 2018 half year, increasing saleable ore production by 6% (or 110kwmt) to 1,811kwmt. The primary circuit continued to achieve high utilisation rates, while the Premium Concentrate Ore (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 the remainder of the financial year.

Manganese alloy saleable production decreased by 7% (or 6kt) to 76kt in the December 2018 half year due to an unplanned outage at one of the four furnaces during the December 2018 quarter. While the furnace has subsequently returned to service, additional maintenance is planned for the June 2019 half year.

South Africa Manganese

(60% share)

South Africa Manganese saleable ore production decreased by 5% (or 54kwmt) to 1,075kwmt in the December 2018 half year 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.

Manganese alloy saleable production decreased by 8% (or 3kt) to 33kt in the December 2018 half year as a planned furnace shutdown was completed.

Cerro Matoso

(99.9% share)

Cerro Matoso payable nickel production decreased by 3% (or 0.7kt) to 21.1kt in the December 2018 half year following a planned increase in the contribution of lower grade stockpiled ore feed. FY19 production guidance remains unchanged at 40.5kt.

Cannington

(100% share)

Cannington payable zinc equivalent production increased by 11% (or 9.8kt) to 95.2kt in the December 2018 half year as silver and zinc grades improved in accordance with our expectations and mill throughput continued to track to plan. FY19 zinc equivalent6 production guidance remains unchanged at 188.1kt (silver 11,750koz, lead 98.0kt and zinc 51.0kt).

Finalisation adjustments and the provisional pricing of Cannington concentrates will decrease Underlying EBIT[13] by US$9.8M in the December 2018 half year (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 the June 2019 half year.

Notes:[14]

[1] Net distributions from equity accounted investments includes net debt movements and dividends, which are unaudited and should not be considered as an indication of or alternative to an IFRS measure of profitability, financial performance or liquidity.

[2] The quarterly sales volume weighted average on the basis of a one month lag to published pricing (Month minus one or "M-1") in the December 2018 half year was US$6.98/dmtu for the Metal Bulletin 44% manganese lump ore index (CIF Tianjin, China) and US$5.91/dmtu for the Metal Bulletin 37% manganese lump ore index (FOB Port Elizabeth, South Africa).

[3] The Colombian corporate tax rate was 40% until 31 December 2017. The Mozambique operations are subject to a royalty on Revenue instead of income tax.

[4] 8% of South Africa Energy Coal is owned by a Broad-Based Black Economic Empowerment (B-BBEE) consortium. The interests owned by the B-BBEE consortium were acquired using vendor finance, with the loans repayable to South32 via distributions attributable to these parties, pro rata to their share in South Africa Energy Coal. Until these loans are repaid, South32's interest in South Africa Energy Coal is accounted at 100%.

[5] Consistent with the presentation of South32's segment information, South Africa Manganese ore and sales have been reported at 60%. The Group's financial statements will continue to reflect a 54.6% interest in South Africa Manganese ore.

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

[7] Realised prices are unaudited. 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 unless otherwise stated.

[8] Realised ore prices are unaudited and 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.

[9] Realised ore prices are unaudited and 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. Manganese ore sales are grossed-up to reflect a 60% accounting effective interest.

[10] Realised nickel sales prices are unaudited and inclusive of by-products.

[11] The information in this release that relates to estimates of Mineral Resources for the Hermosa project are foreign estimates under ASX Listing Rules and reference should be made 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.

[12] The quarterly sales volume weighted average of the Platts Alumina Index (PAX) (FOB Australia) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$501/t in the December 2018 half year.

[13] Underlying EBIT is earnings before net finance costs, taxation and any earnings adjustments. Underlying EBIT is reported net of South32's share of net finance costs and taxation of equity accounted investments.

[14] The following abbreviations have been used throughout this report: US$ million (US$M); US$ billion (US$B); 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).

Operating Performance

Forward-looking statements

This release contains forward-looking statements, including statements about trends in commodity prices and currency exchange rates; demand for commodities; production forecasts; plans, strategies and objectives of management; capital costs and scheduling; operating costs; anticipated productive lives of projects, mines and facilities; and provisions and contingent liabilities. These forward-looking statements reflect expectations at the date of this release, however they are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed in the statements contained in this release. Readers are cautioned not to put undue reliance on forward-looking statements. Except as required by applicable laws or regulations, the South32 Group does not undertake to publicly update or review any forward-looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance.

Further information

17 January 2019JSE Sponsor: UBS South Africa (Pty) Ltd