Quarterly Report June 2015

22 JULY 2015

South32 Limited

QUARTERLY REPORT JUNE 2015

South32 Limited

(Incorporated in Australia under the Corporations Act 2001)

(ACN 093 732 597)

ASX, LSE, JSE Share Code: S32

ISIN: AU000000S320

OPERATIONAL UPDATE

·      Four annual production records including saleable alumina at Brazil Aluminium, coal at Illawarra Metallurgical Coal, alloy at Australia Manganese and ore at South Africa Manganese.

·      Substantial increase in annual exports from South Africa Energy Coal.

·      Aluminium production at Hillside and Mozal broadly unchanged as efficiency gains offset a significant increase in load-shedding events during the year.

·      Strong milling rates at Cannington mitigated the impact of declining silver grades.

·      Record quarterly alumina hydrate production at Worsley as the input circuit operated at expanded capacity.

·      Responded to challenging market conditions by temporarily suspending capacity at Metalloys and prioritising higher value manganese ore production.

·      Cerro Matoso returned to nameplate processing capacity following a 17 day strike during the quarter.

·      Appin Area 9 metallurgical coal project expected to be completed ahead of schedule and approximately 20% below budget.

·      Notified by BHP Billiton that non-cash, pre-tax impairments of South32 assets totalling US$1.9 billion were recognised effective 6 May 2015. Largely offsets prior fair value uplift of US$2.1 billion recognised for Australia Manganese and South Africa Manganese.

·      Increase in depreciation previously expected to accompany the uplift in fair value of the manganese assets will be reduced as a result of the aforementioned impairments.

Graham Kerr, South32 CEO said:

"This was an historic period for our company as shareholders approved the demerger and we listed on the ASX, LSE and JSE.

"We are fast-tracking the implementation of our regional operating model and have established a strong foundation for our agile and entrepreneurial culture. The curtailment of aluminium production at Alumar and manganese alloy production at Metalloys demonstrates our commitment to maximise financial performance per share, rather than volume.

"Our high-quality assets, cash generating capacity and strong balance sheet underpins our confidence in the outlook for our business."

 

Production summary
South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	QoQ
Alumina production (kt)	5,178	5,147	-1%		1,325	1,248	1,266	1%
Aluminium production (kt)	1,174	1,004	-14%		276	245	242	-1%
Energy coal production (kt)	31,923	35,748	12%		8,506	9,425	8,918	-5%
Metallurgical coal production (kt)	5,974	7,455	25%		1,654	1,614	1,983	23%
Manganese ore production (kt)	4,432	4,624	4%		1,207	1,087	1,125	3%
Manganese alloy production (kt)	387	413	7%		109	109	81	-26%
Nickel production (kt)	44.3	40.4	-9%		10.2	10.6	8.6	-19%
Silver production (koz)	25,161	22,601	-10%		6,029	5,130	5,236	2%
Lead production (kt)	187	183	-2%		46	40	44	10%
Zinc production (kt)	58	72	24%		16	16	19	19%
Unless otherwise noted: variance relates to the relative performance during the 2015 financial year compared with the 2014 financial year (YoY) or theJune 2015 quarter compared with the March 2015 quarter (QoQ); production and sales volumes are reported on an attributable basis; and project budgets and capacities are reported on a 100% basis.

 

CORPORATE UPDATE

·      South32 was demerged from BHP Billiton on 25 May 2015 with a strong balance sheet that included net cash of US$54 million, excluding finance leases and pre-funded set-up costs.

·      Consistent with our commitment to maintain an investment grade credit rating, Standard and Poor's and Moody's assigned BBB+ and Baa1 credit ratings, respectively.

·      The implementation of our regional operating model is being fast-tracked. In due course, we expect the associated cost savings to outweigh the additional US$60 million¹ per annum of costs that will be incurred by the corporate office.

·      We have been notified by BHP Billiton that non-cash, pre-tax impairments of South32 assets of US$1.9 billion² were recognised effective 6 May 2015, including: US$445 million at Australia Manganese; US$882 million at South Africa Manganese; and US$539 million at the Wolvekrans Middelburg complex (WMC) within South Africa Energy Coal.

·      The cumulative non-cash impairment of our manganese assets of US$1.3 billion largely offsets the previous fair value uplift of US$2.1 billion described in the South32 listing documents dated 16 March 2015. The associated reduction in book value will result in a lower depreciation charge for the manganese assets than previously indicated.

·      As part of our year-end process we are assessing the fair value of our assets at 30 June 2015 and will keep the market informed should there be a material difference to those figures provided by BHP Billiton.

·      We invested US$4 million in exploration in the months of May and June 2015 of which US$2 million was capitalised. This reflected activity in metallurgical coal and silver in Australia, and nickel in Colombia.

·      South32's underlying effective tax rate (ETR) will reflect the relative contribution of each geography to the company's profitability. The corporate tax rates applicable to South32 include: Australia 30%; South Africa 28%; Colombia 39%; and Brazil 34%³.

Graham Kerr, South32 CEO said:

"We have the right balance sheet for the times and intend to distribute a minimum 40% of underlying earnings to our shareholders from next year."

 

WORSLEY ALUMINA

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Alumina production (kt)	3,916	3,819	-2%		1,010	937	929	-8%	-1%
Alumina sales (kt)	3,864	3,857	0%		1,020	866	1,048	3%	21%

 

Worsley Alumina saleable production declined by 2% (or 97 kt) to 3.8 Mt in the 2015 financial year as planned maintenance reduced calciner availability. Record quarterly alumina hydrate production was, however, achieved in the June 2015 quarter as the input circuit operated at expanded capacity of 4.6 Mtpa (100% basis). As a result, alumina hydrate stockpiles increased by 56 kt during the quarter.

 

SOUTH AFRICA ALUMINIUM

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs  4Q15	3Q15 vs 4Q15
Aluminium production (kt)	804	699	-13%		194	168	175	-10%	4%
Aluminium sales (kt)	804	695	-14%		192	166	177	-8%	7%

 

South Africa Aluminium saleable production declined by 13% (or 105 kt) to 699 kt in the 2015 financial year. The closure of the higher-cost Bayside smelter in June 2014 accounted for the majority (89 kt) of the YoY decline. In contrast, efficiency gains underpinned largely unchanged annual production at Hillside (-2%) despite a 104% increase in load-shedding events and an increase in pot relining activity (136 pots in FY15 versus 58 in FY14). A higher level of pot relining activity is expected in the 2016 financial year as part of the relining cycle.

South Africa Aluminium retains a strong working relationship with Eskom and load-shedding has remained within the allowable limits defined in our electricity supply contracts. Hillside sources power from Eskom under long-term contracts. The price of electricity supplied to potlines 1 and 2 is linked to the LME aluminium price and the South African rand/US dollar exchange rate. The price of electricity supplied to potline 3 is South African rand based and linked to South African and United States producer price indices. A separate and fully utilised 75 MW power supply arrangement not covered by a long-term contract is priced at the same tariff as other South African industrial power users.

The official transfer of ownership of the Bayside aluminium cast house to Isizinda Aluminium occurred on 30 June 2015. This transaction supports the economic transformation of Richards Bay and the development of South Africa's downstream aluminium industry.

MOZAL ALUMINIUm

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs  4Q15	3Q15 vs 4Q15
Aluminium production (kt)	266	265	0%		67	65	65	-3%	0%
Aluminium sales (kt)	276	273	-1%		62	66	70	13%	6%

 

Mozal Aluminium saleable production was effectively unchanged at 265 kt in the 2015 financial year, despite a 50% increase in load-shedding events reported during the period. This included a strong finish to the year (June 2015 quarterly production unchanged at 65 kt) even though load-shedding was skewed to the fourth quarter. Mozal Aluminium retains a strong working relationship with Eskom and load-shedding has remained within the allowable limits defined in its electricity supply contracts.

Mozal Aluminium utilises hydroelectric power under long-term contract that is generated by Hidroeléctric Cahora Bassa (HCB). HCB delivers power into the South African grid to Eskom and Mozal Aluminium sources the power via the Mozambique Transmission Company (Motraco).

 

Brazil Aluminium

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Alumina production (kt)	1,262	1,328	5%		315	311	337	7%	8%
Alumina sales (kt)	1,248	1,309	5%		388	285	330	-15%	16%
Aluminium production (kt)	104	40	-62%		15	12	2	-87%	-83%
Aluminium sales (kt)	104	41	-61%		17	13	3	-82%	-77%

 

Brazil Aluminium saleable alumina production increased by 5% (or 66 kt) to a record 1.3 Mt in the 2015 financial year as the refinery exceeded nameplate capacity. Conversely, saleable aluminium production declined by 62% (or 64 kt) to 40 kt following the decision to suspend production in the last of three potlines from April 2015.

All three potlines will continue to be subject to ongoing review, having regard to market conditions and our commitment to maximise financial performance per share, rather than volume. Excess power supplied by Eletronorte under long-term contract continues to be sold into the grid.

 

South Africa Energy Coal

South32's share4	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Energy coal production (kt)	30,384	34,277	13%		8,013	9,240	8,512	6%	-8%
Domestic sales (kt)	16,330	18,416	13%		4,498	4,921	4,358	-3%	-11%
Export sales (kt)	13,298	16,390	23%		3,528	4,354	4,123	17%	-5%

 

South Africa Energy Coal saleable production increased by 13% (or 3.9 Mt) to 34.3 Mt in the 2015 financial year. The continued optimisation of equipment availability and mine planning also underpinned a 23% and 13% increase in export and domestic sales, respectively. Saleable coal production in the June 2015 quarter declined by 8% (or 728 kt) following the curtailment of mining activity at the Khutala open cut mine. The Khutala open cut mine contributed 1.4 Mt of domestic coal production in the 2015 financial year.

 

illawarra metallurGical coal

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Metallurgical coal production (kt)	5,974	7,455	25%		1,654	1,614	1,983	20%	23%
Metallurgical coal sales (kt)	5,921	7,324	24%		1,761	1,810	2,067	17%	14%
Energy coal production (kt)	1,539	1,471	-4%		493	185	406	-18%	119%
Energy coal sales (kt)	1,623	1,378	-15%		486	272	307	-37%	13%

 

Illawarra Metallurgical Coal saleable production increased by 19% (or 1.4 Mt) to a record 8.9 Mt in the 2015 financial year. An improvement in longwall availability and utilisation, and a 22% increase in washed tonnes from the West Cliff coal processing plant, underpinned record metallurgical coal production. The 33% increase in June 2015 quarter coal production reflected an absence of longwall moves during the period. Three longwall moves are planned for the 2016 financial year (compared to two in the 2015 financial year), including one in the December 2015 half year.

The Appin Area 9 project is 86% complete and is now expected to be commissioned ahead of schedule in the second half of the 2016 financial year. The project, which sustains Illawarra Metallurgical Coal production capacity, is also expected to be approximately 20% below the original budget of US$845 million.

australia manganese

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Manganese ore production (kt)	2,866	2,942	3%		791	682	761	-4%	12%
Manganese ore sales (kt)	3,038	2,845	-6%		773	686	700	-9%	2%
Manganese alloy production (kt)	161	167	4%		45	41	43	-4%	5%
Manganese alloy sales (kt)	166	139	-16%		44	26	36	-18%	38%

 

Australia Manganese saleable ore production increased by 3% (or 76 kt) to 2.9 Mt in the 2015 financial year as plant throughput and concentrator yields improved. Near record production at GEMCO was supported by an increase in total material movement as the waste-to-ore strip ratio increased to 3.0:1 (2.6:1 FY14). An increase in ore inventories was recorded over the course of the year as stockpiles returned to normalised levels. Record annual alloy production was achieved at TEMCO.

The Premium Concentrate Ore (PC02) project increases GEMCO production capacity by 0.5 Mt to 5.3 Mtpa (100% basis). The project is 48% complete and remains on schedule for completion in the second half of the 2016 financial year. The original budget of US$139 million (100% basis) remains unchanged.

 

SOUTH AFRICA manganese

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Manganese ore production (kt)	1,566	1,682	7%		416	405	364	-13%	-10%
Manganese ore sales (kt)	1,545	1,636	6%		413	455	301	-27%	-34%
Manganese alloy production (kt)	226	246	9%		64	68	38	-41%	-44%
Manganese alloy sales (kt)	240	251	5%		67	70	47	-30%	-33%

 

South Africa Manganese saleable ore production increased by 7% (or 116 kt) to a record of 1.7 Mt in the 2015 financial year as equipment availability and recoveries continued to improve. Manganese ore production was affected by planned maintenance and industrial action at Hotazel in the June 2015 quarter. Inventories were rebuilt to normalised levels following this illegal strike.

South Africa Manganese alloy production increased by 9% (or 20 kt) to 246 kt in the 2015 financial year. Metalloys production declined substantially in the June 2015 quarter as a fatality led to the initial suspension of operations, before a decision was taken to restart only one of the four furnaces in response to challenging market conditions. We continue to engage with Transnet to secure additional rail capacity and will adjust higher value ore production to meet market demand.

The second phase of the Central Block project increases ROM production capacity at Wessels to 1.5 Mtpa (100% basis). The US$31 million (100% basis) project is 44% complete and remains on schedule and budget with first production expected in the first quarter of the 2017 financial year.

 

cerro matoso

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Payable nickel production (kt)	44.3	40.4	-9%		10.2	10.6	8.6	-16%	-19%
Payable nickel sales (kt)	45.1	40.6	-10%		10.2	11.0	9.0	-12%	-18%

 

Cerro Matoso payable nickel production declined by 9% (or 3.9 kt) to 40 kt in the 2015 financial year as a result of an 11% reduction in the average ore grade and a 17 day strike in May 2015. While Cerro Matoso was operating at nameplate capacity at the end of the period, production is expected to decline by a similar amount in the 2016 financial year before stabilising the following year. If developed, the higher grade La Esmeralda deposit has the potential to deliver an uplift in ore grades during the 2018 to 2022 financial years. The application process for a new Social and Environmental licence to allow access to La Esmeralda has commenced.

 

cannington

South32's share	FY14	FY15	YoY		4Q14	3Q15	4Q15	4Q14 vs 4Q15	3Q15 vs 4Q15
Silver production (koz)	25,161	22,601	-10%		6,029	5,130	5,236	-13%	2%
Silver sales (koz)	26,160	23,831	-9%		5,641	4,972	6,144	9%	24%
Lead production (kt)	187	183	-2%		46	40	44	-4%	10%
Lead sales (kt)	189	189	0%		42	40	49	17%	23%
Zinc production (kt)	58	72	24%		16	16	19	19%	19%
Zinc sales (kt)	62	66	6%		16	17	16	0%	-6%

 

Cannington contained silver production declined by 10% (or 2.6 Moz) to 22.6 Moz in the 2015 financial year as strong milling rates mitigated the impact of a 13% decline in the average silver ore grade. A modest reduction in the silver ore grade is expected in each of the next two years. With declining ore grades the paste plant will play a critical role in increasing mining rates. Annual paste fill production increased by 3% during the period.

Cannington's mineralogy and associated geochemistry dictates that the vast majority of silver production reports to the lead concentrate. In this regard, contained lead production declined, albeit by a lesser 2% (or 4 kt) in the 2015 financial year. Conversely, a significant increase in the average zinc ore grade and processing recoveries led to a 24% (or 14 kt) increase in contained zinc production.

Finalisation adjustments and the provisional pricing of Cannington concentrates will reduce Underlying EBIT⁵ by US$43 million in the 2015 financial year (+US$29 million 2014 financial year; -US$40 million December 2014 half year). The outstanding concentrate sales (containing 8.6 Moz of silver, 7.0 kt of lead and 1.5 kt of zinc) were revalued at 30 June 2015. The final price of these sales will be determined in the 2016 financial year.

 

Notes:

1.   Additional costs to operate South32's corporate centre are estimated to be US$60 million (pre-tax) per annum, as described in Section 11.2 of the listing documents (page 136). In accordance with UKLA prospectus rules, these costs were not included in the pro-forma financial statements.

2.   The statutory results of the South32 Group for the 2015 financial year will not include all fair value adjustments and impairments due to the timing of the internal restructuring steps associated with the demerger.

3.   A 5% dividend withholding tax applies in South Africa. The ETR in Colombia is comprised of: corporate income tax of 25%; CREE (income tax for equality) of 9%; and a CREE surcharge of 5%. The ETR in Brazil in comprised of: corporate income tax of 15%; a corporate income tax surcharge of 10%; and the CSLL (social contribution tax) of 9%.

4.   10% of South Africa Energy Coal is owned by an Employee Share Ownership Plan (ESOP) and a broad based black economic empowerment (BBBEE) consortium led by Pembani Group (Pty) Limited. The interests owned by the ESOP and BBBEE 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%.

5.   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. Underlying EBITDA is Underlying EBIT, before depreciation and amortisation.

6.   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); thousand dry metric tonnes (kdmt); megawatt (MW); Australian Securities Exchange (ASX); London Stock Exchange (LSE); and Johannesburg Stock Exchange (JSE). 

 

Operating performance

South32's share	FY14	FY15		4Q14	1Q15	2Q15	3Q15	4Q15
Worsley Alumina:
Alumina hydrate production (kt)	3,886	3,875		982	980	976	931	987
Alumina production (kt)	3,916	3,819		1,010	893	1,060	937	929
Alumina sales (kt)	3,864	3,857		1,020	875	1,068	866	1,048
South Africa Aluminium:
Aluminium production (kt)	804	699		194	180	176	168	175
Aluminium sales (kt)	804	695		192	174	178	166	177
Mozal Aluminium:
Aluminium production (kt)	266	265		67	68	67	65	65
Aluminium sales (kt)	276	273		62	64	73	66	70
Brazil Aluminium:
Alumina production (kt)	1,262	1,328		315	342	338	311	337
Alumina sales (kt)	1,248	1,309		388	323	371	285	330
Aluminium production (kt)	104	40		15	13	13	12	2
Aluminium sales (kt)	104	41		17	12	13	13	3
South Africa Energy Coal:
Energy coal production (kt)	30,384	34,277		8,013	8,026	8,499	9,240	8,512
Domestic sales (kt)	16,330	18,416		4,498	4,403	4,734	4,921	4,358
Export sales (kt)	13,298	16,390		3,528	3,739	4,174	4,354	4,123
Illawarra Metallurgical Coal:
Metallurgical coal production (kt)	5,974	7,455		1,654	1,840	2,018	1,614	1,983
Metallurgical coal sales (kt)	5,921	7,324		1,761	1,617	1,830	1,810	2,067
Energy coal production (kt)	1,539	1,471		493	497	383	185	406
Energy coal sales (kt)	1,623	1,378		486	373	426	272	307
Australia Manganese:
Manganese ore production (kt)	2,866	2,942		791	726	773	682	761
Manganese ore sales (kt)	3,038	2,845		773	734	725	686	700
Manganese alloy production (kt)	161	167		45	35	48	41	43
Manganese alloy sales (kt)	166	139		44	34	43	26	36
South Africa Manganese:
Manganese ore production (kt)	1,566	1,682		416	466	447	405	364
Manganese ore sales (kt)	1,545	1,636		413	444	436	455	301
Manganese alloy production (kt)	226	246		64	67	73	68	38
Manganese alloy sales (kt)	240	251		67	69	65	70	47

 

South32's share	FY14	FY15		4Q14	1Q15	2Q15	3Q15	4Q15
Cerro Matoso:
Ore mined (kwmt)	8,490	6,321		2,051	1,512	1,827	1,826	1,156
Ore processed (kdmt)	2,493	2,629		590	657	678	698	596
Ore grade processed (%, Ni)	1.9%	1.7%		1.9%	1.8%	1.7%	1.6%	1.6%
Nickel production (kt)	44.3	40.4		10.2	10.7	10.5	10.6	8.6
Nickel sales (kt)	45.1	40.6		10.2	10.5	10.1	11.0	9.0
Cannington:
Ore mined (kt)	3,446	3,418		806	823	925	813	857
Ore processed (kt)	3,202	3,289		821	819	850	791	829
Silver ore grade processed (g/t, Ag)	296	257		286	301	246	247	235
Lead ore grade processed (%, Pb)	7.1%	6.7%		6.9%	7.1%	7.0%	6.3%	6.4%
Zinc ore grade processed (%, Zn)	3.0%	3.4%		3.1%	3.8%	3.2%	3.2%	3.5%
Silver production (koz)	25,161	22,601		6,029	6,701	5,534	5,130	5,236
Silver sales (koz)	26,160	23,831		5,641	7,084	5,631	4,972	6,144
Lead production (kt)	187	183		46	49	50	40	44
Lead sales (kt)	189	189		42	51	49	40	49
Zinc production (kt)	58	72		16	20	17	16	19
Zinc sales (kt)	62	66		16	15	18	17	16

 

Further information

Investor Relations			MEDIA Relations
Peter Harris			Jill Thomas
T	+61 8 9324 9046		T	+61 8 9324 9181
M	+61 (0) 476 559 190		M	+61 (0) 423 259 190
E	[email protected]		E	[email protected]
Paul Formosa
T	+61 8 9324 9376
M	+61 (0) 431 152 742
E	[email protected]

 

 

22 July 2015

JSE sponsor: UBS South Africa (Pty) Ltd