QUARTERLY REPORT
June 2022

South32 Chief Executive Officer, Graham Kerr: "Our teams delivered another strong operating performance in the June quarter, despite challenges that included extreme weather, supply chain disruptions and reduced labour availability caused by the COVID-19 pandemic. Record annual production at Worsley Alumina, along with record quarterly production at South Africa Manganese and a strong sales result in June, capturing the benefit of high prices, capped another year of substantial progress for South32.

"We achieved further significant milestones as we reshape our portfolio towards the metals critical for a low carbon future. In May, we completed the acquisition of an additional shareholding in the hydro-powered Mozal Aluminium smelter. We also completed our acquisition of an additional interest in the MRN bauxite mine and delivered first production from the restart of our Brazil Aluminium smelter, powered by 100 per cent cost efficient renewable power.

"Our strong financial position and capital management framework, which is designed to reward our shareholders as our financial performance improves, supported further returns across the year via our on-market share buy-back, bringing total returns under our capital management program to US$1.9 billion since its inception."

Corporate Update

Development and Exploration Update

Exploration plays a critical role within our simple strategy to identify and pursue opportunities to sustainably reshape our business for the future, and create enduring social, environmental and economic value. We have established options to discover our next generation of mines, with more than 25 exploration programs across our partnerships and own properties. Our expenditure has continued to increase in this area as we have added further options and advance multiple, maturing exploration programs. In FY22 we spent US$56M across our portfolio of greenfield and development options, an amount we expect to increase further to ~US$90M in FY23 as we continue to execute on our strategy.

Hermosa project

Ambler Metals project

Greenfield exploration

Brownfield exploration

Production Summary

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

b.         Reflects percentage of achieved production for FY22 compared to current FY22e.

marketing Update

Our FY22 realised prices reflect the strong performance of our exchange traded commodities and notable positive realisations against indices for our premium manganese and hard coking coal products. With heightened market volatility and supply chain disruptions prevalent across our industry in H2 FY22, our stable operating performance enabled us to deliver production volumes largely to plan despite COVID-19 labour and adverse weather-related disruptions in many of the geographies where we operate.

Innovative logistic solutions were established across multiple operations to mitigate the impact of ongoing port congestion, tight freight markets and the broader disruption of global supply chains, contributing to our strong sales performance in the June 2022 quarter. This enabled the Group to capitalise on strong markets lowering our inventory position by the end of the financial year with the working capital benefit of this work expected to be realised in the first quarter of FY23.

The average realised prices achieved for our commodities are summarised below. Outstanding concentrate sales were revalued at 30 June 2022 with the final price of these to be determined in the December 2022 half year.

a.      While Brazil Alumina is non-operated, South32 owns the marketing rights for our share of production. While Sierra Gorda is also non-operated, the Joint Venture is responsible for marketing our share of production.

b.       Published realised sales prices and Operating unit costs reflect the period 1 March 2022 to 30 June 2022 whereas quarterly production and sales numbers reflect the period from first ownership (22 February 2022). Revenue, Underlying EBITDA and Underlying EBIT to be published with the Group Segment note released with our FY22 results announcement, as well as Operating unit costs and realised prices (copper of US$3.18/lb, molybdenum US$18.73/lb, gold US$1,776/oz and silver US$20.65/oz), will reflect the period from first ownership (22 February 2022).

OPERATING UNIT COST UPDATE

We expect to report FY22 Operating unit costs in-line with our previously updated guidance at the majority of operations with lower than anticipated producer currencies benefiting costs in the June 2022 quarter. Looking forward, higher volumes at some of our operations and the tailwind of lower producer currencies are expected to provide partial relief from the ongoing effect of industry wide labour, raw material and energy cost inflation that impacted our cost base in H2 FY22.

The cost profile of our Southern African aluminium smelters will continue to be heavily influenced by the South African rand, and the price of raw materials and energy. H2 FY22 Operating unit costs are expected to be 15-20% higher than H1 FY22 (previously 10-15%), as both smelters remained profitable by maintaining their strong operating performance which saw them continue to test their maximum technical capacity, despite increased load-shedding.

The future direction of raw material and energy costs will also influence our non-operated Brazil Alumina refinery, where Operating unit costs in H2 FY22 are expected to be ~15% higher than the first half of the financial year (US$262/t). The below commentary reflects our expectations for FY22 Operating unit costs for all other operations. We will provide FY23 guidance with our financial results announcement for the 30 June 2022 year end.

a.       Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by sales volumes. Operating cost is Revenue less Underlying EBITDA excluding third party sales.

b.        H2 FY22e Operating unit cost guidance reflects a simple average calculation by taking into consideration FY22 Operating unit cost guidance and
H1 FY22 Operating unit cost.

c.        US dollar per pound of copper equivalent production. FY21 index prices for copper (US$4.23/lb), molybdenum (US$15.7/lb), gold (US$1,796/oz) and

silver (US$25.2/oz) have been used for FY22e Operating unit costs. Published realised sales prices and Operating unit costs reflect the period
1 March 2022 to 30 June 2022 whereas quarterly production and sales numbers reflect the period from first ownership (22 February 2022). Revenue, Underlying EBITDA and Underlying EBIT to be published with the Group Segment note released with our FY22 results announcement, as well as Operating unit costs and realised prices (copper of US$3.18/lb, molybdenum US$18.73/lb, gold US$1,776/oz and silver US$20.65/oz), will reflect the period from first ownership (22 February 2022).

d.       US dollar per tonne of ore processed. Periodic movements in finished product inventory may impact Operating unit costs.

e.       US dollar per tonne of ore to kiln. Periodic movements in finished product inventory may impact Operating unit costs.

Worsley Alumina (86% share)

Worsley Alumina saleable production increased by 1% (or 28kt) to a record of 3,991kt in FY22 as the refinery delivered above its nameplate capacity (4.6Mtpa, 100% basis), realising the benefit of embedded improvement initiatives and surpassing guidance expectations.

Sales increased by 23% in the June 2022 quarter with a carry-over shipment from the prior quarter supporting the refinery to draw inventory levels down towards the end of the financial year. We realised an ~8% premium to the Platts Alumina Index²⁶ on a volume weighted M-1 basis for alumina sales in FY22 as we continued to capture the impact of elevated global freight rates in our realised prices (which are also reflected in our Operating unit costs).

Brazil Alumina (36% share)

Brazil Alumina saleable production decreased by 7% (or 101kt) to 1,297kt in FY22 as the refinery returned to nameplate capacity (3.86Mtpa, 100% basis) from October 2021, following an incident in July 2021 that damaged one of the two bauxite ship unloaders at the operation. Despite the impact of local weather-related disruptions across H2 FY22, the refinery achieved 100% of FY22 production guidance.

Sales increased by 20% in the June 2022 quarter with a carry-over shipment from the prior quarter supporting the refinery to draw inventory levels down towards the end of the financial year. We realised a ~5% premium to the Platts Alumina Index²⁶ on a volume weighted M-1 basis for alumina sales in FY22 as we continued to capture the impact of elevated global freight rates in our realised prices (which are also reflected in our Operating unit costs).

The refinery's De-bottlenecking Phase Two project was approved for execution in the June 2022 quarter. The project is expected to increase nameplate production rates by approximately 4% to 1.45Mt from H1 FY26, with anticipated capital expenditure of ~US$40M (South32 share) between FY23 and FY25.

Brazil AluminIUM (40% share)

Brazil Aluminium saleable production was 0.3kt in FY22 with first production achieved in the June 2022 quarter following the successful restart of the smelter. First sales to domestic customers were made in July 2022. With a slower than anticipated ramp-up associated with the need to stabilise the electrolytic bath, we expect to provide updated FY23 production guidance with our FY22 results announcement, including revised timing to achieve nameplate production (179ktpa, our 40% share).

Hillside Aluminium (100% SHARE)

Hillside Aluminium saleable production was largely unchanged at 714kt in FY22 as the smelter achieved 99% of guidance, despite the impact of increased load-shedding. Our first pots utilising the AP3XLE energy efficiency technology were relined during the June 2022 quarter, with the project expected to deliver both volume and energy efficiency benefits, reducing the smelter's carbon intensity.

Sales increased by 11% in the June 2022 quarter with inventory returning to normalised levels as we realised the benefit of initiatives undertaken to establish alternative discharge and cargo shipping options, mitigating poor third-party port performance and ongoing shipping congestion.

Mozal Aluminium (63.7%³ share)

Mozal Aluminium saleable production increased by 5% (or 13kt) to 278kt in FY22 with the smelter benefitting from our roll-out of the AP3XLE energy efficiency technology, which partially offset the impact of increased load-shedding to achieve 99% of guidance. Our equity share of production reflects the completion of our acquisition of an additional 16.6% shareholding in the smelter on 31 May 2022, taking our ownership to 63.7%. Prior period production and sales numbers have not been restated for this change in ownership (presented on a 47.1% basis). 

Aluminium sales increased by 33% in the June 2022 quarter supported by the improvement in quarterly production volumes and the realisation of benefits from initiatives undertaken to optimise our shipping and logistics operations at the smelter.

SIERRA GORDA (45% share)

Sierra Gorda payable copper equivalent production¹⁷ was 29.5kt in FY22, following the completion of our acquisition on 22 February 2022, achieving 95% of guidance due to lower than planned copper grades in the June 2022 quarter. Looking forward, the plant de-bottlenecking project remains on-track to sustainably lift throughput by 6% to ~50Mtpa (100% basis) by the December 2022 quarter. Accordingly, our FY23 production guidance (South32 share) of copper 71.8kt, molybdenum 1.5kt, gold 29.9koz and silver 582koz reflects the benefit of the higher expected plant throughput.

Cannington (100% share)

Cannington payable zinc equivalent production² decreased by 6% (or 19.7kt) to 299.3kt as we completed planned maintenance and built run of mine stocks in the June 2022 quarter to support the operation's transition to 100% truck haulage. Notwithstanding our prioritisation of activities to support the transition to trucking and the ongoing impact of COVID-19 on workforce availability, the operation exceeded our previously upgraded zinc equivalent production guidance by 2% and our original FY22 guidance by 8%.

Payable silver and lead sales increased by 19% and 11% respectively in the June 2022 quarter as we drew inventory down to normalised levels by the end of the financial year, capturing the benefit of strong pricing.

The operation transitioned to 100% truck haulage in the June 2022 quarter. While the new configuration is expected to bring higher-grade material forward in the mine plan at current throughput rates, FY23 volumes are expected to be skewed towards H2 FY23 as crushing operations relocate from underground to surface.

Cerro Matoso (99.9% share)

Cerro Matoso payable nickel production increased by 22% (or 7.6kt) to 41.7kt in FY22 following a major furnace refurbishment completed in FY21 and the addition of higher-grade ore from the Q&P pit, increasing average nickel grades by 6% (FY22: 1.73%; FY21: 1.63%). While the operation only achieved 95% of our FY22 guidance as a result of unplanned maintenance and weather-related disruptions during H2 FY22, we expect plant availability and performance to return to normalised levels in FY23 as these temporary impacts ease.

Our payable nickel sales increased by 21% in the June 2022 quarter with inventories returning to normalised levels as shipping performance improved and the ferronickel market recovered from the disruption that was caused by a temporary spike in LME Nickel prices to previously unseen levels. Our ferronickel product typically attracts a discount to the LME Nickel price index on a volume weighted M or M+1 basis, widening to approximately 15% in the June 2022 quarter (FY22: 7%; FY21: 10%). Looking forward, we expect discounts to remain elevated due to weakening global steel demand, and the current relationship between ferronickel and nickel pig-iron pricing conditions.

Illawarra Metallurgical Coal (100% sHARE)

Illawarra Metallurgical Coal saleable production decreased by 15% (or 1,136kt) to 6,509kt in FY22 as we completed
three longwall moves across Appin and Dendrobium during the year. We also stopped our opportunistic energy coal sales of low-margin coal wash material.

Production volumes declined by 11% in the June 2022 quarter following adverse weather and COVID-19 related labour restrictions that also impacted the operation's ability to maintain budgeted development rates. Notwithstanding these disruptions and the volatility witnessed across seaborne coal markets, our geographically diverse customer base supported a 29% increase in sales volumes in the quarter as we drew down inventory, capturing the benefit of very strong index prices.

Australia Manganese       (60% share)

Australia Manganese saleable production decreased by 5% (or 166kwmt) to 3,363kwmt in FY22 as weather disruptions and COVID-19 workplace restrictions prevented the re-build of stockpiles ahead of the wet season, and contributed to adverse ore handling characteristics that resulted in a lower yield at the primary concentrator during the year.

Notwithstanding these challenges in H1 FY22, saleable production increased by 4% in the June 2022 quarter and we exceeded our revised FY22 guidance by 5% as the operation benefitted from improved weather conditions.  

Our FY22 price realisations improved year-on-year as we took advantage of favourable market conditions, achieving the high grade 44% manganese lump ore index²⁸ on a volume weighted M-1 basis, despite our low-cost PC02 circuit operating above its design capacity, contributing 11% of total production (FY21: 10%).

South Africa Manganese (ore 54.6%¹⁸ share)

South Africa Manganese saleable production was largely unchanged at 2,069kwmt in FY22 as we produced higher volumes of premium material from our Mamatwan mine during the year, more than offsetting the impact of scheduled maintenance in the March 2022 quarter. The operation delivered a strong finish to the year, with saleable production increasing by 60% to a record 625kwmt in the June 2022 quarter following the prior period's maintenance shut, beating our FY22 guidance by 3%.

Record production was matched by a 17% increase in sales for the June 2022 quarter following the partial improvement in third party rail and port performance from the prior quarter. We continue to optimise our product mix to take advantage of favourable market conditions, realising a premium of ~18% to the medium grade 37% manganese lump ore index²⁹ on a volume weighted M-1 basis across FY22.

 Notes

1.        Group FY22 and current FY22e payable copper equivalent production for all operations. Payable copper equivalent production was calculated using FY22 realised prices for all operations except for Brazil Aluminium which is based on FY22 average index price for aluminium.

2.        Payable zinc equivalent production (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY21 realised prices for zinc (US$2,357/t), lead (US$1,862/t) and silver (US$25.4/oz) have been used for FY21, FY22 and FY22e.

3.         Refer to market release "South32 completes acquisition of additional shareholding in Mozal Aluminium" dated 31 May 2022.

4.         Refer to market release "Restart of Brazil Aluminium using renewable power" dated 6 January 2022.

5.         Refer to market release "South32 completes acquisition of 45% interest in Sierra Gorda copper mine" dated 22 February 2022.

6.       Net distributions from our material equity accounted joint ventures (manganese and Sierra Gorda) 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.

7.        Since inception, US$1.5B has been allocated to the on-market share buy-back (695M shares at an average price of A$2.93 per share) and US$386M returned in the form of special dividends.

8.       The corporate tax rates of the geographies where the Group operates include: Australia 30%, South Africa 28%, Colombia 35%, Mozambique 0%, Brazil 34% and Chile 27%. The Colombian corporate tax rate increased to 35% from 1 January 2022. The South African corporate tax rate reduced to 27% from 1 July 2022. The Mozambique operations are subject to a royalty on revenues instead of income tax. Sierra Gorda is subject to a mining tax based on the amount of copper sold and the mining operating margin, the rate is between 5% and 14% for annual sales over 50kt of refined copper.

9.        Australia Manganese is subject to a royalty related tax equal to 20% of adjusted EBIT which is included in Underlying tax expense.

10.     Approximately US$123M and US$28M is expected to be paid in H1 FY23 and H2 FY23 respectively. We expect to recognise this amount as a tax liability in our FY22 financial results. There is no impact on the Income Statement.

11.     The increase in ownership in MRN has triggered a change in accounting treatment with the investment accounted for using the equity method (formerly classified as an investment in an equity instrument designated as fair value through other comprehensive income).

12.    Refer to market release "South32 unlocks up to US$200M in value from non-core royalty sale" dated 12 July 2022. The cash payment comprises US$48M payable on completion, and US$55M payable in six equal quarterly instalments over the next 18 months.

13.     The contingent payment is triggered if the West Musgrave project achieves commercial production, and throughput and commodity price-related conditions are met prior to an agreed expiry date.

14.     Refer to the market announcement "South Africa Energy Coal divestment update" dated 1 April 2021. Purchaser includes Thabong Coal Proprietary Limited, a wholly-owned subsidiary of Seriti and two trusts for the benefit of employees and communities.

15.    Peake Prospect Exploration Target: The information in this announcement that relates to the Exploration Target for Peake Prospect is extracted from "Hermosa Project Update" published on 17 January 2022 and is available to view on www.south32.net. The information was prepared by a Competent Person in accordance with the requirements of the JORC Code. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

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

17.     FY22 and FY22e payable copper equivalent production (kt) was calculated by aggregating revenues from copper, molybdenum, gold and silver, and dividing the total Revenue by the price of copper. FY21 index prices for copper (US$4.23/lb), molybdenum (US$15.7/lb), gold (US$1,796/oz) and silver (US$25.2/oz) have been used for FY22 and FY22e.

18.      South Africa Manganese ore has been reported as a 54.6% interest (previously 60%) to reflect our 60% interest in the Metalloys manganese alloy smelter which is currently on care and maintenance and aligning with our interest in Hotazel Manganese Mines (HMM). South32 has a 44.4% ownership interest in HMM. 26% of HMM is owned by a 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%.

19.     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.

20.      Realised prices for Sierra Gorda are unaudited and net of treatment and refining charges.

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

22.      Realised nickel sales prices are unaudited and inclusive of by-products.

23.      Realised ore prices are unaudited and calculated as external sales Revenue less freight and marketing costs, divided by external sales volume.

24.     Realised ore prices are unaudited and calculated as external sales Revenue less freight and marketing costs, divided by external sales volume.   Manganese ore sales are grossed-up to reflect a 54.6% accounting effective interest.

25.     FY22 Operating unit cost guidance includes royalties (where appropriate) and the influence of exchange rates, and includes various assumptions for FY22, including: an alumina price of US$399/t; an average blended coal price of US$382/t for Illawarra Metallurgical Coal; a manganese ore price of US$6.07/dmtu for 44% manganese product; a nickel price of US$10.60/lb; a silver price of US$24.22/troy oz; a lead price of US$2,308/t (gross of treatment and refining charges); a zinc price of US$3,461/t (gross of treatment and refining charges); an AUD:USD exchange rate of 0.73; a USD:ZAR exchange rate of 15.06; a USD:COP exchange rate of 3,843; and a reference price for caustic soda; all of which reflected forward markets as at March 2022 or our internal expectations.

26.     The sales volume weighted 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") for Worsley Alumina was US$379/t and Brazil Alumina was US$384/t in FY22.

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

28.      The sales volume weighted average of the Metal Bulletin 44% manganese lump ore index (CIF Tianjin, China) on the basis of M-1 was US$6.00/dmtu in FY22.

29.     The sales volume weighted average of the Metal Bulletin 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on the basis of M-1 was US$3.33/dmtu in FY22.

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); Mineração Rio do Norte (MRN).

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

Approved for release to the market by Graham Kerr, Chief Executive Officer
JSE Sponsor: The Standard Bank of South Africa Limited

25 July 2022

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