South32 Regulatory News (S32)

June 2018

South32 Limited

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

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32ISIN: AU000000S320

South32 Limited

Quarterly Report June 2018

"We delivered record annual production at Australia Manganese and Mozal Aluminium, increased payable nickel production at Cerro Matoso by 20 per cent and finished the year on a strong note at the remainder of our operations.

"We are actively reshaping our portfolio and are now managing South Africa Energy Coal as astand-alone business, allowing us to simplify the Group, lower overhead costs and fundamentally change the way we work.

"We also entered into conditional agreements to acquire the remaining 83 per cent of Arizona Mining Inc. that we don't already own and a 50 per cent interest in the Eagle Downs metallurgical coal project.

"In accordance with our disciplined capital management framework, we purchased a further 98 million shares in FY18 for a cash consideration of US$254 million. At year end we had completed US$620 million of our approved US$1 billion capital management program."

Graham Kerr, South32 CEO

Corporate Update

a. Percentage difference to latest production guidance. Australia Manganese, South Africa Manganese, Cannington and Illawarra Metallurgical Coal restated FY18 production guidance during the 2018 financial year. FY18 guidance as at FY17 results: Australia Manganese (manganese ore 3,125kt), South Africa Manganese (manganese ore 1,885kt), Cannington (payable silver, lead and zinc 14,360koz, 115kt and 45kt, respectively). Illawarra Metallurgical Coal FY18 guidance (metallurgical coal 3,350kt, energy coal 1,150kt) was provided with the Strategy and Business Update (5 December 2017).

Worsley Alumina(86% share)

Worsley Alumina saleable production decreased by 3% (or 128kt) to 3.8Mt in FY18. The refinery did, however, finish the year on a strong note as an increase in calciner availability underpinned a 7% increase in production in the June 2018 quarter. Calcined alumina production is expected to approach nameplate capacity of 4.6Mtpa (100% basis) in FY19 as the refinery processes excess hydrate stocks that were established in FY18. Calciner maintenance is planned for the September 2018 and March 2019 quarters.

The average realised price for alumina sales in FY18 is expected to reflect a modest discount to the Platts alumina index7 on a volume weighted M-1 basis. This discount reflects the temporary increase in the alumina to aluminium price ratio recorded in the spot market throughout H2 FY18 and the structure of specific Mozal Aluminium supply contracts that are linked to the LME aluminium price, which in this case reduces the price paid by our smelter.

South Africa Aluminium(100%)

South Africa Aluminium saleable production decreased by 2kt to 712kt in FY18 as the smelter progressively returned all pots to service following an electric arc incident in the December 2017 quarter. Notwithstanding the smelter's continued strong operating performance, higher prices for alumina and aluminium price-linked power, and still elevated prices for pitch and coke have impacted the cost base in H2 FY18.

Mozal Aluminium(47.1% share)

Mozal Aluminium saleable production increased marginally to a record 271kt in FY18 as the smelter continued to test its maximum technical capacity. Notwithstanding the smelters continued strong operating performance, higher prices for alumina and still elevated prices for pitch and coke have impacted the cost base in H2 FY18. The increase in quarterly sales reflects the scheduling of shipments between periods.

Brazil Alumina(36% share)

Brazil Alumina saleable production decreased by 2% (or 25kt) to 1,304kt in FY18 as unplanned maintenance and power outages impacted performance. The increase in quarterly sales reflects the scheduling of shipments between periods.

South Africa Energy Coal(100%)

South Africa Energy Coal saleable production decreased by 6% (or 1,642kt) to 27.3Mt in FY18 as domestic demand remained subdued and sales volumes were reweighted towards the export market. The Wolverkrans-Middelburg Complex (WMC) continued to exceed expectations as it benefitted from the ongoing investment that is providing access to higher margin export tonnes.

Domestic sales decreased by 9% in FY18 as a result of lower demand from the Duvha power station. The commencement of a long term contract to sell lower quality stockpiles to a domestic customer underpinned the 10% increase in domestic sales in the June 2018 quarter.

The redirection of volumes towards export markets, whilst margin accretive, has added washing and logistics costs and is expected to contribute to a modest increase in Operating unit costs from our prior FY18 guidance of US$34/t.

Illawarra Metallurgical Coal(100%)

Illawarra Metallurgical Coal saleable production decreased by 40% (or 2,829kt) to 4.2Mt in FY18 as the Appin colliery recovered from an extended outage in H1 FY18. Notwithstanding longwall moves at both Appin and Dendrobium during the June 2018 quarter, metallurgical coal production increased by 37% (or 295kt) to 1.1Mt as we achieved an annualised mining rate of more than 6Mt throughout the month of June.

Our metallurgical coal continues to be sold with reference to market indices and we achieved a realised price equivalent to the premium low-volatile hard coking coal index8 on a volume weighted M-1 basis in FY18.

Australia Manganese(60% share)

Australia Manganese saleable ore production increased by 13% (or 402kwmt) to a record 3.4Mwmt in FY18 as the Premium Concentrate Ore (PC02) circuit operated at approximately 107% of its design capacity, contributing 9% of total production (6% FY17).

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. Notwithstanding the contribution of the PC02 circuit to our sales profile, our average realised price for external sales of Australian ore will reflect a modest premium to the high grade 44% manganese lump ore index on a volume weighted M-1 basis9 in FY18. Internal sales continue to occur on commercial terms.

Manganese alloy saleable production increased by 12% (or 18kt) to 165kt in FY18 as all four furnaces continued to operate. The increase in quarterly sales reflects a permanent change to the shipping schedule for a specific customer.

South Africa Manganese(60% share)

South Africa Manganese saleable ore production increased by 5% (or 107kwmt) to 2.1Mwmt in FY18 as we continued to take advantage of favourable market conditions by selling lower quality fines product and utilising higher cost trucking. Planned major maintenance at the Wessels underground mine remains on track for completion in July 2018 with the impact on production in the June 2018 quarter mitigated by a draw down of inventory established in advance of the outage.

Our fine grained Wessels concentrate product, which accounted for 13% of sales across FY18 (9% FY17), receives a product discount when referenced to index prices. As a result, our average realised price for external sales of South African in FY18 ore will reflect a modest discount to the medium grade 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on a volume weighted M-1 basis10. Internal sales continue to occur on commercial terms.

Manganese alloy saleable production increased by 8% (or 6kt) to 79kt in FY18 as Metalloys continued to operate one of its four furnaces. 

Cerro Matoso(99.9% share)

Cerro Matoso payable nickel production increased by 20% (or 7.3kt) to 43.8kt in FY18 as ore grades temporarily improved with the ramp up of La Esmeralda and the operation continued to benefit from an improvement in plant utilisation and throughput rates. The improvement in the nickel market during H2 FY18 has resulted in higher price-linked royalties being paid by our operation and is expected to contribute to a modest increase in Operating unit costs from our prior FY18 guidance of US$3.61/lb.

Cannington(100% share)

Cannington silver, lead and zinc payable production increased by 37%, 33% and 45%, respectively, in the June 2018 quarter to marginally exceed revised FY18 guidance. This significant improvement in performance was achieved as the mine moved through a higher grade stope sequence, as planned. Annual and quarterly grade variability is expected to persist over the remaining life of the operation as the stope sequence is optimised to maximise long term value. Metal production declined in FY18 as mining and processing rates were reset in order to deliver greater predictability and stability in the underground mine11.

Finalisation adjustments and the provisional pricing of Cannington concentrates will increase Underlying EBIT12 by US$0.1M in FY18 (US$4.1M: FY17, US$5.5M: H1 FY18). Outstanding concentrate sales (containing 2.2Moz of silver, 18.8kt of lead and 4.9kt of zinc) were revalued at 30 June 2018. The final price of these sales will be determined in the December 2018 half year.

Notes:

1. Refer to media release on 29 May 2018 "South32 to acquire 50% interest in Eagle Downs and assume operatorship".

2. Based on a CAD/USD exchange rate of 0.7574 as of 15 June 2018.

3. Net distributions from equity accounting investments includes net debt movements and dividends, which are unaudited.

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

5. 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%.

6. 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.

7. 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$403/t in FY18.

8. 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$202/t in FY18.

9. 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$6.45/dmtu in FY18.

10. 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$5.46/dmtu in FY18.

11. Underground mine plan as per the current life of operation plan reflecting lower mining rates and consequentially longer mine life.

12. 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.

13. 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).

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

19 July 2018JSE Sponsor: UBS South Africa (Pty) Ltd