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South32 to reset its cost base in Australia and Colombia
South32 Limited
(Incorporated in Australia under the Corporations Act 2001 (Cth)
(ACN 093 732 597)
ASX / LSE / JSE Share Code: S32
ISIN: AU000000S320
south32.net
SOUTH32 TO RESET ITS COST BASE IN AUSTRALIA AND COLOMBIA
South32 Limited (ASX, LSE, JSE: S32) (“South32”) today announced a series of restructuring
initiatives that will reset the cost base of its Worsley Alumina, Illawarra Metallurgical Coal, Australia
Manganese and Cerro Matoso operations.
South32 Chief Executive Officer, Graham Kerr, said: “Our financial results highlight both the
strength of our financial position and the opportunity that lies ahead. The initiatives that we have
announced today across our Australian and Colombian operations are central to our strategy. The
continued optimisation of our high quality operations will strengthen underlying cash flow in what
remains a challenging environment.
“The refinement of our regional operating model allows us to remove additional layers of
management while further aggregating functional support. As a result, we expect another
significant increase in labour productivity and a corresponding reduction in cash costs. When
combined with our broad-based focus on all procurement activities, we are well positioned to
significantly exceed our costs savings target, both in terms of quantum and timing.
“Operating unit costs, including sustaining capital expenditure, will move sharply lower at our
Illawarra Metallurgical Coal, Cerro Matoso and Worsley Alumina operations, mitigating cash
outflows and solidifying their position at the low end of industry cost curves 1 . In addition, the
reconfiguration of our leading Australia Manganese mine, GEMCO, will ensure that it becomes a
positive contributor to free cash flow at current prices.”
Worsley Alumina (86% share)
Operational performance at Worsley Alumina continues to be optimised following the completion
of the US$3.2B (South32 share) Efficiency and Growth project in June 2011, which positioned the
operation as one of the largest refineries in the industry. Incremental capacity creep is anticipated
beyond the current rate of production 2 , while a number of restructuring initiatives are being
implemented to reduce operating unit costs, including sustaining capital expenditure, to
approximately US$200/t3 in FY17.
Note: In August 2015, we announced a commitment to reduce our annual controllable cost base,
including equity accounted investments, by at least US$350M before end FY18.
1 Illawarra Metallurgical Coal is at the high end of the industry margin curve to account for coal quality
differentials.
2 Production guidance increase to 4.61Mt in FY17 (100% basis).
3 Projected operating unit costs are predicated on an alumina price of US$255/t for royalty calculations
and an average AUD:USD exchange rate of 0.68.
Registered Office: Level 35, 108 St Georges Terrace, Perth Western Australia 6000, Australia
ABN 84 093 732 597 Registered in Australia
These initiatives include:
- The fundamental reorganisation of mining and refining into two operations and the removal
of layers of management and functional support;
- The reduction of approximately 390 employees and contractors before the end of FY16,
equivalent to 15% of the employee and contractor headcount at the end of FY15;
- A circa 3% lift in refinery availability and utilisation;
- The continued aggregation of our procurement activities to the region, which is expected
to deliver a circa US$65M (South32 share) saving in FY17;
- The continued optimisation of the coal to gas fuel mix in the co-generation power facility;
and
- A 34%4 reduction in sustaining capital expenditure to approximately US$41M4 (South32
share) in FY17.
Pre-tax restructuring costs, including redundancies, of approximately US$15M (South32 share)
are anticipated at Worsley Alumina in the June 2016 half year. These charges will be excluded
from the Group’s Underlying earnings measures.
Illawarra Metallurgical Coal (100%)
Over the 18 months to the end of December 2015, Illawarra Metallurgical Coal reduced its
employee and contractor headcount by 100 and operating unit costs, including sustaining capital
expenditure and underground development, by 34%5. To mitigate the impact of lower prices, a
number of restructuring initiatives are being implemented in order to reduce operating unit costs,
including sustaining capital expenditure and underground development, by 37%6 to approximately
US$66/t6 in FY17.
These initiatives include:
- The fundamental reorganisation of the mining complex into two operations and the
removal of layers of management and functional support;
- The reduction of at least 300 employees and contractors before the end of FY16,
equivalent to 14% of the employee and contractor headcount at the end of FY15;
- An increase in longwall utilisation at the Appin and Dendrobium mines, and the completion
of the Appin Area 9 project, which will increase production to approximately 9.5Mt in FY17;
- The continued aggregation of our procurement activities to the region, which is expected
to deliver a circa US$50M saving in FY17; and
- A 58%4 reduction in sustaining capital expenditure and underground development to
approximately US$108M4 in FY17.
The Appin Area 9 project will be completed in the March 2016 quarter, meaning that annualised
capital expenditure, including deferred development of US$104M in the December 2015 half year
will not carry forward beyond that point. Underground development (of approximately US$58Mpa)
is not being compromised given a commitment to maximise long-term value, although we do retain
the flexibility to curtail this activity in the future.
4 Compares projected capital expenditure in FY17 with FY15 and FY17 is predicated on an average
AUD:USD exchange rate of 0.68.
5 Compares operating unit costs in H1 FY16 with FY14.
6 Compares projected operating unit costs in FY17 with FY15. Projected operating unit costs are predicated
on an average blended coal price of US$65/t for royalty calculations and an average AUD:USD exchange
rate of 0.68.
2
Pre-tax restructuring costs, including redundancies, of approximately US$10M are anticipated at
Illawarra Metallurgical Coal in the June 2016 half year. These charges will be excluded from the
Group’s Underlying earnings measures.
Australia Manganese (60% share)
To ensure GEMCO retains its leading, low-cost position in the manganese industry, the operations’
mining and processing plans are being reconfigured. As a result, guidance for manganese saleable
ore production in FY17 is lowered by 4% to 5.2Mt (100% basis). At the same time, a double digit
improvement in labour productivity and a substantial reduction in procurement costs are expected
to more than offset a 27% increase in the mining strip ratio (from 3.0 to 3.8) between FY15 and
FY17. Consequently, operating unit costs, including sustaining capital expenditure, are expected
to decline by 43%7 to approximately US$1.56/dmtu7 in FY17.
Specific measures being taken to reposition GEMCO include:
- A revised ramp-up of the Premium Concentrate Ore (PC02) project following its
completion in the June 2016 quarter;
- The reduction of approximately 82 employees and contractors before the end of FY16,
equivalent to 8% of the employee and contractor headcount at the end of FY15, and the
decision not to recruit an additional 55 roles largely related to the PC02 project;
- A targeted 6% increase in the productivity of the mining fleet;
- The continued aggregation of our procurement activities to the region, which is expected
to deliver a circa US$10M (South32 share) saving in FY17; and
- A 56%4 reduction in sustaining capital expenditure to approximately US$40M4 (South32
share) in FY17.
Redundancy costs are not anticipated at GEMCO, despite the meaningful reduction in employees
and contractors.
Cerro Matoso (99.9% share)
Cerro Matoso has been one of the industry’s most successful ferro-nickel operations. To ensure
Cerro Matoso remains competitive amidst declining ore grades and an increasing reliance on
stockpiled ore, the operation must significantly increase labour productivity and reduce costs. In
this regard, a series of restructuring initiatives are expected to deliver a 30%8 reduction in operating
unit costs, including sustaining capital expenditure, to approximately US$3.90/lb8 in FY17.
These initiatives include:
- The reduction of at least 350 employees and contractors before the end of FY16,
equivalent to 18% of the employee and contractor headcount at the end of FY15;
- The continued aggregation of our procurement activities to the region, which is expected
to deliver a circa US$37M saving in FY17; and
- A 56%9 reduction in sustaining capital expenditure to approximately US$16M9 in FY17.
7 Compares projected operating unit costs in FY17 with FY15. Projected operating unit costs are predicated
on a manganese ore price of US$2.00/dmtu (44% manganese product) for royalty calculations and an
average AUD:USD exchange rate of 0.68.
8 Projected operating unit costs are predicated on a nickel price of US$3.75/lb for royalty calculations and an
average USD:COP exchange rate 3,170.
9 Compares projected capital expenditure in FY17 with FY15, and FY17 is predicated on an average
USD:COP exchange rate of 3,170.
3
Pre-tax restructuring costs, including redundancies, of approximately US$2M are anticipated at
Cerro Matoso in the June 2016 half year. These charges will be excluded from the Group’s
Underlying earnings measures.
About South32
South32 is a globally diversified mining and metals company with high quality operations in
Australia, Southern Africa and South America. Our purpose is to make a difference by developing
natural resources, improving people’s lives now and for generations to come. We are trusted by
our owners and partners to realise the potential of their resources. We have a simple strategy to
maximise the potential of our assets and shareholder returns by optimising our existing operations,
unlocking their potential and identifying new opportunities to compete for capital. Further
information on South32 can be found at www.south32.net.
INVESTOR RELATIONS
Leng Lau Alex Volante Rob Ward
T +61 8 9324 9008 T +61 8 9324 9029 T +61 8 9324 9340
M +61 (0) 408 202 698 M +61 (0) 403 328 408 M +61 (0) 431 596 831
E Leng.Lau@south32.net E Alex.Volante@south32.net E Robert.Ward@south32.net
MEDIA RELATIONS
Jill Thomas Tony Johnson
T +61 8 9324 9191 T +61 8 9324 9190
M +61 (0) 423 259 190 M +61 (0) 439 500 799
E Jill.Thomas@south32.net E Tony.Johnson@south32.net
Further information on South32 can be found at www.south32.net.
South32 Limited (ABN 84 093 732 597)
Registered in Australia
Registered Office: Level 35, 108 St Georges Terrace
Perth Western Australia 6000 Australia
25 February 2016
JSE Sponsor: UBS South Africa (Pty) Ltd
25 February 2016
4
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