Wrap Text
Results for announcement to the market
South32 Limited
(Incorporated in Australia under the Corporations Act 2001)
(ACN 093 732 597)
ASX / LSE / JSE Share Code: S32
ISIN: AU000000S320
SOUTH32 FINANCIAL RESULTS
For the half year ended 31 December 2015
SOUTH32 LIMITED
(ABN 84 093 732 597)
25 February 2016
RESULTS FOR ANNOUNCEMENT TO THE MARKET
This statement includes the consolidated results of the South32 Group for the half year ended 31 December
2015 compared with the half year ended 31 December 2014 on both a statutory and pro forma basis.
In accordance with the JSE Listing Requirements, Headline Earnings is presented below.
Pro forma(a) Statutory
US$M H1 FY16 H1 FY15 H1 FY16 H1 FY15
(Loss)/profit from continuing operations attributable to
ordinary equity holders of South32 Limited (1,749) 339 (1,749) (90)
(Loss)/profit attributable to ordinary equity holders of
South32 Limited (1,749) 339 (1,749) (83)
Adjusted for
Loss on disposal of property, plant and equipment 2 - 2 -
Impairment losses 1,384 - 1,384 -
Re-measurements included in share of profit/loss of equity- 208 - 208 -
accounted investments
Total tax benefit on the above items (165) - (165) -
Headline Earnings from continuing operations (320) 339 (320) (90)
Headline Earnings (320) 339 (320) (83)
Basic earnings per share denominator (millions) 5,324 5,324 5,324 3,212
Diluted earnings per share denominator (millions) 5,328 5,324 5,328 3,212
Headline Earnings from continuing operations
Headline Earnings per share (US cents) (6.0) 6.4 (6.0) (2.8)
Diluted Headline Earnings per share (US cents) (6.0) 6.4 (6.0) (2.8)
Headline Earnings
Headline Earnings per share (US cents) (6.0) 6.4 (6.0) (2.6)
Diluted Headline Earnings per share (US cents) (6.0) 6.4 (6.0) (2.6)
(a) Please refer to the note below for the basis of preparation of pro forma financial information.
FINANCIAL RESULTS AND OUTLOOK
HALF YEAR ENDED 31 DECEMBER 2015
25 February 2016 ASX / LSE / JSE: S32
"The continuing optimisation of our high quality operations and balance sheet has enabled us to
reduce net debt by almost US$300M, despite continued weakness in commodity markets. Our low
financial gearing and operational leverage is a powerful combination and the decisive action we are
taking across our portfolio will strengthen short term cash flow."
Graham Kerr, South32 CEO
PERFORMANCE SUMMARY
- Statutory loss of US$1.7B includes non-cash impairment related charges of US$1.7B.
- Underlying EBITDA of US$542M for an operating margin of 20%.
- Underlying EBIT and Underlying earnings of US$141M and US$26M, respectively.
- Controllable costs(1) reduced by US$182M.
- Total capital expenditure(2), including equity accounted investments, reduced by 22% or US$85M to US$301M.
- Closing net debt reduced by US$286M to US$116M.
- Underlying return on invested capital (ROIC) of 1.4%.
- No dividend declared for H1 FY16.
OUTLOOK
- FY16 production guidance maintained for the majority of our upstream operations.
- Major restructuring initiatives underpin targeted US$300M reduction in controllable costs in FY16.
- Redundancy and restructuring charges(3) of US$37M anticipated in the June 2016 half year.
- FY16 Capital expenditure(2) guidance, including equity accounted investments, lowered by US$150M to US$550M.
- Well positioned to significantly exceed our US$350M controllable costs savings target.
Financial highlights
Pro forma Change Statutory(4)(5)
US$M H1 FY16 H1 FY15 % H1 FY15
Revenue(6) 2,981 4,089 (27%) 649
Profit/(loss) from continuing operations (1,587) 786 (302%) 87
Profit/(loss) after taxation (1,749) 339 (616%) (83)
Basic earnings per share (US cents)(7) (32.9) 6.4 (614%) (2.8)
Other financial measures
Underlying EBITDA(8) 542 1,127 (52%) 246
Underlying EBITDA margin(9) 20.1% 29.8% (9.7%) 31.9%
Underlying EBIT(8) 141 710 (80%) 91
Underlying EBIT margin(10) 5.2% 18.5% (13.3%) 13.2%
Underlying earnings(8) 26 460 (94%) 57
Basic Underlying earnings per share (US cents) 0.5 8.6 (94%) 1.8
ROIC(11) 1.4% 8.5% (7.1%) 5.3%
Note: To assist shareholders in their understanding of the South32 Group, pro forma financial information has
been prepared for H1 FY15 comparative purposes to reflect the business as it is now structured and as though it
was in effect for the period 1 July 2014 to 31 December 2014 (refer to the pro forma income statement and
Underlying earnings adjustments on pages 28 and 29). The pro forma financial information must be read in
conjunction with the notes on page 27.
DECEMBER 2015 HALF YEAR PERFORMANCE
SAFETY
We are deeply saddened by the loss of two colleagues in our Africa Region in H1 FY16. Our core value of Care dictates
that safety is paramount and every one of our employees and contractors should go home safe and well, after every
shift. We are in the process of implementing our Care and Safety Strategy across all operated sites. This strategy
focusses on our frontline leaders and the importance of having well planned, designed and executed work. With focus
and perseverance we will create a safer working environment and become a more productive organisation.
Our Total Recordable Injury Frequency (TRIF) was 7.6 per million hours worked in H1 FY16.
EARNINGS
The Group's statutory loss of US$1.7B in H1 FY16 was significantly impacted by non-cash impairment related charges
totalling US$1.7B (post-tax US$1.7B). This included a US$916M impairment at Australia Manganese; a US$97M impairment
at South Africa Manganese; a US$64M impairment at Manganese Marketing; a US$518M impairment at South Africa Energy Coal,
including US$76M relating to available for sale investments; a US$97M impairment at Brazil Alumina; and the US$126M
derecognition of deferred tax assets at South Africa Energy Coal. The tax benefit associated with these non-cash
impairments is US$174M.
Consistent with our accounting policy, various items are excluded from Underlying earnings, including: the
aforementioned impairments; exchange rate gains associated with the restatement of monetary items (US$87M pre-tax);
fair value losses on derivative instruments (US$36M pre-tax); exchange rate gains associated with the Group's non US
dollar denominated net debt (US$26M pre-tax), demerger related set-up costs (US$60M pre-tax), exchange rate losses
on tax balances (US$178M) and the tax benefit of these remaining earnings adjustments (US$58M).
Profit/(loss) from continuing operations to Underlying EBITDA reconciliation
Pro forma
US$M H1 FY16 H1 FY15
Profit/(loss) from continuing operations (1,587) 786
Earnings adjustments to derive Underlying EBIT 1,728 (76)
Underlying EBIT 141 710
Depreciation and amortisation 401 417
Underlying EBITDA 542 1,127
Profit/(loss) after taxation to Underlying earnings reconciliation
Pro forma
US$M H1 FY16 H1 FY15
Profit/(loss) after taxation (1,749) 339
Earnings adjustments to derive Underlying EBIT 1,728 (76)
Earnings adjustments to derive Underlying net finance cost (26) (93)
Earnings adjustments to derive Underlying income tax expense 73 290
Underlying earnings 26 460
Underlying EBITDA declined by 52% in H1 FY16 to US$542M. Lower commodity prices reduced revenue by US$1.0B,
although this was partially offset by a stronger US dollar (US$401M) and lower price-linked costs (US$94M). Half year
production records were achieved at Worsley Alumina, Australia Manganese (ore) and Cannington (zinc), while power
sales at Brazil Alumina contributed US$51M to Underlying EBITDA.
Controllable cost savings of US$182M were delivered during the period as we increased labour productivity, reduced
procurement costs and optimised our energy footprint. The majority of these savings are considered to be structural in
nature and include a sustainable US$30Mpa or 23% saving in Group and unallocated costs. Depreciation and
amortisation remained largely unchanged at US$401M.
H1 FY16 controllable costs(1) savings
US$M Total
Australia Region 26
Africa Region 119
Group and unallocated 37
Total 182
Underlying EBIT declined by 80% in H1 FY16 to US$141M. The Group recorded an Underlying net finance cost of
US$71M, while Underlying income tax expense was US$44M for an Underlying effective tax rate (ETR)(12) of 34%. As a
result, Underlying earnings declined by 94% in H1 FY16 to US$26M.
"Our disciplined approach extends beyond our operations, to the management of our capital and
optimisation of our balance sheet. During the December 2015 half year we created additional financial
flexibility by resolving two legacy tax disputes and restructuring a financing arrangement. These initiatives
reduced net debt by a combined US$136M."
Brendan Harris, South32 CFO
CASH FLOW
Robust free cash flow from operations, excluding equity accounted investments, of US$192M highlighted the cash
generating capacity of our operations. A 23% or US$77M reduction in Total capital expenditure, excluding equity
accounted investments, to US$253M included:
- Stay-in-business, Minor discretionary and Deferred stripping (including underground development) capital
expenditure of US$211M;
- Major project (Appin Area 9) capital expenditure of US$26M; and
- The purchase of intangibles and capitalisation of exploration expenditure of US$16M.
The Appin Area 9 underground extension at Illawarra Metallurgical Coal is the Group's sole Major project in
development. This project is now 95% complete, with commissioning expected to start in the March 2016 quarter. The
project, which sustains saleable production capacity at approximately 9Mtpa, is tracking more than 30% below the
original budget of US$845M and three months ahead of schedule.
Capital expenditure associated with equity accounted investments of US$48M in H1 FY16 includes the Premium
Concentrate Ore (PC02) project at GEMCO (Australia Manganese) and the second phase of the Central Block
development project at Wessels (South Africa Manganese). The PC02 project, which increases Australia Manganese ore
production capacity by 0.5Mt to 5.3Mtpa (100% basis), is expected to be delivered under budget with first production
anticipated in the June 2016 quarter. The ramp-up of this project will be adjusted to match market demand. The second
phase of the Central Block development project has been accelerated to enable underground mining activity to relocate
closer to critical infrastructure, thereby reducing cycle times. The project is 78% complete, with commissioning expected
in July 2016.
Total capital expenditure, including equity accounted investments was US$301M in H1 FY16.
The resolution of two legacy tax disputes contributed US$46M to cash flow, although this was more than offset by a
US$211M increase in working capital. In this regard, a US$196M decline in provisions was largely associated with the
stronger US dollar, whilst lower commodity and raw material prices led to a US$296M reduction in payables which was
partly offset by a US$162M reduction in receivables. A decline in inventory, however, released US$119M to cash flow as
days debtors were held steady at 21 days and stock was consumed at a number of operations.
H1 FY16 free cash flow of operations, excluding equity accounted investments
US$M H1 FY16
Profit/(loss) from continuing operations (1,587)
Non-cash items 1,868
Profit/(loss) from equity accounted investments 356
Change in working capital (211)
Cash generated from continuing operations 426
Total capital expenditure, excluding equity accounted investments (253)
Operating cash flows from continuing operations before financing activities and tax, and after capital
expenditure 173
Net interest (paid)/received (18)
Income tax (paid)/received 37
Free cash flow of operations, excluding equity accounted investments 192
Dividends totalling US$19M were received from our equity accounted investments, although the Group contributed
US$75M to the funding of these entities during the period.
BALANCE SHEET
During H1 FY16 net debt declined by US$286M to US$116M. The restructuring of a legacy financing arrangement
accounted for US$90M or 31% of the change in net debt during the period, whilst a US$36M reduction in finance leases
(to US$595M) largely reflected strength in the US dollar.
The Group's liquidity and flexibility continues to be underpinned by an undrawn US$1.5B revolving credit facility (RCF).
On 22 January 2016, Moody's and S&P announced downward revisions to their respective commodity price forecasts
and Moody's notified South32, along with 174 other mining and energy companies worldwide, that its rating had been
placed on review for downgrade. Moody's is seeking to complete its review process before 31 March 2016.
DIVIDEND
The Group's simple capital management framework prioritises investment in safe and reliable operations, and an
investment grade credit rating through the cycle. Once those core priorities have been satisfied, we intend to distribute a
minimum 40% of Underlying earnings as dividends to shareholders in each six month reporting period.
An interim dividend is not declared for H1 FY16 given the reduction in Underlying earnings to US$26M, or 0.5 US cents
per share, and the quantum of impairment related non-cash charges recorded during the period.
OUTLOOK
PRODUCTION
FY16 saleable production guidance has been maintained for the majority of our upstream operations, which in most
cases occupy the first or second quartile of industry cost or margin curves. Illawarra Metallurgical Coal saleable
production guidance has, however, been lowered by 7% to 8.3Mt after difficult ground conditions were encountered
during the period, while South Africa Manganese has been restructured to ensure it is appropriately configured for the
current environment. Saleable ore production at South Africa Manganese will be adjusted to match market demand.
The mining and processing plans at Australia Manganese (GEMCO) are being adjusted to ensure the operation retains
its leading, low-cost position in the industry. This includes a revised ramp-up profile for the PC02 project and a 0.2Mt or
4% reduction in guidance for FY17 Australia Manganese saleable ore production to 5.2Mt (100% basis). Conversely, an
increase in longwall utilisation at Illawarra Metallurgical Coal is expected to increase saleable production towards 9.5Mt
in FY17, while a further 3% improvement in refinery availability and utilisation at Worsley Alumina is expected to increase
saleable production to approximately 4.0Mt.
That being said, we remain ready to react to changes in the external environment and will not hesitate to adjust volumes
should superior value and cash flow be attainable by varying the output of any operation.
Upstream production guidance (South32 share)
FY15 FY16e FY17e
Worsley Alumina
Alumina production (kt) 3,819 3,950 (Revised up) 3,965
Brazil Alumina
Alumina production (kt) 1,328 1,320 1,320
South Africa Energy Coal(13)
Domestic coal production (kt) 18,123 16,650 15,300
Export coal production (kt) 16,150 15,300 15,700
Illawarra Metallurgical Coal
Metallurgical coal production (kt) 7,455 (Revised down) 6,900 (Revised up) 8,150
Energy coal production (kt) 1,471 (Revised down) 1,350 (Revised up) 1,380
Australia Manganese
Manganese ore production (kt) 2,942 3,050 (Revised down) 3,120
South Africa Manganese
Manganese ore production (kt) 2,273 Subject to demand Subject to demand
Cerro Matoso
Payable nickel production (kt) 40.4 36.5 36.0
Cannington
Payable silver production (koz) 22,601 21,650 19,500
Payable lead production (kt) 183 175 168
Payable zinc production (kt) 72 80 78
At our downstream processing operations we continue to take decisive action.
At Brazil Alumina, we first curtailed activity at our smelter in July 2013 before suspending all aluminium production in
March 2015. With the economics unlikely to support the recommencement of smelting activity we sold forward power for
the 2017 calendar year and served termination notice on our contract with Eletronorte for the remaining years of the
contract.
At South Africa Aluminium, we responded to the deterioration in market conditions by suspending 22 pots, equivalent to
3% of total production. Whilst this decision will lead to an incremental reduction in saleable production, the decision is
expected to deliver a modest improvement in free cash flow given the associated deferral of pot relining activity.
At the Samancor Manganese Joint Venture alloying operations, saleable production has been adjusted to reflect market
demand. At TEMCO (Australian Manganese), one of the four furnaces was suspended in January 2016 for a minimum of
three months while Metalloys (South Africa Manganese) will continue to operate one of its four furnaces for the
foreseeable future.
COSTS AND CAPITAL EXPENDITURE
Operating and capital expenditure continues to be scrutinised in every location as we seek to sustainably de-capitalise
our business and grow ROIC. In this regard, a cumulative reduction in controllable costs and Capital expenditure,
including equity accounted investments, of approximately US$518M is now anticipated in FY16.
Controllable costs
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. Having reduced controllable costs by US$182M in H1 FY16, we are
well positioned to significantly exceed this target.
We announced a number of major restructuring initiatives subsequent to period end. A reduction of approximately 1,750
employees and contractors is expected before the end of FY16, equivalent to 7% of the Group's employee and
contractor headcount at the end of FY15. These initiatives will further optimise and stretch the performance of our high
quality operations as we seek to increase our competitiveness in the industry. We have established specific cost targets
for a number of our more challenged operations; including:
- A reduction in South Africa Manganese operating unit costs, including Sustaining capital expenditure, to
approximately US$1.90/dmtu(14) in FY17;
- A reduction in Worsley Alumina operating unit costs, including Sustaining capital expenditure, to approximately
US$200/t(14) in FY17;
- A reduction in Illawarra Metallurgical Coal operating unit costs, including Sustaining capital expenditure, to
approximately US$66/t(14) in FY17;
- A reduction in Australia Manganese ore operating unit costs, including Sustaining capital expenditure, to
approximately US$1.56/dmtu(14) in FY17; and
- A reduction in Cerro Matoso operating unit costs, including Sustaining capital expenditure, to approximately
US$3.90/lb(14) in FY17.
Greenfield exploration opportunities continue to be assessed although a willingness to invest shareholder funds will
remain contingent on the quality of the opportunity. A modest investment of US$10M or less is anticipated in FY16.
Exploration activity based on our existing footprint of approximately US$15M is anticipated in FY16.
Capital expenditure
Sustaining capital expenditure, comprising Stay-in-business (SIB), Minor discretionary and Deferred stripping capital
expenditure, including equity accounted investments, is now expected to decline by 23% (or US$150M) to US$500M.
The Group's share of planned capital expenditure associated with equity accounted investments of approximately
US$90M in FY16 is included in the Sustaining capital expenditure guidance noted above.
Guidance for Capital expenditure, including equity accounted investments, is reduced by US$150M to approximately
US$550M in FY16 and includes approximately US$50M for Major projects. Major project capital expenditure guidance
includes approximately US$5M for feasibility studies, primarily associated with the Klipspruit Life Extension project
(South Africa Energy Coal).
Other
All demerger related set-up costs associated with the establishment of South32 have been incurred and were 54% lower
than prior guidance at US$60M. These costs, primarily related to the establishment of the Group's IT infrastructure, are
excluded from our Underlying earnings measures in H1 FY16.
DEPRECIATION AND AMORTISATION
Depreciation and amortisation, excluding equity accounted investments, is expected to decrease by US$88M in FY16 to
US$760M following the recognition of impairment related non-cash charges during the period. Depreciation and
amortisation for equity accounted investments is also expected to decline by US$55M to US$117M in FY16.
TAX EXPENSE
South32's Underlying ETR largely reflects the geographic distribution of the Group's profit. The corporate tax rates
applicable to South32 include: Australia 30%; South Africa 28%; Colombia 39%; and Brazil 34%. It should, however, be
recognised that permanent differences have a disproportionate effect on the Group's Underlying ETR when commodity
prices and profit margins are compressed. In this context, the Group's Underlying ETR for FY16 could be significantly
higher than the rates recorded in FY15 (28.7%) and H1 FY16 (34.4%) should current conditions persist.
FINANCIAL RESULTS
To assist shareholders in their understanding of the South32 Group, pro forma financial information for H1 FY15 has
been prepared to reflect the business as it is now structured and as though it was in effect for the period 1 July 2014 to
31 December 2015. To provide insight into the underlying performance of the South32 Group, our financial results
include internal earnings measures used by South32 management. These internal measures include Underlying
EBITDA, Underlying EBIT and Underlying earnings.
Income statement
Pro forma
US$M H1 FY16 H1 FY15
Revenue 2,981 4,089
Other income 122 150
Expenses excluding net finance cost (4,334) (3,513)
Share of profit/(loss) of equity accounted investments (356) 60
Profit/(loss) from operations (1,587) 786
Net finance cost (45) 5
Taxation expense (117) (452)
Profit/(loss) after taxation (1,749) 339
Basic earnings per share (US cents) (32.9) 6.4
Other financial information
Profit/(loss) from operations (1,587) 786
Earnings adjustments to derive Underlying EBIT 1,728 (76)
Underlying EBIT 141 710
Depreciation and amortisation 401 417
Underlying EBITDA 542 1,127
Profit/(loss) after taxation (1,749) 339
Earnings adjustments after taxation 1,775 121
Underlying earnings 26 460
Basic Underlying earnings per share (US cents) 0.5 8.6
The following table notes the relevant significant items excluded from the Group's Underlying measures. A detailed
explanation of the H1 FY16 major adjustments is included in Note 4 on pages 43 to 49.
Earnings adjustments
Pro forma
US$M H1 FY16 H1 FY15
Adjustments to Underlying EBIT
Significant items 92 -
Exchange rate (gains)/losses on restatement of monetary items (87) (64)
Impairment losses 1,384 -
Fair value (gains)/losses on derivative instruments 36 (6)
Major corporate restructures 5 -
Impairment losses included in operating profit/(loss) of equity accounted investments 287 -
Earnings adjustments included in operating profit/(loss) of equity accounted investments 11 (6)
Total Adjustments to Underlying EBIT 1,728 (76)
Adjustments to net finance cost
Exchange rate variations on net debt (26) (93)
Total earnings adjustments to net finance cost (26) (93)
Adjustments to income tax expense
Significant items 39 96
Tax effect of earnings adjustments to Underlying EBIT (152) 22
Tax effect of earnings adjustments to net finance cost 8 28
Exchange rate variations on tax balances 178 144
Total Adjustments to income tax expense 73 290
Total earnings adjustments after taxation 1,775 121
EARNINGS ANALYSIS
The following chart highlights the key factors that have influenced Underlying earnings in H1 FY16, relative to pro forma
H1 FY15.
Reconciliation of movements in Underlying earnings (US$M)(15)(a)
Uncontrollable
Pro forma H1 FY15 Underlying EBIT 710
Sales price (1,027)
Price-linked costs 94
Foreign exchange 401
Inflation (70)
Volume (227)
Controllable cost 182
Other 40
Net finanve cost and taxation
Interest and tax
(equity accounted investments) 38
H1 FY16 Underlying EBIT 141
Underlying net finance costs (71)
Underlying taxation expense (44)
H1 FY16 Underlying earnings 26
(a) Sales price variance reflects the revenue impact of changes in commodity prices, based on the comparative period's sales volume. Price-
linked costs variance reflects the change in royalties together with the change in input costs driven by changes in commodity prices or market
traded consumables. Foreign exchange reflects the impact of exchange rate movements on local currency denominated costs and sales. Volume
variance reflects the revenue impact of sales volume changes, based on the comparative period's sales prices. Controllable costs variance
represents the impact from changes in the Group's controllable local currency cost base, including the variable cost impact of production volume
changes on expenditure, and period on period movements in inventories. The controllable cost variance excludes earnings adjustments including
significant items.
Prices, foreign exchange and inflation
A significant contraction in commodity prices reduced revenue by US$1.0B. Persistent weakness in the aluminium market
accounted for 34% of this impact. Lower metallurgical and energy coal, manganese ore and alloy, alumina and nickel prices
reduced revenue by a further US$185M, US$167M, US$126M and US$123M, respectively. The impact of lower commodity
prices reduced Underlying EBIT by US$933M, net of price-linked costs.
General inflation increased costs by US$70M. The absolute impact was most pronounced at our South African operations,
which collectively accounted for 64% of the total variance.
Weaker commodity prices and inflation were, however, partly offset by the general strengthening of the US dollar against a
basket of producer currencies, which increased Underlying EBIT by US$401M.
Volume
We achieved half year production records at Worsley Alumina, Australia Manganese (ore) and Cannington (zinc) in
H1 FY16 and remain on track to meet FY16 production guidance for the majority of our upstream operations. The
US$227M volume related decline in revenue does, however, largely reflect the decision to curtail or suspend production
at South Africa Manganese (alloy and ore saleable production), Brazil Alumina (aluminium saleable production) and our
African aluminium smelters (aluminium saleable production). The remainder of the volume related differential is
accounted for by production losses at Illawarra Metallurgical Coal (US$47M), where challenging ground conditions were
encountered, and grade decline at Cerro Matoso (US$52M).
Controllable cost reduction
In August 2015, we announced a commitment to reduce our annual controllable cost base, including equity accounted
investments, by at least US$350M per annum before end FY18. Having reduced controllable costs by US$182M in H1
FY16, we are well positioned to significantly exceed this target. The majority of the savings achieved to date are
considered to be structural in nature and include a sustainable US$30Mpa or 23% saving in Group and unallocated
costs.
The suspension of operations, particularly at South Africa Manganese, contributed to the reduction in controllable costs,
although this was broadly offset by additional charges associated with a physical reduction in inventory and an
adjustment to the carrying value of inventory to reflect net realisable value.
Other items
Other items increased Underlying EBIT by a net US$40M. This included: a US$30M reduction in restoration and
rehabilitation provisions at South Africa Energy Coal; an US$18M benefit at Cerro Matoso related to employee provisions in
the prior period; and a US$17M reduction in expenses at Brazil Alumina reflecting the full suspension of smelting activities.
These benefits were partially offset by a US$30M reduction in the contribution of third party product sales and an US$18M
reduction in power sales in Brazil.
Interest and tax associated with equity accounted investments
The Group's manganese operations are jointly controlled by South32 (60% share) and Anglo American (40% share). The
Underlying interest and taxation expense associated with these equity accounted investments declined by US$38M in
H1 FY16.
Net finance costs
The Group incurred Underlying net finance costs, excluding equity accounted investments, of US$71M in H1 FY16. This
largely reflects the unwinding of the discount applied to restoration and rehabilitation provisions (US$49M), and finance
lease charges (US$25M), primarily at Worsley Alumina.
The following table reconciles H1 FY16 Underlying net finance cost to the Group's net finance cost.
Underlying net finance cost reconciliation
US$M H1 FY16
Unwind of discount applied to restoration and rehabilitation provisions 49
Finance lease charges 25
Other (3)
Underlying net finance cost 71
Add back earnings adjustment for exchange rate variations on net debt (26)
Net finance costs 45
Taxation expense
The Group's underlying income tax expense, which excludes taxation associated with equity accounted investments,
was US$44M for an Underlying effective tax rate (ETR)(12) of 34%. The tax expense for equity accounted investments
was US$6M, including royalty related taxation. In this regard, the recognition of the GEMCO (Australia Manganese)
Northern Territory royalty as a profits based tax gives rise to a royalty related taxation expense of US$9M in equity
accounted investments. The Group did not generate franking credits during the period.
The following table reconciles the Group's Underlying income tax expense and Underlying ETR for H1 FY16.
Underlying income tax expense reconciliation and Underlying ETR
US$M H1 FY16
Underlying EBIT 141
Include: Underlying net finance revenue/(costs) (71)
Remove: Share of profit/(loss) of equity accounted investments 58
Underlying Profit/(loss) before taxation 128
Pro forma income tax expense 117
Tax effect of earnings adjustments to Underlying EBIT 152
Tax effect of earnings adjustments to net finance cost (8)
Exchange rate variations on tax balances (178)
Tax on significant items (39)
Underlying income tax expense 44
Underlying effective tax rate (ETR) 34.4%
OPERATIONS ANALYSIS
A summary of the Underlying performance of the South32 operations is presented below.
Operation tables
Revenue Underlying EBIT
US$M H1 FY16 H1 FY15 H1 FY16 H1 FY15
Worsley Alumina 540 651 33 79
South Africa Aluminium 596 823 21 169
Mozal Aluminium 208 340 (10) 76
Brazil Alumina 186 268 74 101
South Africa Energy Coal 542 683 46 1
Illawarra Metallurgical Coal 284 425 (37) 22
Australia Manganese(a) 226 339 10 95
South Africa Manganese(a) 114 231 (51) 13
Cerro Matoso 166 340 (48) 88
Cannington 423 486 141 158
Third party products(16) 291 404 - 30
Inter-segment (254) (332) (19) (65)
Total 3,322 4,658 160 767
Equity accounting adjustment(b) (341) (569) (19) (57)
South32 Group 2,981 4,089 141 710
(a) Revenue and Underlying EBIT reflect South32's proportionally consolidated interest in the manganese operations.
(b) The equity accounting adjustment reconciles the proportional consolidation of the South32 manganese operations to the treatment of the
manganese operations on an equity accounted basis.
Note: Detailed operational analysis is presented on pages 17 to 26. In this section, unless otherwise stated:
- All metrics reflect South32's share;
- H1 FY15 comparative financial information reflects pro forma financial information;
- Operating unit costs, including Sustaining capital expenditure, is Revenue less Underlying EBITDA plus Sustaining
capital expenditure;
- Projected operating unit costs, including Sustaining capital expenditure, and Sustaining capital expenditure for FY17
include royalties (where appropriate) and the influence of exchange rate assumptions, and are predicated on: an
alumina price of US$255/t; an average blended coal price of US$65/t for Illawarra Metallurgical Coal; a manganese
ore price of US$2.00/dmtu for 44% manganese product; a nickel price of US$3.75/lb; an AUD:USD exchange rate of
0.68; a USD:ZAR exchange rate of 14.12; and a USD:COP exchange rate of 3,170; all of which reflect forward
markets at the end of the period or our internal expectations; and
- Quoted variances for: procurement activities; Sustaining capital expenditure; and operating unit costs, including
Sustaining capital expenditure; compares FY17 with FY15.
WORSLEY ALUMINA
(86% SHARE)
Volumes
Worsley Alumina saleable production increased by 2% (or
40kt) to a record 1,993kt in H1 FY16 as the operations
processed stockpiled alumina hydrate and benefitted from
additional efficiency gains. The 2% decline in sales reflected
a timing difference as one shipment slipped into the March
2016 quarter.
Saleable production guidance remains unchanged at 3.95Mt
for FY16, with a further lift to 3.97Mt anticipated in FY17 as
incremental capacity creep is delivered by improving the
consistency of ore feed and increasing refinery availability
and utilisation.
Costs
Operating unit costs declined by 11% to US$228/t as the US
dollar strengthened, general consumables and energy prices
declined, and additional labour productivity gains were
embedded.
The benefit associated with capacity creep and broader
restructuring initiatives is expected to reduce operating unit
costs, including Sustaining capital expenditure, to
approximately US$200/t in FY17. Specific 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;
- The continued aggregation of our procurement activities
to the region, which is expected to deliver a circa
US$65M saving in FY17;
- The continued optimisation of the coal to gas fuel mix in
the co-generation power facility; and
- A 34% reduction in Sustaining capital expenditure to
approximately US$41M in FY17.
Financial performance
Underlying EBIT decreased by US$46M in H1 FY16 to
US$33M. Lower realised alumina prices (-US$84M, net of
price-linked costs) and a favourable movement in foreign
exchange rate markets (+US$59M) had the most significant
influence on financial performance.
Capital expenditure decreased by 19% to US$22M.
Pre-tax restructuring costs, including redundancies, of
approximately US$15M are anticipated at Worsley Alumina in
H2 FY16. These charges will be excluded from the Group's
Underlying earnings measures.
South32 share H1 FY16 H1 FY15
Alumina production (kt) 1,993 1,953
Alumina sales (kt) 1,898 1,943
Realised alumina sales price
(US$/t)(a) 285 335
Operating unit cost (US$/t)(b) 228 255
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales.
South32 share (US$M) H1 FY16 H1 FY15
Revenue 540 651
Underlying EBITDA 108 155
Underlying EBIT 33 79
Net operating assets(a) 3,293 3,361
Capital expenditure 22 27
Major projects (>US$100M) - -
All other capital expenditure 22 27
Exploration expenditure - -
Exploration expensed - -
(a) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
SOUTH AFRICA ALUMINIUM
(100%)
Volumes
South Africa Aluminium saleable production of 352kt was
largely unchanged in H1 FY16, while a 2% reduction in
December quarter production volumes reflected our decision
to suspend production of 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. The ability to
achieve our production guidance remains contingent upon
market conditions and the frequency and intensity of
electricity load-shedding events.
Costs
Operating unit costs declined by 15% to US$1,496/t,
reflecting a stronger US dollar, lower aluminium price-linked
power costs and weaker raw material prices. Additional cost
savings were realised as the smelter lowered its consumption
of coke and alumina per unit of production, and continued to
improve its energy efficiency.
While additional productivity gains are being pursued, the
cost profile of this first quartile smelter will be more heavily
influenced by power and raw material inputs, given the
operation's high variable cost base. Controllable costs will,
however, be impacted by an increase in relining activity
(6 pots) in H2 FY16, consistent with the smelter's natural
relining cycle. 66 pots were relined at a cost of
approximately US$204k per pot in H1 FY16, down 23% from
the prior period.
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.
Financial performance
Underlying EBIT decreased by US$148M in H1 FY16 to
US$21M. The combination of lower realised aluminium prices
and premia reduced Underlying EBIT by US$213M, net of
price-linked costs. This impact was partially offset by a
favourable movement in foreign exchange rate markets
(+US$30M) and an increase in sales volumes (+US$27M).
Capital expenditure of US$8M was broadly unchanged
from the prior period.
South32 share H1 FY16 H1 FY15
Aluminium production (kt) 352 356
Aluminium sales (kt)(a) 363 352
Realised sales price (US$/t)(a) 1,642 2,338
Operating unit cost (US$/t)(b) 1,496 1,761
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of equity production. Realised sales
price is calculated as sales revenue divided by sales volume.
(b) Total cost per tonne of aluminium sold. Operating unit cost is
Revenue less Underlying EBITDA divided by sales.
South32 share (US$M) H1 FY16 H1 FY15
Revenue 596 823
Underlying EBITDA 53 203
Underlying EBIT 21 169
Net operating assets(a) 1,062 1,151
Capital expenditure 8 10
Major projects (>US$100M) - -
All other capital expenditure 8 10
Exploration expenditure - -
Exploration expensed - -
(a) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
MOZAL ALUMINIUM
(47.1% SHARE)
Volumes
Mozal Aluminium saleable production of 133kt was largely
unchanged in H1 FY16, while production increased
marginally in the December 2015 quarter following a
modest reduction in the number of load-shedding events.
The 12% decline in sales reflected the scheduling of
shipments between periods. Aluminium production is
expected to remain broadly unchanged in FY16.
The Mozal Aluminium smelter utilises hydroelectric power
under a long-term contract that is generated by Hidroeléctrica
de 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).
Costs
Operating unit costs declined by 8% to US$1,653/t, reflecting
a stronger US dollar and weaker raw material prices.
While additional productivity gains are being pursued, the
cost profile of the smelter will be more heavily influenced by
power and raw material inputs, given the operation's high
variable cost base. Controllable costs will, however, benefit
from a 15% decrease in relining activity (8 pots) in
H2 FY16 that forms part of the natural relining cycle. Each
pot was relined at a cost of approximately US$212k in H1
FY16, down 14% from the prior period.
Financial performance
Underlying EBIT decreased by US$86M in H1 FY16 to a loss
of US$10M. The combination of lower realised aluminium
prices and premia reduced Underlying EBIT by US$80M, net
of price-linked costs, while lower volumes reduced Underlying
EBIT by a further US$41M. This impact was partially offset by
a favourable movement in foreign exchange rate markets
(+US$19M).
Capital expenditure of US$5M was unchanged from the
prior period.
South32 share H1 FY16 H1 FY15
Aluminium production (kt) 133 135
Aluminium sales (kt)(a) 121 137
Realised sales price (US$/t)(a) 1,719 2,482
Operating unit cost (US$/t)(b) 1,653 1,796
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of the equity production. Realised
sales price is calculated as sales revenue divided by sales volume.
(b) Total cost per tonne of aluminium sold. Operating unit cost is
Revenue less Underlying EBITDA divided by sales.
South32 share (US$M) H1 FY16 H1 FY15
Revenue 208 340
Underlying EBITDA 8 94
Underlying EBIT (10) 76
Net operating assets(a) 593 626
Capital expenditure 5 5
Major projects (>US$100M) - -
All other capital expenditure 5 5
Exploration expenditure - -
Exploration expensed - -
(a) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
BRAZIL ALUMINA
(ALUMINA 36% SHARE, ALUMINIUM
40% SHARE)
Volumes
Brazil Alumina saleable alumina production of 673kt was
largely unchanged in H1 FY16 and FY16 production
guidance of 1.32Mt remains unchanged. The 5% decline in
sales reflected a timing difference as one shipment moved
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
forward sold power for CY17 and served termination notice
on our contract with Eletronorte for the remaining years of the
contract.
Costs
Alumina operating unit costs at the non-operated refinery
declined by 7% to US$185/t as the US dollar strengthened
against the Brazilian real and raw material costs at the
refinery decreased.
Financial performance
Underlying EBIT decreased by US$27M in H1 FY16 to
US$74M. Lower volumes associated with the suspension of
smelting activities (-US$54M), a reduction in realised alumina
prices (-US$18M, net of price-linked costs) and a decline in
power sales (-US$18M to US$51M) was partially offset by a
favourable movement in foreign exchange rate markets
(+US$53M).
As a result of our decision to terminate the contract with
Eletronorte, power sales are not expected to contribute to
Underlying EBIT beyond FY16. 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. Underlying EBIT
generated by these power sales in the June 2016 half year
will change by +/-BRL9M for every +/-US10c/lb movement
in the aluminium price above a floor of US$0.66/lb.
A US$4M increase was recorded for Sustaining capital
expenditure at the refinery.
South32 share H1 FY16 H1 FY15
Alumina production (kt) 673 680
Aluminium production (kt) - 26
Alumina sales (kt) 661 694
Aluminium sales (kt) - 25
Realised alumina sales price
(US$/t)(a) 281 323
Realised aluminium sales price
(US$/t)(a) N/A 2,360
Alumina operating unit cost
(US$/t)(b, c) 185 199
Aluminium operating unit cost
(US$/t)(b,d) N/A 2,840
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales.
(c) Includes cost of acquiring bauxite from MRN.
(d) Includes cost of alumina transferred from the Alumar refinery to the
Alumar smelter at the alumina contract sales price. Excludes
EBITDA from the sale of power.
South32 share (US$M) H1 FY16 H1 FY15
Revenue 186 268
Alumina 186 224
Aluminium - 59
Intra-segment elimination - (15)
Other income(a) 105 127
Underlying EBITDA 110 140
Alumina 64 86
Aluminium 46 54
Underlying EBIT 74 101
Alumina 36 56
Aluminium 38 45
Net operating assets(b) 789 928
Alumina 768 744
Aluminium 21 184
Capital expenditure 9 5
Major projects (>US$100M) - -
All other capital expenditure 9 5
Exploration expenditure - -
Exploration expensed - -
(a) Other income in H1 FY16 includes revenue of US$99M from the
sale of surplus electricity.
(b) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
SOUTH AFRICA ENERGY COAL
(90% SHARE)
Volumes
South Africa Energy Coal saleable production of 16.4Mt was
broadly unchanged in H1 FY16. 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
32.0Mt.
Costs
Operating unit costs declined by 29% to US$25/t as the rand
weakened significantly against the US dollar and labour
productivity continued to rise. The insourcing of activity has
underpinned a 31% reduction in contractors when compared
with the average headcount in FY15, while employee
numbers have also been reduced by 10%.
Labour productivity remains a major focus, while several
procurement initiatives are expected to deliver additional
savings. South African inflation, however, remains a
significant challenge and is expected to more than offset the
savings associated with these initiatives.
Financial performance
Underlying EBIT increased by US$45M in H1 FY16 to
US$46M. A reduction in contractor and labour costs
increased Underlying EBIT by US$53M while a stronger US
dollar delivered a further US$47M benefit. Non-cash charges
declined by US$52M as depreciation and amortisation
reflected the recognition of an impairment in the prior period
and restoration and rehabilitation provisions were reduced. In
contrast, lower realised prices reduced Underlying EBIT by
US$86M, net of price linked costs.
A US$16M decrease in Capital expenditure to US$42M
reflected the purchase of mobile equipment in the prior
period.
100% terms(a) H1 FY16 H1 FY15
Energy coal production (kt) 16,379 16,525
Domestic sales (kt)(b) 9,080 9,137
Export sales (kt)(b) 8,021 7,913
Realised domestic sales price
(US$/t)(b) 19 23
Realised export sales price
(US$/t)(b) 46 60
Operating unit cost (US$/t)(c) 25 35
(a) South32's interest in South Africa Energy Coal is accounted at 100%
until ESOP and B-BBEE vendor loans are repaid.
(b) 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.
(c) Operating unit cost is Revenue less Underlying EBITDA divided by
sales.
100% terms(a) (US$M) H1 FY16 H1 FY15
Sales revenue(b) 542 683
Underlying EBITDA 116 93
Underlying EBIT 46 1
Net operating assets/(liabilities)(c) (38) 395
Capital expenditure 42 58
Major projects (>US$100M) - 8
All other capital expenditure 42 50
Exploration expenditure - -
Exploration expensed - -
(a) South32's interest in South Africa Energy Coal is accounted at 100%
until ESOP and B-BBEE vendor loans are repaid.
(b) Includes domestic and export sales revenue.
(c) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
ILLAWARRA METALLURGICAL COAL
(100%)
Volumes
Illawarra Metallurgical Coal saleable production decreased by
17% (or 782kt) to 3.96Mt in H1 FY16 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. Accordingly, forecast FY16 saleable coal
production has been lowered by 7% to 8.25Mt. An increase in
longwall utilisation at the Appin and Dendrobium
underground mines, and the completion of the Appin Area 9
project is expected to increase production to approximately
9.5Mt in FY17.
Costs
Operating unit costs declined by 13% to US$62/t as
US dollar strengthened and broader cost savings initiatives
were embedded. At current prices and a constant AUD:USD
exchange rate, H2 FY16 operating costs are expected to
remain broadly unchanged.
A number of restructuring initiatives are being implemented in
order to reduce operating unit costs, including Sustaining
capital expenditure and underground development, by 37%
to approximately US$66/t in FY17. Specific 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;
- 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% reduction in Sustaining capital expenditure and
underground development to approximately US$108M in
FY17.
The Appin Area 9 project will be completed in the March
2016 quarter. 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.
Financial performance
Underlying EBIT decreased by US$59M in H1 FY16 to a loss
of US$37M. Lower realised coal prices (-US$85M, net of
price-linked costs) and a decline in sales volumes (-US$47M)
were partially offset by the benefit associated with the
stronger US dollar (+US$55M).
Capital expenditure decreased by 38% from the prior period
to US$111M.
Pre-tax restructuring costs, including redundancies, of
approximately US$10M are anticipated at Illawarra
Metallurgical Coal in H2 FY16. These charges will be
excluded from the Group's Underlying earnings measures.
South32 share H1 FY16 H1 FY15
Metallurgical coal production (kt) 3,298 3,858
Energy coal production (kt) 658 880
Metallurgical coal sales (kt) 3,147 3,447
Energy coal sales (kt) 609 799
Realised metallurgical coal sales
price (US$/t)(a) 82 110
Realised energy coal sales price
(US$/t)(a) 43 57
Operating unit cost (US$/t)(b) 62 71
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales.
South32 share (US$M) H1 FY16 H1 FY15
Sales revenue(a) 284 425
Underlying EBITDA 50 122
Underlying EBIT (37) 22
Net operating assets(b) 1,540 1,518
Capital expenditure 111 180
Major projects (>US$100M) 26 25
All other capital expenditure(c) 85 155
Exploration expenditure 2 2
Exploration expensed 2 2
(a) Includes metallurgical coal and energy coal sales revenue.
(b) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
(c) Includes capitalised underground development expenditure and
Appin Area 9 project underground development expenditure in
H1 FY16 of US$42M.
AUSTRALIA MANGANESE
(60% SHARE)
Volumes
Australia Manganese saleable ore production increased by
6% (or 90kt) to a record 1,589kt in H1 FY16. FY16 saleable
production guidance of 5.1Mt (100% basis) remains
unchanged.
The mining and processing plans at Australia Manganese
(GEMCO) are being adjusted to ensure the operation
retains its leading, low-cost position in the industry. This
includes a revised ramp-up profile for the PC02 project
and a 0.2Mt (100% basis) or 4% reduction in FY17
saleable ore production guidance to 5.2Mt (100% basis).
Saleable manganese alloy production increased by 2%
(or 2kt) to 85kt in H1 FY16. 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 H2 FY16, customer commitments will be met
from inventory.
Costs
Manganese ore operating unit costs declined by 19% to
US$1.58/dmtu, despite a planned 20% increase in the waste
to ore strip ratio (from 3.0 to 3.6).
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 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% to approximately US$1.56/dmtu in FY17.
Specific measures being taken to reposition GEMCO include:
- 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 55 roles planned as
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 saving in FY17; and
- A 56% reduction in Sustaining capital expenditure to
approximately US$40M in FY17.
Redundancy costs are not anticipated at GEMCO, despite
the meaningful reduction in employees and contractors.
Financial performance
Underlying EBIT declined by US$85M in H1 FY16 to
US$10M. Lower manganese ore and alloy prices reduced
Underlying EBIT by US$113M, net of price-linked costs, while
a stronger US dollar increased Underlying EBIT by US$27M.
Capital expenditure increased by US$7M to US$41M. This
included a US$20M investment in the PC02 project.
South32 share H1 FY16 H1 FY15
Manganese ore production (kt) 1,589 1,499
Manganese alloy production (kt) 85 83
Manganese ore sales (kt)(a) 1,499 1,459
External customers 1,328 1,295
TEMCO 171 164
Manganese alloy sales (kt)(a) 76 77
Realised manganese ore sales
price (US$/dmtu)(a)(b) 2.65 4.03
Realised manganese alloy sales
price (US$/t)(a) 737 1,143
Ore operating unit cost
(US$/dmtu)(b)(c) 1.58 1.96
Alloy operating unit cost
(US$/t)(b)(c) 763 979
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of equity production. Realised sales
price is calculated as sales revenue divided by sales volume.
(b) H1 FY16 average manganese content of ore sales was 46% Mn
(H1 FY15: 46% Mn).
(c) Operating unit cost is Revenue less Underlying EBITDA divided by
sales.
(d) Includes the cost of manganese ore acquired by TEMCO from
GEMCO at market prices.
South32 share (US$M) H1 FY16 H1 FY15
Sales revenue(a) 226 339
Manganese Ore 183 270
Manganese Alloy 56 88
Intra-segment elimination (13) (19)
Underlying EBITDA 72 151
Manganese Ore 74 138
Manganese Alloy (2) 13
Underlying EBIT 10 95
Manganese Ore 16 86
Manganese Alloy (6) 9
Net operating assets(b) 376 1,384
Manganese Ore 357 1,365
Manganese Alloy 19 19
Capital expenditure 41 34
Major projects (>US$100M) - 5
All other capital expenditure 41 29
Exploration expenditure 1 2
Exploration expensed - 2
(a) Revenues referring to sales from GEMCO to TEMCO are eliminated
as part of the consolidation.
(b) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
SOUTH AFRICA MANGANESE
(ORE 44.4% SHARE, ALLOY 60% SHARE)
Volumes
South Africa Manganese saleable ore production decreased
by 39% (or 477kt) to 757kt in H1 FY16 following the
suspension of operations at the Hotazel mines in
November 2015.
Following the completion of the Samancor Manganese Joint
Venture's strategic review, the Hotazel mines will operate at a
reduced production rate and with greater flexibility. Subject to
market conditions, saleable production will ramp-up to
2.9Mtpa (100% basis), taking approximately 900ktpa (or 23%
of FY15 production) out of the market for the foreseeable
future.
Saleable manganese alloy production decreased by 67% (or
94kt) to 46kt in H1 FY16 following the suspension of three of
the four furnaces at Metalloys in May 2015 in response to
challenging market conditions. This resulted in a substantial
reduction in ore and alloy inventories.
Costs
Manganese ore operating unit costs increased by 27% to
US$2.48/dmtu as the significant reduction in production
created diseconomies of scale.
A series of restructuring initiatives are expected to reduce
manganese operating unit costs, including Sustaining capital
expenditure, by 24% to US$1.90/dmtu in FY17. Specific
initiatives include:
- The reduction of approximately 620 employees across
the joint venture, equivalent to 37% of the employee
headcount at the end of FY15;
- The acceleration of the second phase of the Central
Block development project at Wessels (US$19M
budget), which will enable mining activity to relocate
closer to critical infrastructure and reduce cycle times;
- The continued operation of only one of four furnaces at
the Metalloys smelter, which is now generating free cash
flow; and
- A circa 80% reduction in annual Sustaining capital
expenditure at the Hotazel mines to US$7M in FY17.
Financial performance
Underlying EBIT declined by US$64M to a loss of US$51M
as lower realised manganese ore and alloy prices reduced
Underlying EBIT by US$47M, net of price-linked costs. The
reduction in sales volumes impacted unit costs, although this
was partially offset by a US$22M benefit associated with the
stronger US dollar.
Capital expenditure of US$7M was significantly lower than
the prior period.
Pre-tax restructuring costs, including redundancies, of
approximately US$10M are anticipated in H2 FY16.
South32 share H1 FY16 H1 FY15
Manganese ore production (kt) 757 1,234
Manganese alloy production (kt) 46 140
Manganese ore sales (kt)(a) 879 1,189
External customers 862 887
Metalloys 17 302
Manganese alloy sales (kt)(a) 50 134
Realised manganese ore sales
price (US$/dmtu)(a)(b) 2.23 2.84
Realised manganese alloy sales
price (US$/t)(a) 748 910
Ore operating unit cost
(US$/dmtu)(b)(c) 2.48 1.95
Alloy operating unit cost
(US$/t)(b)(c) 1,126 930
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of equity production. Realised sales
price is calculated as sales revenue divided by sales volume
(Manganese Ore sales gross-up to reflect 60% accounting effective
interest).
(b) H1 FY16 average manganese content of ore sales was 40% Mn
(H1 FY15: 41% Mn).
(c) Operating unit cost is Revenue less Underlying EBITDA divided by
sales.
(d) Includes the cost of the manganese ore acquired by Metalloys from
Hotazel mines at market prices.
South32 share (US$M) H1 FY16 H1 FY15
Revenue(a) 114 231
Manganese Ore(b) 78 139
Manganese Alloy 37 122
Intra-segment elimination (1) (30)
Underlying EBITDA (28) 40
Manganese Ore(b) (9) 43
Manganese Alloy (19) (3)
Underlying EBIT (51) 13
Manganese Ore(b) (25) 25
Manganese Alloy (26) (12)
Net operating assets(c) 355 530
Manganese Ore(b) 102 384
Manganese Alloy 253 146
Capital expenditure 7 22
Major projects (>US$100M) - 2
All other capital expenditure 7 20
Exploration expenditure - 1
Exploration expensed - 1
(a) Revenues referring to sales from Hotazel mines to Metalloys are
eliminated as part of the consolidation.
(b) 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.
(c) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
CERRO MATOSO
(99.9% SHARE)
Volumes
Cerro Matoso payable nickel production declined by 17%
(or 3.7kt) to 17.5kt in H1 FY16 as the average ore grade
decreased, consistent with the mine plan. Payable nickel
production guidance remains unchanged at approximately
36.5kt for FY16, with a similar rate of production anticipated
in FY17.
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.
Costs
Operating unit costs declined by 11% to US$4.43/lb, largely
as a result of the stronger US dollar and various cost savings
initiatives.
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%
reduction in operating unit costs, including Sustaining capital
expenditure, to approximately US$3.90/lb in FY17. Specific
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% reduction in Sustaining capital expenditure to
approximately US$16M in FY17.
Financial performance
Underlying EBIT declined by US$136M to a loss of US$48M.
Weaker realised prices (-US$129M, net of price-linked costs)
and the grade related decline in sales volumes
(-US$52M) was only partly offset by the benefit associated
with a stronger US dollar (US$51M).
Capital expenditure declined by 33% from the prior period to
US$12M.
Pre-tax restructuring costs, including redundancies, of
approximately US$2M are anticipated at Cerro Matoso in
H2 FY16. These charges will be excluded from the Group's
Underlying earnings measures.
South32 share H1 FY16 H1 FY15
Ore mined (kwmt) 3,017 3,339
Ore processed (kdmt) 1,312 1,335
Ore grade processed (%, Ni) 1.5 1.7
Payable nickel production (kt) 17.5 21.2
Payable nickel sales (kt) 17.5 20.6
Realised nickel sales price
(US$/lb)(a) 4.30 7.49
Operating unit cost (US$/lb)(b) 4.43 4.95
(a) Inclusive of by-products. Realised sales price is calculated as sales
revenue divided by sales volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
Payable nickel sales.
South32 share (US$M) H1 FY16 H1 FY15
Sales revenue 166 340
Underlying EBITDA (5) 115
Underlying EBIT (48) 88
Net operating assets(a) 749 763
Capital expenditure 12 18
Major projects (>US$100M) - -
All other capital expenditure 12 18
Exploration expenditure 3 5
Exploration expensed 1 1
(a) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
CANNINGTON
(100% SHARE)
Volumes
Cannington payable silver production decreased by a
modest 3% (or 357koz) to 11.9Moz in H1 FY16 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 delivers
an increase in the ratio of zinc to lead concentrate over
the remainder of the year.
Costs
Operating unit costs declined by 15% to US$153/t. This
largely reflected a favourable movement in foreign exchange
rate markets and a reduction in labour costs and contractor
spend. By the end of FY17, the employee and contractor
headcount will have decreased by approximately 17%
relative to the average employee and contractor headcount in
FY15.
Further initiatives to increase labour productivity and
operational efficiencies are being pursued, including a
renewed focus on procurement, which is expected to deliver
a US$20M saving in FY17.
Financial performance
Underlying EBIT declined by US$17M to US$141M. Lower
average realised prices, net of price-linked costs, and sales
volumes reduced Underlying EBIT by US$58M. This was
largely offset by a favourable movement in exchange rate
markets (+US$33M).
Finalisation adjustments and the provisional pricing of
Cannington concentrates reduced Underlying EBIT by
US$19M in H1 FY16 (-US$43M in FY15; -US$40M in
H1 FY15). 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 H2 FY16.
Capital expenditure was largely unchanged at US$15M.
South32 share H1 FY16 H1 FY15
Ore mined (kt) 1,743 1,748
Ore processed (kt) 1,657 1,669
Ore grade processed (g/t, Ag) 266 272
Ore grade processed (%, Pb) 7.0 7.0
Ore grade processed (%, Zn) 3.7 3.5
Payable Silver production (koz) 11,878 12,235
Payable Lead production (kt) 98 99
Payable Zinc production (kt) 42 37
Payable Silver sales (koz) 11,898 12,715
Payable Lead sales (kt) 95 100
Payable Zinc sales (kt) 41 33
Realised Silver sales price
(US$/oz)(a) 15 17
Realised Lead sales price
(US$/t)(a) 1,828 1,938
Realised Zinc sales price
(US$/t)(a) 1,640 2,252
Operating unit cost (US$/t ore
processed)(b) 153 179
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
ore processed.
South32 share (US$M) H1 FY16 H1 FY15
Revenue 423 486
Underlying EBITDA 169 187
Underlying EBIT 141 158
Net operating assets(a) 238 280
Capital expenditure 15 14
Major project (>US$100M) - -
All other capital expenditure 15 14
Exploration expenditure 2 3
Exploration expensed 2 3
(a) H1 FY15 Net operating assets reflects balance as at 30 June 2015.
PRO FORMA RECONCILIATIONS
BACKGROUND
Effective 15 May 2015, BHP Billiton shares ceased trading with an entitlement to South32 shares. On 18 May 2015, South32 Limited was listed
as a separate standalone entity on the Australian Securities Exchange on a deferred settlement basis, on the London Stock Exchange on a
when-issued basis and on the Johannesburg Stock Exchange on a normal settlement basis. Economic separation and distribution of South32
shares to shareholders became effective from 25 May 2015.
Prior to the demerger, the South32 Group and the BHP Billiton Group were required to undertake a number of internal share and asset transfers
in connection with the corporate restructure (Internal Restructure).
STATUTORY FINANCIAL INFORMATION
As required, statutory financial information for the South32 Group has been presented for the financial half year ended 31 December 2015 (H1
FY16) and the financial half year ended 31 December 2014 (H1 FY15). The South32 Group's H1 FY15 statutory financial information only
includes the results of the current South32 Group operations (also referred to as "operations") from their date of acquisition during the half year
as part of the Internal Restructure(17) (being Brazil Alumina). The exception is Illawarra Metallurgical Coal, which was part of the South32 Group
at 1 July 2013. The South32 Group's H1 FY15 statutory financial information also includes:
- The results of New Mexico Coal for the period 1 July 2014 to 27 October 2014, being the date that it ceased to be part of the South32
Group as a result of the Internal Restructure; and
- Finance charges on internal borrowings from the BHP Billiton Group in the period.
Accordingly, as a result of the Internal Restructure, the statutory financial information for H1 FY15 does not reflect the performance of the
South32 Group as it is currently structured.
PRO FORMA FINANCIAL INFORMATION
To assist shareholders in their understanding of the South32 Group, pro forma financial information for H1 FY15 has been prepared to reflect the
business as it is now structured and as though it was in effect for the period 1 July 2014 to 31 December 2014. The pro forma financial
information is not prepared in accordance with IFRS.
The following pro forma adjustments, including the associated tax effect, have been made on a basis consistent with those contemplated in the
South32 Listing Documents:
- Equity accounting of the South32 manganese assets (comprising South Africa Manganese, Australia Manganese and Samancor AG)
from 1 July 2013 (refer note 4(c) of the Group's 2015 financial statements); and
- Excluding net finance costs charged by the BHP Billiton Group.
Additional pro forma adjustments, including the associated tax effect, have also been made in the presentation of pro forma financial information.
These include:
- Reflecting changes in corporate costs associated with South32 Limited becoming a stand-alone group as if those costs had been
incurred from 1 July 2014;
- Excluding demerger related major corporate restructuring costs; and
- Including certain significant tax expense items such as the Brazil Alumina tax accounting adjustments.
A reconciliation between the pro forma financial information and the statutory financial information is included. The statutory financial information,
reconciliations and pro forma financial information have not been audited or reviewed by the Group's external auditor.
The following tables reconcile pro forma and statutory earnings for H1 FY15.
H1 FY15 Statutory Demerger related Pro forma
consolidated pro forma consolidated
US$M income statement adjustments(a) financial
information
Revenue 649 3,440 4,089
Other income 114 36 150
Expenses excluding net finance cost (676) (2,837) (3,513)
Share of profit/(loss) of equity accounted investments - 60 60
Profit/(loss) from continuing operations 87 699 786
Net finance cost (24) 29 5
Taxation expense (153) (299) (452)
Profit/(loss) after taxation from continuing operations (90) 429 339
Profit/(loss) from discontinued operations, net of taxation 7 (7) -
Profit/(loss) after taxation (83) 422 339
Other financial information
Profit/(loss) from continuing operations 87 699 786
Earnings adjustments 4 (80) (76)
Underlying EBIT from continuing operations 91 619 710
Depreciation and amortisation 133 284 417
Underlying EBITDA from continuing operations 224 903 1,127
Profit/(loss) after taxation from continuing operations (90) 429 339
Earnings adjustments after taxation 147 (26) 121
Underlying earnings from continuing operations 57 403 460
The following tables reconcile pro forma and statutory operating cash flows before financing activities and tax, and after
capital expenditure for H1 FY15.
H1 FY15
South32 statutory South32 pro forma
consolidated Demerger related pro consolidated
US$M cash flow statement forma adjustments(a) financial information
Profit/(loss) from continuing operations 87 699 786
Non-cash items 138 307 445
(Profit)/loss from equity accounted investments - (60) (60)
Change in working capital (67) (138) (205)
Cash generated from continuing operations 158 808 966
Dividends received (including equity accounted
investments) 4 127 131
Capital expenditure (184) (133) (317)
Operating cash flows from continuing
operations before financing activities and tax (22) 802 780
and after capital expenditure
(a) The significant items contained in the demerger related pro forma adjustments comprise:
- The results of the current South32 Group operations between 1 July 2014 and their date of acquisition during the December 2014 half year as
part of the Internal Restructure;
- Exclusion of the results of New Mexico Coal for the period 1 July 2014 to 27 October 2014 being the date that it ceased to be part of the
South32 Group as a result of the Internal Restructure;
- Presenting South32 manganese assets (comprising South Africa Manganese, Australia Manganese and Samancor AG) on an equity accounted
basis from 1 July 2013 including associated depreciation;
- Additional corporate costs associated with South32 Limited becoming a stand-alone group of US$38M;
- Exclusion of net finance costs charged by the BHP Billiton Group of US$39M;
- Exclusion of demerger related major corporate restructuring costs of US$13M;
- The tax effect of the above items; and
- Including certain significant tax expense items such as the impact of the Brazil Alumina tax accounting adjustments of US$16M.
SEGMENT INFORMATION
The segment reporting information for the South32 operations for H1 FY16 and pro forma H1 FY15 is set out below. The
segment information reflects South32's interest in its manganese assets on a proportional consolidation basis, which is the
measure that is used by South32 management to assess the performance of the manganese assets. The statutory
adjustment column reconciles the proportional consolidation of the manganese assets to the treatment of the manganese
assets on an equity accounted basis.
H1 FY16 SEGMENT INFORMATION
H1 FY16 South South Illawarra South Group and
Worsley Africa Mozal Brazil Africa Metallurgical Australia Africa Cerro Cannington unallocated Statutory Total
Alumina Aluminium Aluminium Alumina Energy Coal Manganese Manganese Matoso items/ adjustment South32
US$M Coal elimination
Revenue
Group production 286 596 208 186 542 284 226 110 166 423 - (336) 2,691
Third party products(a) - - - - - - - - - - 291 (1) 290
Inter-segment revenue 254 - - - - - - 4 - - (254) (4) -
Total revenue 540 596 208 186 542 284 226 114 166 423 37 (341) 2,981
Underlying EBITDA 108 53 8 110 116 50 72 (28) (5) 169 (7) (104) 542
Depreciation and amortisation (75) (32) (18) (36) (70) (87) (62) (23) (43) (28) (12) 85 (401)
Underlying EBIT 33 21 (10) 74 46 (37) 10 (51) (48) 141 (19) (19) 141
Comprising:
Group production 33 21 (10) 74 44 (37) 10 (51) (48) 141 (19) 41 199
Third party products(a) - - - - - - - - - - - - -
Share of profit/(loss) of equity
accounted investments(b) - - - - 2 - - - - - - (60) (58)
Underlying EBIT 33 21 (10) 74 46 (37) 10 (51) (48) 141 (19) (19) 141
Net finance costs (71)
Income tax expense (44)
Underlying earnings 26
Earnings adjustments (1,775)
Profit/(loss) after taxation (1,749)
Capital expenditure 22 8 5 9 42 111 41 7 12 15 13 (48) 237
Investments accounted for using
the equity method(c) - - - - 15 - - - - - - 528 543
Total assets(c) 3,627 1,347 687 890 697 1,751 631 537 921 391 2,163 (686) 12,956
Total liabilities(c) 334 285 94 101 735 211 255 182 172 153 1,817 (686) 3,653
(a) Third party product sold comprises US$138 million for aluminium, US$50 million for freight services, US$28 million for coal, US$11 million for alumina and US$63 million for other.
(b) Share of profit/(loss) of equity accounted investments includes the impacts of earnings adjustments to Underlying EBIT.
(c) Total segment assets and liabilities represent operating assets and liabilities which predominately exclude the carrying amount of equity accounted investments, cash, interest
bearing liabilities and tax balances.
FY15 PRO FORMA SEGMENT INFORMATION
H1 FY16 South South Illawarra South Group and
Worsley Africa Mozal Brazil Africa Metallurgical Australia Africa Cerro Cannington unallocated Statutory Total
Alumina Alumina Alumina Alumina Energy Coal Manganese Manganese Matoso items/ adjustment South32
US$M Coal elimination
Revenue
Group production 319 823 340 268 683 425 339 231 340 486 - (569) 3,685
Third party products(a) - - - - - - - - - - 404 - 404
Inter-segment revenue 332 - - - - - - - - - (332) - -
Total revenue 651 823 340 268 683 425 339 231 340 486 72 (569) 4,089
Underlying EBITDA 155 203 94 140 93 122 151 40 115 187 (33) (140) 1,127
Depreciation and amortisation (76) (34) (18) (39) (92) (100) (56) (27) (27) (29) (2) 83 (417)
Underlying EBIT 79 169 76 101 1 22 95 13 88 158 (35) (57) 710
Comprising:
Group production 79 169 76 101 (2) 22 95 13 88 158 (65) (108) 626
Third party products(a) - - - - - - - - - - 30 - 30
Share of profit/(loss) of equity
accounted investments(b) - - - - 3 - - - - - - 51 54
Underlying EBIT 79 169 76 101 1 22 95 13 88 158 (35) (57) 710
Net finance cost(c) (88)
Income tax expense (162)
Underlying earnings 460
Earnings adjustments (121)
Profit/(loss) after taxation 339
Capital expenditure 27 10 5 5 58 180 34 22 18 14 - (56) 317
(a) Third party product sold comprises US$358 million for aluminium, US$46 million for coal and US$ nil for other. Underlying EBIT on third party products comprises US$17 million for aluminium,
US$13 million for coal and US$ nil for other.
(b) Share of profit/(loss) of equity accounted investments includes the impacts of earnings adjustments to Underlying EBIT.
(c) Excludes interest income and interest expense on borrowings with BHP Billiton.
NOTES
(1) Controllable costs are measured on a cash basis (including equity accounted investments) and exclude significant items, inter-segment sales, foreign
exchange rate movements, country specific inflation, price-linked costs and discontinued/suspended operations. Any controllable cost movement is
defined in absolute terms compared to H1 FY15 and is not a measure of unit cost performance.
(2) Total capital expenditure comprises Capital expenditure, the purchase of intangibles and capitalised exploration expenditure. Capital expenditure
comprises Sustaining capital expenditure and Major projects capital expenditure. Sustaining capital expenditure comprises Stay-in-business (SIB),
Minor discretionary and Deferred stripping (including underground development) capital expenditure.
(3) Redundancy and restructuring charges are pre-tax. These charges will be excluded from the Group's Underlying earnings measures.
(4) The pro forma and statutory financial information reflects continuing operations and therefore excludes the contribution of the New Mexico Coal asset.
(5) Percentage change has not been disclosed for statutory results on the basis that the variances between H1 FY16 and H1 FY15 are substantially
different due to the impact of the Internal Restructure prior to demerger. Information in respect of the demerger is detailed in note 3 to the Financial
Information.
(6) Revenue includes revenue from third party products.
(7) Pro forma H1 FY15 basic earnings per share is calculated as pro forma Profit/(loss) after taxation from continuing operations divided by the number
of shares on issue at 31 December 2014. Pro forma H1 FY15 basic Underlying earnings per share is calculated as pro forma Underlying earnings
divided by the number of shares on issue at 31 December 2015.
(8) Underlying EBIT is profit from continuing operations before net finance costs, taxation and any earnings adjustment items, including impairments.
Underlying EBIT is reported inclusive of South32's share of net finance costs and taxation of equity accounted investments. Underlying EBITDA is
Underlying EBIT, before depreciation and amortisation. Underlying earnings is Profit/(loss) after taxation and earnings adjustment items. Underlying
earnings is the key measure that South32 uses to assess the performance of the South32 Group, make decisions on the allocation of resources and
assess senior management's performance. In addition, the performance of each of the South32 operations and operational management are
assessed based on Underlying EBIT. In order to calculate Underlying earnings, Underlying EBIT and Underlying EBITDA, the following items are
adjusted as applicable each period, irrespective of materiality:
- Exchange rate gains/losses on restatement of monetary items;
- Impairment losses/reversals;
- Net gain/loss on disposal and consolidation of interests in businesses;
- Fair value gain/loss on derivative instruments;
- Major corporate restructures; and
- The income tax impact of the above items.
In addition, items that do not reflect the underlying operations of South32, and are individually significant to the financial statements, are excluded to
determine Underlying earnings. Significant items are detailed in note 4(iii) to the Financial Information.
(9) Comprises Underlying EBITDA excluding third party product EBITDA, divided by revenue excluding third party product revenue.
(10) Comprises Underlying EBIT excluding third party product EBIT, divided by revenue excluding third party product revenue.
(11) Return on invested capital (ROIC) is a key measure that South32 uses to assess performance. ROIC is calculated as annualised Underlying EBIT
(annualised pro forma Underlying EBIT for H1 FY15) less the discount on rehabilitation provisions included in net finance cost, tax effected by the
Group's Underlying ETR, divided by the sum of fixed assets (excluding any rehabilitation asset and other non-cash adjustments) and inventories.
Manganese is included in the calculation on a proportional consolidation basis.
(12) Underlying effective tax rate (ETR) is the Underlying income tax expense (pro forma Underlying income tax expense for H1 FY15) excluding royalty
related taxation divided by Underlying profit before tax (pro forma Underlying profit before tax for H1 FY15); both the numerator and denominator
exclude equity accounted investments.
(13) South32's interest in South Africa Energy Coal is accounted at 100% until employee share ownership plan (ESOP) and broad-based black economic
empowerment (B-BBEE) vendor loans are repaid.
(14) Projected operating unit costs, including Sustaining capital expenditure, and Sustaining capital expenditure for FY17 include royalties (where
appropriate) and the influence of exchange rate assumptions, and are predicated on: an alumina price of US$255/t; an average blended coal price of
US$65/t for Illawarra Metallurgical Coal; a manganese ore price of US$2.00/dmtu for 44% manganese product; a nickel price of US$3.75/lb; an
AUD:USD exchange rate of 0.68; a USD:ZAR exchange rate of 14.12; and a USD:COP exchange rate of 3,170; all of which reflect forward markets
at the end of the period or our internal expectations.
(15) Underlying net finance cost and Underlying taxation expense are actual H1 FY16 results, not year-on-year variances.
(16) Third party product sold comprises US$138M for aluminium (H1 FY15: US$358M), US$50M for freight services (H1 FY15: nil), US$28M for coal (H1
FY15: US$46M), US$11M for alumina (H1 FY15: nil) and US$63M for others (H1 FY15: nil). Underlying EBIT on third party products for H1 FY16 was
nil. H1 FY15 Underlying EBIT on third party products comprised US$17M for aluminium, US$13M for coal and nil for other.
(17) The South32 Group acquired each of the following operations on the respective dates in parentheses: Worsley Alumina (8 May 2015), South Africa
Aluminium (2 February 2015), Mozal Aluminium (27 March 2015), Brazil Alumina (3 July 2014), South Africa Energy Coal (2 February 2015),
Australia Manganese (8 May 2015), South Africa Manganese (3 February 2015), Cerro Matoso (2 February 2015), and Cannington (31 January
2015).
(18) The following abbreviations may be used throughout this report: US$ million (US$M); US$ billion (US$B); half year (H1), for example first half of
2015 financial year is abbreviated to H1 FY15; financial year (FY), 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); dry metric tonne unit (dmtu); pound
(lb); megawatt (MW); Australian Securities Exchange (ASX); London Stock Exchange (LSE); and Johannesburg Stock Exchange (JSE).
DISCLAIMER
FORWARD LOOKING STATEMENTS
Certain statements in this document relate to the future, and may include forward looking statements relating to
South32's financial position; strategy; dividends; trends in commodity prices and currency exchange rates; demand for
commodities; closure or divestment of certain operations or facilities (including associated costs); anticipated production
or construction commencement dates; capital costs and scheduling; operating costs and shortages of materials and
skilled employees; anticipated productive lives of projects, mines and facilities; provisions and contingent liabilities; tax
and regulatory developments.
Forward looking statements can be identified by the use of terminology such as 'intend', 'aim', 'project', 'anticipate',
'estimate', 'plan', 'believe', 'expect', 'may', 'should', 'could', 'will', 'continue' or other similar words. These forward looking
statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties
and other factors, many of which are beyond South32's control, and which may cause the actual results to differ
materially from those expressed in the statements contained in this document. Readers are cautioned not to put undue
reliance on forward looking statements.
Other than as required by law, none of South32, its officers or advisers or any other person gives any representation,
assurance or guarantee that the occurrence of the events expressed or implied in any forward looking statement in this
document will actually occur, in part or in whole.
Except as required by law, South32 disclaims any obligation or undertaking to publicly update or revise any forward
looking statement in this document, whether as a result of new information or future events.
NON-IFRS FINANCIAL INFORMATION
This release includes certain non-IFRS financial measures, including Underlying earnings, Underlying EBIT and
Underlying EBITDA, Underlying basic earnings per share, Underlying effective tax rate, Underlying EBIT margin,
Underlying EBITDA margin, Underlying return on capital, Free cash flow, net debt, net operating assets and ROIC.
These measures are used internally by management to assess the performance of South32's business, make decisions
on the allocation of its resources and assess operational management. Non-IFRS measures have not been subject to
audit or review and should not be considered as an indication of or alternative to an IFRS measure of profitability,
financial performance or liquidity.
NO OFFER OF SECURITIES
Nothing in this release should be construed as either an offer to sell or a solicitation of an offer to buy or sell South32
securities, or be treated or relied upon as a recommendation or advice by South32.
NO FINANCIAL OR INVESTMENT ADVICE – SOUTH AFRICA
South32 does not provide any financial or investment 'advice' as that term is defined in the South African Financial
Advisory and Intermediary Services Act, 37 of 2002, and we strongly recommend that you seek professional advice.
FURTHER INFORMATION
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
(Incorporated in Australia under the Corporations Act 2001)
Registered Office: Level 35, 108 St Georges Terrace
Perth Western Australia 6000 Australia
ISIN: AU000000S320
JSE Sponsor: UBS South Africa (Pty) Ltd
25 February 2016
South32 Limited (ABN 84 093 732 597)
Registered in Australia
Registered Office: Level 35, 108 St Georges Terrace
Perth Western Australia 6000 Australia
SOUTH32 FINANCIAL INFORMATION
For the half year ended 31 December 2015
CONSOLIDATED INCOME STATEMENT
for the half year ended 31 December 2015
US$M Note H1 FY16 H1 FY15
Continuing operations
Revenue
Group production 2,691 641
Third party products 290 8
2,981 649
Other income 122 114
Expenses excluding net finance cost (4,334) (676)
Share of profit/(loss) of equity accounted investments (356) –
Profit/(loss) from continuing operations (1,587) 87
Comprising:
Group production (1,587) 88
Third party products – (1)
Profit/(loss) from continuing operations (1,587) 87
Finance expenses (57) (34)
Finance income 12 10
Net finance cost 7 (45) (24)
Profit/(loss) before taxation (1,632) 63
Income tax (expense)/benefit (117) (57)
Royalty-related taxation (net of income tax) – (96)
Total tax (expense)/benefit 5 (117) (153)
Profit/(loss) after taxation from continuing operations (1,749) (90)
Discontinued operations
Profit/(loss) from discontinued operations, net of taxation – 7
Profit/(loss) for the period (1,749) (83)
Attributable to:
Equity holders of South32 Limited (1,749) (83)
Profit/(loss) from continuing operations attributable to the ordinary equity holders
of South32 Limited
Basic earnings per ordinary share (cents) 6 (32.9) (2.8)
Diluted earnings per ordinary share (cents) 6 (32.9) (2.8)
Profit/(loss) for the period attributable to the ordinary equity holders of South32
Limited
Basic earnings per ordinary share (cents) 6 (32.9) (2.6)
Diluted earnings per ordinary share (cents) 6 (32.9) (2.6)
The accompanying notes form part of the half year financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the half year ended 31 December 2015
US$M H1 FY16 H1 FY15
Profit/(loss) for the period (1,749) (83)
Other comprehensive income
Items that may be reclassified subsequently to the income statement:
Equity accounted investments – share of other comprehensive income/(loss) – –
Available for sale investments:
Net gain/(loss) taken to equity (28) –
Net (gain)/loss transferred to the income statement 23
Taxation benefit/(expense) recognised within other comprehensive income 5 –
Total items that may be reclassified subsequently to the income statement – –
Items not to be reclassified to the income statement:
Equity accounted investments – share of other comprehensive income/(loss) 1 –
Actuarial gain/(loss) on pension and medical schemes 6 (9)
Taxation benefit/(expense) recognised within other comprehensive income (2) 3
Total items not to be reclassified to the income statement 5 (6)
Total other comprehensive income/(loss) 5 (6)
Total comprehensive income/(loss) (1,744) (89)
Attributable to:
Equity holders of South32 Limited (1,744) (89)
The accompanying notes form part of the half year financial statements.
CONSOLIDATED BALANCE SHEET
as at 31 December 2015
US$M Note H1 FY16 FY15
ASSETS
Current assets
Cash and cash equivalents 8 697 644
Trade and other receivables 8 625 1,162
Other financial assets 8 59 14
Inventories 814 953
Current tax assets 18 77
Other 48 18
Total current assets 2,261 2,868
Non-current assets
Trade and other receivables 8 420 185
Other financial assets 8 282 417
Inventories 60 60
Property, plant and equipment 8,678 9,550
Intangible assets 304 306
Investments accounted for using the equity method 543 1,707
Deferred tax assets 391 376
Other 17 20
Total non-current assets 10,695 12,621
Total assets 12,956 15,489
LIABILITIES
Current liabilities
Trade and other payables 8 613 921
Interest bearing liabilities 8 186 364
Other financial liabilities 8 4 4
Current tax payable 38 11
Provisions 324 398
Deferred income 3 6
Total current liabilities 1,168 1,704
Non-current liabilities
Trade and other payables 8 17 30
Interest bearing liabilities 8 627 682
Other financial liabilities 8 20 –
Deferred tax liabilities 590 554
Provisions 1,214 1,479
Deferred income 17 5
Total non-current liabilities 2,485 2,750
Total liabilities 3,653 4,454
Net assets 9,303 11,035
EQUITY
Share capital 14,958 14,958
Reserves (3,545) (3,557)
Retained earnings/(accumulated losses) (2,109) (365)
Total equity attributable to:
Equity holders of South32 Limited 9,304 11,036
Non-controlling interests (1) (1)
Total equity 9,303 11,035
The accompanying notes form part of the half year financial statements.
CONSOLIDATED CASH FLOW STATEMENT
for the half year ended 31 December 2015
US$M H1 FY16 H1 FY15
Operating activities
Profit/(loss) before taxation from continuing operations (1,632) 63
Adjustments for:
Non-cash significant items 37 –
Depreciation and amortisation expense 401 133
Net loss/(gain) on sale of non-current assets 1 –
Impairments of property, plant and equipment, financial assets and intangibles 594 –
Impairments of equity accounted investments 790 –
Employee share awards expense 12 –
Net finance cost 45 24
Share of (profit)/loss of equity accounted investments 356 –
Other non-cash or non-operating items 33 5
Changes in assets and liabilities:
Trade and other receivables 162 9
Inventories 119 –
Trade and other payables (296) (55)
Provisions and other liabilities (196) (21)
Cash generated from continuing operations 426 158
Interest received 12 10
Interest paid (30) (29)
Income tax (paid)/received 37 90
Dividends received 1 4
Dividends received from equity accounted investments 19 –
Net cash flows from continuing operating activities 465 233
Net cash flows from discontinued operating activities – 23
Net cash flows from operating activities 465 256
Investing activities
Purchases of property, plant and equipment (237) (184)
Exploration expenditure (7) (2)
Exploration expenditure expensed and included in operating cash flows 5 2
Purchase of intangibles (14) –
Investment in financial assets (80) (7)
Investment in subsidiaries, operations and joint operations, net of their cash, as part of the
Internal Restructure – (1,533)
Cash outflows from investing activities (333) (1,724)
Proceeds from sale of property, plant and equipment 1 –
Proceeds from financial assets 112 –
Proceeds from divestment of subsidiaries, operations and joint operations, net of their cash, as
part of the Internal Restructure – 172
Net cash flows from continuing investing activities (220) (1,552)
Net cash flows from discontinued investing activities – (9)
Net cash flows from investing activities (220) (1,561)
Financing activities
Proceeds from interest bearing liabilities 2 –
Repayment of interest bearing liabilities (190) (703)
Deposits with BHP Billiton as part of the Internal Restructure – (5,899)
Proceeds from ordinary shares – 8,000
Net cash flows from continuing financing activities (188) 1,398
Net cash flows from discontinued financing activities – –
Net cash flows from financing activities (188) 1,398
Net increase/(decrease) in cash and cash equivalents 57 93
Cash and cash equivalents, net of overdrafts, at the beginning of the period 644 145
Foreign currency exchange rate changes on cash and cash equivalents (8) (3)
Cash and cash equivalents, net of overdrafts, at the end of the period 693 235
The accompanying notes form part of the half year financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the half year ended 31 December 2015
Attributable to equity holders of South32 Limited
Retained
earnings/ Non-
Share (accumulated controlling
US$M capital Reserves losses) Total interests Total equity
Balance as at 1 July 2015 14,958 (3,557) (365) 11,036 (1) 11,035
Profit/(loss) for the period – – (1,749) (1,749) – (1,749)
Other comprehensive income/(loss) – – 5 5 – 5
Total comprehensive income – – (1,744) (1,744) – (1,744)
Transactions with owners:
Accrued employee entitlement for
unexercised awards – 12 – 12 – 12
Balance as at 31 December 2015 14,958 (3,545) (2,109) 9,304 (1) 9,303
Balance as at 1 July 2014 561 – 552 1,113 – 1,113
Profit/(loss) for the period – – (83) (83) – (83)
Other comprehensive income/(loss) – – (6) (6) – (6)
Total comprehensive income – – (89) (89) – (89)
Transactions with owners:
Proceeds from issue of shares 8,000 – – 8,000 – 8,000
Acquisition and divestment of
subsidiaries and operations – (451) – (451) – (451)
Balance as at 31 December 2014 8,561 (451) 463 8,573 – 8,573
The accompanying notes form part of the half year financial statements.
NOTES TO FINANCIAL STATEMENTS – ABOUT THIS REPORT
The consolidated financial statements of South32 Limited referred to as the "Company" and its subsidiaries and joint
operations (collectively, the "South32 Group") for the half year ended 31 December 2015 were authorised for issue in
accordance with a resolution of the Directors on 25 February 2016.
1. Reporting entity
South32 Limited is a for-profit company limited by shares incorporated in Australia with a primary listing on the Australian
Securities Exchange, a standard listing on the London Stock Exchange and a secondary listing on the Johannesburg
Stock Exchange. The nature of the operations and principal activities of the South32 Group are described in note 4
Segment information.
2. Basis of preparation
The half year financial statements are a general purpose condensed financial report which:
- Have been prepared in accordance with AASB 134 Interim Financial Reporting, IAS 34 Interim Financial Reporting
and the Corporations Act 2001
- Have been prepared on a historical cost basis, except for derivative financial instruments and certain other financial
assets and liabilities which are required to be measured at fair value
- Are presented in US dollars, which is the functional currency of the majority of the Group's operations, and all values
are rounded to the nearest million dollars (US$M or US$ million) unless otherwise stated, in accordance with ASIC
Class Order 98/100
- Present reclassified comparative information where required for consistency with the current period's presentation
and
- Have been prepared on the basis of accounting policies and methods of computation consistent with those applied
in the 30 June 2015 annual financial statements.
In preparing these half year financial statements, management has made judgements, estimates and assumptions that
affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense.
Actual results may differ from these estimates. The significant judgements made by management in applying the Group's
accounting policies and the key sources of estimation uncertainty were the same as those that applied to the
consolidated financial statements as at and for the year ended 30 June 2015.
For a full understanding of the financial performance and financial position of the South32 Group it is recommended that
the half year financial statements be read in conjunction with the annual financial statements for the year ended 30 June
2015. Consideration should also be given to any public announcements made by the Company during the half year
ended 31 December 2015 in accordance with the continuous disclosure obligations of the ASX Listing Rules.
The following exchange rates relative to the US dollar have been applied in the financial statements.
Average for the Average for the
half year ended half year ended As at As at
31 December 31 December 31 December As at 31 December
2015 2014 2015 30 June 2015 2014
Australian dollar(a) 0.72 0.89 0.73 0.77 0.82
Brazilian real 3.69 2.40 3.90 3.14 2.66
Colombian peso 2,999 2,037 3,149 2,585 2,392
South African rand 13.60 10.99 15.56 12.28 11.55
(a) Displayed as US$ to A$ based on common convention.
3. South32 Limited demerger
Effective 15 May 2015, BHP Billiton shares ceased trading with an entitlement to South32 shares. On 18 May 2015
South32 Limited was listed as a separate standalone entity on the Australian Securities Exchange on a deferred
settlement basis, on the London Stock Exchange on a when-issued basis and on the Johannesburg Stock Exchange on
a normal settlement basis. The demerger resulted in economic separation at the close of business London time on 22
May 2015 (being 23 May 2015 Melbourne time) with the settlement of intercompany balances between the South32
Group and the BHP Billiton Group. South32 shares were transferred to eligible BHP Billiton Limited and BHP Billiton Plc
shareholders on 24 May 2015 and 25 May 2015, respectively. Economic separation and distribution of South32 shares
to shareholders became effective from 25 May 2015. Further information on businesses acquired and disposed, as well
as the change in control with respect to the manganese operations is disclosed in the South32 Group's 2015 Annual
Report.
4. Segment information
(i) Description of segments
The operating segments (also referred to as "operations") are organised and managed separately according to the
nature of products produced.
The members of the executive management team (the "chief operating decision maker") and the Board of Directors
monitor the segment results regularly for the purpose of making decisions about resource allocation and performance
assessment.
The segment information reflects South32's interest in the manganese operations and is presented on a proportional
consolidation basis, which is the measure used by South32's management to assess the performance of the manganese
operations. The manganese operations are equity accounted in the consolidated financial statements. The statutory
adjustment column reconciles the proportional consolidation to the equity accounting position.
The principal activities of each reporting segment, as the South32 Group is currently structured, are summarised as
follows:
Operating segment Principal activities
Worsley Alumina Integrated bauxite mine and alumina refinery in Western Australia
South Africa Aluminium Aluminium smelter in Richards Bay
Brazil Alumina Alumina refinery in Brazil
Mozal Aluminium Aluminium smelter in Mozambique
South Africa Energy Coal Open-cut and underground energy coal mines and processing operations in South Africa
Illawarra Metallurgical Coal Underground metallurgical coal mines in New South Wales
Australia Manganese Producer of manganese ore in the Northern Territory and manganese alloys in Tasmania
South Africa Manganese Integrated producer of manganese ore and alloy in South Africa
Cerro Matoso Integrated laterite ferronickel mining and smelting complex in Colombia
Cannington Silver, lead and zinc mine in Queensland
The South32 Group separately discloses sales of group production from sales of third party products because of the
significant difference in profit margin earned on these sales.
Group and unallocated items/eliminations represent group centre functions and consolidation adjustments. Group
financing (including finance cost and finance income) and income taxes are managed on a South32 Group basis and are
not allocated to operating segments.
It is the South32 Group's policy that inter-segment transactions are made on a commercial basis.
The following tables present revenue and profit information about the operations for the half year ended 31 December
2015 and 2014, respectively.
Half year ended South Group and
31 December 2015 South Africa Illawarra Australia South Africa unallocated Statutory
Worsley Africa Mozal Brazil Energy Metallurgical Manganese Manganese Cerro items/ adjustment
(a) (a) (a)
US$M Alumina Aluminium Aluminium Alumina Coal Coal Matoso Cannington elimination Group
Revenue
Group production 286 596 208 186 542 284 226 110 166 423 – (336) 2,691
Third party products(b) – – – – – – – – – – 291 (1) 290
Inter-segment revenue 254 – – – – – – 4 – – (254) (4) –
Total revenue 540 596 208 186 542 284 226 114 166 423 37 (341) 2,981
Underlying EBITDA 108 53 8 110 116 50 72 (28) (5) 169 (7) (104) 542
Depreciation and amortisation (75) (32) (18) (36) (70) (87) (62) (23) (43) (28) (12) 85 (401)
Underlying EBIT 33 21 (10) 74 46 (37) 10 (51) (48) 141 (19) (19) 141
Comprising:
Group Production 33 21 (10) 74 44 (37) 10 (51) (48) 141 (19) 41 199
Third party products – – – – – – – – – – – – –
Share of profit/(loss) of equity
accounted investments(e) – – – – 2 – – – – – – (60) (58)
Underlying EBIT 33 21 (10) 74 46 (37) 10 (51) (48) 141 (19) (19) 141
Net finance cost (71)
Income tax (expense)/benefit (44)
Underlying earnings 26
Earnings adjustments(c) (1,775)
Profit/(loss) after taxation
from continuing operations (1,749)
Capital expenditure(f) 22 8 5 9 42 111 41 7 12 15 13 (48) 237
Investments accounted for
using the equity method(d) – – – – 15 – – – – – – 528 543
Total assets(d) 3,627 1,347 687 890 697 1,751 631 537 921 391 2,163 (686) 12,956
Total liabilities(d) 334 285 94 101 735 211 255 182 172 153 1,817 (686) 3,653
(a) The segment information reflects South32's interest in the manganese operations and is presented on a proportional consolidation basis, which is
the measure used by South32's management to assess the performance of the manganese operations. The manganese operations are equity accounted in
the consolidated financial statements. The statutory adjustment column reconciles the proportional consolidation to the equity accounting position.
(b) Third party product sold comprises US$138 million for aluminium, US$50 million for freight services, US$28 million for coal, US$11 million for
alumina and US$63 million for other.
(c) Refer to note 4(ii) Earnings adjustments.
(d) Total segment assets and liabilities represent operating assets and liabilities which predominately exclude the carrying amount of equity accounted
investments, cash, interest bearing liabilities and tax balances.
(e) Share of profit/(loss) of equity accounted investments includes the impacts of earnings adjustments to Underlying EBIT.
(f) Capital expenditure excludes the purchase of intangibles and capitalised exploration expenditure.
Half year ended South Group and
31 December 2014 South Illawarra Australia Africa unallocated
Worsley Africa Mozal Brazil South Africa Metallurgical Manganese Manganese Cerro New Mexico items/ Statutory
(d) (d)
US$M Alumina Aluminium Aluminium Alumina Energy Coal Coal Matoso Cannington Coal (a) elimination adjustment Group
Revenue
Group production – – – 230 – 411 – – – – 133 – – 774
Third party products(b) – – – – – – – – – – – 8 – 8
Inter-segment revenue – – – – – – – – – – – – – –
Total revenue – – – 230 – 411 – – – – 133 8 – 782
Underlying EBITDA – – – 120 – 105 – – – – 22 (1) – 246
Depreciation and amortisation – – – (33) – (100) – – – – (12) – – (145)
Underlying EBIT – – – 87 – 5 – – – – 10 (1) – 101
Comprising:
Group Production – – – 87 – 5 – – – – 10 – – 102
Third party products – – – – – – – – – – – (1) – (1)
Share of profit/(loss) of equity
accounted investments – – – – – – – – – – – – – –
Underlying EBIT – – – 87 – 5 – – – – 10 (1) – 101
Underlying EBIT from
discontinued operations (10)
Underlying EBIT from
continuing operations 91
Net finance cost (18)
Income tax (expense)/benefit (16)
Underlying earnings from
continuing operations 57
Earnings adjustments(c) (147)
Profit/(loss) after taxation
from continuing operations (90)
Capital expenditure – – – 5 – 179 – – – – 9 – – 193
Investments accounted for
using the equity method(d) – – – – 12 – – – – – – – 1,695 1,707
Total assets(d) 3,720 1,475 730 1,039 1,414 1,782 1,649 748 997 453 – 2,271 (789) 15,489
Total liabilities(d) 359 324 104 111 1,019 264 265 218 234 173 – 2,202 (819) 4,454
(a) The New Mexico Coal segment was transferred from the South32 Group to the BHP Billiton Group as part of the demerger process
during the year ended 30 June 2015.
(b) Third party product sold comprises US$8 million for aluminium.
(c) Refer to note 4(ii) Earnings adjustments.
(d) Total segment assets and liabilities are as at 30 June 2015 and represent operating assets and liabilities which predominately
exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax balances. Information
for manganese operations is presented on a proportional consolidation basis.
(ii) Earnings Adjustments
The following table shows earnings adjustments in determining Underlying earnings:
Earnings adjustments
US$M H1 FY16 H1 FY15
Adjustments to Underlying EBIT
Significant items(a) 92 –
Exchange rate (gains)/losses on restatement of monetary items(b) (87) (3)
Impairment losses(b) 1,384 –
Fair value (gains)/losses on derivative instruments(b) 36 7
Major corporate restructures(b) 5 –
Impairment losses included in profit/(loss) of equity accounted investments(c) 287 –
Earnings adjustments included in profit/(loss) of equity accounted investments(c) 11 –
Total adjustments to Underlying EBIT 1,728 4
Adjustments to net finance cost
Exchange rate variations on net debt (26) 6
Total adjustments to net finance cost (26) 6
Adjustments to income tax expense
Significant items(a) 39 96
Tax effect of earnings adjustments to Underlying EBIT (152) (1)
Tax effect of earnings adjustments to net finance cost 8 (2)
Exchange rate variations on tax balances 178 44
Total adjustments to income tax expense 73 137
Total earnings adjustments 1,775 147
(a) Refer to note 4(iii) Significant items.
(b) The amount was recognised in "expenses excluding net finance cost" in the consolidated income statement.
(c) The amount was recognised in "share of profit/(loss) of equity accounted investments" in the consolidated income statement.
Impairments recognised
As a result of significant and continued weakening of commodity markets, the Group recognised the following
impairments and associated tax effect at 31 December 2015. The forecast weakening of commodity prices has also
impacted the probability of generating longer term taxable income for certain South32 operations and therefore resulted
in the derecognition of specific deferred tax asset balances in the half year ended 31 December 2015. An impairment at
Brazil Alumina recognised at 31 December 2015 was as a result of the continued and indefinite suspension of smelting
operations. The following table shows the categorisation of the amounts within earnings adjustments:
Adjustments to income tax
Adjustments to Underlying EBIT expense
Earnings
adjustments Tax effect of
included in earnings
(profit)/loss adjustments
of equity to
31 December 2015 Significant accounted Significant Underlying
US$M Impairments items investments Total items EBIT
Australia Manganese equity
accounted investment 726 – 190 916 – –
South Africa Manganese
equity accounted investment – – 97 97 – –
Manganese Marketing equity
accounted investment 64 – – 64 – –
South Africa Energy Coal -
Wolvekrans Middelburg 322 – – 322 – (89)
Complex
South Africa Energy Coal -
Klipspruit 120 – – 120 – (33)
Available for sale
investments 76 – – 76 – (18)
South Africa Energy Coal
deferred tax asset – – – – 126 –
derecognition
Brazil Alumina smelter 65 32 – 97 (11) (22)
Other 11 – – 11 – (1)
Total 1,384 32 287 1,703 115 (163)
Australia Manganese (equity accounted investment)
The Australia Manganese equity accounted investment impairment of US$916 million includes full impairment of the
remaining fair value uplift applied in advance of the demerger of US$726 million, impairment of the Group's share of
property, plant and equipment of US$228 million and the recognition of an associated tax benefit of US$91 million. The
Group's share of deferred tax assets of US$53 million associated with provisions for future restoration and rehabilitation
were derecognised as utilisation is no longer probable. The recoverable amount of the equity accounted investment was
determined as US$376 million based on its fair value less cost of disposal ("FVLCD").
South Africa Manganese (equity accounted investment)
The South Africa Manganese equity accounted investment impairment of US$97 million includes impairment of the
Group's share of property, plant and equipment of the equity accounted investment of US$45 million, impairment of the
Group's share of available for sale investments of the equity accounted investment of US$36 million and recognition of
an associated tax benefit on the impairments of US$10 million. The Group's share of deferred tax assets of US$26
million associated with provisions for future restoration and rehabilitation were derecognised as utilisation is no longer
probable. The recoverable amount of the equity accounted investment was determined as US$321 million based on its
FVLCD.
Manganese Marketing (equity accounted investment)
The Manganese Marketing equity accounted investment (Samancor AG) impairment of US$64 million relates to
impairment of the fair value uplift. The recoverable amount of the equity accounted investment was determined as
US$81 million based on its FVLCD.
South Africa Energy Coal
The South Africa Energy Coal impairment of US$442 million includes US$322 million for property, plant and equipment
at the Wolvekrans Middelburg Complex (tax benefit of US$89 million) and US$120 million for property, plant and
equipment at the Klipspruit Colliery (tax benefit of US$33 million). The recoverable amount of the Wolvekrans Middelburg
Complex and Klipspruit Colliery cash generating units were determined as -US$57 million and US$77 million
respectively, and were determined based on the FVLCD of each cash generating unit.
The available for sale investments impairment of US$76 million is associated with South African coal activities (tax
benefit of US$18 million). A charge has been recognised in the income statement rather than in Other Comprehensive
Income as a prolonged reduction in fair value is judged to represent an impairment.
South Africa Energy Coal deferred tax assets of US$126 million associated with provisions for future restoration and
rehabilitation were derecognised as utilisation is no longer probable.
Brazil Alumina
The Brazil Alumina smelter impairment of US$97 million includes US$65 million for property, plant and equipment and
US$32 million relating to smelter consumables and indirect tax assets (tax benefit of US$33 million). The recoverable
amount of the Brazil Alumina smelter cash generating unit was determined as -US$11 million based on its FVLCD. The
valuation specifically considered the likelihood of restarting smelting operations, taking into account the continued and
indefinite suspension of smelting operations.
Basis of fair value measurements
The above fair value measurements are categorised as Level 3 fair values based on the inputs in the valuation models.
In determining the FVLCD, a real post tax discount rate of 8.5%, and a country risk premium of up to 2%, were applied to
the post tax forecast cash flows expressed in real terms. The cash flows are forecast to the end of the life of operation
and include future projects which are risked for uncertainties. The key assumptions used for commodity prices are
comparable to market consensus forecasts at the date of testing, and foreign exchange rates are aligned with forward
market rates.
Significant items are those items, not separately identified in note 4(ii) Earnings adjustments, where their nature and
Half year ended 31 December 2015
US$M Gross Tax Net
Set-up costs(a) 60 (17) 43
Derecognition of deferred tax assets – 126 126
Adjustment to Australian tax balances post-demerger including
reset of tax assets – (59) (59)
Brazil Alumina impairment – other items(b) 32 (11) 21
Total significant items 92 39 131
(a) The amount was recognised in "expenses excluding net finance cost" in the consolidated income statement.
(b) Refer to note 4(ii) Earnings adjustments
Half year ended 31 December 2014
US$M Gross Tax Net
Repeal of Minerals Resource Rent Tax Legislation – 96 96
Total significant items – 96 96
Set-up costs
Set-up costs related to the ongoing establishment of South32's corporate and regional offices following the demerger.
The costs primarily relate to transitionary contractor and consultant support, information technology infrastructure and
system support. The amount recognised is inclusive of US$30 million paid to BHP Billiton under an agreement for
information technology services. Those costs relate to all operating segments. All remaining set-up costs relate to group
and unallocated items within the segment note.
Derecognition of deferred tax assets
As a result of the significant and continued weakening of commodity markets, certain deferred tax assets associated with
provisions for restoration and rehabilitation were derecognised as utilisation is no longer probable.
Adjustment to Australian tax balances post-demerger including reset of tax assets
The tax basis of South32 wholly owned Australian operations was reset on demerger from BHP Billiton. The net increase
to tax assets is charged to income tax expense during the half year ended 31 December 2015.
Repeal of Minerals Resource Rent Tax Legislation
On 2 September 2014, legislation to repeal the Minerals Resource Rent Tax ("MRRT") in Australia received the support
of both Houses of Parliament. The repeal took effect on 30 September 2014 and as a result, the South32 Group
derecognised a MRRT deferred tax asset in relation to Illawarra Metallurgical Coal. The impact of this derecognition and
all other MRRT related amounts resulted in an income tax expense of US$96 million.
5. Taxation
The major components of income tax expense in the income statement for the half year ended are:
US$M H1 FY16 H1 FY15
Current tax expense/(benefit) 36 29
Deferred tax expense/(benefit) 81 124
Total tax expense/(benefit) attributable to continuing operations 117 153
Australia (35) 121
Southern Africa 92 –
Rest of world 60 32
Total tax expense/(benefit) attributable to the geographical jurisdiction 117 153
Reconciliation of prima facie tax expense to income tax expense H1 FY16 H1 FY15
% US$M % US$M
Profit/(Loss) before taxation from continued operations (1,632) 63
Tax on profit/(loss) at standard rate of 30% (30.0) (490) 30.0 19
Tax rate differential on foreign income 0.6 10 (21.5) (14)
Exchange rate variations on tax balances 10.9 178 69.8 44
Tax effect of share of profit/(loss) of equity accounted investments 6.3 104 – –
Adjustment to Australian tax balances post-demerger (3.6) (59) – –
Non-deductible impairment expense 14.7 240 – –
Derecognition of future tax benefits 7.7 126 – –
Other 0.5 8 11.8 8
Income tax expense/(benefit) 7.1 117 90.1 57
Royalty-related taxation expense/(benefit) – – 152.1 96
Total tax expense/(benefit) 7.1 117 242.2 153
6. Earnings per share
Basic earnings per share ("EPS") amounts are calculated based on profit attributable to ordinary equity holders of
South32 Limited and the weighted average number of ordinary shares outstanding during the year.
Dilutive EPS amounts are calculated based on profit attributable to ordinary equity holders of South32 Limited and the
weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary
shares.
The following reflects the income and share data used in the basic and diluted EPS computations:
Profit/(loss) attributable to ordinary equity holders
US$M H1 FY16 H1 FY15
Profit/(loss) attributable to ordinary equity holders of South32 Limited
Continuing operations (1,749) (90)
Discontinued operations – 7
Profit/(loss) attributable to ordinary equity holders of South32 Limited (basic) (1,749) (83)
Profit/(loss) attributable to ordinary equity holders of South32 Limited (diluted) (1,749) (83)
Weighted average number of shares
Million H1 FY16 H1 FY15
Basic earnings per ordinary share denominator(a)(c) 5,324 3,212
Shares and options contingently issuable under employee share ownership plans(b)(c) 4 –
Diluted earnings per ordinary share denominator 5,328 3,212
(b) The calculation of the number of ordinary shares used in the computation of basic earnings per share is the aggregate of the weighted average
number of ordinary shares of South32 Limited outstanding during the period.
(b) Included in the calculation of diluted earnings per share are shares contingently issuable under employee share ownership plans.
(c) Due to the share split in May 2015, the number of ordinary shares outstanding during the half year ended 31 December 2014 was retrospectively
adjusted.
Earnings per share
US cents H1 FY16 H1 FY15
Earnings per share – continuing operations
Basic earnings per ordinary share (32.9) (2.8)
Diluted earnings per ordinary share (32.9) (2.8)
Earnings per share – attributable to ordinary equity holders of South32 Limited
Basic earnings per ordinary share (32.9) (2.6)
Diluted earnings per ordinary share (32.9) (2.6)
7. Net finance cost
US$M H1 FY16 H1 FY15
Finance expenses
Interest on bank loans and overdrafts 1 –
Interest on all other borrowings 4 25
Finance lease interest 25 –
Discounting on provisions and other liabilities 49 3
Net interest expense on post-retirement employee benefits 4 –
Exchange rate variations on net debt (26) 6
57 34
Finance income
Interest income 12 10
Net finance cost 45 24
8. Financial assets and financial liabilities
The following table presents the financial assets and liabilities of the South32 Group by class at their carrying amounts
which approximates their fair value.
Other financial
Available for Held at fair assets and
31 December 2015 Loans and sale value through liabilities at
US$M receivables securities profit or loss amortised cost Total
Financial assets
Cash and cash equivalents 697 – – – 697
Trade and other receivables(a) 512 – 13 – 525
Derivative contracts – – 59 – 59
Loans to equity accounted investments 379 – – – 379
Interest bearing loans receivable 40 – – – 40
Shares – 180 – – 180
Other investments – 102 – – 102
Total 1,628 282 72 – 1,982
Financial liabilities
Trade and other payables(b) – – 5 590 595
Derivative contracts – – 24 – 24
Unsecured bank overdrafts – – – 4 4
Unsecured bank loans – – – 14 14
Finance leases – – – 595 595
Unsecured other – – – 200 200
Total – – 29 1,403 1,432
(a) Excludes input taxes of US$101 million included in other receivables.
(b) Excludes input taxes of US$35 million included in other payables.
Other financial
Available for Held at fair assets and
30 June 2015 Loans and sale value through liabilities at
US$M receivables securities profit or loss amortised cost Total
Financial assets
Cash and cash equivalents 644 – – – 644
Trade and other receivables(a) 725 – 25 – 750
Derivative contracts – – 71 – 71
Loans to equity accounted investments 323 – – – 323
Interest bearing loans receivable 148 – – – 148
Shares – 229 – – 229
Other investments – 131 – – 131
Total 1,840 360 96 – 2,296
Financial liabilities
Trade and other payables(b) – – 9 918 927
Derivative contracts – – 4 – 4
Unsecured bank loans – – – 104 104
Finance leases – – – 631 631
Unsecured other – – – 311 311
Total – – 13 1,964 1,977
(a) Excludes input taxes of US$126 million included in other receivables.
(b) Excludes input taxes of US$24 million included in other payables.
Measurement of fair value
The following table shows the South32 Group's financial assets and liabilities carried at fair value with reference to the
nature of valuation inputs used:
Level 1 - Valuation is based on unadjusted quoted prices in active markets for identical financial assets and
liabilities.
Level 2 - Valuation is based on inputs (other than quoted prices included in Level 1) that are observable for the
financial asset or liability, either directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices).
Level 3 - Valuation is based on inputs that are not based on observable market data.
31 December 2015
US$M Level 1 Level 2 Level 3 Total
Financial assets and liabilities
Trade and other receivables – 13 – 13
Trade and other payables – (5) – (5)
Derivative contracts – – 35 35
Investments – available for sale – 102 180 282
Total – 110 215 325
30 June 2015
US$M Level 1 Level 2 Level 3 Total
Financial assets and liabilities
Trade and other receivables – 25 – 25
Trade and other payables – (9) – (9)
Derivative contracts – – 67 67
Investments – available for sale – 131 229 360
Total – 147 296 443
Level 3 financial assets and liabilities
The following table shows the movements in the South32 Group's Level 3 financial assets and liabilities:
US$M H1 FY16
As at 1 July 2015 296
Unrealised gains/(losses) recognised in the income statement(a) (65)
Unrealised gains/(losses) recognised in other comprehensive income(b) (16)
As at 31 December 2015 215
(a) Unrealised gains and losses recognised in "expenses excluding net finance cost" in the consolidated income statement.
(b) Unrealised gains and losses recognised in other comprehensive income are recorded in the "net gain/(loss) taken to equity".
US$M H1 FY15
As at 1 July 2014 –
Acquisition of subsidiaries and operations as part of the demerger(a) 99
Unrealised gains/(losses) recognised in the income statement(b) (7)
As at 31 December 2014 92
(a) Refer to financial statements for the year ended 30 June 2015 for details.
(b) Unrealised gains and losses recognised in "expenses excluding net finance cost" in the consolidated income statement.
NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND
FINANCING
Sensitivity analysis
The carrying amount of financial assets and liabilities that are valued using inputs other than observable market data are
calculated using appropriate valuation models, including discounted cash flow modelling, with inputs such as commodity
prices, foreign exchange rates and inflation. The potential effect of using reasonably possible alternative assumptions in
these models, based on a change in the most significant input by 10% while holding all other variables constant, is
shown in the following table.
31 December 2015 Profit before taxation Equity
10% 10% 10% 10%
Carrying increase in decrease in increase in decrease in
US$M amount Significant input input input input input
Financial assets and liabilities
Aluminium price as
Derivative contracts 35 quoted on the LME (123) 121 (88) 86
Aluminium price as
Investments – available for quoted on the LME
180 – (2) 43 (45)
sale(a) Foreign exchange
rate
Total 215 (123) 119 (45) 41
(a) To the extent that available for sale investments have been impaired, any further losses are recognised in the consolidated income statement.
30 June 2015 Profit before taxation Equity
10% 10% 10% 10%
Carrying increase in decrease in increase in decrease in
US$M amount Significant input input input input input
Financial assets and liabilities
Aluminium price as
Derivative contracts 67 quoted on the LME (64) 64 (43) 43
Aluminium price as
quoted on the LME
Investments – available for sale 229 – – 60 (69)
Foreign exchange
rate
Total 296 (64) 64 17 (26)
9. Employee share ownership plans
The South32 Group established new employee long term incentive plans during the half year ended 31 December 2015.
Awards were granted to Executive Committee members on 4 December 2015 under the following plans:
- the FY16 Long Term Incentive Plan (LTI)
- the FY15 Deferred Short Term Incentive Plan (STI) and
- the FY16 Transitional Award Plan (TSP)
Awards were granted to eligible employees on 30 October 2015 under the following plans:
- the FY16 Management Share Plan (MSP)
- the FY16 Advance Award Plan (AAP)
- the FY16 Transition Award Plan (TAP)
- the FY15 Deferred Shares Plan (GSTIP)
- the FY15 MAP Replacement Plan (MAP) and
- the 2015 AllShare Plan (ASP)
Description of general share-based payment conditions
Awards take the form of rights to receive one ordinary share in South32 Ltd for each right granted, subject to
performance (LTI, TSP, MSP, AAP and TAP awards) and service conditions being met. A portion of the 2015 AllShare
Plan awards (participants located in Colombia and Mozambique) take the form of rights to receive a cash payment
equivalent to the value of South32 Ltd ordinary shares at the time of payment.
Performance rights fair value are measured using a Monte Carlo methodology and retention rights are measured using a
Black Scholes methodology.
Performance conditions are based on the South32 Group's Total Shareholder Return (TSR) measured separately
against two comparator indexes over the performance period as follows:
- One third of performance rights are measured against the Morgan Stanley Capital Index World and
- Two thirds of performance rights are measured against the Euromoney Global Mining Index (constrained by
company and sector).
Performance rights vest when South32's TSR equals or outperforms the comparator index. Full vesting of performance
rights occur if South32's TSR outperforms both indexes by at least 5.5% per annum. To the extent that the performance
conditions are not met, awards are forfeited and no retesting is performed.
Awards do not confer any dividend or voting rights until they convert into ordinary shares at vesting. In addition, the
awards do not confer any rights to participate in a share issue, however, there is discretion under the plans to adjust the
awards in response to a variation in South32 Ltd's share capital.
Further detail of each award is provided below. Details of other incentive plans established by South32 subsequent to
demerger can be found in the South32 Group 2015 Annual Report.
Description of recurring share-based payment arrangements
The awards listed below are subject to the general conditions noted above and may be granted annually subject to
approval by shareholders at the annual general meeting for awards to the CEO and by the board of directors for all other
awards.
FY16 Long Term Incentive Plan (LTI)
The LTI is South32's long term incentive plan for Executive Committee members. Awards have a four year performance
period from 1 July 2015 to 30 June 2019.
FY15 Deferred Short Term Incentive Plan (STI)
The STI is South32's short term incentive plan for Executive Committee members. Awards vest on 30 June 2017
provided participants remain employed by South32.
FY16 Management Share Plan (MSP)
The MSP is South32's long term incentive plan for eligible employees below the Executive Committee. The MSP
comprises two elements:
- Retention Rights vesting on 30 June 2018 provided participants remain employed by South32 and
- Performance Rights vesting on 30 June 2019 subject to performance conditions.
2015 AllShare Plan (ASP)
The ASP is South32's employee share plan for employees not eligible to participate in the other employee share plans.
Awards will vest provided participants remain employed by South32. The vesting period depends on the participants'
location at the grant date:
- Participants in Africa: August 2018 and
- Participants elsewhere: August 2017.
Awards to the value of at least US$1,250 per employee will be granted annually.
Description of transitional share-based payment arrangements
The awards listed below are subject to the general conditions noted above and will not be granted on an ongoing basis.
FY16 Transitional Award Plan (TSP)
The TSP is a one-off grant made to Executive Committee members in recognition of their adjustment from a three year
LTI plan under the BHP Billiton incentive structure to a four year LTI Plan at South32. Awards have a three year
performance period from 1 July 2015 to 30 June 2018.
FY16 Advance Award Plan (AAP)
The AAP is a one-off grant made to all MSP participants in recognition of the different vesting periods under the MSP
retention rights and MSP performance rights. The awards have a three year performance period from 1 July 2015 to 30
June 2018.
FY16 Transition Award Plan (TAP)
The TAP is a grant made to certain eligible employees to bridge the gap between their total target reward at BHP Billiton
and their total target reward at South32. Transition Awards will be made for a maximum of five years post demerger
(FY2020).
The TAP has the same conditions as the MSP and comprises both service and performance conditions.
FY15 Deferred Shares Plan (GSTIP)
The GSTIP is a one-off grant made to individuals who were participating in the BHP Billiton Group Short Term Incentive
Plan (GSTIP) prior to demerger. Since the BHP Billiton STI plan was in place for FY2015, the STI outcomes for
participants who have joined South32 have been delivered in accordance with the BHP Billiton plan (i.e. 50% of the
outcome in cash, 50% in share awards) except the awards are rights to South32 Ltd ordinary shares, not BHP Billiton
ordinary shares.
There are no performance conditions attached to the GSTIP awards. Awards vest on 30 June 2017 provided participants
remain employed by South32.
FY15 MAP Replacement Plan (MAP)
The MAP is a one-off grant which has been made to eligible employees to replace the BHP Billiton MAP award they
would have received in March 2015 had they remained employed by BHP Billiton. Awards are made at an equivalent
value, on equivalent terms and conditions and with the same vesting date as for the BHP Billiton MAP Award. There are
no performance conditions attached to the awards. Awards will vest at the end of the vesting period (three years from
grant of the original BHP Billiton award) provided participants remain employed by South32.
Measurement of fair values
The fair value at grant date of equity-settled share awards is charged to the income statement over the period for which
the benefits of employee services are expected to be derived. The corresponding accrued employee entitlement is
recorded in the employee share awards reserve.
Risk-free
interest rate
Fair value at Share price based on
grant date at grant date Expected life government
(US$) (US$) (weighted- bonds
(weighted (weighted Expected average in (weighted
average) average) volatility(a) years) average)
Recurring plans
Long Term Incentive Plan 0.41 0.86 40% 4.00 2.45%
Short Term Incentive Plan 0.83 0.86 40% 2.00 n/a
Management Share Plan - Retention Rights 0.99 1.06 40% 2.68 n/a
Management Share Plan - Performance
Rights 0.57 1.06 40% 4.00 3.36%
AllShare Plan 1.03 1.05 40% 2.68 n/a
Transitional plans
Transitional Plans - Performance Rights
(TSP, AAP, TAP) 0.55 1.04 40% 3.21 3.56%
Transitional Plans – Retention Rights (TAP,
GSTIP, MAP) 1.01 1.06 40% 2.46 n/a
(a) Expected volatility is based on the historical South32 share price volatility at the grant date.
Reconciliation of outstanding share awards
The following table details the total movement in awards granted by South32 Ltd during the period ended 31 December
2015:
Rights at Granted Vested Forfeited Rights at Vesting at
beginning during the during the during the end of the 30 June
of period period period period period 2016
Recurring plans
Long Term Incentive Plan – 7,220,731 – – 7,220,731 –
Short Term Incentive Plan – 2,415,867 – – 2,415,867 –
Management Share Plan - Retention Rights – 5,300,101 – – 5,300,101 –
Management Share Plan - Performance
– 13,250,383 – – 13,250,383 –
Rights
AllShare Plan – 17,487,600 (462,000) (110,400) 16,915,200 –
Transitional plans
Transitional Plans - Performance Rights
– 18,642,012 – (17,607) 18,624,405 –
(TSP, AAP, TAP)
Transitional Plans - Retention Rights (TAP,
GSTIP, MAP)
– 6,158,326 (8,057) – 6,150,269 –
10. Subsequent events
On 4 February 2016 the Group announced that it had completed a strategic review of the Samancor Manganese Joint
Venture following the suspension of mining activity at the Hotazel Manganese Mines in November 2015. As a result,
mining activity restarted at South Africa Manganese, but at a substantially reduced rate and with greater flexibility, with
optimised mine plans, redundancies and other restructuring initiatives being undertaken. One of four furnaces will
continue to operate at the Metalloys smelter.
On 25 February 2016 the Group announced major restructuring initiatives that will reset the cost base of its Worsley
Alumina, Illawarra Metallurgical Coal, Australia Manganese and Cerro Matoso operations.
11. Contingent liabilities
There have been no material change to the Group's contingent liabilities as reported in the annual financial statements
for the year ended 30 June 2015.
DIRECTORS' DECLARATION
In accordance with a resolution of the Directors of the South32 Group, we state that:
In the opinion of the directors:
(a) The consolidated financial statements and notes that are set out on pages 36 to 59 for the half year ended
31 December 2015 are in accordance with the Corporations Act 2001, including:
(i) Giving a true and fair view of the South32 Group's financial position as at 31 December 2015 and of
its performance for the half year ended on that date; and
(ii) Complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and
Corporations Regulations 2001.
(b) There are reasonable grounds to believe that the South32 Group will be able to pay its debts as and when
they become due and payable.
Signed in accordance with a resolution of the Board of Directors.
David Crawford AO
Chairman
Graham Kerr
Chief Executive Officer
Dated 25 February 2016
DIRECTORS' REPORT
The directors of the South32 Group present the consolidated financial report for the half year ended 31 December 2015
and the auditor's review report thereon.
Directors
The directors of the Company during or since the end of the half year are:
David Crawford AO
Graham Kerr
Frank Cooper AO
Peter Kukielski
Xolani Mkhwanazi (appointed 2 July 2015)
Ntombifuthi (Futhi) Mtoba
Wayne Osborn
Keith Rumble
The office of the company secretary is held by Nicole Duncan and Sue Wilson.
Review and results of operations
A review of the operations of the consolidated entity during the period and of the results of those operations is contained above.
Principal Risks and Uncertainties
Due to the international scope of South32's operations and the industries in which it is engaged there are a number of
risk factors and uncertainties which could have an effect on South32's results and operations for the remaining six
months of the financial year.
Significant external, operational, sustainability and financial risks that could impact South32's performance include:
- Fluctuations in commodity prices, interest rates, currencies and ongoing global economic volatility;
- Actions by governments, political events or tax authorities;
- Breaches of information technology security processes;
- Cost inflation of production inputs and labour;
- Failure to access third party infrastructure required for operations;
- Failure to access water and power resources for operations;
- Unexpected operational or natural catastrophes;
- Failure of our commercial counterparties to meet their obligations;
- Fraud and corruption;
- Failure to retain and attract employees with the right expertise;
- Failure to maintain, realise or enhance existing reserves;
- Deterioration in liquidity and cash flow;
- Changes to government regulations on dividends or capital extraction;
- Health and safety impacts in respect of South32's activities;
- Environmental impacts in respect of South32's activities including those related to water and waste water;
- Dissatisfied communities in which our businesses are located; and
- Climate change and greenhouse gas regulations adversely impacting operations.
Further information on these risks and how they are managed can be found on pages 22 to 25 of the Annual Report for
the year ended 30 June 2015, a copy of which is available on South32's website at www.south32.net.
Events subsequent to the balance date
On 4 February 2016 the Group announced that it had completed a strategic review of the Samancor Manganese Joint
Venture following the suspension of mining activity at the Hotazel Manganese Mines in November 2015. As a result,
mining activity restarted at South Africa Manganese, but at a substantially reduced rate and with greater flexibility, with
optimised mine plans, redundancies and other restructuring initiatives being undertaken. One of four furnaces will
continue to operate at the Metalloys smelter.
On 25 February 2016 the Group announced major restructuring initiatives that will reset the cost base of its Worsley
Alumina, Illawarra Metallurgical Coal, Australia Manganese and Cerro Matoso operations.
UK Responsibility Statements
The Directors state that to the best of their knowledge:
- The Financial Results and Outlook on pages 3 to 34, includes a fair review of important events during the first
six months of the current financial year and their impact on the half year financial statements, and a description
of the principal risks and uncertainties for the remaining six months of the year; and
- That disclosure has been made for related party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial position or performance of the South32
Group during that period, and any changes in the related party transactions described in the last annual report
that could have such a material effect.
Lead Auditor's Independence Declaration
A copy of the lead auditor's independence declaration as required under Section 307C of the Corporations Act 2001 is
set out on page 63.
Rounding
The amounts shown in this report and in the financial statements have been rounded to the nearest million dollars
(US$M or US$ million) unless otherwise stated, in accordance with ASIC Class Order 98/100 dated 10 July 1998.
Signed in accordance with a resolution of the Board of Directors.
David Crawford AO
Chairman
Graham Kerr
Chief Executive Officer
Dated 25 February 2016
LEAD AUDITOR'S INDEPENDENCE DECLARATION UNDER SECTION
307C OF THE CORPORATIONS ACT 2001
To: the Directors of South32 Limited
I declare that, to the best of my knowledge and belief, in relation to the review for the half year ended 31 December 2015
there have been:
(i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to
the review; and
(ii) no contraventions of any applicable code of professional conduct in relation to the review.
KPMG
Denise McComish
Partner
Perth
25 February 2016
KPMG, an Australian partnership and member firm of Liability limited by a scheme approved under
the KPMG network of independent member firms Professional Standards Legislation.
affiliated with KPMG International Cooperative ('KPMG
International'), a Swiss entity.
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF
SOUTH32 LIMITED
We have reviewed the accompanying condensed half year financial report of South32 Limited (the Company), which
comprises the consolidated balance sheet as at 31 December 2015, consolidated statement of comprehensive income,
consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for
the half year period ended on that date, notes 1 to 11 comprising a summary of significant accounting policies and other
explanatory information and the directors' declaration of the Group comprising the company and the entities it controlled
at the half year's end or from time to time during the half year period.
Directors' responsibility for the half year financial report
The directors of the company are responsible for the preparation of the half year financial report that gives a true and fair
view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as
the directors determine is necessary to enable the preparation of the half year financial report that is free from material
misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express a conclusion on the half year financial report based on our review. We conducted our
review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report
Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described,
we have become aware of any matter that makes us believe that the half year financial report is not in accordance with
the Corporations Act 2001 including: giving a true and fair view of the Group's financial position as at 31 December 2015
and its performance for the half year period ended on that date; and complying with Australian Accounting Standard
AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. As auditor of South32 Limited, ASRE
2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.
A review of a half year financial report consists of making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an
audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain
assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Independence
In conducting our review, we have complied with the independence requirements of the Corporations Act 2001.
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF
SOUTH32 LIMITED
Conclusion
Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half
year financial report of South32 Limited is not in accordance with the Corporations Act 2001, including:
(a) giving a true and fair view of the Group's financial position as at 31 December 2015 and of its performance for the
half year period ended on that date; and
(b) complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations
Regulations 2001.
KPMG
Denise McComish
Partner
Perth
25 February 2016
Date: 25/02/2016 08:04:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
