Wrap Text
Quarterly report
South32 Limited
(Incorporated in Australia under the Corporations Act 2001 (Cth))
(ACN 093 732 597)
ASX, LSE, JSE Share Code: S32
ISIN: AU000000S320
QUARTERLY REPORT JUNE 2016
“We have built a strong foundation in our first full year of operation, despite the challenging market.
We prioritised value over volume and took decisive action to restructure our operations, reduce controllable costs
and improve efficiencies, whilst delivering two major projects on or ahead of schedule, and under budget.
We continue to unlock our resource potential, having reached a landmark agreement with the Anindilyakwa Land
Council to mine the Eastern Leases and explore the highly prospective Southern Areas at GEMCO. An
option agreement at the Huckleberry property in Canada also marks our first investment in base and precious metals
greenfields exploration, and aligns with our strategy to identify opportunities beyond our current portfolio.”
Graham Kerr, South32 CEO
- Strong and predictable production, meeting or exceeding FY16 guidance for the majority of operations.
- Record annual production at Australia Manganese, Worsley Alumina, Brazil Alumina, Mozal Aluminium
and Cannington (payable zinc).
- Significant increase in longwall utilisation and cutting rates at Illawarra Metallurgical Coal supported
record annualised coal production of 10.1Mt in the June 2016 quarter.
- Completed previously announced restructuring initiatives, positioning us well to achieve FY17 unit
cost guidance.
- Delivered Appin Area 9 (Illawarra Metallurgical Coal) and Premium Concentrate Ore (Australia
Manganese) projects on or ahead of schedule, and below budget.
- Reached mining and exploration agreements with the Anindilyakwa Land Council of Groote Eylandt,
providing access to first quartile resource potential at GEMCO, one of the world’s largest and lowest
cost manganese mines.
- Entered into an option agreement with Northern Shield Resources for Huckleberry, a property
prospective for Copper-Nickel-PGE mineralisation, in the Labrador Trough, Canada.
Production summary
South32’s share FY15 FY16 YoY 4Q15 3Q16 4Q16 QoQ
Alumina production (kt) 5,147 5,296 3% 1,266 1,334 1,296 (3%)
Aluminium production (kt) 1,004 963 (4%) 242 240 238 (1%)
Energy coal production (kt) 35,744 32,988 (8%) 8,914 7,930 8,021 1%
Metallurgical coal production (kt) 7,455 7,059 (5%) 1,983 1,642 2,119 29%
Manganese ore production (kt) 5,216 4,782 (8%) 1,253 1,205 1,231 2%
Manganese alloy production (kt) 413 224 (46%) 81 48 45 (6%)
Payable nickel production (kt) 40.4 36.8 (9%) 8.6 9.7 9.6 (1%)
Payable silver production (koz) 22,601 21,393 (5%) 5,236 4,478 5,037 12%
Payable lead production (kt) 183.0 173.2 (5%) 44.3 36.9 38.8 5%
Payable zinc production (kt) 72.3 79.0 9% 18.9 18.5 18.7 1%
Unless otherwise noted: percentage variance relates to performance during the financial year ended June 2016 (FY16) compared with the financial year
ended June 2015 (YoY) or the June 2016 quarter compared with the March 2016 quarter (QoQ); production and sales volumes are reported on an
attributable basis.
1
CORPORATE UPDATE
- The previously announced restructuring initiatives at five of our operations (Worsley Alumina, Illawarra
Metallurgical Coal, Australia Manganese, South Africa Manganese and Cerro Matoso) are now complete. These
initiatives position us well to achieve previously announced FY17 unit cost guidance [1]
- Consistent with our strategy to unlock the potential of our resources, we obtained consent from the Anindilyakwa
Land Council to access the Eastern Leases and the Southern Areas at GEMCO. The Eastern Leases will enable
us to mine new areas within our existing operating footprint. Access to the Southern Areas, adjacent to existing
operations, will substantially increase our exploration footprint at this highly prospective manganese deposit.
- We signed an option agreement with Northern Shield Resources to become a partner in the Huckleberry property
in Northern Quebec, Canada. This agreement represents a low-cost entry into the Labrador Trough, a province
identified as being highly prospective for copper, nickel and platinum group elements. We can earn a 50% interest
in the property by funding C$2.5M of exploration spend and a further 20% interest by funding an
additional C$2.5M. Northern Shield’s interest will be free carried to the completion of a Preliminary Economic
Assessment (PEA) study on the property [2].
- In the financial year, South32 invested US$13M in exploration, of which US$4M will be capitalised. Exploration
activities focussed on metallurgical coal and silver in Australia, and nickel in Colombia.
- Our Underlying effective tax rate (ETR)[3] 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%. Permanent differences have a disproportionate effect on the Group’s tax rate when the Group’s profit
margins are compressed.
Upstream production FY15 FY16 FY16
(South32’s share) Actual Actual Guidance %
Worsley Alumina
Alumina production (kt) 3,819 3,961 3,950 0%
Brazil Alumina
Alumina production (kt) 1,328 1,335 1,320 1%
South Africa Energy Coal[4]
Domestic coal production (kt) 18,123 16,825 16,650 1%
Export coal production (kt) 16,150 14,856 15,300 (3%)
Illawarra Metallurgical Coal
Metallurgical coal production (kt) 7,455 7,059 6,900 2%
Energy coal production (kt) 1,471 1,307 1,350 (3%)
Australia Manganese
Manganese ore production (kt) 2,942 3,071 3,050 1%
South Africa Manganese
Subject to
Manganese ore production[5] (kt) 2,274 1,711 N/A
demand
Cerro Matoso
Payable nickel production (kt) 40.4 36.8 36.5 1%
Cannington
Payable silver production (koz) 22,601 21,393 21,650 (1%)
Payable lead production (kt) 183 173 175 (1%)
Payable zinc production (kt) 72 79 80 (1%)
2
WORSLEY ALUMINA
(86% share)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Alumina production (kt) 3,819 3,961 4% 929 1,008 960 3% (5%)
Alumina sales (kt) 3,857 3,874 0% 1,048 1,017 959 (8%) (6%)
Worsley Alumina saleable production increased by 4% (or 142kt) to 4.0Mt in the 2016 financial year as an uplift in
calciner availability underpinned record performance. This represents the first time that the refinery has operated at its
expanded capacity of 4.6Mtpa (100% basis)[6] across a full year and was achieved despite a power outage and
associated process instability that was caused by water ingress during a severe storm in April 2016.
SOUTH AFRICA ALUMINIUM
(100%)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Aluminium production (kt) 699 697 (0%) 175 173 172 (2%) (1%)
Aluminium sales (kt) 695 709 2% 177 162 184 4% 14%
South Africa Aluminium saleable production was largely unchanged for both the 2016 financial year (697kt) and the June
2016 quarter (172kt). The impact of load-shedding was lower than expected and this benefit offset the previously
announced suspension of production in 22 pots in September 2015. The 14% increase in quarterly sales resulted from a
progressive reduction in inventory in the June quarter, following a change in monthly vessel scheduling.
MOZAL ALUMINIUM
(47.1% share)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Aluminium production (kt) 265 266 0% 65 67 66 2% (1%)
Aluminium sales (kt) 273 254 (7%) 70 64 69 (1%) 8%
Mozal Aluminium achieved record annual production of 266kt in the 2016 financial year as a reduction in load-shedding
complemented an increase in potline current efficiency. The increase in quarterly sales reflects the scheduling of
shipments between periods.
3
BRAZIL ALUMINA
(Refinery 36% share, Smelter 40% share)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Alumina production (kt) 1,328 1,335 1% 337 326 336 (0%) 3%
Alumina sales (kt) 1,309 1,359 4% 330 360 338 2% (6%)
Aluminium production (kt) 40 0 N/A 2 0 0 N/A N/A
Aluminium sales (kt) 41 0 N/A 3 0 0 N/A N/A
Brazil Alumina saleable alumina production increased 1% (or 7kt) to a record 1,335kt in the 2016 financial year. The 6%
decrease in quarterly sales reflects a timing difference as one additional shipment occurred in 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. As previously announced, we have forward sold power until the end of CY17 and have
terminated the contract with Eletronorte.
SOUTH AFRICA ENERGY COAL
(100%)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Energy coal production (kt) 34,273 31,681 (8%) 8,508 7,692 7,610 (11%) (1%)
Domestic sales (kt) 18,416 17,169 (7%) 4,358 4,000 4,089 (6%) 2%
Export sales (kt) 16,390 15,157 (8%) 4,123 3,575 3,561 (14%) (0%)
South Africa Energy Coal saleable production decreased by 8% (or 2.6Mt) to 31.7Mt in the 2016 financial year. Lower
production resulted from the planned closure of the opencast mine at Khutala, and a reduction in contractor activity at the
Wolvekrans Middelburg Complex, consistent with our focus on value over volume.
ILLAWARRA METALLURGICAL COAL
(100%)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Metallurgical coal production (kt) 7,455 7,059 (5%) 1,983 1,642 2,119 7% 29%
Metallurgical coal sales (kt) 7,324 6,984 (5%) 2,067 1,595 2,257 9% 42%
Energy coal production (kt) 1,471 1,307 (11%) 406 238 411 1% 73%
Energy coal sales (kt) 1,378 1,333 (3%) 307 364 360 17% (1%)
Illawarra Metallurgical Coal total saleable production decreased by 6% (or 560kt) to 8.4Mt in the 2016 financial year as
challenging geological conditions were encountered at the Appin and Dendrobium mines in the first six months of the
reporting period. Three planned longwall moves were also completed during the year.
The Appin Area 9 project was completed in January ahead of schedule and below budget, significantly increasing
longwall utilisation and cutting rates at the operation. This improvement in longwall performance, and the absence of
longwall moves at Appin or Dendrobium, underpinned a 29% increase in metallurgical coal production in the June
quarter to a record 2.1Mt.
4
AUSTRALIA MANGANESE
(60% share)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Manganese ore production (kt) 2,942 3,071 4% 761 743 739 (3%) (1%)
Manganese ore sales (kt) 2,845 3,180 12% 700 876 805 15% (8%)
Manganese alloy production (kt) 167 133 (20%) 43 26 22 (49%) (15%)
Manganese alloy sales (kt) 139 150 8% 36 44 30 (17%) (32%)
Australia Manganese saleable ore production increased by 4% (or 129kt) to a record 3.1Mt in the 2016 financial year as
concentrator performance improved and the US$139M Premium Concentrate Ore (PC02) project was completed. This
project, which increases GEMCO’s production capacity by 500ktpa to 5.3Mtpa (100% basis), was completed 17% under
budget in the June 2016 quarter. As previously disclosed, the ramp-up of this project has been adjusted to match market
demand. Sales of manganese ore increased by 12% in the 2016 financial year as supply chain inventory was drawn
down to normalised levels.
Saleable manganese alloy production decreased by 20% (or 34kt) to 133kt in the 2016 financial year as power shortages
in Tasmania led to the suspension of two of four furnaces. These furnaces are currently being brought back online, with
return to full production expected in July 2016.
SOUTH AFRICA MANGANESE
(60% share)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Manganese ore production (kt) 2,274 1,711 (25%) 492 462 492 0% 6%
Manganese ore sales (kt) 2,210 1,834 (17%) 407 466 489 20% 5%
Manganese alloy production (kt) 246 91 (63%) 38 22 23 (39%) 5%
Manganese alloy sales (kt) 251 110 (56%) 47 20 40 (15%) 100%
South Africa Manganese saleable ore production decreased by 25% (or 563kt) to 1.7Mt in the 2016 financial year
following the decision to initially suspend (November 2015) and then restructure operations at Wessels and Mamatwan in
response to challenging market conditions. Mining recommenced at both operations in the March 2016 quarter, ramping-
up to an optimised 2.9Mtpa (100% basis) production rate. Sales of manganese ore declined by a lesser 17% as supply
chain inventory was drawn down below normalised levels.
Saleable manganese alloy production decreased by 63% (or 155kt) to 91kt in the 2016 financial year, following the
decision to suspend three of the four high-carbon ferromanganese furnaces at Metalloys in May 2015. Metalloys will
continue to operate one of four furnaces until market conditions improve, consistent with our focus on value over volume.
5
CERRO MATOSO
(99.9% share)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Payable nickel production (kt) 40.4 36.8 (9%) 8.6 9.7 9.6 12% (1%)
Payable nickel sales (kt) 40.6 36.8 (9%) 9.0 9.3 10.0 11% 8%
Cerro Matoso payable nickel production decreased by 9% (or 3.6kt) to 36.8kt in the 2016 financial year. Lower
production resulted from a decline in the average ore grade, consistent with the mine plan.
The previously announced headcount reduction and the restructure of labour activities to improve productivity were
completed in the June 2016 quarter. Combined with a new three-year Collective Labour Agreement, successfully
negotiated with trade unions, these efforts position Cerro Matoso to pursue further optimisation initiatives that will
improve cash generation.
CANNINGTON
(100%)
4Q15 3Q16
South32's share FY15 FY16 YoY 4Q15 3Q16 4Q16 vs vs
4Q16 4Q16
Payable silver production (koz) 22,601 21,393 (5%) 5,236 4,478 5,037 (4%) 12%
Payable silver sales (koz) 23,831 20,852 (13%) 6,144 4,364 4,590 (25%) 5%
Payable lead production (kt) 183.0 173.2 (5%) 44.3 36.9 38.8 (12%) 5%
Payable lead sales (kt) 188.9 169.7 (10%) 48.8 37.0 37.2 (24%) 1%
Payable zinc production (kt) 72.3 79.0 9% 18.9 18.5 18.7 (1%) 1%
Payable zinc sales (kt) 66.8 82.6 24% 16.2 18.6 22.8 41% 23%
Payable silver and lead production decreased by 5%, to 21.4Moz and 173.2kt respectively, in the 2016 financial year due
to a temporary reduction in mill throughput. Conversely, an increase in the average zinc ore grade and recoveries
resulted in record annual zinc production of 79.0kt (+9% YoY).
Finalisation adjustments and the provisional pricing of Cannington concentrates will reduce Underlying EBIT by US$11M
in the 2016 financial year (-US$19M December 2015 half year; -US$43M 2015 financial year). Outstanding concentrate
sales (containing 3.1Moz of silver, 30.9kt of lead and 6.4kt of zinc) were revalued at 30 June 2016. The final price of
these sales will be determined in the first half of the 2017 financial year.
Notes:
1. Unit cost guidance as provided in the 2016 Half Year Financial Results and Outlook management presentation and media release (South32 to reset
its cost base in Australia and Colombia), 25 February 2016. Projected all-in costs for FY17 include royalties (where appropriate) and the influence of
exchange rate assumptions, and were predicated on: an average AUD:USD exchange rate of 0.68; USD:ZAR exchange rate of 14.12; USD:COP
exchange rate of 3,170; a manganese ore price of US$2.00/dmtu for 44% manganese product; an alumina price of US$255/t; a blended coal price of
US$65/t; and a nickel price of US$3.75/lb.
2. For further information, please visit http://www.northern-shield.com
3. The ETR calculation excludes equity accounted investments as they are recorded on an after tax basis.
4. 8% of South Africa Energy Coal is owned by a Broad-Based Black Economic Empowerment (B-BBEE) consortium. The interests owned by the
B-BBEE consortium were acquired using vendor finance, with the loans repayable to South32 via distributions attributable to these parties, pro rata
to their share in South Africa Energy Coal. Until these loans are repaid, South32’s interest in South Africa Energy Coal is accounted at 100%.
5. 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.
6. The Efficiency and Growth Project took nameplate capacity from 3.5Mtpa to 4.6Mtpa at Worsley Alumina.
7. Underlying EBIT is earnings before net finance costs, taxation and any earnings adjustments. Underlying EBIT is reported net of South32’s share of
net finance costs and taxation of equity accounted investments. Underlying EBITDA is Underlying EBIT, before depreciation and amortisation.
8. Figures in italics indicate that this figure has been adjusted since it was previously reported.
9. The following abbreviations have been used throughout this report: grams per tonne (g/t); tonnes (t); thousand tonnes (kt); thousand tonnes per
annum (ktpa); million tonnes (Mt); million tonnes per annum (Mtpa); thousand ounces (koz); million ounces (Moz); thousand wet metric tonnes
(kwmt); thousand dry metric tonnes (kdmt); Australian Securities Exchange (ASX); London Stock Exchange (LSE); and Johannesburg Stock
Exchange (JSE).
6
OPERATING PERFORMANCE
South32’s share FY15 FY16 4Q15 1Q16 2Q16 3Q16 4Q16
Worsley Alumina
(86% share)
Alumina hydrate production (kt) 3,874 3,905 987 990 980 989 946
Alumina production (kt) 3,819 3,961 929 1,031 962 1,008 960
Alumina sales (kt) 3,857 3,874 1,048 930 968 1,017 959
South Africa Aluminium
(100%)
Aluminium production (kt) 699 697 175 178 174 173 172
Aluminium sales (kt) 695 709 177 185 178 162 184
Mozal Aluminium
(47.1% share)
Aluminium production (kt) 265 266 65 66 67 67 66
Aluminium sales (kt) 273 254 70 53 68 64 69
Brazil Alumina
(alumina 36% share, aluminium 40% share)
Alumina production (kt) 1,328 1,335 337 333 340 326 336
Alumina sales (kt) 1,309 1,359 330 320 341 360 338
Aluminium production (kt) 40 0 2 0 0 0 0
Aluminium sales (kt) 41 0 3 0 0 0 0
South Africa Energy Coal
(100%)
Energy coal production (kt) 34,273 31,681 8,508 8,292 8,087 7,692 7,610
Domestic sales (kt) 18,416 17,169 4,358 4,246 4,834 4,000 4,089
Export sales (kt) 16,390 15,157 4,123 4,132 3,889 3,575 3,561
Illawarra Metallurgical Coal
(100%)
Metallurgical coal production (kt) 7,455 7,059 1,983 2,079 1,219 1,642 2,119
Metallurgical coal sales (kt) 7,324 6,984 2,067 1,986 1,146 1,595 2,257
Energy coal production (kt) 1,471 1,307 406 406 252 238 411
Energy coal sales (kt) 1,378 1,333 307 391 218 364 360
Australia Manganese
(60% share)
Manganese ore production (kt) 2,942 3,071 761 857 732 743 739
Manganese ore sales (kt) 2,845 3,180 700 749 750 876 805
Ore grade sold (%, Mn) 47.9 47.6 47.9 48.1 47.6 47.8 46.9
Manganese alloy production (kt) 167 133 43 44 41 26 22
Manganese alloy sales (kt) 139 150 36 38 38 44 30
South Africa Manganese
(60% share)
Manganese ore production (kt) 2,274 1,711 492 580 177 462 492
Manganese ore sales (kt) 2,210 1,834 407 518 361 466 489
Ore grade sold (%, Mn) 41.4 39.9 41.0 40.2 39.9 40.4 39.2
Manganese alloy production (kt) 246 91 38 21 25 22 23
Manganese alloy sales (kt) 251 110 47 25 25 20 40
7
South32’s share FY15 FY16 4Q15 1Q16 2Q16 3Q16 4Q16
Cerro Matoso
(99.9% share)
Ore mined (kwmt) 6,321 6,009 1,156 1,531 1,486 1,512 1,480
Ore processed (kdmt) 2,629 2,699 596 639 673 704 683
Ore grade processed (%, Ni) 1.67 1.54 1.59 1.55 1.52 1.53 1.55
Payable nickel production (kt) 40.4 36.8 8.6 8.7 8.8 9.7 9.6
Payable nickel sales (kt) 40.6 36.8 9.0 8.7 8.8 9.3 10.0
Cannington
(100%)
Ore mined (kt) 3,418 3,289 857 910 833 727 819
Ore processed (kt) 3,289 3,149 829 838 819 673 819
Silver ore grade processed (g/t, Ag) 257 255 235 272 260 258 230
Lead ore grade processed (%, Pb) 6.7 6.6 6.4 6.9 7.1 6.7 5.9
Zinc ore grade processed (%, Zn) 3.4 3.8 3.5 3.4 4.0 4.1 3.6
Payable silver production (koz) 22,601 21,393 5,236 6,278 5,600 4,478 5,037
Payable silver sales (koz) 23,831 20,852 6,144 6,203 5,695 4,364 4,590
Payable lead production (kt) 183.0 173.2 44.3 49.1 48.4 36.9 38.8
Payable lead sales (kt) 188.9 169.7 48.8 48.7 46.8 37.0 37.2
Payable zinc production (kt) 72.3 79.0 18.9 19.6 22.2 18.5 18.7
Payable zinc sales (kt) 66.8 82.6 16.2 19.0 22.2 18.6 22.8
INVESTOR RELATIONS
Alex Volante Rob Ward
T +61 8 9324 9029 T +61 8 9324 9340
M +61 403 328 408 M +61 431 596 831
E Alex.Volante@south32.net E Robert.Ward@south32.net
MEDIA RELATIONS
Tony Johnson
T +61 8 9324 9190
M +61 439 500 799
E Tony.Johnson@south32.net
21 July 2016
JSE Sponsor: UBS South Africa (Pty) Ltd
8
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