Quarterly Operational Report December 2015

South32 Limited

(Incorporated in Australia under the Corporations Act 2001)

(ACN 093 732 597)

ASX, LSE, JSE Share Code: S32

ISIN: AU000000S320

21 JANUARY 2016

South32 Limited

QUARTERLY OPERATIONAL REPORT DECEMBER 2015

·   By optimising the performance of our high quality operations and balance sheet we have delivered a significant reduction in net debt during the December 2015 half year, despite the challenging external environment. Our current estimate for net debt at 31 December 2015 is US$115M.

·    A significant increase in ore grades and recoveries underpinned a 13% increase in Cannington zinc production to a record 41.8kt.

·   A further improvement in concentrator performance at Australia Manganese contributed to a 6% increase in ore production to a record 1.6Mt.

·     Strong and stable hydrate production at Worsley Alumina supported a 2% increase in saleable alumina production to a record 2.0Mt.

·     Ore production at South Africa Manganese was impacted by the temporary suspension of operations during the period. The strategic review, which is nearing completion, will define the optimal configuration and production profile for the South Africa Manganese mines and smelter to ensure cash outflows are mitigated in this difficult pricing environment.

·   While FY16 production guidance is maintained for the majority of our upstream operations, we have lowered our estimate for Illawarra Metallurgical Coal production by 7% to 8.3Mt after difficult geological conditions were encountered during the period.

·   The Appin Area 9 project is 95% complete, with commissioning expected to start in the March 2016 quarter. The project, which sustains Illawarra Metallurgical Coal production capacity, is now more than 30% below the original budget of US$845M and three months ahead of schedule.

Graham Kerr, South32 CEO said:

"Following another solid quarter of operating performance we remain on track to meet production guidance for the majority of our upstream operations.

"Our relentless focus on safety, volume, costs and capital expenditure has allowed us to reduce net debt by almost US$300 million in the December 2015 half year, despite continuing weakness in commodity markets.

"In order to protect our strong financial position in the currently challenging environment we have already cut or suspended production at our South Africa Manganese ore mines and Alumar, Metalloys, TEMCO and South Africa Aluminium smelters. Further decisive action will be taken as we seek to maximise short-term cash flow while preserving longer-term value."

CORPORATE UPDATE

WORSLEY ALUMINA

(86% share)

Worsley Alumina saleable production increased by 2% (or 40kt) to a record 1,993kt in the December 2015 half year as the operations processed stockpiled alumina hydrate and benefitted from additional operating efficiency gains. The 2% decline in sales reflected a timing difference as one shipment slipped into the March 2016 quarter.

Planned calciner maintenance in the December 2015 quarter led to a 7% QoQ reduction in saleable alumina production. The next major calciner outage is now scheduled for the December 2016 quarter. FY16 saleable alumina production guidance remains unchanged at 3.95Mt.

SOUTH AFRICA ALUMINIUM

(100%)

South Africa Aluminium saleable production of 352kt was largely unchanged in the December 2015 half year, while the 2% reduction in quarterly production volumes reflected our decision to suspend production in 22 pots in September 2015. This suspension of activity is expected to deliver an incremental improvement in cash flow as planned pot relining activity is deferred. A loss of 18kt is anticipated should the 22 pots remain offline for the remainder of FY16, with a marginal YoY reduction in production likely.

MOZAL ALUMINIUm

(47.1% share)

Mozal Aluminium saleable production of 133kt was largely unchanged in the December 2015 half year. Production increased marginally in the December 2015 quarter following a modest reduction in the number of load-shedding events during the period. The 12% decline in sales reflected the scheduling of shipments between periods. Aluminium production is expected to remain broadly unchanged in FY16.

Brazil Alumina

(Refinery 36% share, Smelter 40% share)

Brazil Alumina saleable alumina production of 673kt was largely unchanged in the December 2015 half year and FY16 alumina production guidance of 1.32Mt remains unchanged. The 5% decline in sales reflected a timing difference as one shipment slipped into the March 2016 quarter.

Aluminium production was first curtailed at Brazil Alumina in July 2013 and the suspension of all smelting activity was announced in March 2015. With the economics unlikely to support the recommencement of smelting activity we have sold forward power for the 2017 calendar year and served termination notice on our contract with Eletronorte for the remaining years of the contract. As a result of this decision, power sales are not expected to contribute to Underlying EBIT beyond FY16 as a minor provision will be booked in our June 2016 financial year statements to reflect the anticipated cash outflow associated with this contract across the 2017 and 2018 financial years. Unhedged power sales, inclusive of this provision, are now expected to contribute approximately BRL235M to Underlying EBIT in FY16 and will be skewed to the first half.

South Africa Energy Coal

(100%)

South Africa Energy Coal saleable production of 16.4Mt was broadly unchanged in the December 2015 half year as operational efficiencies at the Khutala underground mine and the Wolvekrans Middelburg Complex mitigated the impact of the planned closure of the opencast mine at Khutala. FY16 saleable production guidance remains unchanged at 31.95Mt (16.65Mt domestic, 15.30Mt export).

illawarra metallurgical coal

(100%)

Illawarra Metallurgical Coal saleable production decreased by 17% (or 782kt) to 3.96Mt in the December 2015 half year as challenging geological conditions were encountered at the Appin and Dendrobium mines, and a planned longwall move was completed during the December 2015 quarter. Another two longwall moves are expected to be completed in the March 2016 quarter, consistent with the mine plan. Accordingly, FY16 saleable coal production has been lowered by 7% to 8.25Mt (metallurgical coal 6.9Mt, energy coal 1.35Mt).

The Appin Area 9 project is 95% complete, with commissioning expected to start in the March 2016 quarter. The project, which sustains Illawarra Metallurgical Coal production capacity, is now more than 30% below the original budget of US$845M and three months ahead of schedule.

australia manganese

(60% share)

Australia Manganese saleable ore production increased by 6% (or 90kt) to a record 1,589kt in the December 2015 half year as the operation continued to optimise concentrator performance. The 15% reduction in saleable ore production in the December 2015 quarter was anticipated, ensuring FY16 production guidance remains unchanged at 3.05Mt. A higher strip ratio, planned maintenance and seasonal factors are expected to impact performance in the June 2016 half year.

Saleable manganese alloy production increased by 2% (or 2kt) to 85kt in the December 2015 half year. In response to market conditions, TEMCO has suspended production at one of its four furnaces for a minimum of three months. While production will be impacted in the June 2016 half year, customer commitments will continue to be met from inventory.

The Premium Concentrate Ore (PCO2) project is expected to increase GEMCO production capacity by 0.5Mt to 5.3Mtpa (100% basis). The project is now expected to be delivered under budget with first production anticipated in the June 2016 quarter, as planned.

SOUTH AFRICA manganese

(60% share)

South Africa Manganese saleable ore production decreased by 39% (or 477kt) to 757kt in the December 2015 half year following the suspension of operations at Wessels and Mamatwan in November 2015. South Africa Manganese saleable alloy production decreased by 67% (or 94kt) to 46kt following the suspension of three of the four high-carbon ferromanganese furnaces at Metalloys in May 2015. A strategic review, which is nearing completion, will define the optimal configuration and production profile for the South Africa Manganese mines and smelter to ensure cash outflows are mitigated in this difficult pricing environment.

cerro matoso

(99.9% share)

Cerro Matoso payable nickel production decreased by 17% (or 3.7kt) to 17.5kt in the December 2015 half year as the average ore grade declined, consistent with the mine plan. FY16 production guidance of 36.5kt remains unchanged.

The higher grade La Esmeralda deposit has the potential to deliver an uplift in the average ore grade between 2018 and 2022. A new social and environmental licence to allow access to the ore body was granted in December 2015.

cannington

(100%)

Cannington payable silver production decreased by a modest 3% (or 357koz) to 11.9Moz in the December 2015 half year as the average silver ore grade remained largely unchanged. Conversely, a significant increase in the average zinc ore grade and recovery underpinned a 13% increase in zinc production to a record 41.8kt. FY16 production guidance remains unchanged (payable silver 21.65Moz, payable lead 175kt, payable zinc 80kt) as the mine plan will deliver an increase in the ratio of zinc to lead concentrate over the remainder of the year.

Finalisation adjustments and the provisional pricing of Cannington concentrates will reduce Underlying EBIT by US$19M in the December 2015 half year (-US$43M in the June 2015 financial year; -US$40M December 2014 half year). Outstanding concentrate sales (containing 5.2Moz of silver, 45.7kt of lead and 16.0kt of zinc) were revalued at 31 December 2015. The final price of these sales will be determined in the second half of the 2016 financial year.

Notes:

1.   Provisional unaudited Underlying ETR for the December 2015 half year.

2.   Provisional unaudited net debt balance as at 31 December 2015.

3.   10% of South Africa Energy Coal is owned by an Employee Share Ownership Plan (ESOP) and a broad-based black economic empowerment (B-BBEE) consortium. The interests owned by the ESOP and 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%.

4.   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.

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.   Figures in italics indicate that this figure has been adjusted since it was previously reported.

7.   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

Further information

21 January 2016
JSE Sponsor: UBS South Africa (Pty) Ltd