South32 Regulatory News (S32)

16 January 2020

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 2019

"We continued our strong start to the year, delivering record year to date production at Brazil Alumina and maintaining production guidance across the majority of our operations.

"We have acted decisively during the quarter in response to market conditions, reducing contractor activity at South Africa Energy Coal and higher cost trucking at our South Africa Manganese business.

"Our disciplined approach to capital allocation has enabled us to maintain our strong financial position and return a further US$331 million in the December 2019 half year with the continuation of our on-market share buy-back and payment of our ordinary dividend in respect of the prior six months.

"We have taken further action to reshape and improve our portfolio. We exercised our option to acquire a 50% interest in the base metals focussed Upper Kobuk Mineral Projects in Alaska, entered into a binding conditional agreement for the sale of South Africa Energy Coal and progressed the review of our manganese alloy smelting exposure." 

Graham Kerr, South32 CEO

Corporate Update

Marketing Update

Realised prices exclude third party products and services. We currently anticipate an underlying EBIT loss for third party products and services12 of approximately US$12M in the December 2019 half year (H1 FY19: US$28M). This predominantly reflects the procurement of lower cost third party volumes to replace higher cost equity production in order to fulfil contractual commitments at South Africa Energy Coal.

Development and Exploration Update

Worsley Alumina(86% share)

Worsley Alumina saleable production increased by 1% (or 27kt) to 1,933kt in the December 2019 half year, despite an extended calciner shut, as the refinery continued to benefit from improved calciner availability and we opportunistically sold stockpiled hydrate. FY20 production guidance remains unchanged at 3,965kt with further calciner maintenance scheduled for the March 2020 quarter.

We realised a premium to the Platts Alumina Index13 on a volume weighted M-1 basis for alumina sales in theDecember 2019 half year. This mostly reflected the structure of specific legacy supply contracts with our Mozal Aluminium smelter that are linked to the Platts Alumina Index on an M-1 basis, with caps and floors embedded within specific contracts that reset every calendar year. All other alumina sales were at market based prices.

Brazil Alumina(36% share)

Brazil Alumina saleable production increased by 10% (or 66kt) to a record 702kt in the December 2019 half year as the refinery benefitted from improved steam generation following the installation of package boilers in the June 2019 quarter, enabling the benefits of the De-bottlenecking Phase One project to be realised. Notwithstanding the strong operating performance, lower alumina prices and an increase in the use of higher cost third party bauxite is expected to impact the profitability of the operation in the December 2019 half year. FY20 production guidance remains unchanged at 1,330kt with maintenance scheduled for the June 2020 quarter.

Hillside Aluminium(100%)

Hillside Aluminium saleable production increased by 1% (or 2kt) to 362kt in the December 2019 half year as the smelter continued to test its maximum technical capacity, despite the impact to production from load-shedding and the completion of a major workforce restructure in the June 2019 quarter. Sales decreased by 3% in the December 2019 half year as a shipment slipped into January 2020. FY20 production guidance3 remains unchanged at 720kt.

Mozal Aluminium(47.1% share)

Mozal Aluminium saleable production decreased by 1% (or 1kt) to 134kt in the December 2019 half year as the smelter's operating performance continued to be impacted by load-shedding events. Despite an increase in the frequency of disruptions, FY20 production guidance3 remains unchanged at 273kt.

The smelter sources all of its alumina from our Worsley Alumina refinery with approximately 50% priced as a percentage of the LME aluminium index under a legacy contract and the remainder linked to the Platts alumina index on an M-1 basis, with caps and floors embedded within specific contracts that reset every calendar year. As a result the smelter's cost of alumina was a significant premium to the index in the December 2019 half year.

South Africa Energy Coal(100%)

South Africa Energy Coal saleable production decreased by 3% (or 386kt) to 11.8Mt in the December 2019 half year as the operation demobilised contractors in response to market conditions, more than offsetting a 15% increase in export sales volumes following improved dragline availability at Klipspruit.

Notwithstanding the improvement in dragline performance, supporting a 46% increase in export sales during the December 2019 quarter, its ramp-up to full utilisation has been slower than anticipated as a result of wet weather. Combined with our near-term outlook for domestic demand and the demobilisation of contractors operating in unprofitable pits, we now expect FY20 production to be at the bottom end of our guidance range (26.0Mt). Operating unit costs are expected to be approximately 10% above the top end of our guidance range of US$40/t in the December 2019 half year, ahead of benefitting from an expected increase in volumes during the June 2020 half year and the realisation of cost saving initiatives which include contractor demobilisation.

Illawarra Metallurgical Coal(100%)

Illawarra Metallurgical Coal saleable production decreased by 4% (or 145kt) to 3.7Mt in the December 2019 half year following the completion of a longwall move at the Appin mine during the December 2019 quarter. FY20 production guidance remains unchanged at 7.0Mt with both the Dendrobium and Appin longwalls continuing to perform strongly and a further longwall move scheduled for the March 2020 quarter. Achieving improved development rates at Appin to support the improved longwall performance and a sustained return to a three longwall configuration at the operation from the June 2020 quarter remains a focus.

Australia Manganese(60% share)

Australia Manganese saleable ore production decreased by 2% (or 36kwmt) to 1,775kwmt in the December 2019 half year as heavy rainfall in late FY19 slowed throughput for the primary circuit at the start of the September 2019 quarter. Separately, with demand for our low cost Premium Concentrate Ore (PC02) product remaining favourable, we continued to operate the circuit above its design capacity, contributing 11% of total production (H1 FY19: 9%). The PC02 fines product has a manganese content of approximately 40%, which leads to both grade and product-type discounts when referenced to the high grade 44% manganese lump ore index.

The Metal Bulletin 44% lump ore index (CIF Tianjin, China) price was US$4.30/dmtu as at 10 January 2020 after averaging US$3.95/dmtu during the month of December 2019. While we continue to monitor market conditions and the potential impact from the wet season across the remainder of the financial year, FY20 production guidance remains unchanged at 3,560kwmt.

Manganese alloy saleable production decreased by 25% (or 19kt) to 57kt in the December 2019 half year as one of the four furnaces was taken offline.

South Africa Manganese(60% share)

South Africa Manganese saleable ore production decreased by 3% (or 37kwmt) to 1,038kwmt in the December 2019 half year as we reduced our use of higher cost trucking and undertook an extended maintenance shut at our Wessels mine in the December 2019 quarter, in response to market conditions. The Metal Bulletin 37% lump ore index (FOB Port Elizabeth, South Africa) price was US$3.46/dmtu as at 10 January 2020 after averaging US$3.09/dmtu during the month of December 2019. FY20 production guidance remains unchanged at 2,100kwmt, as we continue to monitor market conditions and respond accordingly.  

Manganese alloy saleable production increased by 3% (or 1kt) to 34kt in the December 2019 half year.

Cerro Matoso(99.9% share)

Cerro Matoso payable nickel production decreased by 2% (or 0.5kt) to 20.6kt in the December 2019 half year following a planned increase in the contribution of lower grade stockpiled ore feed. FY20 production guidance remains unchanged at 35.6kt with the operation scheduled to undertake a major furnace refurbishment in the June 2020 quarter.

Cannington(100% share)

Cannington payable zinc equivalent production increased by 12% (or 12.7kt) to 120.1kt in the December 2019 half year as the operation drew down run of mine stocks to a normalised level and recorded a higher average zinc grade in the September 2019 quarter, that more than offset lower silver grades across the half year.

Processed silver, lead and zinc grades met our expectations in the December 2019 half year and FY20 production guidance remains unchanged (silver 11,200koz, lead 104.0kt and zinc 59.0kt) with sequentially lower lead and silver grades expected in the June 2020 half year. Higher payable zinc sales in the December 2019 half year reflect timing differences following significant floods in North Queensland in the March 2019 quarter that caused an extended outage of a third-party rail line connecting Cannington to the Townsville port.

Notes:

1. Refer to the market announcement "Agreement to Divest South Africa Energy Coal" dated 6 November 2019.

2. 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.

3. Production guidance for our Hillside Aluminium and Mozal Aluminium smelters does not assume any load-shedding impacts on production.

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 production 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) was calculated by aggregating Revenue from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY19 realised prices for zinc (US$2,122/t), lead (US$1,754/t) and silver (US$14.4/oz) have been used for FY19, H1 FY20 and FY20e.

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. Realised prices for Cannington are unaudited and net of treatment and refining charges.

12. Underlying EBIT on third party products and services is unaudited and should not be considered as an indication of or alternative to an IFRS measure of profitability, financial performance or liquidity.

13. The 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") was US$299/t in the December 2019 half year.

14. Illawarra Metallurgical Coal sales are adjusted for moisture and will not reconcile directly to Illawarra Metallurgical Coal production.

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).

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.

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

16 January 2020JSE Sponsor: UBS South Africa (Pty) Ltd