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

24 January 2022

South32 Limited

Quarterly Report December 2021

"We achieved a number of strong production results across our portfolio and realised significantly higher commodity prices in the December 2021 half year, lifting operating margins across the Group. 

"We delivered higher base metals production and our integrated aluminium supply chain benefitted from additional alumina volumes and record aluminium prices.    

"We took further steps to reshape our portfolio for a low carbon future, increasing our exposure to critical metals with our planned acquisition of a 45% interest in the Sierra Gorda copper mine in Chile and further investment in green aluminium. 

"We expect to grow our total share of aluminium production by approximately 24% to 1.2Mt in FY23, through our proposed acquisition of an additional interest in the hydro powered Mozal Aluminium smelter and the restart of the Brazil Aluminium smelter using 100 per cent renewable power.

"We returned US$316M to shareholders during the period through our on-market share buy-back and the payment of ordinary and special dividends. Looking forward our shareholders are well positioned to benefit from stronger markets and production growth, with our capital management framework designed to reward owners as our financial performance improves."

Graham Kerr, South32 CEO

Corporate Update

Development and Exploration Update

Hermosa project

Other development and exploration options

Production Summary

a.         The denotation (e) refers to an estimate or forecast year. All guidance is subject to further potential impacts from COVID-19.

Marketing Summary

Market conditions remained strong in the December 2021 half year. Robust demand, congested freight markets and supply disruptions, including energy curtailments, resulted in significant price increases across many of our commodities.

Worsley Alumina (86% share)

Worsley Alumina saleable production decreased by 2% (or 31kt) to 1,979kt in the December 2021 half year. FY22 production guidance remains unchanged at 3,965kt with our ongoing focus on improvement initiatives at the refinery expected to maintain production above nameplate capacity of 4.6Mt (100% basis).

We realised a circa 8% premium to the Platts Alumina Index¹⁸ on a volume weighted M-1 basis for alumina sales from Worsley Alumina in the December 2021 half year, with our realised prices benefitting from the impact of elevated global freight rates which are also reflected in Operating unit costs.

Notwithstanding the refinery's continued strong performance that has enabled us to capture the benefit of market conditions, elevated caustic soda prices and freight rates are expected to result in Operating unit costs for the December 2021 half year being approximately 5% above our FY22 guidance (US$241/t). We expect higher caustic soda prices to persist in the June 2022 half year further impacting the refinery's Operating unit costs. Updated FY22 Operating unit cost guidance will be provided in our financial results announcement for the December 2021 half year.    

Brazil Alumina (36% share)

Saleable production decreased by 11% (or 75kt) to 631kt in the December 2021 half year. Production improved by 32% (or 87kt) to a record 359kt in the December quarter as the refinery returned to nameplate capacity in October 2021, following an incident in July 2021 that damaged one of the two bauxite unloaders at the operation. FY22 production guidance remains unchanged at 1,300kt.  

Sales increased by 53% in the December 2021 quarter with the prior quarter's shipment schedule impacted by the bauxite unloader outage and vessel availability. We realised a circa 4% premium to the Platts Alumina Index¹⁸ on a volume weighted M-1 basis for alumina sales from Brazil Alumina in the December 2021 half year, with our realised prices benefitting from the impact of elevated global freight rates which are also reflected in Operating unit costs.

Notwithstanding the improvement in production volumes from the refinery returning to nameplate capacity, the impact of elevated raw material input prices, in combination with the already realised volume impact of the bauxite unloader outage, is expected to result in Operating unit costs for the December 2021 half year being approximately 30% higher than the June 2021 half year (US$201/t).   

Hillside Aluminium (100%)

Hillside Aluminium saleable production decreased by 1% (or 3kt) to 358kt in the December 2021 half year as the smelter continued to test its maximum technical capacity, despite the impact from higher load-shedding in the period. FY22 production guidance, which does not assume any load-shedding impact, remains unchanged at 720kt¹⁰.

During the half year, we completed a feasibility study for the AP3XLE energy efficiency project, approving its execution. We expect to roll the technology out as part of the smelter's pot relining program starting in FY23, bringing both volume and efficiency benefits, while reducing carbon intensity.

Third party port performance at Richards Bay and ongoing congestion in global shipping conditions, impacted the smelter's capacity to sustainably unwind working capital that was built in the September 2021 quarter. In response we have and continue to establish alternative discharge and cargo shipping options to mitigate these challenges, while maintaining sales volumes into strong market conditions. The smelter realised record prices of US$2,952/t in the December 2021 half year. We expect the current working capital build to unwind once we realise the full benefit of our initiatives, and port congestion and general freight tightness is alleviated.

While the smelter has benefitted from the continuation of strong underlying realised prices, that are anticipated to further improve operating margins, elevated raw material input costs and the smelter's energy price linkage to the South Africa Producer Price Index are expected to result in an increase in Operating unit costs in the December 2021 half year (June 2021 half year: US$1,722/t) of approximately 10%.  

Mozal Aluminium (47.1% share)

Mozal Aluminium saleable production increased by 1% (or 1kt) to 136kt in the December 2021 half year as the benefit of our investment in the AP3XLE energy efficiency project more than offset the impact of further load-shedding. FY22 production guidance, which does not assume any load-shedding impact, remains unchanged at 273kt¹⁰. Updated production guidance will be provided following the completion of our acquisition of an additional shareholding in Mozal Aluminium that remains on-track to complete in the March 2022 quarter¹.  

Challenging port and global shipping conditions impacted sales volumes from Mozal Aluminium in the December 2021 half year. Conditions improved in the December 2021 quarter with sales increasing by 22%. The smelter realised record prices of US$3,041/t in the December 2021 half year.

While the smelter has benefitted from the continuation of strong underlying realised prices, that are anticipated to further improve operating margins, elevated raw material input costs are expected to result in an increase in Operating unit costs in the December 2021 half year (June 2021 half year: US$1,818/t) of approximately 10%. 

Illawarra Metallurgical Coal (100%)

Illawarra Metallurgical Coal saleable production decreased by 23% (or 951kt) to 3,145kt in the December 2021 half year as we completed an extended longwall move at the Dendrobium mine in the current quarter. We made no energy coal sales of low-margin coal wash, with elevated freight rates making them uneconomic in the period.

The implementation of additional COVID-19 workforce restrictions in New South Wales has the potential to further impact labour availability across the June 2022 half year. We expect to provide updated production guidance for FY22 and FY23 at our financial results announcement for the December 2021 half year, as we continue to monitor the impact of COVID-19 and progress design of an alternate mine plan for the Dendrobium Next Domain life extension project. 

Lower December 2021 half year production and sales volumes, and higher price-linked royalties arising from the significant increase in prices year to date, are expected to result in our Operating unit costs for the December 2021 half year being approximately 20% above our FY22 guidance (US$101/t). Updated FY22 Operating unit cost guidance will be provided in our financial results announcement for the December 2021 half year.    

Australia Manganese       (60% share)

Australia Manganese saleable production decreased by 7% (or 130kwmt) to 1,704kwmt in the December 2021 half year with lower yield at the primary concentrator, while the PC02 circuit continued to deliver production above nameplate capacity (13% of total production, 1H21: 10%).

FY22 production guidance has been revised lower by 9% to 3,200kwmt with wet weather disruptions and additional COVID-19 workforce restrictions in the Northern Territory preventing the re-build of stockpiles ahead of the wet season.

Lower December 2021 half year production and sales volumes are expected to result in our Operating unit costs for the period being approximately 5% above our FY22 guidance (US$1.68/dmtu). Updated FY22 Operating unit cost guidance will be provided in our financial results announcement for the December 2021 half year.    

South Africa Manganese (60% share)

South Africa Manganese saleable production increased by 7% (or 71kwmt) to 1,157kwmt in the December 2021 half year as planned maintenance completed in the December 2021 quarter was more than offset by higher volumes of premium material from our Mamatwan mine as we optimised our product mix. 

Ore sales increased by 12% during the December 2021 quarter and 9% across the half year as we continued to truck additional volume, drawing down inventory and optimising our sales mix for market conditions. As a result, our sales achieved a premium of approximately 11% to the medium grade 37% manganese lump ore index²⁰ on a volume weighted M-1 basis.     

FY22 production guidance remains unchanged at 2,200kwmt as we continue to monitor market conditions and our use of higher cost trucking.    

Cerro Matoso (99.9% share)

Cerro Matoso payable nickel production increased by 26% (or 4.2kt) to 20.3kt in the December 2021 half year as plant availability returned to normal following the major plant refurbishment completed in FY21. Separately, average ore processed nickel grades improved to 1.73% (1H21: 1.57%) with the processing of higher-grade material from the Q&P project.

Notwithstanding a shipment slipping at the end of the period due to congestion at a destination port, nickel sales increased by 22% in the December 2021 half year as production levels normalised. While our ferronickel product continues to sell at a discount to the LME Nickel index price on a M or M+1 basis, this discount narrowed during the December 2021 half year, averaging approximately 5% (FY21: 9%).

FY22 production guidance remains unchanged at 43.8kt with the operation expected to benefit from a further improvement in plant availability and additional volumes from the higher-grade Q&P project in the June 2022 half year.  

Cannington (100% share)

Cannington payable zinc equivalent production increased by 9% (or 12kt) to 152.5kt in the December 2021 half year as higher grades across all products and strong underground performance supported metal production. FY22 production guidance has been revised higher by 5% (silver 12,283koz, lead 117.9kt and zinc 66.7kt, for 292.2kt of payable zinc equivalent production¹²) with the operation remaining on-track to transition to 100% truck haulage from the June 2022 quarter.

Payable zinc sales increased by 29% during the December 2021 quarter as we drew down inventory, while payable lead and silver sales increased by 50% and 47% respectively due to the timing of shipments, following adverse weather in the September 2021 quarter.

A trial of light battery electric vehicles is expected to commence during the June 2022 half year, testing their potential use in our vehicle fleet.

Notes

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); dry metric tonne unit (dmtu); 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. South32 cautions against reliance on any forward looking statements or guidance, particularly in light of the current economic climate and the significant volatility, uncertainty and disruption arising in connection with COVID-19.

Further information

24 January 2022
Approved for release by Graham Kerr, Chief Executive Officer
JSE Sponsor: UBS South Africa (Pty) Ltd