South32 Regulatory News (S32)

20 April 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 March 2020

"We have responded to the COVID-19 pandemic by introducing a number of measures aligned to our priorities of keeping our people safe and well, maintaining reliable operations and supporting our communities.

"We have acted to protect our strong financial position, reducing capital and exploration expenditure, suspending our on-market share buy-back and commencing a group wide review aimed at delivering a reduction in controllable costs.

"At our operations, we have delivered a strong operating result in the year to date, highlighted by record production at Brazil Alumina and Hillside Aluminium.

"Despite market volatility, we continue our work to reshape and improve our portfolio, forming the Ambler Metals Joint Venture, progressing the sale of South Africa Energy Coal and maintaining momentum at Hermosa. "

Graham Kerr, South32 CEO

Corporate Update

Development and Exploration Update

Production Summary

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

Worsley Alumina

(86% share)

Worsley Alumina saleable production increased by 3% (or 70kt) to 2,869kt in the nine months ended March 2020 as the refinery benefitted from improvement initiatives expected to support a sustainable increase in production to nameplate capacity of 4.6Mt (100% basis).

Sales declined by 12% during the March 2020 quarter as scheduled calciner maintenance impacted production, and a shipment slipped to the June 2020 quarter as a result of COVID-19 quarantine delays at port. Subject to existing or additional COVID-19 restrictions or measures having no impact during the remainder of the financial year, FY20 production is expected to approach guidance of 3,965kt with no further material calciner maintenance scheduled.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$13M (or 22%) to US$47M.

Brazil Alumina

(36% share)

Brazil Alumina saleable production increased by 10% (or 98kt) to a record 1,042kt in the nine months ended March 2020 as the refinery benefitted from improved steam generation, enabling the benefits of the De-bottlenecking Phase One project to be realised. Subject to existing or additional COVID-19 restrictions or measures having no impact during the remainder of the financial year, FY20 production guidance remains unchanged at 1,330kt with additional maintenance scheduled for the June 2020 quarter.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure is unchanged at US$35M.

Hillside Aluminium

(100%)

Hillside Aluminium saleable production increased by 1% (or 4kt) to a record 540kt in the nine months ended March 2020 as the smelter continued to test its maximum technical capacity, despite the impact to production from load-shedding.

Hillside Aluminium is considered an essential business in South Africa for the maintenance of power generation, given the role it plays in the sustainability of Eskom's generation network. As a result, the smelter continues to operate despite the nationwide lockdown that is currently scheduled to expire on 30 April, having commenced at midnight on 26 March.

As previously reported, FY20 production guidance has been withdrawn due to the uncertain impact of measures or restrictions that may be required to contain the spread of COVID-19.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$11M (or 48%) to US$12M.

Mozal Aluminium

(47.1% share)

Mozal Aluminium saleable production was unchanged at 201kt in the nine months ended March 2020 as the smelter continued to test its maximum technical capacity, despite the impact to production from load-shedding. Subject to no impact from existing or additional COVID-19 restrictions or measures during the remainder of the financial year, FY20 production guidance8 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 premium to the index in the nine months ended March 2020.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$1M (or 8%) to US$11M.

South Africa Energy Coal

(100%)

South African Energy Coal saleable production decreased by 5% (or 825kt) to 17.4Mt in the nine months ended March 2020 as the demobilisation of contractors in response to market conditions and heavy rainfall experienced in the March 2020 quarter, more than offset a 12% increase in export sales volumes. Higher export sales volumes were achieved as a result of improved dragline availability at Klipspruit and the diversion of lower calorific value coal to the export market to take advantage of favourable market conditions.

The diversion of lower calorific value coal has an impact on the average price received for our export sales and accordingly we realised a discount of approximately 20% to the API4 index12 in the nine months ended March 2020. Notwithstanding the increased tonnages in the nine months ended March 2020, export sales declined 7% during the quarter, as the temporary closure of the Richards Bay Coal Terminal, caused by the national lockdown resulted in the deferral of shipments.

Our average realised price for domestic coal in the nine months ended March 2020 was US$24/t. In the June 2019 quarter, we invoked a hardship clause in our contract to supply coal from the Wolvekrans-Middelburg Complex to the Duvha power station with a view to securing a long term pricing tariff that supports the sustainability of the business. During the March 2020 quarter an interim pricing arrangement has been agreed to ensure continuous supply while Eskom undertakes their review of the hardship claim.

As previously reported, FY20 production guidance has been withdrawn following the nationwide lockdown in South Africa that is currently scheduled to expire on 30 April, having commenced at midnight on 26 March. While our domestic operations are considered essential in South Africa for the maintenance of power generation and are exempt from the lockdown, domestic demand is expected to be impacted by lower total power generation during the June 2020 quarter. Our export operations were placed on temporary care and maintenance at commencement of the lockdown. We subsequently requested and received government approval to undertake limited activity during the lockdown period and have partially remobilised at a reduced rate.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$21M (or 32%) to US$44M.

Illawarra Metallurgical Coal

(100%)

Illawarra Metallurgical Coal saleable production increased by 12kt to 5.1Mt in the nine months ended March 2020 as we completed a longwall move at Dendrobium during the March 2020 quarter. Notwithstanding both longwalls encountering challenging strata conditions to commence the June 2020 quarter, FY20 guidance remains unchanged at 7.0Mt, subject to no impact from existing or additional COVID-19 restrictions or measures during the remainder of the financial year.

The operation remains on track to return to a three longwall configuration in the June 2020 quarter. With continued strong longwall performance at both Dendrobium and Appin with a two longwall configuration, we have commenced a review to optimise production, sustaining capital and operating costs at Illawarra Metallurgical Coal, to maximise long term value.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$2M (or 1%) to US$183M.

Australia Manganese

(60% share)

Australia Manganese saleable ore production decreased by 1% (or 15kwmt) to 2,616kwmt in the nine months ended March 2020 as lower primary circuit throughput, following heavy rain in late FY19, was partially offset by an increase in demand for our low cost Premium Concentrate Ore (PC02) product. We continued to operate the PC02 circuit above its design capacity, contributing 11% of total production in the nine months ended March 2020 (10% in the prior corresponding period). Manganese ore sales declined 12% during the March 2020 quarter due to lower production and a shipment that slipped to the June 2020 quarter as a result of quarantine delays at port.

FY20 production guidance has been lowered by 5% to 3,375kwmt, reflecting lower year to date throughput and reduced productivity expectations to finish the year following temporary roster changes made to respond to COVID-19. Guidance is subject to no further impact from COVID-19 restrictions or measures during the remainder of the financial year. We also continue to monitor the potential impact of the wet season and market conditions on our adjusted FY20 production guidance.

Manganese alloy saleable production decreased by 29% (or 33kt) to 81kt in the nine months ended March 2020 as one of the four furnaces remained offline.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$1M (or 2%) to US$63M.

South Africa Manganese

(60% share)

South Africa Manganese saleable ore production decreased by 7% (or 111kwmt) to 1,504kwmt in the nine months ended March 2020 as we reduced our use of higher cost trucking and undertook an extended maintenance shut at our Wessels mine in the December quarter, in response to market conditions.

As previously reported, FY20 production guidance has been withdrawn following the nationwide lockdown in South Africa that is currently scheduled to expire on 30 April, having commenced at midnight on 26 March. Our manganese ore and alloy operations were placed on temporary care and maintenance at commencement of the lockdown. We subsequently requested and received government approval to undertake limited activity during the lockdown period and have partially remobilised our manganese ore operations to resume production activities at a reduced rate across the June 2020 quarter.

Manganese alloy saleable production increased by 2% (or 1kt) to 48kt in the nine months ended March 2020. Our Metalloys smelter remains on temporary care and maintenance.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$5M (or 19%) to US$21M.

Cerro Matoso

(99.9% share)

Cerro Matoso payable nickel production increased by 1% (or 0.4kt) to 30.9kt in the nine months ended March 2020 as we achieved a higher rate of plant utilisation.

As previously reported, FY20 production guidance has been withdrawn following the nationwide lockdown in Colombia that is currently scheduled to expire on 27 April, having commenced at midnight on 24 March. Despite the lockdown, Cerro Matoso continues to operate with government approval, at a reduced rate, with FY20 production expected to benefit from the deferral of the major furnace refurbishment previously scheduled for the June 2020 quarter.

Sales declined 2% during the March 2020 quarter. Our ferronickel product sells with reference to the LME Nickel index price on a M or M+1 basis and attracts product discounts that have widened in the current market.

Following a review of activity in response to market conditions, deferral of the furnace refurbishment to the September 2020 quarter and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$21M (or 38%) to US$34M.

Cannington

(100% share)

Cannington payable zinc equivalent production increased by 10% (or 16.4kt) to 174.5kt in the nine months ended March 2020 as the operation drew down run of mine stocks to a normalised level and recorded a higher average zinc grade, that more than offset lower silver and lead grades across the period.

Subject to no impact from existing or additional COVID-19 restrictions or measures during the remainder of the financial year, FY20 production guidance remains unchanged at 221.0kt payable zinc equivalent with a lower average zinc grade expected in the June 2020 quarter. Reduced sales in the March 2020 quarter reflect lower silver and lead production and a return to normalised inventory levels following elevated sales in the prior quarter. Our lead and zinc sells with reference to the LME market on a M+2 or M+3 basis and our realised prices are disclosed net of treatment and refining charges that have widened in the current market.

Following a review of activity in response to market conditions and an update to our assumptions for foreign exchange rates over the remainder of FY20, guidance for sustaining capital expenditure has been reduced by US$5M (or 9%) to US$50M.

Notes:

1. Net Cash number is unaudited and should not be considered as an indication of or alternative to an IFRS measure of profitability, financial performance or liquidity.

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. Since inception, US$1.0B has been allocated to the on-market share buy-back (477M shares at an average price of A$2.94 per share).

4. South32 subscription payment of US$145M to form the Ambler Metals JV. The JV has retained US$87.5M of the subscription payment to fund its activities, exploration and a pre-feasibility study for the Arctic deposit, and loaned US$57.5M back to South32. On a proportionally consolidated basis the net effect on South32's net cash is US$(72.5)M.

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

6. The primary corporate tax rates applicable to the Group for FY20 include: Australia 30%, South Africa 28%, Colombia 33%, Mozambique 0% and Brazil 34%. The Colombian corporate tax rate is 32% in CY20 and 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.

7. Information that relates to estimates of Mineral Resources for the Clark Deposit (formally the Central Deposit) of the Hermosa project are foreign estimates under ASX Listing Rules and are not reported in accordance with the JORC Code. 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 estimate or has the ability to verify the foreign estimate as a Mineral Resource in accordance with the JORC Code. South32 confirms that the supporting information contained in the clarifying statement in the 18 June 2018 market announcement continues to apply and has not materially changed. 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. During FY20 we have undertaken a work program aimed at increasing confidence in the resource to ensure that resources are reported in accordance with the JORC Code.

8. Production guidance for Mozal Aluminium does not assume any load-shedding impact on production.

9. 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%.

10. 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.

11. 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, YTD FY20 and FY20e.

12. The sales volume weighted average of the API4 index on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$72/t in the nine months ended March quarter 2020.

13. 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

20 April 2020JSE Sponsor: UBS South Africa (Pty) Ltd