Wrap Text
Posting of Annual Report
South32 Limited
(Incorporated in Australia under the Corporations Act 2001 (Cth))
(ACN 093 732 597)
ASX / LSE / JSE Share Code: S32
ISIN: AU000000S320
south32.net
2016 ANNUAL REPORT
South32 Limited (ASX, LSE, JSE: S32) (“South32”) advises that the following documents have
today been submitted to the National Storage Mechanism and will shortly be available for
inspection at: www.morningstar.co.uk/uk/NSM.
- Annual Report 2016
http://www.south32.net/CMSPages/GetFile.aspx?guid=805af58e-03f7-401f-94c3-
8f999ab4cbeb
- Appendix 4G: Key to Disclosures – Corporate Governance Council Principles &
Recommendations
http://www.south32.net/CMSPages/GetFile.aspx?guid=8855e1a4-f9f6-48be-8199-
3de7d93f5a1e
These documents may be accessed via South32’s website (www.south32.net) or by using the
web links above.
Additional information
The following information is extracted from the 2016 Annual Report (page references are to
pages in the Annual Report) and should be read in conjunction with South32’s Financial Results
and Outlook for the year ended 30 June 2016 announcement issued on 25 August 2016. Both
documents can be found at www.south32.net and together constitute the material required by
DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory
Information Service. This material is not a substitute for reading the 2016 Annual Report in full.
1. Principal risks and uncertainties
1.1. Risk management
The identification, assessment and management of risk is fundamental to our business. Our risk
management and internal control framework is used to identify and assess risk events, and to
establish robust controls and mitigation strategies.
Risk management is embedded in our business activities, functions and processes with
materiality and tolerance for risk being key considerations in our decision making processes.
Material risks that could impact the delivery of our strategy are analysed and assessed
consistently across the business. The potential consequence of each risk is determined in
accordance with the methodology outlined in our Risk Management Standard.
Registered Office: Level 35, 108 St Georges Terrace, Perth Western Australia 6000, Australia
ABN 84 093 732 597 Registered in Australia
Controls are implemented and verified on an ongoing basis to ensure the level of risk is
monitored and managed. Action plans to correct deficiencies in the application of the Risk
Management Standard or specific deficiencies in risks and controls are tracked to ensure all
actions are completed.
Our business, operating and financial performance are subject to various risks and uncertainties,
many of which are beyond the Group’s reasonable control. The following identified risks are not
listed in order of significance and are not intended to be exhaustive. They reflect the most
significant risks currently identified for our Group.
1.2. Risk factors
Strategic and External risks
Fluctuations in commodity prices, exchange rates, interest rates and global economy
Nature: Our earnings, balance sheet and cash flows are affected by the volatility of commodity
prices, interest rates and currencies. The prices realised for our products are linked to global
commodity markets, which reflect the balance of supply and demand for each commodity.
Operating costs are influenced by the currencies of those countries where our operations are
located and by currencies in which the costs of imported equipment and services are
determined.
Mitigation: The combination of our high-quality operations and strong balance sheet is a key
differentiator in the current challenging economic environment. Our diverse portfolio and
geographical spread also provide some downside protection from variability. To further mitigate
risk, we typically seek to manage financing costs, currency impacts, input costs and commodity
prices on a floating index basis. We actively monitor the markets in which we operate and
continuously review our operating and capital expenditure plans.
Actions by governments, political events or tax authorities
Nature: Our business could be adversely affected by new government regulations, such as
changes to taxation policy and controls on imports, exports and prices. Our operations are based
on material long-term investments that are dependent on long-term fiscal stability. Audits and
reviews by administrative bodies may result in us incurring additional tax or royalty payments. In
addition, our entities could be exposed to the risk of nationalisation, renegotiation or nullification
of existing contracts, leases, permits or other agreements.
Mitigation: We proactively manage relationships with local, domestic and international
governments and regulators. We engage directly with governments and key stakeholders to
ensure risk associated with regulatory change is identified, understood and, where possible,
mitigated.
Cost inflation and labour disputes could impact operating margins and expansion plans
Nature: Our business are exposed to the price variability of our production inputs and this could
negatively impact operating margins. Labour is a significant input to our operating costs. Labour
costs may vary depending on underlying demand and the requirements of each operation. An
increase in the capital cost of development projects or scheduling delays could adversely impact
anticipated financial returns. Industrial action, acts of terror and civil unrest could impact on
operations.
Mitigation: Our strategy seeks to optimise our operations, sustainably lowering operating costs
and capital expenditure. We aspire to have constructive relationships and dialogue with trade
unions and employees across our business. Investment decisions are framed by our simple
capital management framework and all discretionary investments compete, based on the risk
and return equation.
Access to water and power
Nature: Water and power are critical to all our operations. Continued access to water and power,
on current terms, to support existing activities cannot be guaranteed in the future. Underlying
factors can change, such as the climate, our operations, counterparties, contractual
arrangements or government policy.
Mitigation: We work closely with suppliers of water and power, engaging on a long-term, mutually
beneficial basis. We also work to secure water and energy resources within our control.
In areas where the long-term availability of water has become less certain as a result of climate
change and drought, we are investigating, and where appropriate investing in, initiatives such as
the desalination facility at our Hillside operation. As we seek to diversify our energy supply
sources where possible, we will continue to pursue opportunities such as the co-generation and
multiple fuel options in place at Worsley Alumina.
We may be subject to regulations in relation to dividend payments and capital returns
Nature: Our ability to pay dividends and utilise excess capital will depend on government
regulations, the level of distributions received from operating subsidiaries and associates, and
the level of cash balances and access to those cash balances.
Mitigation: We have robust procedures in place that govern the efficient allocation of capital
across the Company, including returning surplus capital to South32 Limited. These procedures
are continuously reviewed in line with government regulations and business requirements to
ensure our risk is managed. We also have a highly integrated cash management structure that
underpins our access to cash.
Regulatory risks of climate change
Nature: Carbon pricing including carbon taxes, trading or any other regulatory carbon pricing
mechanism, has the potential to affect the economic viability of our operations. We monitor
climate and energy policy developments including the large increase in the range and depth of
carbon pricing legislation globally. This includes the outcomes of the Paris Agreement signed in
December 2015 and the accompanying ‘Nationally Determined Contributions’, plus policy
changes relating to carbon pricing legislation in Australia and South Africa (in draft).
Mitigation: When considering the long-term viability of our operations and future capital
investments, we apply a range of scenarios for carbon pricing. We support carbon pricing that is
globally competitive and broad-based, covering all industry sectors and possible emission
sources. Recognising that carbon pricing will likely become more stringent over time, we are
committed to de-carbonising our operations. An emissions reduction target is included in all
employee remuneration packages, including executives.
Risks to commodity portfolio from climate change
Nature: We are monitoring and responding to increasing commitments to divest or reduce
investments in fossil fuel companies. While our energy coal operations represented 20.4 per cent
of total revenue from Group production in FY2016, this trend could have a detrimental impact on
investor appetite for our shares. Furthermore, any reduction in the anticipated level of demand
for energy coal could have a negative impact on the pricing of our energy coal products.
Mitigation: We have chosen not to develop any new energy coal basins. Our South African
energy coal operations are positioned at the low end of the industry cost curve. We supply the
domestic South African market under long-term contracts to Eskom, the national power provider
which accounts for 90 per cent of coal powered generation, and international markets. Our
seaborne energy coal is predominantly sold to emerging markets where electricity supply is
dominated by coal powered generation. We conduct scenario analyses annually to stress test
our portfolio. A number of our commodities are critical in supporting a transition to a two degree
limited future. This includes metallurgical coal and manganese to create high quality steel for
climate resilient infrastructure: aluminium for light weighting and creating more efficient transport
options; and manganese and nickel, both used in some battery technologies that support
renewable energy.
Access to infrastructure
Nature: Our products are transported to customers by a range of methods, including road, rail
and sea. A number of factors could disrupt the availability of transport services, including
weather-related problems, rail or port capacity and allocation constraints, key equipment and
infrastructure failures, and industrial action. These risks may limit our ability to deliver product to
our customers. Further, the cost of accessing required infrastructure may increase and we may
not be able to pass on the full extent of the increase to our customers.
Mitigation: Our business manages the infrastructure needs of our operations. We seek to
understand our access requirements and then implement infrastructure plans to address them.
Many of our operations have long-term agreements in place to secure necessary access.
Business continuity plans are developed to manage the risk of disruption to critical infrastructure.
Our centralised, fully integrated marketing function allows us to optimise our supply chain and
effectively manage logistics and handling of commodities from load point to customer.
Failure to maintain, realise or enhance existing reserves
Nature: Mineral Resource and Ore Reserve estimates are expressions of judgement based on
knowledge, experience and industry practice. Our value is limited to the known resources and
reserves position. Failure to take the right opportunities to optimise and enhance our resources
and reserves position could detrimentally impact long-term shareholder returns.
Mitigation: We have a number of initiatives in place to optimise our operations, unlock their
potential and identify new options that may compete for capital. Our simple capital management
framework and capital prioritisation process is designed to maximise total shareholder returns.
Support of the local communities in which businesses are located
Nature: Notwithstanding our contribution to the communities in which we are located, local
communities may become dissatisfied with the impact of our operations or oppose new
development projects. Community action could include litigation, which may affect the costs,
production and, in extreme cases, viability of our operations. There are also security risks that
may impact our people and operations.
Mitigation: We enable our operations to effectively manage relationships with communities and
we actively seek to engage and support them. Our Regional Model means our operations are
managed by people who understand their communities and the environment in which they
operate.
Operational Risks
Health and safety risks in respect of our activities
Nature: Longer-term health impacts may arise due to the exposure of the workforce to hazardous
substances. As we operate internationally, we may be affected by potential pandemic outbreaks.
Potential safety events that may have an adverse impact on our operations include fi re,
explosion or rock fall incidents both in above ground and underground mining operations,
personnel conveyance equipment failures or human errors in underground operations, aircraft
incidents, incidents involving light vehicles and mining mobile equipment, ground control failures
or gas leaks, equipment isolation during repair and maintenance, working from heights or lifting
operations.
Mitigation: The well-being of our employees is paramount and our values of Togetherness and
Care underpin everything we do. As a result, our operations have, and have had for a number of
years, comprehensive health and safety policies in place with associated performance
requirements that are intended to help prevent and mitigate the impact of such exposures. The
company-wide Care Strategy will further our eff orts to provide a safe working environment and
prevent all injuries. The creation of an inclusive workplace with a strong culture of care and
accountability will be supported by well-designed work that delivers safe outcomes and a focus
on continuously improving and learning.
Environmental risks in respect of activities including water and waste water management
Nature: Our operations, by their nature, have the potential to impact biodiversity, land, water and
related ecosystems, including from the discharge of contaminants. Changes in scientific
understanding of these impacts, regulatory requirements or stakeholder expectations may
prevent or delay project approvals and result in increased costs for mitigation, off sets or
compensatory actions. They may also impact the sustainability of operations.
Mitigation: We have defined policies and standards that seek to prevent, monitor and limit the
impact of our operations on the environment. Certain sites are subject to remediation plans that
seek to address known contamination as a result of past activities. As part of this process, we
are focussed on water and waste water management, as the sustainability of our operations
relies on our ability to obtain an appropriate quality and quantity of water. We use water
responsibly and manage it appropriately, taking into account natural supply variations.
Deterioration in liquidity and cash flow
Nature: Fluctuations in commodity prices and the global economy may adversely impact future
cash flows. If we compromise our balance sheet, liquidity and cash reserves, interest rate costs
on borrowed debt and future access to financial capital markets could be adversely affected.
Mitigation: As part of our capital management framework, we have committed to maintain an
investment grade credit rating and strong liquidity through the economic cycle. Our Treasury
team is responsible for managing the balance sheet and cash flow within strict financial criteria.
Unexpected operational or natural catastrophes
Nature: We have extractive, processing and logistical operations in a number of geographic
locations. Our operations can be exposed to incidents such as fi re and explosion, loss of power
supply and critical mechanical equipment failures. Our operations, including the associated
transport networks, are exposed to the physical impacts of climate change. This includes
changes to water availability and access (both scarcity and potential for flooding), variability in
temperatures and rising sea levels. We may also be exposed to other incidents that affect
operations, including fi re, flooding, underground rock failures, pit wall failures at open-cut mines
and unexpected natural catastrophes, the frequency and severity of which may be exacerbated
as a result of climate change.
Mitigation: We undertake planning designed to protect the safety of our employees, contractors
and stakeholders, and the long-term value of our operations. Our operations use our risk
management tools to analyse risks, such as unexpected catastrophes, and implement actions to
prevent or limit the effects. We are also working on projects to increase the long-term resilience
of our operations to the physical impacts of climate change. This includes incorporating the most
up-to-date climate parameters into our planning, risk and investment model. By recognising that
we share critical and valuable natural resources with others, we are also taking action to protect
and maintain access to shared ecosystem services such as water and biodiversity for the long-
term. Contingency, business continuity and disaster recovery plans are developed to respond to
significant events to ensure the safe restoration of normal business activity. We purchase
insurance to protect ourselves against the financial consequences of an event, subject to
availability and cost.
Commercial counterparties that we transact with may not meet their obligations
Nature: We contract with a number of commercial, government and financial counterparties,
including customers, suppliers and financial institutions. Counterparties may fail to perform
against existing contracts and obligations or long-term take-or-pay agreements may adversely
impact on cost or price performance. Non-supply or changes to the quality of key inputs may
impact costs and production at operations.
Mitigation: We seek to proactively engage with our contracting counterparties to collaboratively
manage instances of non-supply or quality control prior to it occurring. Our operations manage
exposures by defining counterparty limits based on counterparty credit ratings and the level of
exposure. We purchase insurance to protect ourselves against the financial consequences of
supply disruption, subject to availability and cost.
Risks of fraud and corruption
Nature: We are exposed to the risks of fraud and corruption, both within and external to our
organisation. Fraud and corruption may lead to regulatory fines, financial loss, litigation, loss of
operating licences or reputational damage.
Mitigation: We adhere to the applicable legislative and regulatory requirements in respect of
fraud and corruption in the jurisdictions in which we operate. Our Code of Business Conduct,
policies and procedures describe the controls in place to manage this risk and our expectations
of our people when faced with fraud and corruption. We also provide our people with the tools to
safely report any suspected fraudulent or corrupt activities.
Breaches of information technology security processes
Nature: Our global information technology systems, consisting of infrastructure, applications and
communication networks, could be subject to security breaches resulting in theft, disclosure or
corruption of information. Security breaches could also result in misappropriation of funds or
disruption to operations.
Mitigation: Network and physical control frameworks, together with anti-virus software, provide a
level of protection. Monitoring of networks, ethical hacking and data analysis is undertaken to
identify suspicious activity and potential exposures, allowing appropriate action to be taken.
Failure to retain and attract key employees
Nature: The loss of key personnel or the failure to attract, train and recruit sufficiently qualified
employees could affect our operations, financial position and growth.
Mitigation: We have a number of initiatives in place to provide an inclusive workplace and
establish an effective, engaged and empowered workforce. Our skills development activities
focus on having the right people in the right roles, building a strong pipeline of future leaders and
maintaining a competent workforce with deep functional expertise. Engaging with employees at
all levels allows everyone to connect, supporting decision making and continual improvement.
2. Related party transactions
Extract from Note 31 ‘Key management personnel ’, page 181 of the 2016 Annual Report.
Key management personnel compensation
US$’000 FY2016 FY2015
Short-term employee benefits 7,225 1,754
Post-employment benefits 108 44
Other long-term benefits 310 36
Share-based payments 8,464 1,320
Total 16,107 3,154
Transactions with key management personnel
There were no transactions with key management personnel during the year ended 30 June
2016 (2015: US$ nil).
Loans to key management personnel
There were no loans with key management personnel during the financial year and as at 30
June 2016 (2015: US$ nil).
Transactions with key management personnel’s personally related entities
There were no transactions with entities controlled or jointly controlled by key management
personnel and there were no outstanding amounts with those entities as at 30 June 2016 (2015:
US$ nil).
Extract from Note 32 ‘Related party transactions’, page 182 of the 2016 Annual Report.
Transactions with related parties
Joint ventures Associates
US$’000 FY2016 FY2015 FY2016 FY2015
Sales of goods and
services 143,502 65,154 2,838 3,682
Purchases of goods
and services - - 33,162 50,081
Interest income 9,892 3,907 33 16
Dividend income 18,685 - - -
Interest expense 2,647 697 - -
Short term financing
arrangements
to/(from) related
parties (19,319) - - -
Loans made
to/(from) related
parties - 30,000 28,374 5,613
Outstanding balances with related parties
Joint ventures Associates
US$’000 FY2016 FY2015 FY2016 FY2015
Trade amounts
owing to related
parties - - 583 2,343
Other amounts
owing to related
(1)
parties 269,126 249,807 - -
Trade amounts
owing from related
parties 31,216 1,406 - -
Loan amounts
owing from related
(2) (2)
parties 300,000 300,000 52,314 23,940
(1)
Amount owing relates to short-term deposits and cash managed by the South32 Group.
Interest is paid based on the three month LIBOR and the one month JIBAR.
(2)
The loan was made on commercial terms, with interest charged at market rates and is due
to be repaid in December 2016 (subject to refinancing).
Terms and conditions
Sales to, and purchases from, related parties of goods and services are transactions at
market prices and on commercial terms.
Outstanding balances at year-end are unsecured and settlement mostly occurs in cash.
No guarantees are provided or received for any related party receivables or payables.
No provision for doubtful debts has been recognised in relation to any outstanding balances
and no expense has been recognised in respect of bad or doubtful debts due from related
parties.
Transactions with BHP Billiton Group
Transactions between members of the South32 Group whilst they were wholly-owned
subsidiaries of BHP Billiton Limited and the BHP Billiton Group for the year ended 30 June
2015 included:
- Advancement and repayment of loans
- Provision of management and administrative assistance
- Purchases and sales of products and services
- Interest expense and income, paid or received by controlled entities of South32
Limited for money borrowed
- Transfer of tax related balances for tax consolidation purposes and
- Acquisition and disposal of businesses and operations whilst under common control
Prior to the demerger the South32 Group entered into a Separation Deed with the BHP Billiton
Group. The Separation Deed deals with matters arising in connection with the demerger of the
South32 Group from the BHP Billiton Group. Refer to note 4 ‘South32 Limited demerger’, on
pages 133 - 134.
The Separation Deed principally covers the following key terms: assumption of liabilities,
limitations and exclusions from indemnities and claims, contracts, financial support, demerger
costs and litigation.
3. Directors’ Responsibility Statement
The following statement was prepared for the purposes of the South32 Group's 2016 Annual
Report and is repeated here for the purposes of complying with DTR 6.3.5. It relates to, and is
extracted from, the South32 Group's 2016 Annual Report and is not connected to the extracted
and summarised information presented in this announcement.
“The Directors state, that to the best of their knowledge:
a) The consolidated financial statements and notes that are set out on pages 125 to 183
prepared in accordance with applicable accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit and loss of South32 and the
undertakings included in the consolidation taken as a whole and
b) The Directors’ Report includes a fair review of the development and performance of the
business and the position of South32 and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and uncertainties they
face.
This Directors’ Report is made in accordance with a resolution of the Board.”
David Crawford AO, Chairman and Graham Kerr, Chief Executive Officer.
4. No Change Statement and Notice of Annual General Meeting
Shareholders are advised that the financial statements in the 2016 Annual Report do not
contain any material changes to the South32’s Financial Results and Outlook for the year
ended 30 June 2016 announcement issued on 25 August 2016 on SENS.
Notice is hereby given that the Company’s Annual General Meeting will be held at 2.00pm
(AWST) on 24 November 2016 in the Golden Ballroom, Pan Pacific Hotel, 207 Adelaide
Terrace, Perth, Western Australia 6000, Australia to transact the business as set out in the
Notice of Annual General Meeting to be dispatched no later than 25 October 2016.
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
James Clothier
T +61 8 9324 9697
M +61 413 319 031
E James.Clothier@south32.net
Further information on South32 can be found at www.south32.net.
8 September 2016
JSE Sponsor: UBS South Africa (Pty) Ltd
8 September 2016
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