Wrap Text
Quarterly Report - September 2017
South32 Limited
(Incorporated in Australia under the Corporations Act 2001 (Cth))
(ACN 093 732 597)
ASX, LSE, JSE Share Code: S32 ADR: SOUHY
ISIN: AU000000S320
QUARTERLY REPORT
“Our key commodity markets continue to benefit from strong demand and a steepening of industry cost curves.
This supportive dynamic has further bolstered our net cash position despite the continuation of our capital
management program and the prepayment that will increase our interest in Arizona Mining.
“Annual production guidance is maintained for our operations following generally strong performance across
our supply chain. Mozal aluminium achieved another production record, payable nickel production rose sharply
at Cerro Matoso and we continued to optimise our manganese operations to benefit from elevated prices.
“We have also commenced a measured
ramp-up of longwall mining activity at the Appin mine that will allow us to reset the operation’s culture, re-
establish minimum performance criteria and drive productivity towards a more acceptable level.”
Graham Kerr, South32 CEO
- Stronger commodity markets delivered a US$33M increase in our net cash position to US$1.7B despite an
increase in working capital, the continuation of our capital management program and the prepayment that
will increase our stake in Arizona Mining.
- Maintained annual production guidance for our operations and confirmed that we will operate one longwall
at the Illawarra Metallurgical Coal Appin mine across the remainder of FY18.
- Achieved record quarterly production at Mozal Aluminium and robust performance at our alumina
refineries despite bauxite supply being impacted by adverse weather in Western Australia and Brazil.
- Increased payable nickel production at Cerro Matoso by 21% as scheduled maintenance was deferred
and the average ore grade benefitted from the ramp-up of La Esmeralda.
- Continued to take advantage of strong market conditions by maintaining South Africa Manganese ore
sales at an annualised rate of 3.5Mwmt pa (100% basis).
- Successfully replaced shaft haulage with additional trucking capacity following the decommissioning of the
underground crusher at Cannington, with processing rates to increase as run-of-mine stocks are rebuilt
and the new crusher chamber is commissioned in the March 2018 quarter.
Production summary
YTD YTD
South32’s share YoY 1Q17 4Q17 1Q18 QoQ
FY17 FY18
Alumina production (kt) 1,293 1,279 (1%) 1,293 1,320 1,279 (3%)
Aluminium production (kt) 243 249 2% 243 248 249 0%
Energy coal production (kt) 8,191 7,014 (14%) 8,191 7,722 7,014 (9%)
Metallurgical coal production (kt) 1,437 494 (66%) 1,437 1,437 494 (66%)
Manganese ore production (kwmt) 1,180 1,304 11% 1,180 1,314 1,304 (1%)
Manganese alloy production (kt) 59 56 (5%) 59 58 56 (3%)
Payable nickel production (kt) 8.7 11.7 34% 8.7 9.7 11.7 21%
Payable silver production (koz) 4,694 2,763 (41%) 4,694 3,326 2,763 (17%)
Payable lead production (kt) 38.4 25.8 (33%) 38.4 26.9 25.8 (4%)
Payable zinc production (kt) 17.7 11.0 (38%) 17.7 13.2 11.0 (17%)
Unless otherwise noted: percentage variance relates to performance during the September 2017 quarter
compared with the June 2017 quarter (QoQ); production and sales volumes are reported on an attributable basis.
CORPORATE UPDATE
- Industry cost curves continue to steepen as a result of US dollar weakness, rising raw material input
costs and the environmental policy response in China. While our unit costs are tracking to plan on the
basis of previously disclosed exchange rate and commodity price assumptions1, we will experience
additional cost inflation should these external pressures persist across the remainder of the year.
- Exploration remains a key pillar of our strategy. We invested US$6.8M in greenfield and brownfield
activity in the September 2017 quarter (US$0.5M capitalised), including US$0.5M in our equity
accounted investments
- (US$0.2M capitalised). Our exploration budget for FY18 remains unchanged at US$30M.
- On 14 September, we entered into an over-the-counter equity forward contract to acquire up to an
additional
- 15 million shares in Arizona Mining Incorporated (TSX: AZ) (Arizona Mining), equivalent to 4.9 per cent
of the Common Shares on issue. South32 settled the contract in full before the program commenced2.
- Our net cash balance increased by US$33M to US$1,673M in the September 2017 quarter despite a
rise in working capital and the prepayment that will increase our interest in Arizona Mining. With the
continuation of our capital management program, we also purchased 19M shares for a cash
consideration of US$47M during the September 2017 quarter. To 30 September 2017, we had
completed 35% of our approved US$750M capital management program at an average price of
AUD$2.73 per share. On 12 October, we paid our first fully-franked dividend, with the US$333M
distribution representing 50% of Underlying earnings in respect of the June 2017 half year.
- While Australia Manganese paid US$99M (100% share) in royalties in respect of the prior 6 month
period, strong prices allowed our manganese equity accounted investments to distribute a net US$85M3
(South32 share) during the period.
- Our Underlying Effective Tax Rate, which excludes tax associated with equity accounted investments,
largely reflects the geographic distribution of the Group’s profit. The corporate tax rates applicable to the
Group include: Australia 30%, South Africa 28%, Colombia 39% and Brazil 34%. A payment of
approximately US$100M will be made to the Australian Taxation Office in December 2017 in respect of
earnings generated in FY17.
Production guidance 3M
(South32’s share) FY17 YTD18 FY18e
Worsley Alumina
Alumina production (kt) 3,892 942 3,975
South Africa Aluminium
Aluminium production (kt) 714 180 720
Mozal Aluminium
Aluminium production (kt) 271 69 269
Brazil Alumina
Alumina production (kt) 1,329 337 1,345
4
South Africa Energy Coal
Energy coal production (kt) 28,913 6,689 27,500
Domestic coal production (kt) 16,717 3,867 16,000
Export coal production (kt) 12,196 2,822 11,500
Illawarra Metallurgical Coal
Total coal production (kt) 7,073 819 N/A
Metallurgical coal production (kt) 5,697 494 N/A
Energy coal production (kt) 1,376 325 N/A
Australia Manganese
Manganese ore production (kwmt) 2,994 808 3,125
South Africa Manganese
5
Manganese ore production (kwmt) 2,038 496 1,885
Cerro Matoso
Payable nickel production (kt) 36.5 11.7 41.6
Cannington
Payable silver production (koz) 15,603 2,763 14,360
Payable lead production (kt) 132 26 115
Payable zinc production (kt) 70 11 45
WORSLEY ALUMINA
(86% share)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Alumina production (kt) 967 942 (3%) 967 988 942 (3%) (5%)
Alumina sales (kt) 960 966 1% 960 920 966 1% 5%
Worsley Alumina saleable production decreased by 5% (or 46kt) to 942kt in the September 2017 quarter as
calciner maintenance was undertaken and heavy rainfall temporarily affected bauxite supply from the Boddington
mine. Alumina sales were 3% higher than production following the deferral of shipments in the prior period. FY18
production guidance remains unchanged at 4.0Mt with additional calciner outages scheduled for the December
2017 and March 2018 quarters.
SOUTH AFRICA ALUMINIUM
(100%)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Aluminium production (kt) 175 180 3% 175 180 180 3% 0%
Aluminium sales (kt) 178 162 (9%) 178 203 162 (9%) (20%)
South Africa Aluminium saleable production was unchanged at 180kt in the September 2017 quarter as the
smelter continued to achieve benchmark levels of current efficiency and pot line amperage. The decrease in
quarterly sales reflects the scheduling of shipments between periods. Our FY18 production guidance remains
unchanged at 720kt.
MOZAL ALUMINIUM
(47.1% share)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Aluminium production (kt) 68 69 1% 68 68 69 1% 1%
Aluminium sales (kt) 64 65 2% 64 73 65 2% (11%)
Mozal Aluminium achieved record performance in the September 2017 quarter, increasing production by 1% (or
1kt) to 69kt as the smelter continued to optimise performance and test its maximum technical capability. Our
FY18 production guidance remains unchanged at 269kt.
The US$38M (100% share) AP3XLE energy efficiency project was approved during the September 2017 quarter.
This project is expected to deliver a circa 5% (or 10ktpa) increase in annual production with no associated
increase in power consumption. First production is anticipated in FY20, with the full benefit to be realised in
FY24.
BRAZIL ALUMINA
(36% share)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Alumina production (kt) 326 337 3% 326 332 337 3% 2%
Alumina sales (kt) 299 333 11% 299 322 333 11% 3%
Brazil Alumina saleable production increased by 2% (or 5kt) in the September 2017 quarter as the refinery
continued to operate at its capacity. While severe drought conditions in the Porto Trombetas region of Brazil have
impacted bauxite supply from the MRN mine (14.8% South32 share), we have successfully mitigated the impact
across the remainder of the calendar year and our FY18 production guidance for the Alumar refinery remains
unchanged at 1.3Mt.
SOUTH AFRICA ENERGY COAL
(100%)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Energy coal production (kt) 7,744 6,689 (14%) 7,744 7,413 6,689 (14%) (10%)
Domestic sales (kt) 4,446 3,788 (15%) 4,446 3,948 3,788 (15%) (4%)
Export sales (kt) 2,904 2,748 (5%) 2,904 3,068 2,748 (5%) (10%)
South Africa Energy Coal saleable production decreased by 10% (or 724kt) to 6,689kt in the September 2017
quarter as we completed planned dragline maintenance, relocated critical mobile equipment at the Wolvekrans-
Middelburg Complex (WMC) and continued to deplete existing pits. Following prior weather related delays, the
development of new mining areas at the WMC is proceeding according to plan and our FY18 production
guidance remains unchanged at 27.5Mt. Export sales were sequentially lower as congestion at the Richards Bay
Coal Terminal was not fully cleared in the September 2017 quarter. Final approval of the Klipspruit Life Extension
project is expected in the December 2017 quarter.
ILLAWARRA METALLURGICAL COAL
(100%)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Total coal production (kt) 1,884 819 (57%) 1,884 1,746 819 (57%) (53%)
Total coal sales (kt) 2,193 778 (65%) 2,193 1,711 778 (65%) (55%)
Metallurgical coal production (kt) 1,437 494 (66%) 1,437 1,437 494 (66%) (66%)
Metallurgical coal sales (kt) 1,723 403 (77%) 1,723 1,470 403 (77%) (73%)
Energy coal production (kt) 447 325 (27%) 447 309 325 (27%) 5%
Energy coal sales (kt) 470 375 (20%) 470 241 375 (20%) 56%
Total saleable production for Illawarra Metallurgical Coal decreased by 53% (or 927kt) as the Appin mine
remained suspended during the September 2017 quarter. While the Dendrobium mine continued to perform well
during the period, production was impacted by geological conditions, consistent with the mine plan. The
Dendrobium longwall is expected to pass through a fault zone in the December 2017 quarter and a longwall
move is scheduled to commence at Dendrobium in the March 2018 quarter.
Production recommenced at Longwall 707 on 13 October following the completion of the necessary remedial
action at the Appin mine. We will operate a single longwall at the Appin mine across the remainder of FY18 as
part of a staged ramp-up of activities, before returning to a two longwall configuration in the December 2018
quarter. Longwall 707 is expected to be completed in the June 2018 quarter, at which point we will commence
production at Longwall 902. FY18 production guidance for Illawarra Metallurgical Coal will be provided in due
course and will be informed by the performance of Longwall 707 and other ramp-up activities at the Appin mine.
AUSTRALIA MANGANESE
(60% share)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Manganese ore production (kwmt) 763 808 6% 763 776 808 6% 4%
Manganese ore sales (kwmt) 757 790 4% 757 838 790 4% (6%)
Manganese alloy production (kt) 38 39 3% 38 41 39 3% (5%)
Manganese alloy sales (kt) 54 36 (33%) 54 36 36 (33%) 0%
Australia Manganese saleable ore production increased by 4% (or 32kwmt) to 808kwmt in the September 2017
quarter as performance improved in the primary higher grade circuit and the contribution of the PC02 circuit
reduced to 7% of total ore production. Our FY18 production guidance remains unchanged at 3,125kwmt with
preparation underway for the upcoming wet season.
Saleable manganese alloy production decreased by 5% (or 2kt) to 39kt in the September 2017 quarter.
SOUTH AFRICA MANGANESE
(60% share)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Manganese ore production (kwmt) 417 496 19% 417 538 496 19% (8%)
Manganese ore sales (kwmt) 417 528 27% 417 542 528 27% (3%)
Manganese alloy production (kt) 21 17 (19%) 21 17 17 (19%) 0%
Manganese alloy sales (kt) 20 14 (30%) 20 20 14 (30%) (30%)
South Africa Manganese saleable ore production decreased by 8% (or 42kwmt) to 496kwmt in the September
2017 quarter, while sales were maintained at an annualised rate of 3.5Mwmt pa as strong market demand
enabled us to sell Wessels concentrate and utilise higher cost trucking during the period. FY18 production
guidance remains unchanged at 1,885kwmt.
Manganese alloy saleable production was unchanged in the September 2017 quarter. Metalloys continues to
operate one of its four furnaces.
CERRO MATOSO
(99.9% share)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Payable nickel production (kt) 8.7 11.7 34% 8.7 9.7 11.7 34% 21%
Payable nickel sales (kt) 8.2 11.4 39% 8.2 9.8 11.4 39% 16%
Cerro Matoso payable nickel production increased by 21% (or 2kt) in the September 2017 quarter as scheduled
maintenance was deferred into the December quarter and the average ore grade benefitted from the ramp-up of
La Esmerelda. Our FY18 production guidance remains unchanged at 41.6kt.
CANNINGTON
(100%)
1Q17 4Q17
YTD YTD
South32's share YoY 1Q17 4Q17 1Q18 vs vs
FY17 FY18
1Q18 1Q18
Payable silver production (koz) 4,694 2,763 (41%) 4,694 3,326 2,763 (41%) (17%)
Payable silver sales (koz) 5,063 2,926 (42%) 5,063 3,866 2,926 (42%) (24%)
Payable lead production (kt) 38.4 25.8 (33%) 38.4 26.9 25.8 (33%) (4%)
Payable lead sales (kt) 40.1 25.9 (35%) 40.1 32.3 25.9 (35%) (20%)
Payable zinc production (kt) 17.7 11.0 (38%) 17.7 13.2 11.0 (38%) (17%)
Payable zinc sales (kt) 18.5 13.6 (26%) 18.5 9.8 13.6 (26%) 39%
Cannington silver, lead and zinc payable production decreased by 17%, 4% and 17%, respectively in the
September 2017 quarter as we successfully replaced shaft haulage with additional trucking capacity following the
decommissioning of the underground crusher on 11 September 2017. Our FY18 production guidance (silver
14,360koz, lead 115kt and zinc 45kt) remains unchanged with processing rates scheduled to increase towards
the end of the year as run-of-mine stocks are rebuilt and the new crusher chamber is commissioned in the March
2018 quarter.
Notes:
1. FY18e Operating unit cost guidance provided in our FY17 Results Announcement includes royalties (where appropriate) and the influence
of exchange rates, and was predicated on various assumptions for FY18, including: an alumina price of US$299/t; a manganese ore price
of US$4.50/dmtu for 44% manganese product; a nickel price of US$4.27/lb; a thermal coal price of US$72/t (API4) for South Africa Energy
Coal; a silver price of US$16.82/troy oz; a lead price of US$2,135/t; a zinc price of US$2,555/t; an AUD:USD exchange rate of 0.74; a
USD:ZAR exchange rate of 14.17 and a USD:COP exchange rate of 2,961; all of which reflected forward markets as at May 2017 or our
internal expectations.
2. In May 2017, South32 acquired 45 million Common Shares, or approximately 15 per cent of Arizona Mining as part of a private placement
and investor rights agreement. The investor rights agreement allows South32 to acquire up to, but no more than 19.9 per cent of Arizona
Mining within an 18-month standstill period without the consent of Arizona Mining’s board of directors. Under the terms of the September
2017 forward contract, a third-party financial institution will seek to purchase the additional shares in the market over a maximum period of
12 months. Trading activity will occur at the financial institution’s sole discretion, subject to certain agreed trading parameters. South32
settled the contract in full before the program commenced. The final cost will be determined on completion of the program and will be based
on the daily volume weighted average price of the shares over the period.
3. Net distributions from equity accounted investments includes net debt movements and dividends.
4. 8% of South Africa Energy Coal is owned by a Broad-Based Black Economic Empowerment (B-BBEE) consortium. The interests owned by
the
B-BBEE consortium were acquired using vendor finance, with the loans repayable to South32 via distributions attributable to these parties,
pro rata to their share in South Africa Energy Coal. Until these loans are repaid, South32’s interest in South Africa Energy Coal is accounted
at 100%.
5. Consistent with the presentation of South32’s segment information, South Africa Manganese ore production and sales have been reported
at 60%. The Group’s financial statement will continue to reflect a 54.6% interest in South Africa Manganese ore.
6. The following abbreviations have been used throughout this report: grams per tonne (g/t); tonnes (t); thousand tonnes (kt); thousand tonnes
per annum (ktpa); million tonnes (Mt); million tonnes per annum (Mtpa); thousand ounces (koz); million ounces (Moz); thousand wet metric
tonnes (kwmt); million wet metric tonnes (Mwmt); million wet metric tonnes per annum (Mwmt pa); thousand dry metric tonnes (kdmt).
OPERATING PERFORMANCE
YTD YTD
South32’s share 1Q17 2Q17 3Q17 4Q17 1Q18
FY17 FY18
Worsley Alumina
(86% share)
Alumina hydrate production (kt) 980 974 980 966 993 959 974
Alumina production (kt) 967 942 967 973 964 988 942
Alumina sales (kt) 960 966 960 949 1,018 920 966
South Africa Aluminium
(100%)
Aluminium production (kt) 175 180 175 181 178 180 180
Aluminium sales (kt) 178 162 178 169 163 203 162
Mozal Aluminium
(47.1% share)
Aluminium production (kt) 68 69 68 68 67 68 69
Aluminium sales (kt) 64 65 64 70 66 73 65
Brazil Alumina
(alumina 36% share)
Alumina production (kt) 326 337 326 347 324 332 337
Alumina sales (kt) 299 333 299 339 356 322 333
South Africa Energy Coal
(100%)
Energy coal production (kt) 7,744 6,689 7,744 7,081 6,675 7,413 6,689
Domestic sales (kt) 4,446 3,788 4,446 4,472 4,056 3,948 3,788
Export sales (kt) 2,904 2,748 2,904 2,952 2,873 3,068 2,748
Illawarra Metallurgical Coal
(100%)
Total coal production (kt) 1,884 819 1,884 1,829 1,614 1,746 819
Total coal sales (kt) 2,193 778 2,193 1,412 1,980 1,711 778
Metallurgical coal production (kt) 1,437 494 1,437 1,392 1,431 1,437 494
Metallurgical coal sales (kt) 1,723 403 1,723 1,065 1,694 1,470 403
Energy coal production (kt) 447 325 447 437 183 309 325
Energy coal sales (kt) 470 375 470 347 286 241 375
Australia Manganese
(60% share)
Manganese ore production (kwmt) 763 808 763 736 719 776 808
Manganese ore sales (kwmt) 757 790 757 743 749 838 790
Ore grade sold (%, Mn) 46.7 46.1 46.7 46.1 46.0 46.2 46.1
Manganese alloy production (kt) 38 39 38 40 28 41 39
Manganese alloy sales (kt) 54 36 54 28 37 36 36
South Africa Manganese
(60% share)
Manganese ore production (kwmt) 417 496 417 517 566 538 496
Manganese ore sales (kwmt) 417 528 417 511 554 542 528
Ore grade sold (%, Mn) 39.7 40.7 39.7 40.8 40.1 39.8 40.7
Manganese alloy production (kt) 21 17 21 16 19 17 17
Manganese alloy sales (kt) 20 14 20 20 14 20 14
YTD YTD
South32’s share 1Q17 2Q17 3Q17 4Q17 1Q18
FY17 FY18
Cerro Matoso
(99.9% share)
Ore mined (kwmt) 1,238 1,051 1,238 1,109 1,044 1,056 1,051
Ore processed (kdmt) 645 696 645 644 648 624 696
Ore grade processed (%, Ni) 1.52 1.91 1.52 1.55 1.60 1.69 1.91
Payable nickel production (kt) 8.7 11.7 8.7 9.0 9.1 9.7 11.7
Payable nickel sales (kt) 8.2 11.4 8.2 9.4 9.2 9.8 11.4
Cannington
(100%)
Ore mined (kwmt) 780 647 780 859 675 595 647
Ore processed (kdmt) 828 593 828 841 739 628 593
Silver ore grade processed (g/t, Ag) 216 175 216 182 183 196 175
Lead ore grade processed (%, Pb) 5.7 5.2 5.7 5.2 5.3 5.2 5.2
Zinc ore grade processed (%, Zn) 3.2 2.8 3.2 4.2 3.0 3.1 2.8
Payable silver production (koz) 4,694 2,763 4,694 4,035 3,548 3,326 2,763
Payable silver sales (koz) 5,063 2,926 5,063 3,797 3,544 3,866 2,926
Payable lead production (kt) 38.4 25.8 38.4 35.5 31.3 26.9 25.8
Payable lead sales (kt) 40.1 25.9 40.1 33.2 32.5 32.3 25.9
Payable zinc production (kt) 17.7 11.0 17.7 24.4 15.1 13.2 11.0
Payable zinc sales (kt) 18.5 13.6 18.5 22.3 16.8 9.8 13.6
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.
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
Hayley Cardy James Clothier
T +61 8 9324 9008 T +61 8 9324 9697
M +61 409 448 288 M +61 413 319 031
E Hayley.Cardy@south32.net E James.Clothier@south32.net
19 October 2017
JSE Sponsor: UBS South Africa (Pty) Ltd
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