South32 Regulatory News (S32)

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

20 July 2017

South32 Limited

QUARTERLY REPORT JUNE 2017

· Record performance at Mozal Aluminium underpinned a 2% increase in total aluminium production in FY17 as our smelters continued to operate at their maximum technical capability. 

· Refined alumina production was largely unchanged in FY17 as Worsley Alumina operated at its expanded capacity of 4.6Mtpa (100% basis) in the June quarter. 

· Manganese ore production increased by 5% in FY17 as South Africa Manganese continued to take advantage of stronger demand and pricing by maintaining an operating rate of 3.6Mwmt pa (100% basis) in the June quarter. 

· Cannington recorded a significant decrease in ore grades and metal production in FY17 as high grade stope 60L was only partially extracted in the June quarter and run-of-mine stocks were consumed to support processing rates following a fire in April. 

· Challenging ground conditions in the new Appin Area 9 longwall block and two extended outages at the Appin colliery led to a 15% decrease in Illawarra Metallurgical Coal production in FY17, despite record run-of-mine performance at Dendrobium. 

· Adverse weather and an associated delay in the development of new mining areas at the Wolvekrans-Middelburg Complex (WMC) led to a 9% decrease in South Africa Energy Coal production in FY17, despite a sequential improvement in performance in the June quarter. 

· While the publication of South Africa's Mining Charter III has created additional uncertainty, its implementation has been suspended pending a judicial review. We remain committed to the country's transformation agenda, with Broad-Based Black Economic Empowerment (B-BBEE) entities having a 26%1 equity interest in our South Africa Manganese mines and an 8%2 equity interest in our South Africa Energy Coal mines, which increases significantly when historic asset transactions are taken into account.

Graham Kerr, South32 CEO, said:

"We delivered record annual production at Mozal Aluminium and stronger aluminium volumes overall as both of our smelters continued to operate at their maximum technical capability. While we didn't achieve the level of consistency that we expect from our broader portfolio, our alumina, nickel and manganese operations finished the year on a strong note."

"Production at the Illawarra Metallurgical Coal Appin colliery remains suspended as a comprehensive review of the operation's systems and processes is undertaken. This in depth review has been designed to ensure the operation restarts safely and reliably."

"We will continue to invest in high quality opportunities where we see value, having acquired a 15% interest in Arizona Mining for US$81M during the quarter. We also allocated US$211M towards our share buy-back program as our balance sheet continued to strengthen."

CORPORATE UPDATE

· Our metallurgical coal and manganese (ore) products continued to be priced with reference to market indices in FY17, with no meaningful change in product quality differentials. For metallurgical coal, a minor discount to the premium low-volatile hard coking coal index was achieved on a volume weighted M-1 basis4, while manganese ore of Australian origin achieved the high grade 44% manganese lump ore index (CIF Tianjin, China) on a volume weighted M-1 basis5. For manganese ore of South African origin, a discount of approximately 10% to the medium grade 37% manganese lump ore index (FOB Port Elizabeth, South Africa) was achieved on a volume weighted M-1 basis6 as stronger demand and pricing created a market opportunity for fine grained Wessels concentrate. 

· Consistent with prior guidance, we invested US$28.8M in exploration (US$2.6M capitalised) in FY17, including US$15.4M at our existing operations and US$13.4M on greenfield opportunities (all expensed). Brownfield exploration focused on metallurgical coal, manganese, bauxite and silver in Australia, and nickel in Colombia, with US$2.0M directed towards our equity accounted investments (US$1.1M capitalised). Our greenfield spend was largely accounted for by our decision to inject US$10M into Trilogy Metals (TSX.TMQ) to pre-fund drilling at its Bornite deposit. This drilling program commenced on 12 June. 

· Our Underlying effective tax rate (ETR) for FY17 will reflect the geographical distribution of the Group's pre-tax profit. The corporate tax rates applicable to the Group include: Australia 30%; South Africa 28%; Colombia 39%; and Brazil 34%. The ETR calculation excludes the contribution from our equity accounted investments as they are recorded on an after tax basis. 

· Distributions totalling US$446M (South32 share) were received from our equity accounted investments in FY17, including shareholder dividends and loan repayments. 

· On 16 May, we acquired a 15% interest in Arizona Mining Inc. (TSX:AZ) for US$81M. Arizona Mining's Hermosa Project, located in Santa Cruz County, Arizona, includes the high grade (zinc, lead and silver) Taylor Deposit. 

· On 27 March, we announced our intention to return an additional US$500M of capital to shareholders. Consistent with this commitment, we commenced an on-market share buy-back program on 19 April and to 30 June had purchased shares with an aggregate consideration of US$211M at an average price of A$2.66 per share. We intend to continue buying our shares at a similar rate in FY18, assuming the on-market option remains an efficient mechanism by which to return excess capital to shareholders.

WORSLEY ALUMINA

(86% share)

Worsley Alumina saleable production decreased by 2% (or 69kt) to 3.9Mt in FY17 as performance was impacted by unplanned calciner maintenance in the March quarter. The refinery finished the year on a strong note, operating at its expanded capacity of 4.6Mtpa (100% basis) in the June quarter. Alumina sales were 7% lower than production in the June quarter as adverse weather led to the deferral of one shipment.

SOUTH AFRICA ALUMINIUM

(100%)

South Africa Aluminium saleable production increased by 2% (or 17kt) to 714kt in FY17 as the smelter continued to achieve benchmark levels of current efficiency and pot line amperage, 22 pots were brought back online in the December quarter and there were fewer load-shedding events. The increase in quarterly sales reflects the scheduling of shipments between periods.

MOZAL ALUMINIUM

(47.1% share)

Mozal Aluminium achieved record performance in FY17, increasing production by 2% (or 5kt) to 271kt. The smelter continued to achieve benchmark levels of current efficiency and pot line amperage, while benefitting from fewer load-shedding events.

BRAZIL ALUMINA

(36% share)

Brazil Alumina saleable production of 1.3Mt in FY17 remained largely unchanged from the record rate achieved in the prior period. The decline in alumina sales in the June quarter reflected the timing of shipments between periods.

SOUTH AFRICA ENERGY COAL

(100%)

South Africa Energy Coal saleable production decreased by 9% (or 2.8Mt) to 28.9Mt in FY17, despite an 11% improvement in performance in the June quarter as throughput increased at the WMC export plant. The impact of adverse weather and the associated delay in the development of new mining areas at the WMC will continue to weigh on performance in FY18. Export sales in the June quarter were impacted by a severe storm that affected the Richards Bay Coal Terminal and deferred shipments into FY18.

ILLAWARRA METALLURGICAL COAL

(100%)

Illawarra Metallurgical Coal total saleable production decreased by 15% (or 1.3Mt) to 7.1Mt in FY17, despite record run-of-mine performance at Dendrobium, as challenging ground conditions in the new Appin Area 9 longwall block and two extended outages at the Appin colliery significantly impacted performance. Metallurgical Coal sales were 4% (or 255kt) higher than production in FY17. Our average realised price will reflect a minor discount to the premium low-volatile hard coking coal index on a volume weighted M-1 basis4 as our shipping schedule was affected by our prior declaration of force majeure and the drawdown of finished goods inventory in the second half.

Production at the Appin colliery, which accounted for 49% of total coal production in FY17, remains suspended as a comprehensive review of the operation's systems and processes is undertaken. This in-depth review has been designed to ensure the operation restarts safely and reliably following an extended outage. Upon recommencing underground activity we will be relocating the Appin Area 9 longwall to panel 902. Revised production guidance will be provided when we report our FY17 results to reflect the completion of our annual budget cycle.

AUSTRALIA MANGANESE

(60% share)

Australia Manganese saleable ore production decreased by 3% (or 77kwmt) to 3.0Mwmt in FY17, despite an 8% improvement in performance in the June quarter as the operation recovered from the impact of heavy rainfall and Tropical Cyclone Alfred. The Premium Concentrate Ore (PC02) circuit operated at approximately 90% of its 500kwmt (100% share) capacity in the June quarter, contributing 6% of total production across FY17 (FY16: 1%).

Our low cost 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. Given the contribution of the PC02 circuit to our sales profile, our average realised price for external sales of Australian ore in FY17 will reflect the high grade 44% manganese lump ore index on a volume weighted M-1 basis5. Internal sales continue to occur on commercial terms.

Saleable manganese alloy production increased by 11% (or 14kt) to 147kt in FY17 as third party power supply to TEMCO was restored and all four furnaces ramped-up to full capacity in the June quarter.

SOUTH AFRICA MANGANESE

(60% share)

South Africa Manganese saleable ore production increased by 19% (or 327kwmt) to 2.0Mwmt in FY17 as we continued to take advantage of stronger demand and pricing by maintaining an operating rate of 3.6Mwmt pa (100% basis) in the June quarter. This strong rate of production was supported by the sale of Wessels concentrate and the recommencement of trucking activity.

Our fine grained Wessels concentrate product, which accounted for 9% of sales across FY17 (FY16: 4%), receives a substantial product discount when referenced to index prices. As a result, our average realised price for external sales of South African ore will reflect a discount of approximately 10% to the medium grade 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on a volume weighted M-1 basis6. Internal sales continue to occur on commercial terms.

Manganese alloy saleable production decreased by 20% (or 18kt) to 73kt in FY17 as a result of furnace instability. Metalloys continues to operate one of its four furnaces.

CERRO MATOSO

(99.9% share)

Cerro Matoso payable nickel production remained largely unchanged in FY17 as a reduction in furnace availability was offset by the delivery of first ore from the adjacent, higher grade La Esmeralda deposit in March. Payable nickel production is expected to increase in FY18 as La Esmeralda ramps up and contributes across the full year.

CANNINGTON

(100%)

Cannington silver, lead and zinc saleable production decreased by 27%, 24% and 11%, respectively, in FY17 as feed grades did not recover to the extent expected in the June quarter as high grade stope 60L was only partially extracted and run-of-mine stocks were consumed to support processing rates following an underground fire in April.

As previously indicated, the rate of deformation within the existing crusher chamber has increased and it is now expected to become inoperable in the September quarter. Commissioning of the replacement crusher chamber is anticipated in the March quarter, with approximately 90% of FY17 mining rates7 to be maintained in the intervening period as shaft haulage is replaced with additional trucking via the decline. The stope sequence within the mine is also being adjusted to re-establish above ground stocks and manage geotechnical conditions. While our plans for FY18 are currently being finalised, average silver and lead feed grades are expected to remain largely unchanged, while the average zinc feed grade is expected to decline. Revised production guidance will be provided when we report our FY17 results to reflect the completion of our annual budget cycle.

Finalisation adjustments and the provisional pricing of Cannington concentrates will increase Underlying EBIT8 by US$4.1M in FY17 (-US$11M: FY16, US$0.5M: H1 FY17). Outstanding concentrate sales (containing 2.4Moz of silver, 26.2kt of lead and 4.6kt of zinc) were revalued at 30 June 2017. The final price of these sales will be determined in H1 FY18.

Notes:

1. 26% of Hotazel Manganese Mines (HMM) is owned by a Broad-Based Black Economic Empowerment (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%.

2. South32 has undertaken a number of historic asset transactions where it has transferred South Africa Energy Coal resources to historically disadvantaged entities which resulted in additional ownership credits. These transactions were completed in consultation with the Department of Mineral Resources to ensure consistency with the requirements of the Mining Charter. 8% of South Africa Energy Coal is owned by Phembani Holdings. The interests owned by Phembani 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%.

3. 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 statement will continue to reflect a 54.6% interest in South Africa Manganese ore.

4. The quarterly sales volume weighted average of the premium low-volatile hard coking coal Platts index (FOB Australia) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$179/t in the 2017 financial year.

5. 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$5.54/dmtu in the 2017 financial year.

6. 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$4.54/dmtu in the 2017 financial year.

7. Mining rates refer to ore mined on a wet basis (moisture ~3%), whereas mill throughput is reported on a dry basis.

8. 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.

9. Figures in Italics indicate that an adjustment has been made since the figures were previously reported.

10. The following abbreviations have been used throughout this report: grams per tonne (g/t); tonnes (t); thousand tonnes (kt); thousand tonnes per annum (ktpa); million tonnes (Mt); million tonnes per annum (Mtpa); 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); Australian Securities Exchange (ASX); London Stock Exchange (LSE); Johannesburg Stock Exchange (JSE); and American Depositary Receipts (ADR).

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

20 July 2017JSE Sponsor: UBS South Africa (Pty) Ltd