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.net
South32 Limited
RESULTS FOR ANNOUNCEMENT TO THE MARKET
This statement includes the consolidated results of the South32 Group for the year ended 30 June 2016 compared with
the year ended 30 June 2015 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 FY16 FY15 FY15
(Loss)/profit attributable to ordinary equity holders of South32
Limited (1,615) 28 (919)
Adjusted for
Loss on disposal of property, plant and equipment 2 10 10
Gain on disposal of investment (1) - -
Fair value uplift on equity accounted investments - - (921)
Impairment losses 1,386 594 1,389
Re-measurements included in share of profit/(loss) of equity
accounted investments 212 41 41
Total tax benefit on the above items (165) (174) (182)
Headline Earnings (181) 499 (582)
Diluted Headline Earnings (181) 499 (582)
Basic earnings per share denominator (millions) 5,324 5,324 3,437
Diluted earnings per share denominator (millions)(b) 5,324 5,324 3,437
Headline Earnings from continuing operations
Headline Earnings per share (US cents) (3.4) 9.4 (17.1)
Diluted Headline Earnings per share (US cents) (3.4) 9.4 (17.1)
Headline Earnings
Headline Earnings per share (US cents) (3.4) 9.4 (16.9)
Diluted Headline Earnings per share (US cents) (3.4) 9.4 (16.9)
(a) Refer to note at the bottom for the basis of preparation of pro forma financial information.
(b) Diluted earnings per share calculation excludes 74,710,141 (2015: 11,744,880) rights which are considered antidilutive and are subject to
service and performance conditions.
FINANCIAL RESULTS AND OUTLOOK
YEAR ENDED 30 JUNE 2016
South32 significantly reduces costs, further strengthens its balance sheet and announces inaugural dividend
"In our first full year, the successful transition to our regional model, a series of restructuring initiatives and robust
operating performance delivered strong results. We set five production records and achieved guidance for the majority of
our upstream operations, generated controllable cost savings of US$386M and reduced capital expenditure by
US$306M.
"By optimising our operations and maintaining a core focus on value, we generated free cash flow of US$597M and
finished the year with net cash of US$312M. We will continue to unlock the potential of our portfolio, identify opportunities
and pursue investments where we see value, but will not compromise our strong balance sheet and investment grade
credit rating.
"Looking to FY17, we have maintained production guidance for the majority of our upstream operations and will stretch
performance to meet cost targets. Our functions are lean, with corporate costs now half the level envisaged at the time of
listing.
"12 months on, South32 is a much stronger company with significantly lower costs and a balance sheet that provides
flexibility. Against this backdrop, our Board resolved to pay an inaugural dividend of US 1 cent per share."
Graham Kerr, South32 CEO
Financial highlights
Pro forma Change Statutory(1)(2)
US$M FY16 FY15 % FY15
Revenue(3) 5,812 7,743 (25%) 3,843
Profit/(loss) from continuing operations (1,441) 519 (378%) (331)
Profit/(loss) after taxation (1,615) 28 (5,868%) (926)
Basic earnings per share (US cents)(4) (30.3) 0.5 (6,160%) (26.9)
Other financial measures
Underlying EBITDA(5) 1,131 1,849 (39%) 820
Underlying EBITDA margin(6) 21.5% 26.2% (4.7%) 23.4%
Underlying EBIT(5) 356 1,001 (64%) 345
Underlying EBIT margin(7) 6.7% 14.0% (7.3%) 9.7%
Underlying earnings(5) 138 575 (76%) 79
Basic Underlying earnings per share (US cents)(4) 2.6 10.8 (76%) 2.3
ROIC(8) 1.7% 6.2% (4.5%) N/A
Note: To assist shareholders in their understanding of the South32 Group, pro forma financial information has been prepared
for 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 30 June 2015 (refer to the pro forma income statement and Underlying earnings adjustments. The pro
forma financial information must be read in conjunction with the notes.
2016 FINANCIAL YEAR SUMMARY
SAFETY
Our vision is to create a safe working environment where everyone goes home safe and well every day. Tragically, we
lost four of our colleagues in the 2016 financial year (FY16) and our Total Recordable Injury Frequency (TRIF) increased
from 5.8 to 7.7 per million hours worked. Despite our efforts over many years, we have not eliminated significant
incidents and require a step change in performance. We are working hard to build an inclusive workplace with a strong
culture of care and accountability, where work is well-designed and we continuously improve and learn.
PERFORMANCE HIGHLIGHTS
The Group's strategy is simple, with three core elements designed to deliver sector leading total shareholder returns: the
optimisation of our existing operations; the conversion of high quality resources into reserves to unlock their potential; and
the identification and pursuit of investment opportunities beyond our portfolio. While volatile macro-economic conditions
posed a significant challenge to the industry, strict application of this strategy and an overarching focus on cash flow,
value and investment returns delivered strong results in the areas that we control. Specific performance highlights
included:
- Free cash flow, excluding equity accounted investments, of US$597M and net cash of US$312M at 30 June 2016;
- Record annual production at Australia Manganese (ore), Worsley Alumina, Brazil Alumina, Mozal Aluminium and
Cannington (payable zinc), and robust performance at our other sites;
- The successful restructuring of our operations and implementation of our regional model;
- A US$386M and US$306M reduction in controllable costs(9) and capital expenditure, respectively;
- The creation of lean support functions and a reduction in corporate costs to approximately US$70M per annum from
FY17, around half the level envisaged at the time of listing;
- The completion of the Appin Area 9 (Illawarra Metallurgical Coal) and Premium Concentrate Ore (Australia
Manganese) projects on or ahead of schedule, and below budget;
- A significant reduction in the estimated capital cost for the development of the higher grade La Esmeralda Mineral
Resource(10) at Cerro Matoso;
- The progression of the Klipspruit Life Extension project at South Africa Energy Coal into the feasibility study stage,
where the viability of a lower capital cost development option is being assessed;
- Continuing to work with Eskom under the existing (cost plus) Coal Sales Agreement to progress a lower capital cost
option to extend the life of the Khutala underground mine at South Africa Energy Coal;
- Reaching agreement to mine the Eastern Leases and explore the Southern Areas at GEMCO, which have the
potential to substantially extend the life of one of the world's largest and lowest cost manganese mines; and
- The retention of our investment grade credit rating and the Board's resolution to pay an inaugural US 1 cent per
share dividend.
In addition, we entered into 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.
EARNINGS
The Group's statutory loss of US$1.6B in the 2016 financial year (FY16) was significantly impacted by non-cash
impairment related charges recorded in the December 2015 half year totalling US$1.7B (post-tax US$1.7B). Consistent
with our accounting policies, various items are excluded from Underlying earnings including the aforementioned
impairments, major corporate restructures (US$63M pre-tax), demerger related set-up costs (US$60M pre-tax),
exchange rate gains associated with the restatement of monetary items (-US$43M pre-tax), the net benefit of
adjustments to closure and rehabilitation provisions for closed sites (-US$59M pre-tax), fair value losses on derivative
instruments (US$60M pre-tax), exchange rate gains associated with the Group's non-US dollar denominated debt and
cash (-US$30M pre-tax), exchange rate losses on tax balances (US$124M), and the tax benefit on all pre-tax earnings
adjustments (-US$178M).
Profit/(loss) from continuing operations to Underlying EBITDA reconciliation
US$M Pro forma
FY16 FY15
Profit/(loss) from continuing operations (1,441) 519
Earnings adjustments to derive Underlying EBIT 1,797 482
Underlying EBIT 356 1,001
Depreciation and amortisation 775 848
Underlying EBITDA 1,131 1,849
Profit/(loss) after taxation to Underlying earnings reconciliation
US$M Pro forma
FY16 FY15
Profit/(loss) after taxation (1,615) 28
Earnings adjustments to derive Underlying EBIT 1,797 482
Earnings adjustments to derive Underlying net finance cost (21) (134)
Earnings adjustments to derive Underlying income tax expense (23) 199
Underlying earnings 138 575
The Group generated Underlying EBITDA of US$1.1B in FY16, for an operating margin of 21.5% and Underlying EBIT and
Underlying earnings of US$356M and US$138M, respectively. A deterioration in commodity markets was the primary driver
of the significant decline in profitability, reducing revenue by US$1.5B, net of price linked costs. In this context, the Group
would have recorded an Underlying EBIT loss if not for the substantial US$386M reduction in controllable costs. Detailed
earnings analysis is included.
CASH FLOW
Despite a 21% reduction in the average realised price of our commodities, we generated free cash flow from operations,
excluding equity accounted investments, of US$597M.
Capital expenditure, excluding equity accounted investments, was reduced by 39% or US$246M to US$383M. This
included:
- Sustaining capital expenditure, comprising Stay-in-business, Minor discretionary and Deferred stripping (including
underground development), of US$351M; and
- Major project capital expenditure of US$32M.
The purchase of intangibles and the capitalisation of exploration accounted for a further US$17M of expenditure.
The Appin Area 9 underground extension at Illawarra Metallurgical Coal was the Group's sole Major project in development
during FY16. The project was completed in the March 2016 quarter, 33% below its US$845M budget and three months
ahead of schedule.
Capital expenditure associated with equity accounted investments of US$79M in FY16 included the Premium
Concentrate Ore (PC02) project at GEMCO (Australia Manganese) and the second phase of the Central Block
development project at the Wessels underground mine (South Africa Manganese). The PC02 project, which increased
Australia Manganese ore production capacity by 0.5Mt to 5.3Mtpa (100% basis), was delivered on schedule and under
budget in the June 2016 quarter. The second phase of the Central Block development project will enable underground
mining activity to relocate closer to critical infrastructure, thereby reducing cycle times. As a result of the fatality at
Wessels in June 2016 and the subsequent reprioritisation of activities, commissioning is now expected in the March
2017 quarter. A further US$1M in capitalised exploration expenditure associated with equity accounted investments was
incurred in FY16.
Total capital expenditure(11), including equity accounted investments was US$480M in FY16.
A US$121M reduction in provisions was mostly associated with expenditure on closure and rehabilitation activities and a
stronger US dollar, while lower commodity and raw material prices led to a US$244M reduction in payables. In contrast,
a reduction in supply chain inventory and receivables benefited cash flow by US$191M and US$163M, respectively, as
average days debtors declined to 19 days (from 21 days at 31 December 2015). The resolution of two legacy tax
disputes also contributed US$46M to cash flow in the December 2015 half year.
Free cash flow of operations, excluding equity accounted investments
US$M FY16
Profit/(loss) from continuing operations (1,441)
Non-cash items 2,190
(Profit)/loss from equity accounted investments 330
Change in working capital (11)
Cash generated from continuing operations 1,068
Total capital expenditure, excluding equity accounted investments, including intangibles and capitalised exploration (400)
Operating cash flows from continuing operations before financing activities and tax, and after capital expenditure 668
Interest (paid)/received (19)
Income tax (paid)/received (52)
Free cash flow of operations, excluding equity accounted investments 597
We received dividends totalling US$33M during FY16, including US$19M from our equity accounted manganese
investments and US$14M from our investment in Mineração Rio do Norte S.A. A further US$38M was received from our
equity accounted manganese investments in the June 2016 half year as an overdraft facility owing to South32 was
repaid.
BALANCE SHEET
Strong operating cash flow and the sustainable decapitalisation of our business, via more focussed investment, further
strengthened the Group's Balance Sheet and established a solid foundation from which to grow return on invested
capital (ROIC). As at 30 June 2016, the Group's net cash position was US$312M, a significant improvement on opening
net debt of US$402M. The restructuring of a legacy financing arrangement (US$90M) in the December 2015 half year
and a US$29M reduction in finance leases primarily associated with the appreciation of the US dollar contributed to the
US$714M improvement in net cash. Additional liquidity is available via an undrawn US$1.5B revolving credit facility.
Net cash/(debt)
US$M Pro forma
FY16 FY15
Cash and cash equivalents 1,225 644
Finance leases (602) (631)
Other interest bearing liabilities (311) (415)
Net cash/(debt) 312 (402)
Consistent with our commitment to maintain a strong investment grade credit rating, Standard and Poor's and Moody's
retained the Group's BBB+ and Baa1 credit ratings throughout FY16.
DIVIDENDS
The Board has resolved to pay an inaugural final dividend of US 1 cent per share in respect of FY16. The dividend will
not be franked for Australian taxation purposes given the current level of profitability and the recognition of additional
deductions as part of the demerger related tax reset process.
This dividend is paid in line with South32's policy to distribute a minimum 40% of Underlying earnings as dividends to its
shareholders following each six-month reporting period, having regard to South32's first two priorities for cash flow, being
a commitment to maintain safe and reliable operations and an investment grade credit rating through the cycle.
Dividend Timetable Date
Announce currency conversion into Rand 12 September 2016
Last day to trade cum dividend on the Johannesburg Stock Exchange (JSE) 13 September 2016
Ex-dividend date on the JSE 14 September 2016
Ex-dividend date on the ASX and London Stock Exchange (LSE) 15 September 2016
Record Date (including currency election date for ASX) 16 September 2016
Payment Date 6 October 2016
South32 Limited shareholders registered on the South African branch register will not be able to dematerialise or
rematerialise their shareholdings between 14 and 16 September 2016 (both dates inclusive), nor will transfers to/from
the South African branch register be permitted between 12 and 16 September 2016 (both dates inclusive).
Details of the currency exchange rates applicable for the dividend will be announced to the relevant stock exchanges
and will appear on the Company's website.
South32 American Depositary Receipts (ADRs) each represent five fully paid ordinary shares in South32 and ADR
holders will receive dividends accordingly, subject to the terms of the Depositary Agreement.
SHARE SALE FACILITY
South32 announces the establishment of a small shareholding sale facility (Sale Facility) for shareholders on its
Australian register with holdings valued at less than A$500 and whose registered address is in Australia or New Zealand.
The Sale Facility enables eligible shareholders to sell their shares in South32 without incurring any brokerage or
handling costs. Further details are provided in a separate announcement on 25 August 2016. Eligible shareholders will
also receive separate correspondence providing details of the Sale Facility.
This initiative is expected to reduce annual administration costs given the large number of shareholders with small
holdings. Eligible shareholders will be entitled to the FY16 final dividend.
OUTLOOK
PRODUCTION
Production guidance for FY17 is unchanged for the majority of our upstream operations, although a downward revision is
noted for Cannington. FY18 production guidance is provided for the first time.
Worsley Alumina saleable alumina production guidance is largely unchanged with the refinery expected to produce at its
nameplate capacity of 4.6Mtpa (100% basis) across FY17 and FY18. Similarly, Brazil Alumina saleable production
guidance for FY17 is unchanged at 1.32Mt before a small increase in production is expected in FY18.
At South Africa Energy Coal, total coal production guidance for FY17 is maintained at approximately 31Mt, albeit with a
higher proportion of domestic sales. A small decrease in production is expected in FY18. At Illawarra Metallurgical Coal,
saleable coal production guidance is unchanged at 9.5Mt for FY17, with an increase in longwall utilisation and cutting rates
anticipated following the completion of the Appin Area 9 project in January 2016. Production is expected to remain largely
unchanged in FY18.
Payable nickel production guidance for Cerro Matoso remains unchanged at approximately 36kt for FY17. A small decrease in
production is expected in FY18. Access to the higher grade La Esmeralda Mineral Resource(10) will be facilitated by the
development of a low cost river crossing with payable nickel production expected to rise temporarily to more than 40ktpa in
FY19 and FY20.
Consistent with prior guidance and in response to challenging market conditions, Australia Manganese is expected to operate
below recently expanded capacity of 5.3Mwmt (100% basis), with ore production of 3.1Mwmt projected for each of FY17 and
FY18. Production guidance is not provided for South Africa Manganese as our plans will be adjusted to reflect customer
demand given our focus on value over volume.
Following the completion of our first annual planning cycle, we have optimised the longer term mine plan at Cannington,
with silver and lead production guidance for FY17 reduced by 2% and 3%, respectively, and zinc production guidance
increased by 3%. This plan, which seeks to increase total silver, lead and zinc extraction across the remaining years of
the underground operation and reduce geotechnical risk by resequencing stope design, results in a further 10-13%
reduction in payable metal production in FY18.
Upstream production guidance (South32 share)(12)
FY16 FY17e(a) FY18e(a)
Worsley Alumina
Alumina production (kt) 3,961 3,965 3,965
Brazil Alumina
Alumina production (kt) 1,335 1,320 1,350
South Africa Energy Coal(13)
Domestic coal production (kt) 16,825 Revised up 17,000 17,000
Export coal production (kt) 14,856 Revised down 13,850 12,800
Illawarra Metallurgical Coal
Metallurgical coal production (kt) 7,059 8,150 8,140
Energy coal production (kt) 1,307 1,380 1,400
Australia Manganese
Manganese ore production (kwmt) 3,071 3,120 3,125
South Africa Manganese
Manganese ore production (kwmt) 1,711 Subject to Demand Subject to Demand
Cerro Matoso
Payable nickel production (kt) 36.8 36.0 35.0
Cannington
Payable silver production (koz) 21,393 Revised down 19,050 16,550
Payable lead production (kt) 173 Revised down 163 147
Payable zinc production (kt) 79 Revised up 80 72
(a) The denotation (e) refers to an estimate or forecast year.
High rates of current efficiency have been achieved at our African aluminium smelters. The impact of electricity
load-shedding events was lower than anticipated in FY16 and production will continue to be influenced by the duration
and regularity of these outages. We are yet to restart production in the 22 pots that were taken offline at South Africa
Aluminium in September 2015 in response to challenging market conditions (equivalent to 3% of total production).
At Metalloys (South Africa Manganese), saleable manganese alloy production has been adjusted to reflect market
demand, with one of four furnaces to remain in operation until market conditions improve. At TEMCO (Australia
Manganese), power shortages in FY16 led to the suspension of two of four furnaces. These furnaces returned to full
production in July 2016.
Consistent with our focus on value over volume, we will continue to take decisive action should superior value and cash
flow be attainable by varying the output of any operation.
COSTS AND CAPITAL EXPENDITURE
We reduced controllable costs by US$386M and capital expenditure, including equity accounted investments, by 40% to
US$462M in FY16.
Cost targets
In February 2016, we announced major restructuring initiatives at a number of our operations, including Worsley
Alumina, Illawarra Metallurgical Coal, Australia Manganese (GEMCO), South Africa Manganese and Cerro Matoso.
These restructuring activities have been completed, while additional cost savings were also embedded within our support
functions.
As a result, we are well positioned to achieve the majority of our FY17 operational cost targets, which have been
adjusted to reflect revised commodity price and foreign exchange rate assumptions. In this regard, our cost target for
South Africa Manganese is unlikely to be achieved before the June 2017 half year following the fatality at Wessels in
June 2016 and the subsequent reprioritisation of activities in the underground mine. Cost targets for South Africa Energy
Coal and Cannington are provided for the first time. Forecast corporate costs of approximately US$70M per annum from
FY17 are almost 50% lower than envisaged at the time of listing.
Operating unit costs, including Sustaining capital expenditure by upstream operation(14)
FY17 FY17
Units FY15 FY16 Prior guidance(a) New guidance(b)
Worsley Alumina US$/t 266 221 200 204
Illawarra Metallurgical Coal US$/t 104 80 66 71
Australia Manganese ore (FOB) US$/dmtu 2.40 1.88 1.56 1.66
South Africa Manganese ore (FOB) US$/dmtu 2.23 2.01 1.90 1.71
Cerro Matoso US$/lb 5.54 4.30 3.90 3.87
South Africa Energy Coal US$/t 33 27 - 26
Cannington (c) US$/t 182 153 - 138
(a) Prior Operating unit cost guidance, including Sustaining capital expenditure, predicated on previously disclosed price and foreign exchange rate
assumptions (refer to notes).
(b) New FY17 Operating unit cost targets, including Sustaining capital expenditure, are predicated on revised commodity price and foreign exchange
rate assumptions (notes). The target for South Africa Manganese reflects the expected June 2017 half year run-
rate as activity has been reprioritised following a fatality at the Wessels underground mine in June 2016. New Operating unit cost targets,
including Sustaining capital expenditure, based upon previously disclosed commodity price and foreign exchange rate assumptions would be:
Worsley Alumina US$194/t, Illawarra Metallurgical Coal US$66/t, Australia Manganese ore US$1.56/dmtu, South Africa Manganese US$1.93/dmtu
and Cerro Matoso US$3.68/lb.
(c) Shows US dollar per tonne of ore processed. Periodic movements in finished product inventory may impact operating unit cost as related marketing
costs and treatment and refining charges may change.
Capital expenditure
We expect capital expenditure, including equity accounted investments, to remain largely unchanged in FY17 at
approximately US$450M(17). Major project expenditure is not anticipated, aside from study costs and land acquisitions
associated with our South Africa Energy Coal life extension options, primarily Klipspruit. Looking to FY18, sustaining
capital expenditure, including equity accounted investments, is expected to remain largely unchanged from FY17, while
the rate of expenditure associated with Major projects will remain dependent on the status of our development options.
The Klipspruit Life Extension is the sole Major project scheduled for approval before the end of FY18, noting that the low
cost La Esmeralda development at Cerro Matoso does not fall into this category.
Exploration expenditure
During the year 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.
Modest investment in greenfield exploration is currently planned for FY17, although the rate of expenditure will rise
should additional opportunities be identified. Exploration expenditure of approximately US$12M is expected within our
existing footprint.
Restructuring charges
Once-off redundancy and restructuring charges of US$51M were recognised in FY16 as previously announced
operational initiatives were completed. Following a review of our functional support structures in the June 2016 quarter, a
further US$12M of redundancy and restructuring charges were recognised prior to the end of the financial year. The
majority of these once-off charges have been paid, with the remaining US$28M to be paid in FY17. US$8M of once-off
redundancy and restructuring charges were recognised and paid by Equity Accounted Investments in FY16.
Movement in restructuring provision (excluding EAI)
US$
Opening Balance (1 July 2015) 23
Profit and loss charge 63
Amounts paid H1 FY16 (17)
Amount paid H2 FY16 (41)
Closing Balance (30 June 2016) 28
These once-off charges are excluded from the Group's Underlying measures.
DEPRECIATION AND AMORTISATION
Depreciation and amortisation, excluding equity accounted investments, is expected to decrease by US$55M to
US$720M in FY17 following the recognition of non-cash impairment charges in FY16. Similarly, depreciation and
amortisation for equity accounted investments is expected to decline by US$55M to US$70M in FY17.
TAX EXPENSE
The Group's Underlying effective tax rate (Underlying ETR) primarily reflects the geographic distribution of the Group's
profit. The corporate tax rates applicable to the Group include: Australia 30%; South Africa 28%; Colombia 40%; and
Brazil 34%. It should also be recognised that permanent differences have a disproportionate effect on the Group's
Underlying ETR(18) when commodity prices and profit margins are compressed. Based on current projections, the Group
is not expected to generate franking credits in FY17.
2016 FINANCIAL YEAR RESULTS
To assist shareholders in their understanding of the Group, pro forma FY15 financial information has been included for
comparative purposes to reflect the business as it is now structured and as though it was in effect for the period 1 July
2014 to 30 June 2015. To provide further insight into the underlying performance of the South32 Group, we also present
internal earnings measures utilised by management. These internal measures include Underlying EBITDA, Underlying
EBIT and Underlying earnings.
Income statement
US$M Pro forma
FY16 FY15
Revenue 5,812 7,743
Other income 324 261
Expenses excluding net finance cost (7,247) (7,479)
Share of profit/(loss) of equity accounted investments (330) (6)
Profit/(loss) from continuing operations (1,441) 519
Net finance cost (104) (60)
Taxation expense (70) (431)
Profit/(loss) after taxation (1,615) 28
Basic earnings per share (US cents) (30.3) 0.5
Other financial information
Profit/(loss) from continuing operations (1,441) 519
Earnings adjustments to derive Underlying EBIT 1,797 482
Underlying EBIT 356 1,001
Depreciation and amortisation 775 848
Underlying EBITDA 1,131 1,849
Profit/(loss) after taxation (1,615) 28
Earnings adjustments after taxation 1,753 547
Underlying earnings 138 575
Basic Underlying earnings per share (US cents) 2.59 10.80
EARNINGS ADJUSTMENTS
The following table notes the various Earnings adjustments that are excluded from the Group's Underlying measures.
A detailed explanation of these adjustments, including Significant items, is included.
Earnings adjustments
US$M Pro forma
FY16 FY15
Adjustments to Underlying EBIT
Significant items(a) 24 -
Exchange rate (gains)/losses on restatement of monetary items (b) (43) (93)
Impairment losses(b) 1,386 594
Fair value (gains)/losses on derivative instruments(b) 60 (25)
Major corporate restructures(b) 63 -
Impairment losses included in operating profit/(loss) of equity accounted investments (c) 291 -
Earnings adjustments included in operating profit/(loss) of equity accounted investments (c) 16 6
Total adjustments to Underlying EBIT 1,797 482
Adjustments to net finance cost
Significant items(a) 9 -
Exchange rate variations on net debt (30) (134)
Total adjustments to net finance cost (21) (134)
Adjustments to income tax expense
Significant items(a) 31 96
Tax effect of earnings adjustments to Underlying EBIT (187) (134)
Tax effect of earnings adjustments to net finance cost 9 40
Exchange rate variations on tax balances 124 197
Total adjustments to income tax expense (23) 199
Total earnings adjustments after taxation 1,753 547
(a) Refer to Significant items on pages.
(b) Recognised in "expenses excluding net finance cost" in the consolidated income statement.
(c) Recognised in "share of profit/(loss) of equity accounted investments" in the consolidated income statement.
EARNINGS ANALYSIS
The following key factors influenced earnings in FY16, relative to pro forma FY15
Reconciliation of movements in Underlying earnings (US$M)
FY15 Underlying EBIT 1,001
Sales price (1,649)
Price-linked costs 188
Foreign exchange 623
Inflation (141)
Volume (258)
Controllable costs 386
Other 142
Interest & tax (equity accounted investments) 64
FY16 Underlying EBIT 356
Underlying net finance cost (125)
Underlying taxation expense (93)
FY16 Underlying earnings 138
Prices, foreign exchange and inflation
A 21% reduction in the average realised price of our commodities reduced revenue by US$1.6B. Weaker aluminium and
alumina prices accounted for US$918M of this impact. Lower manganese ore and alloy, metallurgical and energy coal, and
nickel prices reduced revenue by a further US$268M, US$262M, and US$203M, respectively.
The pronounced decline in commodity markets led to a US$188M reduction in price linked costs, although this was largely
offset by general inflation which increased costs by US$141M. The inflationary impact was most pronounced at our African
operations, which accounted for 65% of the total variance.
The general strengthening of the US dollar against a basket of producer currencies provided some relief, increasing
Underlying EBIT by US$623M.
Volume
We delivered record annual production at Australia Manganese (ore), Worsley Alumina, Brazil Alumina, Mozal
Aluminium and Cannington (payable zinc), and robust performance at our other sites. In this context, the US$258M
volume related decline in revenue reflects the proactive decisions we took to temporarily suspend and then rebase
production at South Africa Manganese, optimise production at South Africa Energy Coal for cash flow and margin, and
extend the closure of loss making smelting activities at Brazil Alumina.
Controllable cost reduction
We reduced controllable costs by a substantial US$386M in FY16, including equity accounted investments. These
savings were achieved by increasing labour productivity, lowering the utilisation of and rates for contractors and
consultants, reducing procurement, freight and logistics costs, and optimising our energy footprint. This included a US$65M
reduction in controllable costs for our marketing and corporate functions, highlighting the breadth of our efforts.
FY16 controllable costs savings
US$M Total
Cost initiatives 238
Volume (12)
Inventory (68)
Australia region 158
Cost initiatives 99
Volume 152
Inventory (59)
Africa region 192
Corporate and other(a) 36
Total 386
(a) Corporate and other includes Corporate cost savings of approximately US$65M.
The temporary suspension and rebasing of production at South Africa Manganese contributed to the reduction in
controllable costs, however this was broadly offset by an increase in costs within the income statement to reflect the
associated reduction of inventory.
Other items
Other items increased Underlying EBIT by a net US$142M. Depreciation and amortisation reduced by US$120M primarily
due to impairments recorded in the December 2015 half year at Australia Manganese, South Africa Energy Coal, South
Africa Manganese and Brazil Alumina.
The suspension of aluminium smelting at Brazil Alumina reduced costs by US$57M, although this was largely offset by a
net US$36M reduction in the contribution of power sales. As previously indicated, a US$24M (onerous contract) provision
has been recorded in the June 2016 half year to reflect the anticipated future losses associated with the remaining
Eletronorte power supply commitments across FY17 and FY18.
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$64M in FY16
to US$41M.
Net finance costs
The Group incurred Underlying net finance costs, excluding equity accounted investments, of US$125M in FY16. This
largely reflects the unwinding of the discount applied to closure and rehabilitation provisions (US$96M), and finance lease
charges (US$37M), primarily at Worsley Alumina.
Underlying net finance cost reconciliation
US$M FY16
Unwind of discount applied to closure and rehabilitation provisions (96)
Finance lease charges (37)
Other 8
Underlying net finance cost (125)
Add back earnings adjustment for exchange rate variations on net debt 30
Add back Significant items (9)
Net finance cost (104)
Taxation expense
The Group's underlying income tax expense, which excludes taxation associated with equity accounted investments,
was US$93M for an Underlying effective tax rate (ETR) of 36.6%. The tax expense for equity accounted investments was
US$13M, including royalty related taxation. The GEMCO (Australia Manganese) Northern Territory royalty, as a profits
based tax, gives rise to royalty related taxation of US$9M in equity accounted investments.
Underlying income tax expense reconciliation and Underlying ETR
US$M FY16
Underlying EBIT 356
Include: Underlying net finance cost (125)
Remove: Share of profit/(loss) of equity accounted investments 23
Underlying Profit/(loss) before taxation 254
Income tax expense 70
Tax effect of earnings adjustments to Underlying EBIT 187
Tax effect of earnings adjustments to net finance cost (9)
Exchange rate variations on tax balances (124)
Tax on significant items (31)
Underlying income tax expense 93
Underlying effective tax rate 36.6%
OPERATIONS ANALYSIS
A summary of the Underlying performance of the Group's operations is presented below.
Operations table
Revenue Underlying EBIT
US$M FY16 FY15(c) FY16 FY15(c)
Worsley Alumina 1,011 1,291 42 174
South Africa Aluminium 1,161 1,541 82 250
Mozal Aluminium 431 630 - 112
Brazil Alumina 346 497 78 181
South Africa Energy Coal 1,009 1,315 95 94
Illawarra Metallurgical Coal 642 814 (61) (30)
Australia Manganese(a) 476 595 65 123
South Africa Manganese(a) 234 420 (47) (20)
Cerro Matoso 333 593 (88) 58
Cannington 786 902 274 287
Third party products(21) 587 795 6 28
Inter-segment / Group and Unallocated (492) (635) (49) (151)
Total 6,524 8,758 397 1,106
Equity accounting adjustment(b) (712) (1,015) (41) (105)
South32 Group 5,812 7,743 356 1,001
(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.
(c) Pro forma FY15 information.
Note: Detailed operational analysis is presented on other pages. Unless otherwise stated:
- All metrics reflect South32's share;
- 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. Additional manganese disclosures are included and
- New operating unit cost targets, including Sustaining capital expenditure, and Sustaining capital expenditure
guidance, include royalties (where appropriate) and the influence of exchange rate assumptions, and are predicated
on: an alumina price of US$259/t; an average blended coal price of US$83/t for Illawarra Metallurgical Coal; a
manganese ore price of US$3.23/dmtu for 44% manganese product; a nickel price of US$3.95/lb; a silver price of
US$17.50/troy oz; a lead price of US$1,723/t; a zinc price of US$1,907/t; an AUD:USD exchange rate of 0.72; a
USD:ZAR exchange rate of 16.57; and a USD:COP exchange rate of 3,025; all of which reflect forward markets as
at May 2016 or our internal expectations.
WORSLEY ALUMINA
(86% SHARE)
Volumes
Worsley Alumina saleable production increased by 142kt (or
4%) to 4.0Mt in FY16 as an uplift in calciner availability
underpinned record performance. This is the first time that
the refinery has operated at its expanded capacity of 4.6Mtpa
(100% basis) 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.
Saleable alumina production guidance is largely unchanged
with the refinery expected to produce at its nameplate
capacity of 4.6Mt (100% basis) across FY17 and FY18.
Costs
Operating unit costs decreased by 16% to US$210/t in FY16
as we benefitted from a stronger US dollar, reduced
employee and contractor numbers by 24%, embedded
procurement savings, including lower energy input costs, and
restructured our teams to create discrete mining and refining
operations with greater focus.
Previously announced restructuring initiatives have been
completed and we expect operating unit costs, including
Sustaining capital expenditure, to decline to US$204/t in
FY17 (FY16: US$221/t). This reflects planned Sustaining
capital expenditure of US$56M as additional investment is
directed towards water infrastructure. Revised exchange rate
and price assumptions for our FY17 unit cost targets are
detailed.
Financial performance
Underlying EBIT declined by US$132M in FY16 to US$42M.
Lower realised alumina prices (-US$249M, net of price-linked
costs), a favourable movement in foreign exchange rate
markets (+US$71M) and a US$41M reduction in controllable
costs had the most significant influence on financial
performance.
Capital expenditure decreased by 29% to US$44M in FY16.
Pre-tax restructuring costs, including redundancies, of
approximately US$17M were incurred in FY16 and have
been excluded from the Group's Underlying earnings
measures.
South32 share FY16 FY15
Alumina production (kt) 3,961 3,819
Alumina sales (kt) 3,874 3,857
Realised alumina sales price
(US$/t)(a) 261 335
Operating unit cost (US$/t)(b) 210 250
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales volume.
South32 share (US$M) FY16 FY15
Revenue 1,011 1,291
Underlying EBITDA 199 325
Underlying EBIT 42 174
Net operating assets 3,208 3,361
Capital expenditure 44 62
Major projects (>US$100M) - -
All other capital expenditure 44 62
Exploration expenditure - -
Exploration expensed - -
SOUTH AFRICA ALUMINIUM
(100%)
Volumes
South Africa Aluminium saleable production was largely
unchanged in FY16 as the impact of electricity load-shedding
events was lower than anticipated, particularly in the
December 2015 half year. While high rates of current
efficiency are being achieved within the potlines, production
will continue to be influenced by the duration and regularity of
load-shedding events. We are yet to restart production in the
22 pots that were taken offline in September 2015 in
response to market conditions.
Costs
Operating unit costs decreased by 19% to US$1,430/t in
FY16, reflecting a stronger US dollar, lower aluminium price-
linked power costs and weaker raw material prices. Additional
cost savings were realised as the smelter continued to
improve its energy efficiency. A total of 183 pots were relined
across FY16 at a cost of approximately US$191k per pot
(FY15: 136 pots at US$245k per pot). 72 pots are scheduled
to be relined in FY17.
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. 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$168M in FY16 to
US$82M. The combination of lower realised aluminium prices
and premia reduced Underlying EBIT by US$258M, net of
price-linked costs. This impact was partially offset by a
favourable movement in foreign exchange rates (+US$66M)
and an increase in sales volumes (+US$40M).
Capital expenditure decreased by 46% to US$19M in
FY16.
Pre-tax restructuring costs, including redundancies, of
approximately US$2M were incurred in FY16 and have been
excluded from the Group's Underlying earnings measures.
South32 share FY16 FY15
Aluminium production (kt) 697 699
Aluminium sales (kt)(a) 709 695
Realised sales price (US$/t)(a) 1,638 2,217
Operating unit cost (US$/t)(b) 1,430 1,761
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of equity production. Realised sales
price is calculated as sales revenue divided by sales volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales volume.
South32 share (US$M) FY16 FY15
Revenue 1,161 1,541
Underlying EBITDA 147 317
Underlying EBIT 82 250
Net operating assets 1,059 1,151
Capital expenditure 19 35
Major projects (>US$100M) - -
All other capital expenditure 19 35
Exploration expenditure - -
Exploration expensed - -
MOZAL ALUMINIUM
(47.1% SHARE)
Volumes
Mozal Aluminium achieved record annual production of
266kt in FY16 as a reduction in load-shedding events
complemented an increase in potline current efficiency.
While high rates of current efficiency are being achieved,
production will continue to be influenced by the duration and
regularity of load-shedding events.
Costs
Operating unit costs declined by 12% to US$1,559/t in FY16,
reflecting a stronger US dollar and weaker raw materials
prices. Planned relining activity increased in FY16 with 109
pots relined at a cost of US$207k per pot (FY15: 91 pots at
US$231k per pot). 118 pots are scheduled to be relined in
FY17.
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. Mozal Aluminium 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).
Financial performance
Underlying EBIT decreased by US$112M in FY16 to US$0M.
The combination of lower realised aluminium prices and
premia reduced Underlying EBIT by US$115M, net of
price-linked costs, while lower sales volumes reduced
Underlying EBIT by a further US$47M. These impacts were
partially offset by a favourable movement in foreign exchange
rate markets (+US$46M).
Capital expenditure decreased by 50% to US$7M in FY16.
South32 share FY16 FY15
Aluminium production (kt) 266 265
Aluminium sales (kt)(a) 254 273
Realised sales price (US$/t)(a) 1,697 2,308
Operating unit cost (US$/t)(b) 1,559 1,762
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of the equity production. Realised
sales price is calculated as sales revenue divided by sales volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales volume.
South32 share (US$M) FY16 FY15
Revenue 431 630
Underlying EBITDA 35 149
Underlying EBIT - 112
Net operating assets 565 626
Capital expenditure 7 14
Major projects (>US$100M) - -
All other capital expenditure 7 14
Exploration expenditure - -
Exploration expensed - -
BRAZIL ALUMINA
(ALUMINA 36% SHARE, ALUMINIUM
40% SHARE)
Volumes
Brazil Alumina saleable alumina production increased by 7kt
to a record 1,335kt in FY16. Production guidance for FY17 is
unchanged at 1,320kt. A small increase in production is
expected in FY18 to 1,350kt.
Aluminium production was first curtailed in July 2013 and the
suspension of all smelting activity was announced in March
2015. We have forward sold power until the end of CY17 and
have terminated our supply contract with Eletronorte.
Costs
Alumina operating unit costs at the non-operated refinery
decreased by 12% to US$189/t in FY16 as the US dollar
strengthened and raw material costs declined.
Financial performance
Underlying EBIT decreased by US$103M in FY16 to
US$78M. A reduction in realised alumina prices (-US$80M,
net of price-linked costs) and a declining contribution from
powersales (-US$36M) was partially offset by a favourable
movement in foreign exchange rate markets (+US$29M).
As a result of our decision to terminate the contract with
Eletronorte, power sales are not expected to contribute to
Underlying EBIT beyond FY16. In this context, a US$24M
(onerous contract) provision has been recorded in the June
2016 half year to reflect anticipated future losses associated
with the remaining Eletronorte power supply commitments
across FY17 and FY18.
Unhedged power sales, inclusive of this provision,
contributed BRL214M to Underlying EBIT in FY16 (FY15:
BRL300M). The cumulative cash impact will change by up to
BRL40M for every +/-US10c/lb movement in the aluminium
price above a floor of US$0.66/lb
Capital expenditure at the refinery increased by 50% to
US$12M in FY16.
South32 share FY16 FY15
Alumina production (kt) 1,335 1,328
Aluminium production (kt) - 40
Alumina sales (kt) 1,359 1,309
Aluminium sales (kt) - 41
Realised alumina sales price
(US$/t)(a) 255 323
Realised aluminium sales price
(US$/t)(a) N/A 2,366
Alumina operating unit cost
(US$/t)(b) (c) 189 215
Aluminium operating unit cost
(US$/t)(b) (d) N/A 2,366
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
sales volume.
(c) Includes cost of acquiring bauxite from Mineração Rio do Norte S.A.
(d) Includes cost of alumina transferred from the Alumar refinery to the
Alumar smelter at the alumina contract sales price. Excludes
EBITDA from the sale of power.
South32 share (US$M) FY16 FY15
Revenue 346 497
Alumina 346 423
Aluminium - 97
Intra-segment elimination - (23)
Other income(a) 191 229
Underlying EBITDA 140 259
Alumina 89 141
Aluminium 51 118
Underlying EBIT 78 181
Alumina 36 83
Aluminium 42 98
Net operating assets 707 928
Alumina 737 744
Aluminium (30) 184
Capital expenditure 12 8
Major projects (>US$100M) - -
All other capital expenditure 12 8
Exploration expenditure - -
Exploration expensed - -
(a) Other income in FY16 includes revenue of US$172M from the sale
of surplus electricity.
SOUTH AFRICA ENERGY COAL
(92% SHARE)
Volumes
South Africa Energy Coal saleable production decreased by
2.6Mt (or 8%) to 31.7Mt in FY16. 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.
Total coal production guidance for FY17 is maintained at
approximately 30.9Mt, with a higher proportion of domestic
sales. In FY18, a small decrease in production is expected to
29.8Mt.
The Klipspruit Life Extension project proceeded into the
feasibility study stage in FY16, where the viability of a
lower capital cost development option is being assessed.
In addition, we continue to work with Eskom under the
existing (cost plus) Coal Sales Agreement to progress a
lower capital cost option to extend the life of the Khutala
underground mine.
Costs
Operating unit costs decreased by 13% to US$26/t in FY16
due to a stronger US dollar and a significant improvement in
labour productivity. In this context, the insourcing of activity
underpinned a 38% reduction in contractor numbers when
compared with the average headcount in FY15, while
employee numbers were also reduced by 14%.
Operating unit costs, including Sustaining capital expenditure,
are expected to decline only marginally to US$26/t in FY17
(FY16: US$27/t) despite the assumed weakening of the
South African Rand given the relatively high proportion of
fixed costs and lower production. In this context, Sustaining
capital expenditure of US$72M is planned. Exchange rate
and price assumptions for our FY17 unit cost targets are
detailed.
Financial performance
Underlying EBIT remained largely unchanged in FY16 at
US$95M. A reduction in contractor and labour costs
increased Underlying EBIT by US$66M while a stronger US
dollar delivered a further US$112M net benefit. Non-cash
charges declined by US$95M as depreciation and
amortisation was rebased following the recognition of
impairments in FY15 and the December 2015 half year. In
contrast, lower realised prices reduced Underlying EBIT by
US$117M, net of price-linked costs.
Capital expenditure decreased by 36% to US$63M in FY16
following the purchase of mobile equipment in the prior
period.
Pre-tax restructuring costs, including redundancies, of
approximately US$15M were incurred in FY16 and have
been excluded from the Group's Underlying earnings
measures.
100 per cent terms(a) FY16 FY15
Energy coal production (kt) 31,681 34,273
Domestic sales (kt)(b) 17,169 18,416
Export sales (kt)(b) 15,157 16,390
Realised domestic sales price
(US$/t)(b) 18 21
Realised export sales price
(US$/t)(b) 46 56
Operating unit cost (US$/t)(c) 26 30
(a) South32's interest in South Africa Energy Coal is accounted at 100%
until 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 volume.
100 per cent terms(a) (US$M) FY16 FY15
Sales revenue(b) 1,009 1,315
Underlying EBITDA 182 276
Underlying EBIT 95 94
Net operating assets/(liabilities) (99) 395
Capital expenditure 63 98
Major projects (>US$100M) 2 -
All other capital expenditure 61 98
Exploration expenditure - -
Exploration expensed - -
(a) South32's interest in South Africa Energy Coal is accounted at 100%
until B-BBEE vendor loans are repaid.
(b) Includes domestic and export sales revenue.
ILLAWARRA METALLURGICAL COAL
(100%)
Volumes
Illawarra Metallurgical Coal saleable production decreased by
560kt (or 6%) to 8.4Mt in FY16 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 2016,
ahead of schedule and below budget, significantly increasing
longwall utilisation and cutting rates. Saleable coal production
guidance is unchanged at 9.5Mt for FY17 and this rate of
production is expected to be maintained in FY18. Two
longwall moves and one step around are planned for FY17,
with the step around scheduled for the September 2016
quarter and the two longwall moves for the March 2017
quarter.
Costs
Operating unit costs decreased by 18% to US$61/t in FY16
as the US dollar strengthened and we reorganised the
operation into two teams, surface processing and logistics,
and underground mining, thereby removing layers of
management and functional support while creating greater
focus. Employee and contractor numbers declined by 17%.
Previously announced restructuring initiatives have been
completed and we expect operating unit costs, including
Sustaining capital expenditure, to decline to US$71/t in FY17
(FY16: US$80/t). This reflects planned Sustaining capital
expenditure of US$117M, including underground
development of approximately US$66M. Revised exchange
rate and price assumptions for our FY17 unit cost targets are
detailed.
Financial performance
Underlying EBIT decreased by US$31M in FY16 to a loss of
US$61M. Lower realised coal prices (-US$128M, net of
price-linked costs) and a decline in sales volumes
(-US$36M) were partially offset by a US$67M reduction in
controllable costs and the benefit of a stronger US dollar
(+US$71M).
Capital expenditure decreased by 40% to US$185M in FY16
with the completion of the Appin Area 9 project. Underground
development of US$106M included US$64M for Appin Area 9.
Pre-tax restructuring costs, including redundancies, of
approximately US$12M were incurred in FY16 and have
been excluded from the Group's Underlying earnings
measures.
South32 share FY16 FY15
Metallurgical coal production (kt) 7,059 7,455
Energy coal production (kt) 1,307 1,471
Metallurgical coal sales (kt) 6,984 7,324
Energy coal sales (kt) 1,333 1,378
Realised metallurgical coal sales
price (US$/t)(a) 84 101
Realised energy coal sales price
(US$/t)(a) 43 54
Operating unit cost (US$/t)(b) 61 74
(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 volume.
South32 share (US$M) FY16 FY15
Sales revenue(a) 642 814
Underlying EBITDA 132 167
Underlying EBIT (61) (30)
Net operating assets 1,516 1,518
Capital expenditure 185 308
Major projects (>US$100M) 30 51
All other capital expenditure(b) 155 257
Exploration expenditure 4 5
Exploration expensed 4 5
(a) Includes metallurgical coal and energy coal sales revenue.
(b) Includes capitalised underground development expenditure and
Appin Area 9 project underground development expenditure in
FY16 of US$106M (FY15: US$119M).
AUSTRALIA MANGANESE
(60% SHARE)
Volumes
Australia Manganese saleable ore production increased by
129kwmt (or 4%) to a record 3.1Mwmt in FY16 as
concentrator performance improved and the Premium
Concentrate Ore (PCO2) project was completed. The project,
which increased GEMCO's production capacity by 500kwmt,
was completed 17% under budget and ahead of schedule in
the June 2016 quarter.
Consistent with prior guidance and in response to challenging
market conditions, Australia Manganese is expected to
operate below recently expanded capacity of 5.3Mwmt
(100% basis), with ore production of 3.1Mwmt projected for
each of FY17 and FY18.
We obtained consent from the Anindilyakwa Land Council to
access the Eastern Leases and the Southern Areas at
GEMCO in June 2016. The Eastern Leases will enable us to
mine new areas within our existing operating footprint.
Access to the Southern Areas, adjacent to the existing
operations, will substantially increase our exploration footprint
at this highly prospective manganese operation.
Saleable manganese alloy production decreased by 34kt
(or 20%) to 133kt in FY16 as power shortages led to the
suspension of two of four furnaces. The operation returned to
full production in July 2016.
Costs
FOB manganese ore operating unit costs decreased by 16%
to US$1.41/dmtu in FY16 as the US dollar strengthened and
we reduced GEMCO employee and contractor numbers by
4%. Associated costs savings more than offset an increase in
the strip ratio from 3.0 to 3.3.
Previously announced restructuring initiatives have been
completed and we expect FOB operating unit costs, including
Sustaining capital expenditure, to decline to US$1.66/dmtu in
FY17 (FY16: US$1.88/dmtu FOB), despite an expected
increase in the strip ratio to 3.7. This reflects planned
Sustaining capital expenditure of US$31M. Revised
exchange rate and price assumptions for our FY17 unit cost
targets are detailed.
Financial performance
Underlying EBIT decreased by US$58M in FY16 to US$65M.
Lower manganese ore and alloy prices reduced Underlying
EBIT by US$163M, net of price-linked costs, although this
was partially offset by a stronger US dollar, which increased
Underlying EBIT by US$33M.
Capital expenditure decreased by US$30M to US$68M in
FY16 and included a US$28M investment to complete the
PC02 project.
Due to natural attrition and the decision not to recruit roles
associated with the PC02 project, the reduction in employee
and contractor numbers resulted in no redundancy costs at
GEMCO in FY16.
South32 share FY16 FY15
Manganese ore production (kwmt) 3,071 2,942
Manganese alloy production (kt) 133 167
Manganese ore sales (kwmt)(a) 3,084 2,788
External customers 2,771 2,483
TEMCO 313 305
Manganese alloy sales (kt)(a) 150 139
Realised manganese ore sales
price (FOB, US$/dmtu)(a)(b) 2.48 3.48
Realised manganese alloy sales
price (US$/t)(a) 860 1,079
Ore operating unit cost
(FOB, US$/dmtu)(b)(c) 1.41 1.68
Alloy operating unit cost (US$/t)(c) 833 971
(a) Volumes and realised prices do not include any third party trading
that may be undertaken independently of equity production. Realised
ore prices are calculated as sales revenue less freight and marketing
costs, divided by sales volume. Realised alloy prices are calculated
as sales revenue, including sinter revenue, divided by alloy sales
volume. Ore converted to sinter and alloy, and sold externally is
eliminated as an intracompany transaction. External ore sales in
italics have been restated.
(b) FY16 average manganese content of ore sales was 47.3% on a dry
basis (FY15: 47.7%). 94% of FY16 manganese ore sales
(FY15: 90%) were completed on a CIF basis. FY16 realised FOB
ore prices and operating unit costs have been adjusted for freight
and marketing costs of US$24M (FY15: US$37M), consistent with
our FOB cost guidance.
(c) FOB ore operating unit cost is Revenue less Underlying EBITDA,
freight and marketing costs, divided by ore sales volume. Alloy
operating unit costs is Revenue less Underlying EBITDA divided by
alloy sales volumes and includes costs associated with sinter sold
externally.
South32 share (US$M) FY16 FY15
Sales revenue(a) 476 595
Manganese ore 372 479
Manganese alloy 129 150
Intra-segment elimination (25) (34)
Underlying EBITDA 154 243
Manganese ore 150 228
Manganese alloy 4 15
Underlying EBIT 65 123
Manganese ore 67 116
Manganese alloy (2) 7
Net operating assets 341 1,384
Manganese ore 322 1,365
Manganese alloy 19 19
Capital expenditure 68 98
Major projects (>US$100M) - -
All other capital expenditure 68 98
Exploration expenditure 1 2
Exploration expensed - 2
(a) Revenues referring to sales from GEMCO to TEMCO are eliminated
as part of the consolidation.
SOUTH AFRICA MANGANESE
(ORE 44.4% SHARE, ALLOY 60% SHARE)
Volumes
South Africa Manganese saleable ore production decreased
by 563kwmt (or 25%) to 1.7Mwmt in FY16 following the
decision to initially suspend mining activity in November 2015
and then restructure the operation in response to challenging
market conditions. Mining recommenced at both Wessels
and Mamatwan in the March 2016 quarter, ramping-up to an
optimised 2.9Mwmt pa (100% basis) production rate.
The second phase of the Central Block development project
will enable underground mining activity to relocate closer to
critical infrastructure, thereby reducing cycle times. As a
result of the fatality at the Wessels underground mine in June
2016 and the subsequent reprioritisation of activities,
commissioning is now expected in the March 2017 quarter.
Saleable manganese alloy production decreased by 155kt
(or 63%) to 91kt in FY16 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.
Costs
FOB manganese ore operating unit costs decreased by 3%
to US$1.91/dmtu in FY16 as the US dollar strengthened,
production volumes were rebased and employee and
contractor numbers were reduced by 41%.
Previously announced restructuring initiatives have been
completed and we expect FOB operating unit costs, including
Sustaining capital expenditure, to decline to US$1.71/dmtu in
the June 2017 half year (FY16: US$2.01/dmtu FOB). This
reflects planned Sustaining capital expenditure of US$7M.
The expected six month delay in achieving our cost target
reflects the reprioritisation of activities at the Wessels
underground mine following the fatality that occurred in
June 2016. Revised exchange rate and price assumptions
for our FY17 unit cost targets are detailed.
Financial performance
Underlying EBIT decreased by US$27M in FY16 to a loss of
US$47M as lower realised manganese ore and alloy prices
reduced Underlying EBIT by US$69M, net of price-linked
costs. Lower sales volumes reduced Underlying EBIT by a
further US$112M, although this impact was more than offset
by a reduction in costs associated with the temporary
suspension of operations (+US$111M) and a stronger US
dollar (+US$44M).
Capital expenditure decreased significantly to US$11M in FY16.
Pre-tax restructuring costs, including redundancies, of
approximately US$8M were incurred in FY16 and have been
excluded from the Group's Underlying earnings measures.
South32 share FY16 FY15
Manganese ore production (kwmt) 1,711 2,274
Manganese alloy production (kt) 91 246
Manganese ore sales (kwmt)(a) 1,834 2,210
External customers 1,736 1,685
Metalloys 98 525
Manganese alloy sales (kt)(a) 110 251
Realised manganese ore sales
price (US$/dmtu)(a)(b) 2.06 2.53
Realised manganese alloy sales
price (US$/t)(a) 682 876
Ore operating unit cost
(US$/dmtu)(b)(c) 1.91 1.97
Alloy operating unit cost
(US$/t)(b)(c) 882 948
(a) Volumes and prices do not include any third party trading that may
be undertaken independently of equity production. Realised ore
prices are calculated as sales revenue less freight and marketing
costs, divided by sales volume. Realised alloy prices are calculated
as sales revenue, divided by alloy sales volume. Ore converted to
sinter and alloy, and sold externally is eliminated as an intracompany
transaction. Manganese ore sales are grossed-up to reflect a 60%
accounting effective interest.
(b) FY16 average manganese content of ore sales was 39.9% on a dry
basis (FY15: 41.4%). 57% of FY16 manganese ore sales
(FY15: 36%) were completed on a CIF basis. FY16 realised FOB
ore prices and operating costs have been adjusted for freight and
marketing costs of US$17M (FY15: US$20M), consistent with our
FOB cost guidance.
(c) FOB ore operating unit cost is Revenue less Underlying EBITDA,
freight and marketing costs, divided by ore sales volume. Alloy
operating unit costs is Revenue less Underlying EBITDA divided by
alloy sales volumes.
South32 share (US$M) FY16 FY15
Revenue(a) 234 420
Manganese ore(b) 166 249
Manganese alloy 75 220
Intra-segment elimination (7) (49)
Underlying EBITDA (11) 32
Manganese ore(b) 11 50
Manganese alloy (22) (18)
Underlying EBIT (47) (20)
Manganese ore(b) (13) 12
Manganese alloy (34) (32)
Net operating assets 342 530
Manganese ore(b) 258 384
Manganese alloy 84 146
Capital expenditure 11 41
Major projects (>US$100M) - -
All other capital expenditure 11 41
Exploration expenditure - -
Exploration expensed - -
(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.
CERRO MATOSO
(99.9% SHARE)
Volumes
Cerro Matoso payable nickel production decreased by 3.6kt
(or 9%) to 36.8kt in FY16. Lower production resulted from a
decline in the average ore grade, consistent with the mine
plan.
Payable nickel production guidance remains unchanged at
approximately 36.0kt for FY17. A small decrease in
production is expected in FY18, however access to the
higher grade La Esmeralda Mineral Resource(10) is expected
to be facilitated by the development of a low cost river
crossing which should see payable nickel production rise
temporarily to more than 40kt in FY19 and FY20.
Costs
Operating unit costs decreased by 21% to US$4.08/lb in
FY16. This largely reflected the benefit of a stronger US
dollar, an 18% reduction in employee and contractor
numbers, and a decrease in energy usage and rates.
Previously announced restructuring initiatives have been
completed and we expect operating unit costs, including
Sustaining capital expenditure, to decline to US$3.87/lb in
FY17 (FY16: US$4.30/lb). This reflects planned Sustaining
capital expenditure of US$15M and a new collective labour
agreement which provides certainty for the next three years.
Revised exchange rate and price assumptions for our FY17
unit cost targets are detailed.
Financial performance
Underlying EBIT decreased by US$146M in FY16 to a loss of
US$88M due to weaker realised prices (-US$192M, net of
price-linked costs) and a decline in sales volumes
(-US$57M). These impacts were partially offset by a
reduction in controllable costs (+US$36M) and a stronger US
dollar (+US$84M).
Capital expenditure of US$18M was 50% lower than the prior period.
Pre-tax restructuring costs, including redundancies, of
approximately US$4M were incurred in FY16 and have been
excluded from the Group's Underlying earnings measures.
South32 share FY16 FY15
Ore mined (kwmt) 6,009 6,321
Ore processed (kdmt) 2,699 2,629
Ore grade processed (%, Ni) 1.54 1.67
Payable nickel production (kt) 36.8 40.4
Payable nickel sales (kt) 36.8 40.6
Realised nickel sales price
(US$/lb)(a) 4.10 6.63
Operating unit cost (US$/lb)(b) 4.08 5.14
(a) Inclusive of by-products. Realised sales price is calculated as sales
revenue divided by sales volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
Payable nickel sales volume.
South32 share (US$M) FY16 FY15
Sales revenue 333 593
Underlying EBITDA 2 133
Underlying EBIT (88) 58
Net operating assets 683 763
Capital expenditure 18 36
Major projects (>US$100M) - -
All other capital expenditure 18 36
Exploration expenditure 5 9
Exploration expensed 2 1
CANNINGTON
(100% SHARE)
Volumes
Payable silver and lead production decreased by 5%, to
21.39Moz and 173.2kt respectively, in FY16 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%).
Following the completion of our first annual planning cycle,
we have optimised the longer term mine plan at Cannington,
with silver and lead production guidance for FY17 reduced by
2% and 3%, respectively, and zinc production guidance
increased by 3%. This plan, which seeks to increase total
silver, lead and zinc extraction across the remaining years of
the underground operation and reduce geotechnical risk by
resequencing stope design, results in a further 10-13%
reduction in payable metal production in FY18 (to 16.55Moz
for silver, 147kt for lead and 72kt for zinc).
We have also concluded that an investment decision to
potentially extend the life of the Cannington mine will not be
required before the end of this decade.
Costs
Operating unit costs declined by 15% to US$145/t of ore
processed in FY16 as the US dollar strengthened, employee
and contractor numbers were reduced by 17% and
procurement savings, including lower contractor rates, were
embedded.
We expect operating unit costs, including Sustaining capital
expenditure, to decline to US$138/t of ore processed in FY17
(FY16: US$153/t). This reflects planned Sustaining capital
expenditure of US$45M. Exchange rate and price
assumptions for our FY17 unit cost targets are detailed.
Financial performance
Underlying EBIT decreased by US$13M in FY16 to
US$274M. Lower average realised prices reduced
Underlying EBIT by US$89M, net of price-linked costs,
although this impact was offset by a US$47M reduction in
controllable costs and a US$41M benefit associated with the
stronger US dollar.
Finalisation adjustments and the provisional pricing of
Cannington concentrates reduced Underlying EBIT by
US$11M in FY16 (-US$19M in the December 2015 half year;
-US$43M in FY15). 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 FY17.
Capital expenditure of US$27M was 31% lower than the prior
period.
South32 share FY16 FY15
Ore mined (kt) 3,289 3,418
Ore processed (kt) 3,149 3,289
Ore grade processed (g/t, Ag) 255 257
Ore grade processed (%, Pb) 6.6 6.7
Ore grade processed (%, Zn) 3.8 3.4
Payable silver production (koz) 21,393 22,601
Payable lead production (kt) 173.2 183.0
Payable zinc production (kt) 79.0 72.3
Payable silver sales (koz) 20,852 23,831
Payable lead sales (kt) 169.7 188.9
Payable zinc sales (kt) 82.6 66.8
Realised silver sales price
(US$/oz)(a) 16.2 16.8
Realised lead sales price
(US$/t)(a) 1,780 1,890
Realised zinc sales price
(US$/t)(a) 1,780 2,171
Operating unit cost (US$/t ore
processed)(b) 145 170
(a) Realised sales price is calculated as sales revenue divided by sales
volume.
(b) Operating unit cost is Revenue less Underlying EBITDA divided by
ore processed. Periodic movements in finished product inventory
may impact operating unit costs as related marketing costs and
treatment and refining charges may change.
South32 share (US$M) FY16 FY15
Revenue 786 902
Underlying EBITDA 330 342
Underlying EBIT 274 287
Net operating assets 242 280
Capital expenditure 27 39
Major project (>US$100M) - -
All other capital expenditure 27 39
Exploration expenditure 3 5
Exploration expensed 3 5
NOTES
(1) The pro forma and statutory financial information reflects continuing operations and therefore excludes the contribution of the New Mexico Coal asset.
(2) Percentage change has not been disclosed for statutory results on the basis that the variances between FY16 and FY15 are substantially different
due to the impact of the Internal Restructure prior to demerger.
(3) Revenue includes revenue from third party products.
(4) FY16 basic earnings per share is calculated as Profit/(loss) after taxation from continuing operations divided by the weighted average number of
shares for FY16 (5,324 million). FY16 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average
number of shares for FY16. Pro forma 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 30 June 2015 (5,324 million). Pro forma FY15 basic Underlying earnings per share is calculated as pro
forma Underlying earnings divided by the number of shares on issue at 30 June 2015.
(5) 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 the Financial Information.
(6) Comprises Underlying EBITDA excluding third party product EBITDA, divided by revenue excluding third party product revenue.
(7) Comprises Underlying EBIT excluding third party product EBIT, divided by revenue excluding third party product revenue.
(8) Return on invested capital (ROIC) is a key measure that South32 uses to assess performance. ROIC is calculated as Underlying EBIT less the
discount on rehabilitation provisions included in net finance cost, tax effected by the Group's Underlying effective tax rate (ETR), divided by the sum
of fixed assets (excluding any rehabilitation asset and impairments) and inventories. Manganese is included in the calculation on a proportional
consolidation basis.
(9) 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 FY15 and is not a measure of unit cost performance.
(10) La Esmeralda comprises 9.4Mt of Mineral Resources of the total reported Mineral Resources for FY16 which is provided in this report. This is made
up of 74% Measured Mineral Resources and 26% Indicated Mineral Resources at an average grade of 1.59% Ni. The project is based on a
completed Feasibility Study demonstrating the project is economically viable. La Esmeralda has recently been granted regulatory environmental
approvals. The information that relates to the FY16 Cerro Matoso Ore Reserves and Mineral Resources (inclusive of Ore Reserves) is reported in
accordance with the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves' ('The JORC Code, 2012 Edition')
in this report. The information related to Mineral Resources and Ore Reserves is based on information compiled by Ivan Espitia (MAusIMM) and
Nelson Monterroza (MAusIMM) respectively. The above-mentioned persons are full-time employees of South32 Limited and have the required
qualifications and experience to qualify as Competent Persons for Mineral Resources and Ore Reserves as defined in the 2012 Edition of the JORC
Code. The Competent Persons verify that this report is based on and fairly reflects the Mineral Resources and Ore Reserves information in the report
and consent to the inclusion in this report of the matters based on the information in the form and context in which it appears. The Mineral Resources
and Ore Reserves breakdown by classification are contained on page 49 for Cerro Matoso. All tonnes and grade information has been rounded,
hence small differences may be present in the totals. Tonnages are reported on a dry basis in millions of tonnes (Mt).
(11) 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.
(12) South32's ownership share of operations are as follows: Worsley Alumina (86%), South Africa Aluminium (100%), Mozal Aluminium (47.1% share),
Brazil Alumina (Alumina 36% share, Aluminium 40% share), South Africa Energy Coal (92% share), Illawarra Metallurgical Coal (100%), Australia
Manganese (60% share), South Africa Manganese (60% share), Cerro Matoso (99.9% share), and Cannington (100%).
(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) Operating unit cost, including Sustaining capital expenditure is operating cost plus Sustaining capital expenditure divided by sales. Operating cost is
Revenue less Underlying EBITDA. Additional manganese disclosures are included on pages 23 and 24.
(15) Prior projected Operating unit cost guidance, including Sustaining capital expenditure, and prior Sustaining capital expenditure guidance, 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 reflected
forward markets at the end of H1 FY16 or our internal expectations.
(16) New projected Operating unit cost targets, including Sustaining capital expenditure, and Sustaining capital expenditure guidance, include royalties
(where appropriate) and the influence of exchange rate assumptions, and are predicated on: an alumina price of US$259/t; an average blended coal
price of US$83/t for Illawarra Metallurgical Coal; a manganese ore price of US$3.23/dmtu for 44% manganese product; a nickel price of US$3.95/lb; a
thermal coal price of US$54/t (API4) for South Africa Energy Coal; a silver price of US$17.50/troy oz; a lead price of US$1,723/t; a zinc price of
US$1,907/t; an AUD:USD exchange rate of 0.72; a USD:ZAR exchange rate of 16.57; and a USD:COP exchange rate of 3,025; all of which reflect
forward markets as at May 2016 or our internal expectations.
(17) FY17 Capital expenditure guidance is predicated on: an AUD:USD exchange rate of 0.72; a USD:ZAR exchange rate of 16.57; and a USD:COP
exchange rate of 3,025; all of which reflect forward markets as at May 2016 or our internal expectations.
(18) Underlying effective tax rate (ETR) is Underlying income tax expense (pro forma Underlying income tax expense for FY15) excluding royalty related
taxation divided by Underlying profit before tax (pro forma Underlying profit before tax for FY15); both the numerator and denominator exclude equity
accounted investments.
(19) Sales price variance reflects the revenue impact of changes in commodity prices, based on the current 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.
(20) Underlying net finance cost and Underlying taxation expense are actual FY16 results, not year-on-year variances.
(21) Third party product sold comprises US$264 million for aluminium (pro forma FY15: US$394 million), US$59 million for alumina (pro forma FY15:
US$147 million), US$72 million for coal (pro forma FY15: US$88 million), US$90 million for freight services (pro forma FY15: US$40 million) and
US$100 million for aluminium raw materials (pro forma FY15: US$126 million). Underlying EBIT on third party products comprise US$3 million for
aluminium (pro forma FY15: US$1 million), (US$3) million for alumina (pro forma FY15: US$22 million), US$5 million for coal (pro forma FY15:
US$1 million), US$1 million for freight services (pro forma FY15: US$ nil) and US$ nil for aluminium raw materials (pro forma FY15: US$4 million).
(22) The South32 Group acquired each of the following operations on the respective dates in parentheses: Worsley Alumina (8 May 2015), South Africa
Aluminium (2 February 2015), Mozal Aluminium (27 March 2015), Brazil Alumina (3 July 2014), South Africa Energy Coal (2 February 2015),
Australia Manganese (8 May 2015), South Africa Manganese (3 February 2015), Cerro Matoso (2 February 2015), and Cannington (31 January
2015).
The following abbreviations may be used throughout this report: US$ million (US$M); US$ billion (US$B); financial year is abbreviated to FY16; 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 troy ounces (koz); million troy ounces (Moz); thousand wet metric tonnes (kwmt); thousand dry metric tonnes (kdmt) dry metric tonne unit (dmtu);
pound (lb); megawatt (MW); Australian Securities Exchange (ASX); London Stock Exchange (LSE); and Johannesburg Stock Exchange (JSE).
SOUTH32 FINANCIAL INFORMATION
For the year ended 30 June 2016
BASIS OF PREPARATION
The financial information included in this document for the year ended 30 June 2016 is unaudited. The financial
information does not constitute the South32 Group's full financial statements for the year ended 30 June 2016, which will
be approved by the Board, reported on by the auditors, and filed with the Australian Securities and Investments
Commission. The South32 Group's full financial statements will be prepared in accordance with the requirements of the
Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian
Accounting Standards Board. Unless otherwise stated, the comparative figures for the financial year ended 30 June
2015 are from the accounts of South32 Limited.
Effective 15 May 2015, BHP Billiton shares ceased trading with an entitlement to South32 shares. 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)(22). As required, and unless otherwise stated, comparative
statutory financial information for the South32 Group has been presented for the 2015 financial year (FY15). The
South32 Group's comparative 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 financial year as part of the Internal
Restructure. The exception is Illawarra Metallurgical Coal, which was part of the South32 Group at 1 July 2014 and 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. Accordingly, as a result of the Internal Restructure, the
comparative statutory financial information for FY15 does not reflect the performance of the South32 Group as it is
currently structured.
All amounts are expressed in US dollars unless otherwise stated. The South32 Group's presentation currency and the
functional currency of the majority of its operations is US dollars as this is the principal currency of the economic
environment in which it operates.
Comparative figures have been prepared on the same basis as the current period figures. Amounts in this financial
information have, unless otherwise indicated, been rounded to the nearest million dollars (US$M).
CONSOLIDATED INCOME STATEMENT
for the year ended 30 June 2016
US$M FY16 FY15
Continuing operations
Revenue
Group production 5,227 3,480
Third party products 585 363
5,812 3,843
Other income 324 1,143
Expenses excluding net finance cost (7,247) (5,247)
Share of profit/(loss) of equity accounted investments (330) (70)
Profit/(loss) from continuing operations (1,441) (331)
Comprising:
Group production (1,447) (338)
Third party products 6 7
Profit/(loss) from continuing operations (1,441) (331)
Finance expenses (132) (89)
Finance income 28 22
Net finance cost (104) (67)
Profit/(loss) before taxation (1,545) (398)
Income tax (expense)/benefit (70) (432)
Royalty-related taxation (net of income tax) – (96)
Total tax (expense)/benefit (70) (528)
Profit/(loss) after taxation from continuing operations (1,615) (926)
Discontinued operations
Profit/(loss) from discontinued operations, net of taxation – 7
Profit/(loss) for the year (1,615) (919)
Attributable to:
Ordinary equity holders of South32 Limited (1,615) (919)
Profit/(loss) from continuing operations attributable to the ordinary equity holders of
South32 Limited
Basic earnings per ordinary share (cents) (30.3) (26.9)
Diluted earnings per ordinary share (cents) (30.3) (26.9)
Profit/(loss) for the year attributable to the ordinary equity holders of South32 Limited
Basic earnings per ordinary share (cents) (30.3) (26.7)
Diluted earnings per ordinary share (cents) (30.3) (26.7)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2016
US$M FY16 FY15
Profit/(loss) for the year (1,615) (919)
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 (54) 65
Net (gain)/loss transferred to the income statement 23 –
Taxation benefit/(expense) recognised within other comprehensive income 9 (33)
Total items that may be reclassified subsequently to the income statement (22) 32
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 3 3
Taxation benefit/(expense) recognised within other comprehensive income (1) (1)
Total items not to be reclassified to the income statement 3 2
Total other comprehensive income/(loss) (19) 34
Total comprehensive income/(loss) (1,634) (885)
Attributable to:
Ordinary equity holders of South32 Limited (1,634) (885)
CONSOLIDATED BALANCE SHEET
as at 30 June 2016
US$M FY16 FY15
ASSETS
Current assets
Cash and cash equivalents 1,225 644
Trade and other receivables 618 1,162
Other financial assets 32 14
Inventories 747 953
Current tax assets 61 77
Other 18 18
Total current assets 2,701 2,868
Non-current assets
Trade and other receivables 445 185
Other financial assets 260 417
Inventories 55 60
Property, plant and equipment 8,651 9,550
Intangible assets 288 306
Equity accounted investments 570 1,707
Deferred tax assets 382 376
Other 22 20
Total non-current assets 10,673 12,621
Total assets 13,374 15,489
LIABILITIES
Current liabilities
Trade and other payables 676 921
Interest bearing liabilities 282 364
Other financial liabilities 1 4
Current tax payable 6 11
Provisions 408 398
Deferred income 4 6
Total current liabilities 1,377 1,704
Non-current liabilities
Trade and other payables 5 30
Interest bearing liabilities 631 682
Other financial liabilities 16 –
Deferred tax liabilities 501 554
Provisions 1,410 1,479
Deferred income 12 5
Total non-current liabilities 2,575 2,750
Total liabilities 3,952 4,454
Net assets 9,422 11,035
EQUITY
Share capital 14,958 14,958
Treasury shares (3) –
Reserves (3,555) (3,557)
Retained earnings/(accumulated losses) (1,977) (365)
Total equity attributable to ordinary equity holders of South32 Limited 9,423 11,036
Non-controlling interests (1) (1)
Total equity 9,422 11,035
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 30 June 2016
US$M FY16 FY15
Operating activities
Profit/(loss) before taxation from continuing operations (1,545) (398)
Adjustments for:
Non-cash significant items (27) (921)
Depreciation and amortisation expense 775 477
Impairments of property, plant and equipment, financial assets, intangibles and equity
accounted investments 1,386 1,389
Employee share awards expense 23 1
Net finance cost 95 67
Share of (profit)/loss of equity accounted investments 330 70
Other non-cash or non-operating items 42 90
Changes in assets and liabilities:
Trade and other receivables 163 (327)
Inventories 191 85
Trade and other payables (244) 161
Provisions and other liabilities (121) (29)
Cash generated from continuing operations 1,068 665
Interest received 27 23
Interest paid (46) (42)
Income tax (paid)/received (52) 1
Dividends received 14 –
Dividends received from equity accounted investments 19 –
Net cash flows from continuing operating activities 1,030 647
Net cash flows from discontinued operating activities – 23
Net cash flows from operating activities 1,030 670
Investing activities
Purchases of property, plant and equipment (383) (454)
Exploration expenditure (13) (10)
Exploration expenditure expensed and included in operating cash flows 9 7
Purchase of intangibles (13) (9)
Investment in financial assets (53) (400)
Investment in subsidiaries, operations and joint operations, net of their cash as part of the
BHP Billiton demerger - (12,734)
Investment in equity accounted investments (1) (1,565)
Cash outflows from investing activities (454) (15,165)
Proceeds from sale of property, plant and equipment, financial assets and intangibles 112 8
Proceeds from divestment of subsidiaries, operations and joint operations, net of their cash
as part of the BHP Billiton demerger - 171
Net cash flows from continuing investing activities (342) (14,986)
Net cash flows from discontinued investing activities – (9)
Net cash flows from investing activities (342) (14,995)
Financing activities
Proceeds from interest bearing liabilities 31 72
Repayment of interest bearing liabilities (127) (6)
Proceeds from amounts received from BHP Billiton – 1,224
Repayment of amounts owing to BHP Billiton – (831)
Purchase of shares by Employee Share Ownership Plan (ESOP) trusts (3) –
Proceeds from ordinary shares – 14,397
Net cash flows from continuing financing activities (99) 14,856
Net cash flows from financing activities (99) 14,856
Net increase/(decrease) in cash and cash equivalents 589 531
Cash and cash equivalents, net of overdrafts, at the beginning of the financial year 644 145
Foreign currency exchange rate changes on cash and cash equivalents (8) (9)
Change in cash and cash equivalents on commencement of equity accounting – (23)
Cash and cash equivalents, net of overdrafts, at the end of the financial year 1,225 644
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 30 June 2016
Attributable to ordinary equity holders of South32 Limited
Retained
earnings/ Non-
Share Treasury (accumulated controlling Total
US$M capital shares Reserves losses) Total interests equity
Balance as at 1 July 2015 14,958 – (3,557) (365) 11,036 (1) 11,035
Profit/(loss) for the year – – – (1,615) (1,615) – (1,615)
Other comprehensive income/(loss) – – (22) 3 (19) – (19)
Total comprehensive income/(loss) – – (22) (1,612) (1,634) – (1,634)
Transactions with owners:
Accrued employee entitlement for
unexercised awards – – 24 – 24 – 24
Purchase of shares by ESOP trusts – (3) – – (3) – (3)
Balance as at 30 June 2016 14,958 (3) (3,555) (1,977) 9,423 (1) 9,422
Balance as at 1 July 2014 561 – – 552 1,113 – 1,113
Profit/(loss) for the year – – – (919) (919) – (919)
Other comprehensive income/(loss) – – 32 2 34 – 34
Total comprehensive income/(loss) – – 32 (917) (885) – (885)
Transactions with owners:
Proceeds from issue of shares 14,397 – – – 14,397 – 14,397
Accrued employee entitlement for
unexercised awards – – 1 – 1 – 1
Acquisition and divestment of
subsidiaries and operations – – (3,569) – (3,569) 453 (3,116)
Disposal on change from control to
joint control of South Africa
Manganese and Samancor AG – – – – – (454) (454)
Other movements – – (21) – (21) – (21)
Balance as at 30 June 2015 14,958 – (3,557) (365) 11,036 (1) 11,035
SEGMENT INFORMATION
(a) 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 for the manganese operations are presented on a
proportional consolidation basis, which is the measure used by South32's management to assess their performance.
The principal activities of each operating 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 Integrated 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
All operations are operated or jointly operated by South32 except Alumar (which forms part of Brazil Alumina), which is
operated by Alcoa.
(b) Segment results
Segment performance is measured on Underlying EBIT and Underlying EBITDA. Underlying EBIT is profit before net
finance cost, taxation and other earnings adjustment items including impairments. Underlying EBITDA is Underlying
EBIT, before depreciation and amortisation. A reconciliation of Underlying EBIT, Underlying EBITDA and the South32
Group's consolidated profit after taxation from continuing operations is set out below. Segment revenue is measured
on the same basis as in the consolidated income statement.
Revenue is not reduced for royalties and other taxes payable from group production.
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.
It is the South32 Group's policy that inter-segment transactions are made on a commercial basis.
Group and unallocated items/eliminations represent group centre functions and consolidation adjustments. Group
financing (including finance expense and finance income) and income taxes are managed on a South32 Group basis
and are not allocated to operating segments.
Total assets and liabilities for each operating segment represent operating assets and liabilities which predominately
exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax balances. The
carrying amount of investments accounted for using the equity method represents the balance of the South32 Group's
investment in equity accounted investments, with no adjustment for cash, interest bearing liabilities and tax balances of
the equity accounted investment.
FY16 SEGMENT INFORMATION
South South Group and
South Africa Illawarra Australia Africa unallocated Statutory
FY16 Worsley Africa Mozal Brazil Energy Metallurgical Manganese Manganese Cerro items/ adjustment
US$M Alumina Aluminium Aluminium Alumina Coal Coal (a) (a) Matoso Cannington elimination (a) Group
Revenue
Group production 542 1,161 431 323 1,009 642 476 230 333 786 - (706) 5,227
Third party products(b) - - - - - - - - - - 587 (2) 585
Inter-segment revenue 469 - - 23 - - - 4 - - (492) (4) -
Total revenue 1,011 1,161 431 346 1,009 642 476 234 333 786 95 (712) 5,812
Underlying EBITDA 199 147 35 140 182 132 154 (11) 2 330 (13) (166) 1,131
Depreciation and amortisation (157) (65) (35) (62) (87) (193) (89) (36) (90) (56) (30) 125 (775)
Underlying EBIT 42 82 - 78 95 (61) 65 (47) (88) 274 (43) (41) 356
Comprising
Group production 42 82 - 78 94 (60) 65 (47) (88) 274 (49) (18) 373
Third party products(b) - - - - - - - - - - 6 - 6
Share of profit/(loss) of equit
accounted investments(c) - - - - 1 (1) - - - - - (23) (23)
Underlying EBIT from
continuing operations 42 82 - 78 95 (61) 65 (47) (88) 274 (43) (41) 356
Net finance cost (125)
Income tax (expense)/benefit (93)
Underlying earnings 138
Earnings adjustments(d) (1,753)
Profit/(loss) after taxation (1,615)
from continuing operation
Capital expenditure(e) 44 19 7 12 63 185 68 11 18 27 8 (79) 383
Equity accounted investments - - - - 13 - - - - - - 557 570
Total assets(f) 3,647 1,334 656 874 728 1,745 577 517 889 401 2,654 (648) 13,374
Total liabilities(f) 439 275 91 167 827 229 236 175 206 159 1,796 (648) 3,952
(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 their
performance. The manganese operations are equity accounted in the consolidated financial statements. The statutory adjustment column reconciles the proportional consolidation to equity accounting position.
(b) Third party product sold comprises US$264 million for aluminium, US$59 million for alumina, US$72 million for coal, US$90 million for freight services and US$100 million for aluminium raw materials. Underlying EBIT
on third party products comprise US$3 million for aluminium, (US$3) million for alumina, US$5 million for coal, US$1 million for freight services and US$ nil for aluminium raw materials.
(c) Share of profit/(loss) of equity accounted investments includes the impacts of earnings adjustments to Underlying EBIT.
(d) Refer to Earnings adjustments.
(e) Capital expenditure excludes the purchase of intangibles and capitalised exploration expenditure.
(f) Total assets and liabilities for each operating segment represent operating assets and liabilities which predominately exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax
balances.
FY15 SEGMENT INFORMATION(a)
South South Group and
South Africa Illawarra Australia Africa New Mexico unallocated Statutory
FY16 Worsley Africa Mozal Brazil Energy Metallurgical Manganese Manganese Cerro Coal(b) items/ adjustment
US$M Alumina Aluminium Aluminium Alumina Coal Coal (c) (c) Matoso Cannington (discontinued) elimination (c) Group
Revenue
Group production 292 610 250 459 523 803 204 140 197 346 133 - (344) 3,613
Third party products(d) - - - - - - - - - - - 363 - 363
Inter-segment revenue 239 - - - - - - - - - - (239) - -
Total revenue 531 610 250 459 523 803 204 140 197 346 133 124 (344) 3,976
Underlying EBITDA 67 91 21 240 165 156 60 (11) 17 137 22 (37) (86) 842
Depreciation and amortisation (26) (27) (10) (72) (76) (197) (27) (33) (40) (22) (12) (5) 60 (487)
Underlying EBIT 41 64 11 168 89 (41) 33 (44) (23) 115 10 (42) (26) 355
Comprising:
Group production 41 64 11 168 89 (41) 33 (44) (23) 115 10 (49) 5 379
Third party products(d) - - - - - - - - - - - 7 - 7
Share of profit/(loss) of equity
accounted investments(e) - - - - - - - - - - - - (31) (31)
Underlying EBIT 41 64 11 168 89 (41) 33 (44) (23) 115 10 (42) (26) 355
Underlying EBIT from
discontinued operations (10)
Underlying EBIT from
continuing operations 345
Net finance cost (74)
Income tax (expense)/benefit (192)
Underlying earnings from
continuing operations 79
Earnings adjustments(f) (1,005)
Profit/(loss) after taxation
from continuing operations (926)
Capital expenditure(g) 15 23 6 7 29 308 22 17 13 23 9 30 (39) 463
Equity accounted
investments - - - - 12 - - - - - - - 1,695 1,707
Total assets(h) 3,720 1,475 730 1,039 1,414 1,782 1,649 748 997 453 - 2,271 (789) 15,489
Total liabilities(h) 359 324 104 111 1,019 264 265 218 234 173 - 2,202 (819) 4,454
(a) Refer to FY15 Pro Forma Segment Information.
(b) The New Mexico Coal segment was transferred from the South32 Group to the BHP Billiton Group as part of the demerger process.
(c) 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 their performance. The
manganese operations are equity accounted in the consolidated financial statements. The statutory adjustment column reconciles the proportional consolidation to equity accounting position.
(d) Third party product sold comprises US$141 million for aluminium, US$89 million for alumina, US$37 million for coal, US$40 million for freight services and US$56 million for aluminium raw materials. Underlying EBIT on third party
products comprise (US$16) million for aluminium, US$19 million for alumina, US$4 million for coal, US$ nil for freight services and US$ nil for aluminium raw materials.
(e) Share of profit/(loss) of equity accounted investments includes the impacts of earnings adjustments to Underlying EBIT.
(f) Refer to Earnings adjustments.
(g) Capital expenditure excludes the purchase of intangibles and capitalised exploration expenditure.
(h) Total assets and liabilities for each operating segment represent operating assets and liabilities which predominately exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax balances.
EARNINGS ADJUSTMENTS
The following table shows earnings adjustments in determining Underlying earnings:
Earnings adjustments
US$M FY16 FY15
Adjustments to Underlying EBIT
Significant items(a) 24 (770)
Exchange rate (gains)/losses on restatement of monetary items(b) (43) (18)
Impairment losses(b) 1,386 1,389
Fair value (gains)/losses on derivative instruments(b) 60 (12)
Major corporate restructures(b) 63 46
Impairment losses included in profit/(loss) of equity accounted investments(c) 291 –
Earnings adjustments included in profit/(loss) of equity accounted investments(c) 16 41
Total adjustments to Underlying EBIT 1,797 676
Adjustments to net finance cost
Significant items(a) 9 –
Exchange rate variations on net debt (30) (7)
Total adjustments to net finance cost (21) (7)
Adjustments to income tax expense
Significant items(a) 31 419
Tax effect of earnings adjustments to Underlying EBIT (187) (179)
Tax effect of earnings adjustments to net finance cost 9 2
Exchange rate variations on tax balances 124 94
Total adjustments to income tax expense (23) 336
Total earnings adjustments 1,753 1,005
(a) Refer to Significant items.
(b) Recognised in "expenses excluding net finance cost" in the consolidated income statement.
(c) Recognised in "share of loss of equity accounted investments" in the consolidated income statement.
Major corporate restructures
In February 2016 the South32 Group announced a number of major restructuring initiatives which included redundancy
and related costs associated with a reduction in the number of employees and contractors across several operations. In
the second half of the financial year additional major restructuring activities occurred within the functional support areas
with further redundancy and related costs incurred.
Impairments recognised
As a result of significant and continued weakening of commodity markets, the South32 Group recognised the following
impairments and associated tax effect in the year ended 30 June 2016. The forecast weakening of commodity prices has
also impacted the probability of generating longer term taxable income for certain operations and therefore resulted in
the derecognition of specific deferred tax asset balances in the year ended 30 June 2016. An impairment at the Brazil
Aluminium Smelter 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
included in Tax effect of
share of earnings
(profit)/loss adjustments
of equity to
30 June 2016 Significant accounted Significant Underlying
US$M Impairments items investments Total items EBIT
Australia Manganese equity 726 – 190 916 – –
accounted investment
South Africa Manganese – – 97 97 – –
equity accounted investment
Manganese Marketing equity 64 – – 64 – –
accounted investment
South Africa Energy Coal -
Wolvekrans Middelburg 322 – – 322 – (89)
Complex
South Africa Energy Coal - 120 – – 120 – (33)
Klipspruit
Available for sale 76 – – 76 – (18)
investments
South Africa Energy Coal
deferred tax asset – – – – 126 –
derecognition
Brazil Aluminium Smelter 65 32 – 97 (11) (22)
Other 13 – 4 17 – (2)
Total 1,386 32 291 1,709 115 (164)
Impairments recognised in the year ended 30 June 2015 primarily related to the impairment of South Africa Manganese
of US$740 million and the Wolvekrans Middelburg Complex cash generating unit as part of South Africa Energy Coal of
US$551 million.
SIGNIFICANT ITEMS
Significant items are those items, not separately identified in Earnings adjustments, where their nature and amount is
considered material to the consolidated financial statements. Such items included within the South32 Group's
(income)/expense for the year are detailed below:
Year ended 30 June 2016
US$M Gross Tax Net
Set-up costs(a) 60 (17) 43
Adjustment to Australian tax balances post-demerger including reset of tax assets – (85) (85)
Derecognition of deferred tax assets – 126 126
Brazil Aluminium Smelter impairment(b) 32 (11) 21
Brazil Alumina tax accounting adjustments – 20 20
Change in discount rate(c) 9 (1) 8
Closure and rehabilitation provisions(a) (68) (1) (69)
Total significant items 33 31 64
(a) Recognised in "expenses excluding net finance cost" in the consolidated income statement.
(b) Refer Earnings adjustments "Impairments recognised".
(c) Recognised in "net finance cost" in the consolidated income statement.
Year ended 30 June 2015
US$M Gross Tax Net
Set-up costs(a) 59 (17) 42
Adjustment to Australian tax balances post-demerger including reset of tax assets – 221 221
Repeal of Minerals Resource Rent Tax Legislation – 96 96
Fair value uplift on equity accounted investments(b) (921) – (921)
Brazil Alumina tax accounting adjustments – 103 103
Demerger related dividend withholding tax paid – 16 16
Demerger related stamp duty paid(a) 92 – 92
Total significant items (770) 419 (351)
(a) Recognised in "expenses excluding net finance cost" in the consolidated income statement.
(b) Recognised in "other income" in the consolidated income statement.
Set-up costs
Set-up costs related to the ongoing establishment of South32's corporate and regional offices following the demerger.
The costs primarily related to transitionary contractor and consultant support, information technology infrastructure and
system support. The amount recognised is inclusive of US$30 million (2015: US$12 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.
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/ (decrease) to tax assets is charged/ (credited) to income tax expense in the consolidated income statement.
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 closure and rehabilitation were derecognised as utilisation is no longer probable.
Brazil Alumina tax accounting adjustments
South32's cash and profit repatriation practices result in a probable expectation that tax deferrals will ultimately unwind.
This has resulted in the recognition of associated deferred tax balances at a rate closely aligned to the country statutory
rate and the reassessment of future tax losses as a result of revised interpretation of the applicability of local tax laws.
Closure and rehabilitation provisions and Change in discount rate
Following a review of cash flow assumptions and discount rates, South32 recognised a net decrease in closure and
rehabilitation provisions of US$59 million. Where this related to closed sites, US$68 million was recognised as a benefit
in expenses and US$9 million as a charge in net finance cost in the consolidated income statement. The benefit
recognised in expenses included US$18 million related to South Africa Energy Coal and US$50 million related to the
closed Bayside operation, formerly part of South Africa Aluminium.
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.
Fair value uplift on equity accounted investments
South Africa Manganese and Samancor AG were acquired by South32 on 3 February 2015. As a result of the
renegotiation of the agreement between BHP Billiton and Anglo American on 2 March 2015, BHP Billiton Group moved
from control to joint control of the manganese assets. South32 derecognised the carrying amounts of all assets, liabilities
and non-controlling interest attributed to Anglo American and recorded its retained 60 per cent interest at fair value. The
uplift in fair value on the commencement of equity accounting was US$749 million for South Africa Manganese and
US$172 million for Samancor AG.
Demerger related dividend withholding tax paid
Dividend withholding tax incurred on repatriation of pre-demerger profits.
Demerger related stamp duty paid
Stamp duty paid by the South32 Group on the acquisition of Australia Manganese from the BHP Billiton Group as part of
the demerger.
NET FINANCE COST
US$M FY16 FY15
Finance expenses
Interest on borrowings (10) (32)
Finance lease interest (37) (10)
Discounting on provisions and other liabilities (96) (47)
Change in discount rate on closure and rehabilitation provisions (9) –
Net interest expense on post-retirement employee benefits (7) (5)
Fair value change on financial asset (3) (2)
Exchange rate variations on net debt 30 7
(132) (89)
Finance income
Interest income 28 22
Net finance cost (104) (67)
INCOME TAX EXPENSE
US$M FY16 FY15
Current tax (expense)/benefit (51) (156)
Deferred tax (expense)/benefit (19) (372)
Total tax (expense)/benefit attributable to continuing operations (70) (528)
Australia 54 (338)
Southern Africa (99) 89
Rest of world (25) (279)
Total tax (expense)/benefit attributed to geographical jurisdiction (70) (528)
EQUITY ACCOUNTED INVESTMENTS
The South32 Group's interests in equity accounted investments with the most significant contribution to the South32
Group's net profit/(loss) or net assets are as follows:
Country of
incorporation
/ principal Ownership interest
Significant joint place of Reporting Acquisition FY16 FY15
ventures business Principal activity date date % %
Australia Manganese(a)(b) Australia Integrated producer of 30 Jun 2016 8 May 2015 60 60
manganese ore and alloy
South Africa South Africa Integrated producer of 30 Jun 2016 3 Feb 2015 60 60
Manganese(a)(c) manganese ore and alloy
(a) The joint ventures were acquired under the Internal Restructure. Whilst the South32 Group holds a greater than 50 per cent interest in the joint
ventures, joint control is contractually achieved as joint venture parties unanimously consent on decisions over the joint venture's relevant activities.
(b) Australia Manganese consists of an investment in Groote Eylandt Mining Company Pty Limited.
(c) South Africa Manganese consists of an investment in Samancor Holdings (Proprietary) Limited.
The following table summarises the financial information of the South32 Group's significant equity accounted
investments.
Share of profit/(loss) of equity accounted investments
US$M FY16 FY15
Australia Manganese and South Africa Manganese (339) (72)
Individually immaterial(a) 9 2
Total (330) (70)
(a) Individually immaterial consists of investments in Samancor AG (60 per cent), Samancor Marketing Pte Ltd (60 per cent), Richards Bay Coal Terminal
Proprietary Limited (21.1 per cent) and Port Kembla Coal Terminal Limited (16.7 per cent).
INTERESTS IN JOINT OPERATIONS
Significant joint operations of the South32 Group, which are those with the most significant contributions to the South32
Group's net profit/(loss) or net assets, are as follows:
Effective interest
Country of Acquisition FY16 FY15
Significant joint operations operation Principal activity date % %
Alumar(a) Brazil Alumina refining 3 Jul 2014 36 36
Aluminium smelting 3 Jul 2014 40 40
Mozal SARL(a)(b) Mozambique Aluminium smelting 27 Mar 2015 47.1 47.1
Worsley(a)(c) Australia Bauxite mining and alumina refining 8 May 2015 86 86
(a) These joint operations were acquired under the Internal Restructure.
(b) This joint arrangement is an incorporated entity. However it is classified as a joint operation as the participants are entitled to receive output, not
dividends, from the arrangement.
(c) Whilst the South32 Group holds a greater than 50 per cent interest in Worsley, all the participants approve the operating and capital budgets and
therefore the South32 Group is deemed to have joint control over the relevant activities of Worsley.
PRO FORMA RECONCILIATIONS AND INFORMATION
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, comparative statutory financial information for the South32 Group has been presented for the financial year ended 30 June 2015
(FY15). The South32 Group's FY15 statutory financial information only includes the results of the current South32 Group operations from their
date of acquisition during the year as part of the Internal Restructure. The exception is Illawarra Metallurgical Coal, which was part of the
South32 Group at 1 July 2014. The South32 Group's 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 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 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 30 June 2015. 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 2014 (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 comparative statutory financial information is included. The statutory
financial information was audited by the Group's external auditor. The reconciliations and pro forma financial information were subject to an
unmodified review report to the Directors of South32 Limited by the Group's external auditor.
The following table reconciles pro forma and statutory earnings for FY15.
Pro forma
FY15 Statutory Demerger related consolidated
consolidated pro forma financial
US$M income statement adjustments(a) information
Revenue 3,843 3,900 7,743
Other income 1,143 (882) 261
Expenses excluding net finance cost (5,247) (2,232) (7,479)
Share of profit/(loss) of equity accounted investments (70) 64 (6)
Profit/(loss) from continuing operations (331) 850 519
Net finance cost (67) 7 (60)
Income tax (expense)/benefit (528) 97 (431)
Profit/(loss) after taxation from continuing operations (926) 954 28
Profit/(loss) from discontinued operations, net of taxation 7 (7) -
Profit/(loss) after taxation (919) 947 28
Other financial information
Profit/(loss) from continuing operations (331) 850 519
Earnings adjustments 676 (194) 482
Underlying EBIT from continuing operations 345 656 1,001
Depreciation and amortisation 475 373 848
Underlying EBITDA from continuing operations 820 1,029 1,849
Profit/(loss) after taxation from continuing operations (926) 954 28
Earnings adjustments after taxation 1,005 (458) 547
Underlying earnings from continuing operations 79 496 575
(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 financial 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 operations (comprising South Africa Manganese, Australia Manganese and Samancor AG) on an equity
accounted basis from 1 July 2014 including associated depreciation;
- Additional corporate costs associated with South32 Limited becoming a stand-alone group of US$46M;
- Exclusion of net finance costs charged by the BHP Billiton Group of US$69M;
- Exclusion of demerger related set up costs, stamp duty on the acquisition of assets, and major corporate restructuring costs of US$269M;
- Exclusion of the gain that arises on recording South Africa Manganese and Samancor AG at fair value on adoption of equity accounting of
US$921M and their subsequent impairment of US$770M;
- The tax effect of the above items; and
- Excluding certain significant tax expense items such as the impact of the reset of Australian tax balances post demerger and the Brazil
Alumina tax accounting adjustments of US$481M.
The following table reconciles pro forma and statutory operating cash flows before financing activities and tax, and after
capital expenditure for FY15.
South32 statutory South32 pro forma
FY15 consolidated Demerger related pro consolidated
US$M cash flow statement forma adjustments(a) financial information
Profit/(loss) from continuing operations (331) 850 519
Non-cash items 1,036 391 1,427
(Profit)/loss from equity accounted investments 70 (64) 6
Change in working capital (110) (4) (114)
Cash generated from continuing operations 665 1,173 1,838
Dividends received (including equity accounted
investments) - 472 472
Capital expenditure (454) (175) (629)
Operating cash flows from continuing
operations before financing activities and tax 211 1,470 1,681
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 financial 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 operations (comprising South Africa Manganese, Australia Manganese and Samancor AG) on an equity
accounted basis from 1 July 2014 including associated depreciation;
- Additional corporate costs associated with South32 Limited becoming a stand-alone group of US$46M; and
- Exclusion of demerger related set up costs, stamp duty on the acquisition of assets, and major corporate restructuring costs of US$269M.
FY15 PRO FORMA SEGMENT INFORMATION
South South Group and
South Africa Illawarra Australia Africa unallocated Statutory
FY16 Worsley Africa Mozal Brazil Energy Metallurgical Manganese Manganese Cerro items/ adjustment
US$M Alumina Aluminium Aluminium Alumina Coal Coal (a) (a) Matoso Cannington elimination (a) Group
Revenue
Group production 656 1,541 630 497 1,315 814 595 410 593 902 - (1,005) 6,948
Third party products(b) - - - - - - - - - - 795 - 795
Inter-segment revenue 635 - - - - - - 10 - - (635) (10) -
Total revenue 1,291 1,541 630 497 1,315 814 595 420 593 902 160 (1,015) 7,743
Underlying EBITDA 325 317 149 259 276 167 243 32 133 342 (117) (277) 1,849
Depreciation and amortisation (151) (67) (37) (78) (182) (197) (120) (52) (75) (55) (6) 172 (848)
Underlying EBIT 174 250 112 181 94 (30) 123 (20) 58 287 (123) (105) 1,001
Comprising:
Group production 174 250 112 181 93 (31) 123 (20) 58 287 (151) (103) 973
Third party products(b) - - - - - - - - - - 28 - 28
Share of profit/(loss) of equity
accounted investments(c) - - - - 1 1 - - - - - (2) -
Underlying EBIT from
continuing operations 174 250 112 181 94 (30) 123 (20) 58 287 (123) (105) 1,001
Net finance cost(d) (194)
Income tax (expense)/benefit (232)
Underlying earnings 575
Earnings adjustments(e) (547)
Profit/(loss) after taxation
from continuing operations 28
Capital expenditure(f) 62 35 14 8 98 308 98 41 36 39 29 (139) 629
Equity accounted
investments - - - - 12 - - - - - - 1,695 1,707
Total assets(g) 3,720 1,475 730 1,039 1,414 1,782 1,649 748 997 453 2,271 (789) 15,489
Total liabilities(g) 359 324 104 111 1,019 264 265 218 234 173 2,202 (819) 4,454
(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 their performance. The
manganese operations are equity accounted in the consolidated financial statements. The statutory adjustment column reconciles the proportional consolidation to equity accounting position.
(b) Third party product sold comprises US$394 million for aluminium, US$147 million for alumina, US$88 million for coal, US$40 million for freight services and US$126 million for aluminium raw materials. Underlying EBIT on third
party products comprise US$1 million for aluminium, US$22 million for alumina, US$1 million for coal, US$ nil for freight services and US$4 million for aluminium raw materials.
(c) Share of profit/(loss) of equity accounted investments includes the impacts of earnings adjustments to Underlying EBIT.
(d) Excludes interest income and interest expense on borrowings with BHP Billiton.
(e) For details of pro forma earnings adjustments.
(f) Capital expenditure excludes the purchase of intangibles and capitalised exploration expenditure.
(g) Total assets and liabilities for each operating segment represent operating assets and liabilities which predominately exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax
balances.
DISCLAIMER
FORWARD LOOKING STATEMENTS
This release contains forward-looking statements, including statements about trends in commodity prices and currency
exchange rates; demand for commodities; production forecasts; plans, strategies and objectives of management; capital
costs and scheduling; operating costs; anticipated productive lives of projects, mines and facilities; and provisions and
contingent liabilities. These forward-looking statements reflect expectations at the date of this release, however they are
not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other
factors, many of which are beyond our control, and which may cause actual results to differ materially from those
expressed in the statements contained in this release. Readers are cautioned not to put undue reliance on forward-
looking statements. Except as required by applicable laws or regulations, the South32 Group does not undertake to
publicly update or review any forward looking statements, whether as a result of new information or future events. Past
performance cannot be relied on as a guide to future performance.
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 our business, make decisions on the
allocation of our 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 read or understood as an offer or recommendation 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.
CERRO MATOSO MINERAL RESOURCES AND ORE RESERVES
Nickel
Mineral Resources
As at 30 June 2016 As at 30 June 2015
Measured Indicated Inferred Total South32 Total
Resources Resources Resources Resources Interest Resources
Deposit Ore Type Mt % Ni Mt % Ni Mt % Ni Mt % Ni % Mt % Ni
Cerro Matoso (1) Laterite (2) 48 1.2 130 0.9 42 0.8 220 0.9 99.94 280 0.9
SP (3) 15 1.0 43 0.9 - - 59 0.9 52 1.1
MNR - Ore 17 0.2 - - - - 17 0.2 17 0.2
Ore Reserves
As at 30 June 2016 As at 30 June 2015
Proved Ore Probable Ore Total Ore Reserve South32 Reserve
Reserves Reserves Reserves Life Interest Total Ore Reserves Life
Deposit Ore Type Mt % Ni Mt % Ni Mt % Ni Years % Mt % Ni Years
Cerro Matoso (1)(4)(5) Laterite 12 1.1 4.9 1.2 17 1.1 13 99.94 20 1.1 14
SP 9.1 1.1 16 1.1 25 1.1 25 1.3
(1) Cut-off grade
Mineral
Resources Ore Reserves
Laterite 0.6% Ni 0.6% Ni
SP 0.6% Ni 0.6% Ni
MNR-Ore 0.12% Ni
(2) Decrease in Mineral Resources for Laterite due to application of updated metallurgical constraints.
(3) Increase in stockpile Mineral Resources due to additional drilling, density adjustment and application of updated metallurgical constraints.
(4) Ore delivered to process plant.
(5) Metallurgical Recovery: 84% (reserves to metal).
FURTHER INFORMATION
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 James Clothier
T +61 8 9324 9190 T +61 8 9324 9697
M +61 439 500 799 M +61 413 319 031
E Tony.Johnson@south32.net E James.Clothier@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 August 2016
Date: 25/08/2016 08:50:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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