Wrap Text
Results of the South32 Group for the year ended 30 June 2018
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
ASX / LSE / JSE Share Code: S32 ADR: SOUHY
ISIN: AU000000S320
23 AUGUST 2018
RESULTS FOR ANNOUNCEMENT TO THE MARKET
This statement includes the consolidated results of the South32 Group for the year ended 30 June 2018
compared with the year ended 30 June 2017 on a statutory basis.
In accordance with the JSE Listing Requirements, Headline Earnings is presented below.
US$M FY18 FY17
Profit attributable to ordinary equity holders of South32 Limited 1,332 1,231
Adjusted for
Gain on disposal of property, plant and equipment (4) (5)
Gain on disposal of investment (33) -
Total tax benefit on the above items 3 1
Headline Earnings 1,298 1,227
Diluted Headline Earnings 1,298 1,227
Basic earnings per share denominator (millions) 5,159 5,307
Diluted earnings per share denominator (millions)(a) 5,239 5,367
Headline Earnings from continuing operations
Headline Earnings per share (US cents) 25.2 23.1
Diluted Headline Earnings per share (US cents) 24.8 22.9
Headline Earnings
Headline Earnings per share (US cents) 25.2 23.1
Diluted Headline Earnings per share (US cents) 24.8 22.9
(a) Diluted EPS calculation excludes 4,512,861 (30 June 2017: 11,120,599) rights which are considered anti-dilutive and
are subject to service and performance conditions.
Financial Results and Outlook
Year ended 30 June 2018
23 August 2018 ASX, LSE, JSE Share Code: S32 ADR: SOUHY
South32 produces strong financial results while reshaping its portfolio
"Stronger commodity prices and our efforts to mitigate inflationary pressure delivered a 16 per cent increase in
Underlying earnings to US$1.3B, free cash flow from operations of US$1.4B and a closing net cash balance of US$2.0B.
"We achieved record production at Australia Manganese and Mozal Aluminium, delivered a 10 per cent increase in total
manganese ore production and a 20 per cent increase in payable nickel production at Cerro Matoso. At the same time
our fully integrated aluminium supply chain benefitted from tight markets by virtue of our predominantly index-linked
3.2 million tonne long alumina position.
"The decision to manage South Africa Energy Coal as a stand-alone business has also allowed us to collapse our
regional model and simplify the Group, and is expected to deliver a US$50M annual cost saving from the 2020 financial
year. We will also commence a process to broaden South Africa Energy Coal's ownership in the September 2018
quarter.
This new way of working is not only lean but also scalable, allowing us to expand our global footprint and invest in
opportunities where we can create value. During the year, we entered into a conditional agreement to acquire a 50 per
cent interest in the Eagle Downs project, exercised the second year of our Trilogy Metals option and have increased
our commitment to exploration with 18 partnerships for greenfield base metal projects now established. Subsequent to
year end, we also completed the acquisition of Arizona Mining, adding the high grade zinc-lead-silver Hermosa project
and a prospective land package to our portfolio.
"Our strong financial position allowed us to return US$946M to shareholders in respect of the period. This included
payment of a US$221M fully franked interim dividend and declaration of a US$317M fully franked final dividend in
accordance with our dividend policy. A further US$408M was returned to shareholders as part of our ongoing US$1B
capital management program with the remaining US$380M balance expected to be returned to shareholders in the 2019
financial year.
"Looking ahead, we are well positioned. Group production is expected to rise by 5 per cent in the 2019 financial year,
further productivity gains and functional cost savings are expected to mitigate industry wide inflationary pressure and
we have added high quality development options to our portfolio."
Graham Kerr, South32 CEO
Financial highlights
US$M FY18 FY17 % Change
Revenue(1) 7,549 6,950 9%
Profit/(loss) 1,719 1,795 (4%)
Profit/(loss) after tax 1,332 1,231 8%
Basic earnings per share (US cents)(2) 25.8 23.2 11%
Ordinary dividends per share (US cents)(3) 10.5 10.0 5%
Special dividends per share (US cents)(4) 3.0 - N/A
Other financial measures
Underlying EBITDA(5) 2,516 2,411 4%
Underlying EBITDA margin(6) 37.3% 38.9% (1.6%)
Underlying EBIT(5) 1,774 1,648 8%
Underlying EBIT margin(7) 26.2% 26.6% (0.4%)
Underlying earnings(5) 1,327 1,146 16%
Basic Underlying earnings per share (US cents)(2) 25.7 21.6 19%
ROIC(8) 13.5% 11.4% 2.1%
2018 Financial Year Summary
Safety
The most important thing we can all do is to make sure that everyone goes home safe and well at the end of every shift. It is with
deep regret that one of our colleagues, was fatally injured whilst working at our Metalloys Manganese Smelter
in South Africa on 12 April 2018. A detailed investigation led by a member of our Lead Team was undertaken as we seek to understand
and learn for this incident. The results were reviewed by the CEO, management team and Board.
We are committed to improving safety at our operations to avoid, mitigate and manage risk. We are doing this by creating an inclusive
workplace where all work is well-designed and we continuously improve and learn. Our Total Recordable Injury Frequency (TRIF)(9)(10)
was 5.1 per million hours worked, an improvement of 16% on last year's TRIF of 6.1(11) per million hours worked.
Performance summary
The Group's statutory profit after tax increased by 8% to US$1.3B in FY18, while Underlying earnings increased by 16%
(or US$181M) to US$1.3B. This significant increase in profitability was driven by stronger commodity prices, which were only partially
offset by a 7%(12) decrease in sales volumes and broader inflationary pressure, most notably in our aluminium supply chain. Free
cash flow from operations, including net distributions from equity accounted investments, of US$1.4B and an increase in our net cash
balance to US$2.0B allowed us to acquire Arizona Mining and announce the acquisition of a 50% interest in the Eagle Downs
metallurgical coal project with fully-funded cash offers amounting to US$1.4B.
The key factors that impacted financial performance included:
- A US$349M increase in the contribution of our alumina refineries to Underlying EBITDA and a 10% increase in their combined
Operating margin to 40% as we benefited from our long alumina position and our exposure to market prices for the vast majority
of production;
- A 10% increase in total manganese ore production, including record production at Australia Manganese, as we continued to
respond to strong demand and pricing;
- Record production at Mozal Aluminium, as the smelter continued to test its technical capacity;
- A 20% increase in payable nickel production at Cerro Matoso as ore grades improved temporarily following the ramp up of
La Esmeralda;
- A 40% decrease in Illawarra Metallurgical Coal production as the Appin colliery was suspended for much of H1 FY18 as we
sought to re-establish minimum performance criteria; and
- Strong cost control as the majority of our upstream operations achieved Operating unit cost guidance, despite broader inflationary
pressure.
Our strong financial position allowed us to return US$946M to shareholders in respect of the period. This included payment of a
US$221M fully franked interim dividend and declaration of a US$317M fully franked final dividend in accordance with our dividend
policy, which seeks to return a minimum 40% of Underlying earnings in each six month period. A further US$408M was returned to
shareholders as part of our ongoing capital management program, with US$254M allocated to our on-market share
buy-back program and US$154M returned in the form of a special dividend. Our capital management program was increased by
US$250M to US$1B during FY18 with the remaining US$380M balance expected to be returned to shareholders in FY19.
Reshaping our portfolio
In November 2017 we announced our intention to manage South Africa Energy Coal as a stand-alone business in order to improve
the operation's competitiveness and ensure its ongoing sustainability. We are well advanced in our implementation of this important
strategic initiative having appointed a separate leadership team with its own governance framework. We also approved a 4.3B(13)
South African rand investment to extend the life of the Klipspruit colliery by at least 20 years and will commence a process to broaden
South Africa Energy Coal's ownership in the September 2018 quarter, consistent with our commitment to further transform our South
African operations.
The decision to establish South Africa Energy Coal as a stand-alone business has also allowed us to simplify the Group by collapsing
our regional operating model, consolidating our support structures and changing the way we work. This fundamental redesign of
South Africa Energy Coal and the Group's functions is expected to deliver an annual saving of US$50M from FY20, further mitigating
industry wide inflationary pressure.
This new way of working is not only lean but also scalable, allowing us to expand our global footprint and invest in opportunities
where we can create value. In FY18 we:
- Entered into a conditional agreement to acquire a 50% interest in the Eagle Downs metallurgical coal project in Queensland;
- Exercised the second year of our Trilogy Metals (TSX:TMQ) option, to fully test the high grade copper extension at the Bornite
deposit in Alaska; and
- Increased our commitment to exploration with 18 partnerships for greenfield base metal projects now established in Australia,
the Americas and Sweden.
Subsequent to year end, we also completed the acquisition of Arizona Mining, adding the Hermosa project's high grade
zinc-lead-silver resource(14) and a prospective land package to our portfolio.
Earnings
The Group's statutory profit after tax increased by US$101M (or 8%) to US$1.3B in FY18. Consistent with our accounting policies,
various items are excluded from the Group's statutory profit to derive Underlying earnings including: redundancy and restructuring
charges associated with the simplification of the Group's functional structures and the voluntary redundancy program undertaken at
Illawarra Metallurgical Coal (US$58M pre-tax); exchange rate gains associated with the restatement of monetary items
(US$15M pre-tax); losses on fair value movements of non-trading derivative instruments (US$73M pre-tax); exchange rate gains
associated with the Group's non US dollar denominated net debt (US$23M pre-tax); the tax expense for all pre-tax earnings
adjustments and exchange rate variations on tax balances (-US$37M); earnings adjustments included in the profit of our equity
accounted investments (-US$30M) and significant items (-US$31M pre-tax). Further information on these earnings adjustments is
included futher on.
On this basis, the Group generated Underlying EBITDA of US$2.5B for an operating margin of 37% as higher realised prices for the
majority of our commodities gave rise to a US$599M increase in sales revenue. The Group's cost base was primarily impacted by
external inflationary pressure, including stronger producer currencies and raw material input costs, that more than offset broader
equipment productivity and energy procurement initiatives that were embedded across our portfolio. Inflationary pressure was most
evident in our aluminium supply chain as caustic soda, energy, coke, pitch and alumina prices moved sharply higher with commodity
markets. Underlying EBIT increased by 8% to US$1.8B as depreciation and amortisation decreased with the reduction in production
volumes, while Underlying earnings increased by 16% to US$1.3B.
Profit/(loss) to Underlying EBITDA reconciliation
US$M FY18 FY17
Profit/(loss) 1,719 1,795
Earnings adjustments to derive Underlying EBIT 55 (147)
Underlying EBIT 1,774 1,648
Depreciation and amortisation 742 763
Underlying EBITDA 2,516 2,411
Profit/(loss) after tax to Underlying earnings reconciliation
US$M FY18 FY17
Profit/(loss) after tax 1,332 1,231
Earnings adjustments to derive Underlying EBIT 55 (147)
Earnings adjustments to derive Underlying net finance cost (23) 35
Earnings adjustments to derive Underlying income tax expense (37) 27
Underlying earnings 1,327 1,146
Earnings analysis
The following key factors influenced Underlying EBIT in FY18, relative to FY17.
Reconciliation of movements in Underlying EBIT (US$M)(15)(16)(17)
The reconciliation of movements in Underlying EBIT graph can be found within the National Storage Mechanism version of the release.
Earnings analysis US$M Commentary
FY17 Underlying EBIT 1,648
Change in sales price 1,481
Higher average realised prices for our commodities, including:
Aluminium and alumina (+US$715M)
Manganese ore and alloy (+US$309M)
Energy coal (+US$237M)
Nickel (+US$114M)
Net impact of price-linked costs (202)
Higher smelter raw material costs (-US$86M), including pitch and coke
Higher caustic soda prices (-US$84M)
Higher LME-linked electricity costs at South Africa Aluminium (-US$31M)
Higher freight rates (-US$26M)
Higher bauxite costs at Brazil Alumina (-US$22M)
Higher price-linked royalties more than offset by the impact of lower volumes (+US$23M)
Lower negotiated treatment and refining charges for Cannington concentrates (+US$38M)
Change in exchange rates (131)
Stronger South African rand (-US$82M) and Australian dollar (-US$47M)
Change in inflation (142)
Broader inflationary pressure in Southern Africa (-US$85M), Australia (-US$36M) and other
jurisdictions (-US$21M)
Change in sales volume (607)
Illawarra Metallurgical Coal (-US$525M)
Cannington (-US$221M)
Australia Manganese (+US$58M)
Cerro Matoso (+US$68M)
Controllable costs (215)
Higher contractor, labour, freight, maintenance and greenfield exploration costs across our
operations, including:
South Africa Energy Coal (-US$106M)
Australia Manganese (-US$25M)
Brazil Alumina (-US$25M)
Other 39
Lower depreciation and amortisation (+US$17M)
Opportunistic sale of logistics capacity to third parties (+US$15M)
EBIT on third party product (+US$13M)
Recognition of provision for transmission charges at Brazil Alumina (-US$16M)
Interest & tax (equity accounted (97)
investments) Stronger profitability in our jointly controlled manganese operations
FY18 Underlying EBIT 1,774
Net finance cost
The Group's Underlying net finance cost, excluding equity accounted investments, was US$123M in FY18 and largely reflects the
unwinding of the discount applied to our closure and rehabilitation provisions (US$105M) and finance lease interest (US$52M), primarily
at Worsley Alumina.
Underlying net finance cost reconciliation
US$M FY18 FY17
Unwind of discount applied to closure and rehabilitation provisions (105) (98)
Finance lease interest (52) (52)
Other 34 14
Underlying net finance cost (123) (136)
Add back earnings adjustment for exchange rate variations on net debt 23 (35)
Net finance cost (100) (171)
Tax expense
The Group's Underlying income tax expense, which excludes tax associated with equity accounted investments, was US$324M
for an Underlying effective tax rate(18) (ETR) of 27.9%. The Group's Underlying ETR reflects the geographic distribution of the
Group's profit. The corporate tax rates applicable to the Group include: Australia 30%, South Africa 28%, Colombia 37%(19),
Mozambique 0%(19) and Brazil 34%.
The Underlying income tax expense for manganese equity accounted investments was US$318M, including royalty related taxation
of US$87M at GEMCO (Australia Manganese), for an Underlying ETR of 38.6%.
Underlying income tax expense reconciliation and Underlying ETR
US$M FY18 FY17
Underlying EBIT 1,774 1,648
Include: Underlying net finance cost (123) (136)
Remove: Share of profit/(loss) of equity accounted investments (491) (320)
Underlying profit/(loss) before tax 1,160 1,192
Income tax expense 287 393
Tax effect of earnings adjustments to Underlying EBIT 34 (42)
Tax effect of earnings adjustments to net finance cost (7) 9
Exchange rate variations on tax balances 11 6
Tax effect of significant items (1) -
Underlying income tax expense 324 366
Underlying effective tax rate 27.9% 30.7%
Cash flow
The Group's free cash flow from operations, excluding equity accounted investments, was US$873M in FY18. Stronger prices for our
commodities and higher raw material input costs contributed to a US$392M build in working capital. Increasing profitability during
FY17 and FY18 also gave rise to a significant increase in income tax payments during the period (+US$179M to US$306M, excluding
tax paid within equity accounted investments).
Within working capital, Trade and other receivables increased by US$153M as average days debtor reverted to 21 days during
H2 FY18 (H1 FY18: 25, FY17: 18 days). With no change in customer payment terms, we expect average days debtors to remain
around this level, depending on timing differences at period end. The US$99M increase in the value of inventory primarily reflects
higher raw material input costs in our aluminium supply chain, while provisions and other liabilities decreased by US$118M as we continued to
invest in progressive rehabilitation at South Africa Energy Coal.
Working capital movement reconciliation
US$M Movement
Trade and other receivables (153)
Inventories (99)
Trade and other payables (22)
Provisions and other liabilities (118)
Working capital movement (392)
The ramp up of activity at the Klipspruit Life Extension (KPSX) project and prior weather related deferral of activity at South Africa
Energy Coal contributed to a US$117M increase in Total capital expenditure (20), excluding equity accounted investments,
to US$436M. This included:
- Sustaining capital expenditure, comprising Stay-in-business, Minor discretionary and Deferred stripping
(including underground development) of US$368M; and
- Major project capital expenditure of US$62M relating to the KPSX project.
The purchase of intangibles and the capitalisation of exploration expenditure accounted for a further US$6M.
Total capital expenditure associated with equity accounted investments increased by US$28M to US$65M during FY18 as we
invested in additional tailings storage capacity at Australia Manganese.
Total capital expenditure, including equity accounted investments, was US$501M in FY18.
Free cash flow from operations, excluding equity accounted investments
US$M FY18 FY17
Profit/(loss) 1,719 1,795
Non-cash items 815 585
(Profit)/loss from equity accounted investments (521) (312)
Change in working capital (392) (105)
Cash generated 1,621 1,963
Total capital expenditure, excluding equity accounted investments, including intangibles and capitalised
exploration (436) (319)
Operating cash flows before financing activities and tax, and after capital expenditure 1,185 1,644
Interest (paid)/received (6) (32)
Income tax (paid)/received (306) (127)
Free cash flow from operations 873 1,485
We also received (net) distributions totalling US$561M from our manganese equity accounted investments in FY18, primarily
comprising US$394M in dividends and US$168M from the repayment of a shareholder loan. A further US$14M in dividends was
received from other investments, including Mineração Rio do Norte S.A (MRN).
Balance sheet, dividends and capital management
The Group's net cash balance increased by US$401M to finish the period at US$2.0B, after US$1.0B was returned to shareholders
by way of ordinary dividends (US$554M) and our broader capital management program. As at 30 June 2018 we had completed
US$620M of our approved US$1B capital management program having paid a US$154M special dividend in April 2018 and bought
back a further 98M shares across FY18 for a cash consideration of US$254M.
Net cash/(debt)
US$M FY18 FY17
Cash and cash equivalents 2,970 2,675
Finance leases (570) (613)
Other interest bearing liabilities (359) (422)
Net cash/(debt) 2,041 1,640
Our strong net cash position ensures we are well placed to invest in our existing portfolio, fund the initial US$106M(21) payment for a
50% interest in the Eagle Downs metallurgical coal project and complete the remaining US$380M of our approved capital
management program during FY19. The US$1.3B acquisition of Arizona Mining was completed in August 2018.
Our capital management framework remains unchanged and we continue to believe that a combination of high operating leverage
and undue financial leverage delivers a sub-optimal outcome for shareholders. Consistent with our commitment to maintain an
investment grade credit rating, Standard and Poor's and Moody's reaffirmed their respective BBB+ and Baa1 credit ratings for the
Group following the announcement of the Arizona Mining transaction in June 2018.
Further demonstrating the strength of the Group's financial position, the Board resolved to pay a fully franked final dividend of
US 6.2 cents per share in respect of FY18 (US$317M), representing 40% of Underlying earnings in the H2 FY18.
Dividends announced
Dividend per share
Period US$M Franking Pay-out ratio
(US cents)
H1 FY17 3.6 192 0% 40%
H2 FY17 6.4 334 100% 50%
H1 FY18 4.3 223 100% 41%
February 2018 special dividend 3.0 155 81% n/a
H2 FY18 6.2 317 100% 40%
South32 Limited shareholders registered on the South African branch register will not be able to dematerialise or rematerialise their
shareholdings between 12 and 14 September 2018 (both dates inclusive), nor will transfers to/from the South African branch register
be permitted between 7 and 14 September 2018 (both dates inclusive).
Details of the currency exchange rates applicable for the dividend will be announced to the relevant stock exchanges. Further dividend
information is available on our website (www.south32.net).
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.
Dividend timetable Date
Announce currency conversion into Rand 10 September 2018
Last day to trade cum dividend on the Johannesburg Stock Exchange (JSE) 11 September 2018
Ex-dividend date on the JSE 12 September 2018
Ex-dividend date on the ASX and London Stock Exchange (LSE) 13 September 2018
Record date (including currency election date for ASX) 14 September 2018
Payment date 11 October 2018
Outlook
Production
The Group's production volumes are expected to rise by 5%(12) in FY19. Illawarra Metallurgical Coal continues to recover from the
extended outage at the Appin colliery in H1 FY18, with improved longwall and development performance expected to underpin 6.1Mt
of production in FY19 and an anticipated return to historical rates of more than 8Mt per annum from H2 FY20. Within our aluminium
supply chain, we expect another incremental improvement in production as we continue to test the maximum technical capacity of
our smelters, benefit from the completion of the De-bottlenecking Phase One project at Brazil Alumina and achieve a modest increase
in calciner availability at Worsley Alumina. At Cannington, zinc equivalent production(22) is expected to remain unchanged across
FY18 to FY20 as an increase in payable zinc production offsets lower silver and lead ore grades. Our manganese operations will
continue to manage production according to market demand. Payable nickel production guidance has been increased by 1.7kt to 40.5kt
at Cerro Matoso given an expectation for higher throughput and utilisation rates, while production guidance has been lowered at
South Africa Energy Coal as a result of an extended outage of the dragline at Klipspruit.
Production guidance (South32's share)(17)
FY18 FY19e FY20e Key guidance assumptions
Worsley Alumina FY19 guidance unchanged
An improvement in calciner availability and a drawdown of excess
Alumina production (kt) 3,764 3,965 3,965 hydrate
South Africa Aluminium FY19 guidance unchanged
Smelter to test its technical capacity having returned all pots to
Aluminium production (kt) 712 720 720 service following an electric arc incident in the December 2017
quarter
Mozal Aluminium FY19 guidance unchanged
AP3XLE energy efficiency project to add incremental production
Aluminium production (kt) 271 269 273 from FY20
Brazil Alumina FY19 guidance unchanged
Alumina production (kt) 1,304 1,355 1,370 Production creep from De-bottlenecking Phase One project
South Africa Energy Coal (23) FY19 guidance decreased by 1%
Total coal production (kt) 27,271 down 29,000 30,300 Domestic volumes to benefit from a new long term contract to sell
lower quality stockpiles to a local customer
Domestic coal production (kt) 15,154 up 17,500 16,900
Export production guidance is subject to review and is based
Export coal production (kt) 12,117 down 11,500 13,400 upon revised guidance for Klipspruit
Illawarra Metallurgical Coal FY19 guidance provided for the first time
Total coal production (kt) 4,244 6,100 7,000
Appin colliery to operate with a single longwall configuration for
Metallurgical coal production (kt) 3,165 4,900 5,800
FY19 before returning to a two longwall configuration in H2 FY20
Energy coal production (kt) 1,079 1,200 1,200
Australia Manganese FY19 guidance provided for first time (subject to market
demand)
Subject to Premium Concentrate Ore (PC02) circuit to operate above
Manganese ore production (kwmt) 3,396 3,350 demand nameplate capacity
South Africa Manganese FY19 guidance provided for first time (subject to market
demand)
Subject to
Manganese ore production (kwmt) 2,145 2,050 demand Opportunistic fines sales expected to decline in FY19
Cerro Matoso FY19 guidance increased by 4%
Ore to kiln (kt) 2,722 2,750 2,500 An improvement in plant utilisation and throughput rates more
than offset by lower ore grades and an extended outage of the
Payable nickel production (kt) 43.8 up 40.5 35.6 furnace in FY20
Cannington FY19 guidance unchanged
Ore processed (kdmt) 2,355 2,400 2,500
Payable zinc equivalent production (kt)(22) 187.2 188.1 187.1
Zinc equivalent production to remain unchanged, reflecting an
Payable silver production (koz) 12,491 11,750 10,850 increase in mill throughput and grade variability according to the
mine plan
Payable lead production (kt) 104.4 98.0 94.7
Payable zinc production (kt) 41.3 51.0 57.3
The denotation (e) refers to an estimate or forecast year.
Costs and capital expenditure
An improvement in energy and equipment productivity enabled us to achieve FY18 Operating unit cost guidance at the majority of
our operations, despite broader inflationary pressure, most notably in our aluminium supply chain. Stronger production and additional
productivity gains are expected to further mitigate continued inflationary pressure, while a stronger US dollar and lower caustic soda
prices are forecast to provide some relief.
Operating unit cost guidance
Operating unit costs by upstream operation(17),(24)
H1 FY18 H2 FY18 FY18 FY19e(a) FY19 key guidance assumptions
Worsley Alumina
(US$/t) Lower caustic soda consumption rates
224 247 235 230 (from 103kg/t to 93kg/t) and prices
South Africa Energy Coal(23)
(US$/t) An extended outage of the dragline at Klipspruit and
36 37 36 41 an increase in material movement at the
Wolvekrans-Middleburg Complex (WMC)
Illawarra Metallurgical Coal
(US$/t) Stronger volumes at the Appin colliery and an
149 136 142 105 associated increase in productivity
Australia Manganese ore (FOB)
(US$/dmtu) Equipment productivity gains and low cost PC02
1.55 1.72 1.63 1.63 circuit to offset a further increase in strip ratio
South Africa Manganese ore (FOB)
(US$/dmtu) An increase in premium product volumes to
2.31 2.74 2.53 2.56 largely offset a reduction in low cost, low grade
fine grained material
Cerro Matoso
(US$/lb) Lower ore grades and payable nickel production
3.41 3.92 3.67 4.21 and an increase in price-linked royalties
Cannington
(US$/t)(b) An increase in mill throughput and the successful
renegotiation of our power supply contract to
170 130 150 147 more than offset increasing geological
complexity
(a) FY19e Operating unit cost guidance includes royalties (where appropriate) and the influence of exchange rates, and includes various assumptions for FY19,
including: an alumina price of US$411/t; an average blended coal price of US$149/t for Illawarra Metallurgical Coal; a manganese ore price of US$6.20/dmtu for
44% manganese product; a nickel price of US$6.92/lb; a thermal coal price of US$93/t (API4) for South Africa Energy Coal; a silver price of US$17.58/troy oz; a
lead price of US$2,406/t; a zinc price of US$3,066/t; an AUD:USD exchange rate of 0.76; a USD:ZAR exchange rate of 13.43 and a USD:COP exchange rate of
2,927; all of which reflected forward markets as at 15 June 2018 or our internal expectations.
(b) US dollar per tonne of ore processed. Periodic movements in finished product inventory may impact operating unit costs as related marketing costs and treatment
and refining charges may change.
Other expenditure guidance
Following the simplification of the Group's functional structures in the June 2018 quarter, Group and unallocated costs of US$80M
are expected in FY19, excluding greenfield exploration. Greenfield exploration expenditure is expected to rise by US$20M to US$41M
as we progress 18 early stage greenfield projects.
Depreciation and amortisation, and tax expense
Depreciation and amortisation (excluding equity accounted investments) is expected to remain largely unchanged at approximately
US$750M. Depreciation and amortisation of US$85M is expected for our equity accounted investments. The Group's Underlying
ETR(18), which excludes tax associated with equity accounted investments, reflects the geographic distribution of the Group's profit.
The corporate tax rates applicable to the Group include: Australia 30%, South Africa 28%, Colombia 37% (19), Mozambique 0%(19)
and Brazil 34%. It should also be recognised that permanent differences have a disproportionate effect on the Group's Underlying
ETR when commodity prices and profit margins are compressed.
Capital expenditure guidance
Sustaining capital expenditure, excluding equity accounted investments, is expected to increase by US$97M to US$465M in FY19 as we
increase underground development at Illawarra Metallurgical Coal by US$60M to facilitate the progressive ramp-up in production to historic
rates of more than 8Mt per annum. In addition, we are developing additional bauxite residue disposal areas at Worsley Alumina and
Brazil Alumina, water catchment capacity at Worsley Alumina, tailings storage capacity at Cannington, purchasing materials in
advance of the major furnace refurbishment project at Cerro Matoso in FY20 and advancing the AP3XLE energy efficiency project at
Mozal Aluminium. Capital expenditure associated with equity accounted investments is expected to increase by US$45M to US$110M
and includes the construction of additional tailings storage capacity at Australia Manganese.
Sustaining capital expenditure (South32's share)(17)
US$M FY18 FY19e
Worsley Alumina 52 56
South Africa Aluminium 28 24
Mozal Aluminium 10 18
Brazil Alumina 12 40
South Africa Energy Coal(23) 102 66
Illawarra Metallurgical Coal 89 170
Australia Manganese 48 75
South Africa Manganese 17 35
Cerro Matoso 22 41
Cannington 51 50
Group and unallocated 2 N/A
Sustaining capital expenditure (including equity accounted investments) 433 575
Equity accounted adjustment(a) (65) (110)
Sustaining capital expenditure (excluding equity accounted investments) 368 465
(a) 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.
Major project capital expenditure is expected to increase to US$265M in FY19 as activity ramps up at the South Africa Energy Coal
KPSX project and early stage works at the Hermosa project are undertaken. The 4.3B(13) South African rand KPSX project is
approximately 20% complete and remains on schedule and budget. At Hermosa, we expect to invest approximately US$100M in
FY19 which will include the development of the twin exploration decline that will allow us to increase our geological understanding of
this high grade resource(14) and test for extensions. Capital expenditure guidance is not provided for Eagle Downs as the transaction
has not been completed.
Major capital expenditure (South32's share)(17)
US$M FY18 FY19e
South Africa Energy Coal(23) 62 165
Hermosa project - 100
Major capital expenditure (including equity accounted investments) 62 265
Equity accounted adjustment(a) - -
Major capital expenditure (excluding equity accounted investments) 62 265
(a) 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.
Guidance for capital expenditure does not include any assessment of the cost of repairing the dragline at Klipspruit.
Operations analysis
A summary of the underlying performance of the Group's operations is presented below and more detailed analysis is presented on
pages 14 to 23. Unless otherwise stated: all metrics reflect South32's share; Operating unit cost is Revenue less Underlying EBITDA
excluding third party sales divided by sales volumes; and Operating cost is Revenue less Underlying EBITDA excluding third party
sales.
Operations table (South32 share)(17)
Revenue Underlying EBIT
US$M FY18 FY17 FY18 FY17
Worsley Alumina 1,473 1,106 422 159
South Africa Aluminium 1,583 1,324 213 219
Mozal Aluminium 629 521 99 76
Brazil Alumina 551 385 136 66
South Africa Energy Coal(23) 1,366 1,103 276 212
Illawarra Metallurgical Coal 686 1,133 (62) 358
Australia Manganese 1,111 851 651 467
South Africa Manganese 503 391 186 110
Cerro Matoso 559 377 120 (16)
Cannington 584 768 183 308
Third party products(25) 870 792 25 12
Inter-segment / Group and unallocated (749) (557) (125) (70)
Total 9,166 8,194 2,124 1,901
Equity accounting adjustment(a) (1,617) (1,244) (350) (253)
South32 Group 7,549 6,950 1,774 1,648
(a) 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.
Worsley Alumina (86% share)
Volumes
Worsley Alumina saleable production decreased by 3%
(or 128kt) in FY18 to 3.8Mt as additional calciner maintenance
was undertaken during the year. Production is expected to
approach 4.0Mt (4.6Mtpa 100% basis) in FY19 and FY20 as
we drawdown excess hydrate stock and achieve an increase
in calciner availability.
Operating costs
Operating unit costs increased by 16% in FY18 to US$235/t.
A significant rise in the price of caustic soda (FY18: US$582/t,
FY17: US$413/t) accounted for more than 50% of this increase,
while additional costs were incurred as contractors were utilised
to integrate the West Marradong mining area and its lower
reactive silica bauxite feed(26) during H2 FY18.
We expect the refinery's Operating unit costs to decrease by a
modest 2% in FY19 to US$230/t with both the caustic soda price
and consumption rate (-10% to 93kg/t) forecast to decline, with
the latter benefit linked to the ramp-up of West Marradong.
Exchange rate and price assumptions for FY19 Operating unit
cost guidance are detailed earlier.
Financial performance
Underlying EBIT increased by 165% (or US$263M) in FY18 to
US$422M. A 36% rise in the average realised price of alumina
(+US$388M) was partially offset by an increase in the caustic
soda price (-US$66M), lower sales volumes (-US$21M),
a stronger Australian dollar (-US$13M) and higher contractor
costs (-US$12M).
Worsley Alumina's realised alumina price in FY18 was 95% of
the Platts alumina index on a volume weighted M-1 basis. While
the vast majority of sales are linked to the index or observable
market rates, the discount primarily related to the structure of
certain legacy Mozal Aluminium supply contracts that are linked
to the LME aluminium price.
Capital expenditure
Sustaining capital expenditure increased by US$9M in FY18 to
US$52M as we invested in additional bauxite residue disposal
capacity and boiler maintenance. The level of expenditure will
remain elevated in FY19 (US$56M) and FY20 as we continue to
invest in additional bauxite residue disposal and water
catchment capacity.
South32 share FY18 FY17
Alumina production (kt) 3,764 3,892
Alumina sales (kt) 3,763 3,847
Realised alumina sales price
(US$/t)(27) 391 287
Operating unit cost (US$/t)(28) 235 203
South32 share (US$M) FY18 FY17
Revenue 1,473 1,106
Underlying EBITDA 588 326
Underlying EBIT 422 159
Net operating assets 3,028 3,043
Capital expenditure 52 43
All other capital expenditure 52 43
Exploration expenditure 1 1
Exploration expensed 1 1
South Africa Aluminium (100%)
Volumes
South Africa Aluminium saleable production decreased by 2kt
in FY18 to 712kt as the smelter progressively returned all pots
to service following an electric arc incident in the December
2017 quarter. Production is expected to increase to 720kt in
both FY19 and FY20 as the smelter continues to test its
technical capacity.
Operating costs
Operating unit costs increased by 26% in FY18 to US$1,826/t as
a significant rise in raw material input costs created inflationary
pressure across the aluminium value chain. Alumina, coke, pitch
and aluminium price-linked electricity accounted for 70% of the
smelter's cost base in FY18 (FY17: 65%). 122 pots were also
relined across FY18 at a cost of US$220k per pot (FY17: 75 pots
at US$234k per pot). 182 pots are scheduled to be relined in
FY19, reflecting a peak in the relining cycle.
While Operating unit cost guidance is not provided, the cost
profile of South Africa Aluminium will continue to be heavily
influenced by the price of power and raw material inputs, given its
highly variable cost base. The smelter sources alumina from our
Worsley Alumina refinery with prices linked to the Platts alumina
index on an M-1 basis, while its power is sourced 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.
Financial performance
Underlying EBIT decreased by 3% (or US$6M) in FY18 to
US$213M as a 20% increase in the average realised price of
aluminium (+US$262M) was offset by higher alumina, pitch and
coke input costs (-US$199M), a rise in aluminium price-linked
electricity costs (-US$31M) and a stronger South African rand
(-US$19M).
Capital expenditure
Sustaining capital expenditure increased by US$13M in FY18 to
US$28M. A modest decrease in Sustaining capital expenditure
to US$24M is expected in FY19.
South32 share FY18 FY17
Aluminium production (kt) 712 714
Aluminium sales (kt)(29) 711 713
Realised sales price (US$/t)(29) 2,226 1,857
Operating unit cost (US$/t)(28) 1,826 1,454
South32 share (US$M) FY18 FY17
Revenue 1,583 1,324
Underlying EBITDA 285 287
Underlying EBIT 213 219
Net operating assets 1,202 1,205
Capital expenditure 28 15
All other capital expenditure 28 15
Mozal Aluminium (47.1% share)
Volumes
Mozal Aluminium saleable production increased to a record
271kt in FY18 as the smelter continued to test its maximum
technical capacity. Production is expected to decline
marginally to 269kt in FY19 as the smelter reaches a peak in
its pot relining cycle, before increasing to 273kt in FY20 as
incremental production is progressively delivered from the
AP3XLE energy efficiency project.
Operating costs
Operating unit costs increased by 21% in FY18 to US$1,810/t as
a significant rise in raw material input costs created inflationary
pressure across the aluminium value chain. Alumina, coke and
pitch accounted for 49% of the smelters cost base in FY18
(FY17: 45%). 60(30) pots were also relined across FY18 at a cost
of US$211k per pot (FY17: 94(30) pots at US$204k per pot).
126(30) pots are scheduled to be relined in FY19, reflecting a peak
in the relining cycle.
While Operating unit cost guidance is not provided, the cost
profile of Mozal Aluminium will continue to be heavily influenced
by the price of power and raw material inputs, given its highly
variable cost base. The smelter sources alumina from our
Worsley Alumina refinery with approximately 50% priced as a
percentage of the LME aluminium index and the remainder linked
to the Platts alumina index on an M-1 basis, with caps and floors
embedded within specific contracts. Its electricity requirements
are largely met by hydroelectric power that is generated by
Hidroeléctrica de Cahora Bassa (HCB). HCB delivers power into
Eskom's South African grid and Mozal Aluminium sources
electricity via the Mozambique Transmission Company (Motraco)
under a long term contract. The price of electricity is South African
rand based with the rate of escalation linked to a South Africa
domestic production price index plus margin.
Financial performance
Underlying EBIT increased 30% (or US$23M) in FY18 to
US$99M as a 20% increase in the average realised price of
aluminium (+US$106M) was partially offset by higher alumina,
pitch and coke input costs (-US$47M), and a rise in South African
rand-linked electricity costs (-US$8M).
Capital expenditure
Sustaining capital expenditure increased by US$4M in FY18 to
US$10M and is expected to rise further to US$18M in FY19. The
US$18M AP3XLE energy efficiency project remains on schedule
with first incremental production anticipated in FY20 and the full
benefit to be realised by FY24. The project is expected to deliver
a circa 5% (or 10kt pa) increase in annual production with no
associated increase in power consumption.
South32 share FY18 FY17
Aluminium production (kt) 271 271
Aluminium sales (kt)(29) 274 273
Realised sales price (US$/t)(29) 2,296 1,908
Operating unit cost (US$/t)(28) 1,810 1,495
South32 share (US$M) FY18 FY17
Revenue 629 521
Underlying EBITDA 133 113
Underlying EBIT 99 76
Net operating assets 553 534
Capital expenditure 10 6
All other capital expenditure 10 6
Brazil Alumina (Alumina 36% share, Aluminium 40% share)
Volumes
Brazil Alumina saleable production decreased by 2% (or 25kt)
in FY18 to 1.30Mt as unplanned maintenance and power
outages impacted performance. Production is expected to
increase to 1.36Mt in FY19 and 1.37Mt in FY20 following
completion of the De-bottlenecking Phase One project.
Operating costs
Operating unit costs increased by 28% in FY18 to US$252/t as
the price of caustic soda increased by 41% and the cost of
bauxite from MRN was reset in accordance with its linkage to
aluminium and alumina. The caustic consumption rate also rose
temporarily as lower quality bauxite feed was required following
the impact of adverse weather in the Amazon Basin during the
September 2017 quarter.
Financial performance
Alumina Underlying EBIT increased by 128% (or US$88M) in
FY18 to US$157M as a 40% increase in the average realised
price of alumina (+US$159M) was partially offset by higher
caustic soda (-US$18M) and bauxite (-US$22M) costs.
Aluminium Underlying EBIT decreased by US$18M in FY18 to a
loss of US$21M as our obligation to purchase electricity from
Eletronorte was fulfilled during the period, following termination of
the contract in December 2015. The sale of surplus electricity
generated other income of US$36M in H1 FY18, although this
was more than offset by the utilisation of the associated onerous
contract provision and the recognition of a US$16M provision to
reflect transmission charges that will no longer be offset by
ongoing electricity purchases.
Capital expenditure
Sustaining capital expenditure decreased by US$8M in FY18 to
US$12M as the De-bottlenecking Phase One project was
completed in March 2018. Sustaining capital expenditure is
expected to increase by US$28M in FY19 to US$40M as we
invest in additional bauxite residue disposal capacity, boiler
maintenance and commence the De-bottlenecking Phase Two
project. This project is expected to increase our share of alumina
production to 1.43Mt from FY21.
South32 share FY18 FY17
Alumina production (kt) 1,304 1,329
Alumina sales (kt) 1,341 1,316
Realised alumina sales price
(US$/t)(27) 411 293
Alumina operating unit cost
(US$/t)(28)(31) 252 197
South32 share (US$M) FY18 FY17
Revenue 551 385
Alumina 551 385
Aluminium - -
Other income 46 143
Underlying EBITDA 192 123
Alumina 213 126
Aluminium (21) (3)
Underlying EBIT 136 66
Alumina 157 69
Aluminium (21) (3)
Net operating assets/(liabilities) 644 691
Alumina 656 718
Aluminium (12) (27)
Capital expenditure 12 20
All other capital expenditure 12 20
South Africa Energy Coal (92% share)
Volumes
South Africa Energy Coal saleable production decreased by 6%
(or 1.6Mt) in FY18 to 27.3Mt as domestic demand remained
subdued and our product mix was reweighted towards the export
market. We have lowered our FY19 saleable coal production guidance
to 29Mt with export volumes expected to decline to 11.5Mt due to
an extended outage of the dragline at Klipspruit as structural
damage was incurred in the process of swinging the boom on
17 August 2018. This guidance is preliminary in nature and
assumes that mobile fleet mitigates the impact across the
remainder of the year. Conversely, domestic volumes are
expected to rise as we sell additional lower quality stockpiled
product under the terms of a new contract. Production is
expected to increase in FY20 to approximately 30Mt.
Operating costs
Operating unit costs increased by 24% in FY18 to US$36/t as
general inflation and an unfavourable movement in exchange
rates impacted the largely South African rand cost base. Costs
were further impacted by additional washing and logistics
charges as we intentionally increased the proportion of higher
margin export sales to maximise margins and returns.
We expect Operating unit costs to increase to approximately
US$41/t in FY19 largely as a result of the extended dragline
outage at Klipspruit and an increase in material movement at the
WMC. The management of South Africa Energy Coal as a stand-
alone business from 30 April 2018 is expected to deliver a
reduction in the Group's functional costs and additional
procurement savings amounting to US$50M from FY20.
Exchange rate and price assumptions for FY19 Operating unit
cost guidance are detailed above.
Financial performance
Underlying EBIT increased by 30% (or US$64M) in FY18 to
US$276M as higher average realised prices (+US$228M) were
partially offset by general inflation (-US$43M), an increase in
activity and labour costs (-US$37M), a stronger South African
rand (-US$35M) and a drawdown of inventory (-US$54M).
Capital expenditure
Sustaining capital expenditure increased by US$46M in FY18 to
US$102M as we continued to invest in new mining areas at the
WMC. Sustaining capital expenditure is expected to decrease by
US$36M in FY19 to US$66M as activity at the WMC returns to
typical levels. We also invested US$62M in FY18 to progress the
4.3B(13) South African rand KPSX project, which was approved
by the Board in November 2017. The 8Mt per annum brownfield
project extends the life of the colliery by more than 20 years. The
project is approximately 20% complete and remains on schedule
and budget, with the level of expenditure expected to rise to
US$165M in FY19. Guidance for capital expenditure does not
include any assessment of the cost of repairing the dragline at
Klipspruit.
100 per cent terms(23) FY18 FY17
Energy coal production (kt) 27,271 28,913
Domestic sales (kt)(29) 15,396 16,922
Export sales (kt)(29) 12,518 11,797
Realised domestic sales price
(US$/t)(29) 25 21
Realised export sales price (US$/t)(29) 79 64
Operating unit cost (US$/t)(28) 36 29
100 per cent terms(23) (US$M) FY18 FY17
Revenue(32) 1,366 1,103
Underlying EBITDA 353 273
Underlying EBIT 276 212
Net operating liabilities (23) (84)
Capital expenditure 164 64
Major projects (>US$100M) 62 8
All other capital expenditure 102 56
Illawarra Metallurgical Coal (100% share)
Volumes
Illawarra Metallurgical Coal saleable production decreased by
40% (or 2.8Mt) in FY18 to 4.2Mt as the Appin colliery recovered
from an extended outage and achieved an annualised mining
rate of more than 6Mt throughout the month of June. Saleable
coal production is expected to increase by 44% in FY19 to
6.1Mt, with a further 15% increase to 7.0Mt anticipated in
FY20 as the Appin colliery reverts to a two longwall operation.
Operating costs
Operating unit costs increased by 78% in FY18 to US$142/t. We
expect Operating unit costs to decrease by 26% in FY19 to
US$105/t as production ramps-up and a general improvement in
productivity is achieved across our supply chain. Exchange rate
and price assumptions for FY19 Operating unit cost guidance are
detailed above.
Financial performance
Underlying EBIT decreased by US$420M in FY18 to a loss of
US$62M as lower sales volumes (-US$525M) and one-off costs
associated with the Appin restart plan (-US$23M) more than
offset higher average realised coal prices (+US$78M), lower
selling and distribution costs (+US$30M), and lower price-linked
royalties (+US$30M).
Capital expenditure
Sustaining capital expenditure decreased by US$15M in FY18 to
US$89M as underground development was impacted by the
extended outage. Sustaining capital expenditure is expected to
increase by US$81M in FY19 to US$170M as we raise the level
of underground development to US$97M (FY18: US$37M) to
facilitate the progressive ramp-up in production to historic rates of
more than 8Mt per annum.
South32 share FY18 FY17
Metallurgical coal production (kt) 3,165 5,697
Energy coal production (kt) 1,079 1,376
Metallurgical coal sales (kt) 2,937 5,952
Energy coal sales (kt) 1,179 1,344
Realised metallurgical coal sales
price (US$/t)(27) 203 175
Realised energy coal sales price
(US$/t)(27) 76 69
Operating unit cost (US$/t)(28) 142 80
South32 share (US$M) FY18 FY17
Revenue(33) 686 1,133
Underlying EBITDA 103 548
Underlying EBIT (62) 358
Net operating assets 1,408 1,406
Capital expenditure 89 112
Major projects (>US$100M) - 8
All other capital expenditure 89 104
Exploration expenditure 7 5
Exploration expensed 7 5
Australia Manganese (60% share)
Volumes
Australia Manganese saleable ore production increased by
13% (or 402kwmt) to a record 3.4Mwmt in FY18 as the PC02
circuit operated at approximately 107% of its design capacity
and contributed 9% of total production (6% FY17). Saleable
Manganese alloy production increased by 12% (or 18kt) to
165kt in FY18 as all four furnaces continued to operate.
Ore production guidance of 3.4Mwmt in FY19 currently
assumes we continue to operate the low cost PC02 circuit
above nameplate capacity. As this PC02 product attracts a
discount to our primary higher grade GEMCO ore, we will
continue to adjust its performance in response to market
demand.
Operating costs
FOB manganese ore Operating unit costs increased by 7% in
FY18 to US$1.63/dmtu as a stronger Australian dollar, a rise in
planned maintenance and higher price linked royalties more than
offset underlying productivity gains. We expect Operating unit
costs to remain unchanged at US$1.63/dmtu in FY19 as broader
productivity gains mitigate a further increase in strip ratio
(FY19: 4.2, FY18: 4.0) and a temporary decline in product yield.
Exchange rate and price assumptions for FY19 Operating unit
cost guidance are detailed above.
Financial performance
Underlying EBIT increased by 39% (or US$184M) in FY18 to
US$651M. Higher realised ore and alloys prices (+US$202M)
and an increase in sales volumes (+US$58M) were only partially
offset by a rise in raw material input prices (coke, energy, diesel)
(-US$16M) and additional freight and marketing costs
(-US$13M).
Our low cost PC02 fines product has a manganese content of
approximately 40%, which leads to both grade and product-
type discounts when referenced to the high grade 44%
manganese lump ore index. Notwithstanding the contribution
of the PC02 circuit to our sales profile, our average realised
price for external sales of Australian ore in FY18 reflects a
modest premium to the high grade 44% manganese lump ore
index on a volume weighted M-1 basis(34) in FY18.
Capital expenditure
Sustaining capital expenditure increased by US$20M in FY18 to
US$48M and is expected to rise to US$75M in FY19 as we
continue to invest in additional tailings storage capacity. Our
FY19 plan also includes investment within our alloys business of
US$8M.
South32 share FY18 FY17
Manganese ore production (kwmt) 3,396 2,994
Manganese alloy production (kt) 165 147
Manganese ore sales (kwmt)(35) 3,290 3,087
External customers 2,917 2,777
TEMCO 373 310
Manganese alloy sales (kt)(35) 170 155
Realised external manganese ore
sales price (US$/dmtu, FOB)(35)(36) 6.38 5.22
Realised manganese alloy sales price
(US$/t)(35) 1,518 1,174
Ore operating unit cost
(US$/dmtu)(36)(37) 1.63 1.52
Alloy operating unit cost (US$/t)(37) 906 755
South32 share (US$M) FY18 FY17
Revenue(38) 1,111 851
Manganese Ore 884 694
Manganese Alloy 258 182
Intra-segment elimination (31) (25)
Underlying EBITDA 710 521
Manganese Ore 606 456
Manganese Alloy 104 65
Underlying EBIT 651 467
Manganese Ore 552 406
Manganese Alloy 99 61
Net operating assets 289 319
Manganese Ore 284 313
Manganese Alloy 5 6
Capital expenditure 48 28
All other capital expenditure 48 28
Exploration expenditure 1 1
Exploration expensed 1 -
South Africa Manganese (Ore 44.4% share, Alloy 60% share)
Volumes
South Africa Manganese saleable ore production increased by
5% (or 107kwmt) in FY18 to 2.1Mwmt as we continued to take
advantage of favourable market conditions by selling lower
quality fines product and utilising higher cost trucking as an
additional route to market. Manganese alloy saleable
production increased by 8% (or 6kt) in FY18 to 79kt as we
continued to operate one of Metalloys' four furnaces.
Ore production is currently expected to remain largely
unchanged at 2.1Mwmt in FY19. This is premised upon an
underlying increase in production for our premium products
and a reduction in lower quality, fine grained material that has
historically attracted grade and product-type discounts.
Production will, however, continue to be adjusted in response
to market demand.
Operating costs
FOB manganese Operating unit costs increased by 21% to
US$2.53/dmtu in FY18 as a result of a stronger South African
rand, higher price-linked royalties and additional costs associated
with opportunistic trucking activity. We expect Operating unit
costs to remain largely unchanged at US$2.56/dmtu in FY19,
with a weaker South African rand and an improvement in
equipment utilisation expected to offset the impact of marginally
lower production. Exchange rate and price assumptions for FY19
Operating unit cost guidance are detailed above.
Financial performance
Underlying EBIT increased by 69% (or US$76M) in FY18 to
US$186M as a significant improvement in ore and alloy prices
(+US$107M) was only partially offset by a stronger South African
rand (-US$14M), an increase in costs associated with
opportunistic trucking (-US$14M) and higher price-linked
royalties (-US$5M).
Our lower quality fine grained material, which accounted for
13% of sales across FY18 (9% FY17), receives a product
discount when referenced to index prices. As a result, our
average realised price for external sales of South African ore
reflected a 5% discount to the medium grade 37% manganese
lump ore index (FOB Port Elizabeth, South Africa) on a
volume weighted M-1 basis(39).
Capital expenditure
Sustaining capital expenditure increased by US$8M in FY18 to
US$17M and is expected to rise to US$35M in FY19 as we invest
in mobile fleet and extract a boundary pillar at our Mamatwan
mine. Our FY19 plan also includes investment within our alloys
business of US$7M.
South32 share FY18 FY17
Manganese ore production (kwmt) 2,145 2,038
Manganese alloy production (kt) 79 73
Manganese ore sales (kwmt)(40) 2,082 2,024
External customers 1,919 1,866
Metalloys 163 158
Manganese alloy sales (kt)(40) 67 74
Realised external manganese ore
sales price (US$/dmtu, FOB)(40)(41) 5.21 4.01
Realised manganese alloy sales price
(US$/t)(40) 1,269 1,027
Ore operating unit cost
(US$/dmtu)(41)(42) 2.53 2.09
Alloy operating unit cost (US$/t)(42) 970 1,000
South32 share (US$M) FY18 FY17
Revenue(43) 503 391
Manganese Ore(44) 436 328
Manganese Alloy 85 76
Intra-segment elimination (18) (13)
Underlying EBITDA 215 140
Manganese Ore(44) 195 138
Manganese Alloy 20 2
Underlying EBIT 186 110
Manganese Ore(44) 175 120
Manganese Alloy 11 (10)
Net operating assets 297 307
Manganese Ore(44) 234 245
Manganese Alloy 63 65
Capital expenditure 17 9
All other capital expenditure 17 9
Cerro Matoso (99.9% share)
Volumes
Cerro Matoso payable nickel production increased by 20%
(or 7.3kt) in FY18 to 43.8kt as ore grades temporarily
improved with the ramp up of La Esmeralda and the operation
continued to benefit from an improvement in plant utilisation
and throughput rates. We have increased payable nickel
production guidance by 4% to 40.5kt in FY19 as a further
improvement in plant utilisation and throughput rates is
expected to partially offset the impact of lower grades.
Production is expected to decrease again in FY20 to 35.6kt as
ore grades continue to decline and a major refurbishment of
the furnace is undertaken to broaden its operating window.
Operating costs
Operating unit costs decreased by 3% in FY18 to US$3.67/lb as
the increase in production more than offset a substantial increase
in price-linked royalties. We expect Operating unit costs to
increase by 15% in FY19 to US$4.21/lb as lower production and
higher price-linked royalties are expected to more than offset
additional productivity gains. Exchange rate and price
assumptions for FY19 Operating unit cost guidance are detailed
above.
Financial performance
Underlying EBIT increased by US$136M in FY18 to US$120M
as the higher average realised nickel price (+US$114M) and rise
in sale volumes (+US$68M) were partially offset by an increase
in price-linked royalties (-US$20M) and energy costs
(-US$9M), which were mitigated by our energy optimisation
strategy (+US$6M).
Capital expenditure
Sustaining capital expenditure increased by US$8M in FY18 to
US$22M as the higher grade La Esmeralda ore body was
connected to the broader operation with the completion of a
permanent access bridge. Sustaining capital expenditure is
expected to rise to US$41M in FY19 as we prepare for the
major furnace refurbishment in FY20.
South32 share FY18 FY17
Ore mined (kwmt) 3,741 4,447
Ore processed (kdmt) 2,722 2,561
Ore grade processed (%, Ni) 1.79 1.59
Payable nickel production (kt) 43.8 36.5
Payable nickel sales (kt) 43.3 36.6
Realised nickel sales price (US$/lb)(45) 5.86 4.67
Operating unit cost (US$/lb)(46) 3.67 3.77
South32 share (US$M) FY18 FY17
Revenue 559 377
Underlying EBITDA 209 74
Underlying EBIT 120 (16)
Net operating assets 551 611
Capital expenditure 22 14
All other capital expenditure 22 14
Exploration expenditure 9 5
Exploration expensed 8 4
Cannington (100% share)
Volumes
Cannington silver, lead and zinc payable production
decreased by 20%, 21% and 41%, respectively, in FY18 as
mining and processing rates were reset in order to deliver
greater predictability and stability in the underground mine.
Although grade variability is expected to persist over the
remaining life of the operation as the stope sequence is
optimised to maximise long term value, zinc equivalent
payable metal production(22) is expected to remain unchanged
in FY19 (11.8Moz for silver, 98.0kt for lead and 51.0kt for
zinc), and FY20 (10.9Moz for silver, 94.7kt for lead and 57.3kt
for zinc).
Operating costs
Operating unit costs increased by 13% to US$150/t in FY18 as
geological complexity and lower throughput rates more than
offset a reduction in treatment and refining charges and the
benefit we achieved by further optimising energy supply and
logistics. We expect Operating unit costs to decrease marginally
to US$147/t in FY19 as mill throughput increases and we benefit
from lower power costs following the renegotiation of a supply
contract. Exchange rate and price assumptions for FY19
Operating unit cost guidance are detailed above.
Financial performance
Underlying EBIT decreased by 41% (or US$125M) in FY18 to
US$183M as the decline in sales volumes (-US$221M) was
partially offset by higher average realised prices (+US$37M), a
reduction in negotiated treatment and refining charges
(+US$38M), and lower royalty (+US$10M) and logistics costs
(+US$10M). Finalisation adjustments and the provisional
pricing of Cannington concentrates increased Underlying
EBIT by US$0.1M in FY18 (FY17: US$4.1M, H1 FY18:
US$5.5M). Outstanding concentrate sales (containing 2.2Moz
of silver, 18.8kt of lead and 4.9kt of zinc) were revalued at 30
June 2018. The final price of these sales will be determined in
the December 2018 half year.
Capital expenditure
Sustaining capital expenditure increased by US$15M to US$51M
in FY18 as we commissioned a new underground crusher in the
March 2018 quarter and invested in additional underground
development that will create greater operating flexibility in the
mine. Sustaining capital expenditure is expected to remain
largely unchanged at US$50M in FY19 as underground
development rates remain elevated and we invest in additional
tailings storage capacity.
South32 share FY18 FY17
Ore mined (kwmt) 2,463 2,909
Ore processed (kdmt) 2,355 3,036
Ore grade processed (g/t, Ag) 194 194
Ore grade processed (%, Pb) 5.3 5.4
Ore grade processed (%, Zn) 2.6 3.4
Payable silver production (koz) 12,491 15,603
Payable lead production (kt) 104.4 132.1
Payable zinc production (kt) 41.3 70.4
Payable silver sales (koz) 11,985 16,270
Payable lead sales (kt) 97.9 138.1
Payable zinc sales (kt) 45.0 67.4
Realised silver sales price (US$/oz)(27) 16.6 17.6
Realised lead sales price (US$/t)(27) 2,463 2,223
Realised zinc sales price (US$/t)(27) 3,185 2,601
Operating unit cost (US$/t ore
processed)(47) 150 133
South32 share (US$M) FY18 FY17
Revenue 584 768
Underlying EBITDA 230 364
Underlying EBIT 183 308
Net operating assets 210 215
Capital expenditure 51 36
All other capital expenditure 51 36
Exploration expenditure 3 2
Exploration expensed 2 2
Notes
(1) Revenue includes revenue from third party products.
(2) FY18 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for FY18 (5,159 million). FY18 basic
Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for FY18.
FY17 basic earnings per share is calculated as Profit/(loss) after tax divided by the weighted average number of shares for FY17 (5,307 million). FY17 basic
Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for FY17.
(3) FY18 ordinary dividend per share is calculated as H1 FY18 ordinary dividend announced (US$223M) divided by the number of shares on issue at 31 December
2017 (5,181 million) plus H2 FY18 ordinary dividend announced (US$317M) divided by the number of shares on issue at 30 June 2018 (5,120 million).
(4) H1 FY18 special dividend per share is calculated as H1 FY18 special dividend announced (US$155M) divided by the number of shares on issue at 31 December
2017 (5,181 million).
(5) Underlying EBIT is profit before net finance costs, tax and any earnings adjustment items, including impairments. Underlying EBIT is reported inclusive of South32's
share of net finance costs and tax of equity accounted investments. Underlying EBITDA is Underlying EBIT, before depreciation and amortisation. Underlying earnings
is Profit/(loss) after tax 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 (gains)/losses on disposal and consolidation of interests in businesses;
- Fair value (gains)/losses on non-trading derivative instruments;
- Major corporate restructures; and
- Earnings adjustments included in profit/(loss) of equity accounted investments.
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) To ensure that incident classification definitions are applied uniformly across our workforce, we have adopted the United States Government Occupational Safety
and Health Assessment (OSHA) guidelines for the recording and reporting of occupational injuries and illnesses.
(10) Total Recordable Injury Frequency (TRIF): The sum of (fatalities + lost-time cases + restricted work cases + medical treatment cases) x 1,000,000
÷ actual hours worked, for employees and contractors. Stated in units of per million hours worked.
(11) Figure has been restated since it was previously reported due to the reclassification of a recordable illness to a recordable injury.
(12) Based on revenue equivalent sales or production (where applicable) which assumes average realised prices remain unchanged from FY18.
(13) Refer to the market announcement "South32 approves Klipspruit Life Extension Project" dated 27 November 2017.
(14) The information that relates to estimates of Mineral Resources for the Hermosa Project are qualifying foreign estimates under ASX Listing Rules and reference
should be had to the clarifying statement on Mineral Resources in the market announcement 'South32 to acquire Arizona Mining in agreed all cash offer' dated 18
June 2018, in accordance with ASX Listing Rule 5.12. South32 is not in possession of any new information or data relating to the foreign estimate that materially
impacts on the reliability of the estimates. South32 confirms that the information contained in the clarifying statement in the 18 June 2018 market announcement
continues to apply and has not materially changed. The estimates of Mineral Resources are not reported in accordance with the JORC Code. Competent persons
have not done sufficient work to classify the foreign estimates as Mineral Resources in accordance with JORC Code. It is uncertain that following evaluation and
further exploration that the foreign estimates will be able to be reported as Mineral Resources or Ore Reserves in accordance with the JORC Code.
(15) 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.
(16) Underlying net finance cost and Underlying tax expense are actual FY18 results, not year-on-year variances.
(17) South32's ownership share of operations are presented as follows: Worsley Alumina (86% share), 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%).
(18) Underlying ETR is Underlying income tax expense, excluding royalty related tax, divided by Underlying profit before tax; both the numerator and denominator exclude
equity accounted investments.
(19) The Colombian corporate tax rate was 40% until 31 December 2017. The Mozambique operations are subject to a royalty on revenues instead of income tax.
(20) 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.
(21) The Eagle Downs consideration also includes a deferred payment of US$27M due three years after completion and a coal price-linked production royalty which is
capped at US$80M.
(22) Payable Zinc Equivalent (kt) was calculated by aggregating revenues from payable sliver, lead and zinc, and dividing the total revenue by price of zinc. FY18 realised
prices for zinc (US$3,185/t), lead (US$2,463/t) and silver (US$16.6/oz) was used for FY18, FY19e and FY20e. Zinc equivalent is used to compare Cannington with
recently acquired Hermosa project which is currently reported in zinc equivalent terms.
(23) South32's interest in South Africa Energy Coal is accounted at 100% until Broad-Based Black Economic Empowerment (B-BBEE) vendor loans are repaid.
(24) Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by sales volumes. Operating cost is Revenue less Underlying EBITDA
excluding third party sales. Additional manganese disclosures are included in footnotes 36 and 41.
(25) Third party products and services sold comprise US$206M for aluminium, US$49M for alumina, US$290M for coal, US$198M for freight services and US$124M for
aluminium raw materials. Underlying EBIT on third party products comprise US$11M for aluminium, US$2M for alumina, US$12M for coal,
(US$1)M for freight services and US$1M for aluminium raw materials.
(26) The information that relates to the Mineral Resources and Ore Reserves of Worsley Alumina was declared in the market announcement "Worsley Alumina Ore
Reserves Update" dated 23 August 2018. South32 confirms that it is not aware of any new information or data that materially affects the information included in the
original announcement. All material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and
have not materially changed. South32 confirms that the form and context in which the Competent Persons' findings are presented have not been materially modified
from the original market announcement.
(27) Realised sales price is calculated as sales Revenue divided by sales volume.
(28) Operating unit cost is Revenue less Underlying EBITDA divided by sales volume.
(29) 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.
(30) Presented on a 100% basis.
(31) Alumina operating unit cost includes cost of acquiring bauxite mainly from MRN.
(32) South Africa Energy Coal Revenue includes domestic and export sales Revenue.
(33) Illawarra Metallurgical Coal Revenue includes metallurgical coal and energy coal sales Revenue.
(34) The quarterly sales volume weighted average of the Metal Bulletin 44% manganese lump ore index (CIF Tianjin, China) on the basis of a one month lag to published
pricing (Month minus one or "M-1") was US$6.45/dmtu in FY18.
(35) 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
external sales Revenue less freight and marketing costs, divided by external 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.
(36) FY18 average manganese content of ore sales was 45.7% on a dry basis (FY17: 46.2%). 94% of FY18 external manganese ore sales (FY17: 95%) were completed
on a CIF basis. FY18 realised FOB ore prices and operating unit costs have been adjusted for freight and marketing costs of US$43M (FY17: US$30M), consistent
with our FOB cost guidance.
(37) FOB ore operating unit cost is Revenue less Underlying EBITDA, freight and marketing costs, divided by ore sales volume. Alloy operating unit cost is revenue less
Underlying EBITDA divided by alloy sales volumes and includes costs associated with sinter sold externally.
(38) Revenues associated with sales from GEMCO to TEMCO are eliminated as part of the consolidation. Internal sales occur on a commercial basis.
(39) The quarterly sales volume weighted average of the Metal Bulletin 37% manganese lump ore index (FOB Port Elizabeth, South Africa) on the basis of a one month
lag to published pricing (Month minus one or "M-1") was US$5.46/dmtu in FY18.
(40) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Realised ore prices are calculated as external
sales Revenue less freight and marketing costs, divided by external 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.
(41) FY18 average manganese content of ore sales was 39.9% on a dry basis (FY17: 40.1%). 70% of FY18 external manganese ore sales (FY17: 63%) were completed
on a CIF basis. FY18 realised FOB ore prices and operating costs have been adjusted for freight and marketing costs of US$33M (FY17: US$24M), consistent with
our FOB cost guidance.
(42) FOB ore operating unit cost is Revenue less Underlying EBITDA, freight and marketing costs, divided by ore sales volume. Alloy operating unit cost is revenue less
Underlying EBITDA divided by alloy sales volumes.
(43) Revenues associated with sales from Hotazel Manganese Mines (HMM) to Metalloys are eliminated as part of the consolidation. Internal sales occur on a commercial
basis.
(44) Consistent with the presentation of South32's segment information, South Africa Manganese ore production and sales have been reported at 60%. South32 has a
44.4% ownership interest in HMM. 26% of HMM is owned by a B-BBEE consortium comprising Ntsimbintle Mining (9%), NCAB Resources (7%), Iziko Mining (5%)
and HMM Education Trust (5%). The interests owned by NCAB Resources, Iziko Mining and HMM Education Trust were acquired using vendor finance with the
loans repayable via distributions attributable to these parties, pro rata to their share in HMM. Until these loans are repaid, South32's interest in HMM is accounted at
54.6%.
(45) Cerro Matoso Realised nickel sales price is inclusive of by-products. Realised sales price is calculated as sales Revenue divided by sales volume.
(46) Cerro Matoso Operating unit cost is Revenue less Underlying EBITDA divided by Payable nickel sales volume.
(47) Cannington Operating unit cost is Revenue less Underlying EBITDA divided by ore processed. Periodic movements in finished product inventory may impact
operating unit costs as related marketing costs and treatment and refining charges may change.
Figures in Italics indicate that an adjustment has been made since the figures were previously reported.
The following abbreviations may be used throughout this report: US$ million (US$M); US$ billion (US$B); financial year (FY18); 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); dry metric tonne unit
(dmtu); pound (lb); megawatt (MW); Australian Securities Exchange (ASX); London Stock Exchange (LSE); Johannesburg Stock Exchange (JSE); and American
Depositary Receipts (ADR).
South32 Financial Information
For the year ended 30 June 2018
Basis of preparation
The financial information included in this document for the year ended 30 June 2018 is unaudited. The financial information does
not constitute the South32 Group's (the Group) full financial statements for the year ended 30 June 2018, which will be approved
by the Board, reported on by the auditors, and filed with the Australian Securities and Investments Commission. The 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.
The financial information set out on pages 28 to 38 for the year ended 30 June 2018 has been prepared on the basis of accounting
policies and methods of computation consistent with those applied in the 30 June 2017 financial statements contained within the
Annual Report of the Group.
As required, and unless otherwise stated, comparative financial information for the Group has been presented.
All amounts are expressed in US dollars unless otherwise stated. The 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 or US$ million).
Consolidated Income Statement
for the year ended 30 June 2018
US$M FY18 FY17
Revenue
Group production 6,682 6,160
Third party products 867 790
7,549 6,950
Other income 226 275
Expenses excluding net finance cost (6,577) (5,742)
Share of profit/(loss) of equity accounted investments 521 312
Profit/(loss) 1,719 1,795
Comprising:
Group production 1,694 1,783
Third party products 25 12
Profit/(loss) 1,719 1,795
Finance expenses (168) (212)
Finance income 68 41
Net finance cost (100) (171)
Profit/(loss) before tax 1,619 1,624
Income tax (expense)/benefit (287) (393)
Profit/(loss) after tax 1,332 1,231
Attributable to:
Equity holders of South32 Limited 1,332 1,231
Profit/(loss) for the year attributable to the equity holders of South32 Limited
Basic earnings per share (cents) 25.8 23.2
Diluted earnings per share (cents) 25.4 22.9
The accompanying notes form part of this financial information.
Consolidated Statement of Comprehensive Income
for the year ended 30 June 2018
US$M FY18 FY17
Profit/(loss) for the year 1,332 1,231
Other Comprehensive Income
Items that may be reclassified to the Consolidated Income Statement:
Available for sale investments:
Net gains/(losses) recognised in equity 170 19
Net (gains)/losses transferred to the Consolidated Income Statement (33) -
Tax benefit/(expense) recognised within Other Comprehensive Income (3) 1
Cash flow hedges:
Net gains/(losses) recognised in equity 5 -
Total items that may be reclassified to the Consolidated Income Statement 139 20
Items not to be reclassified to the Consolidated Income Statement:
Equity accounted investments - share of Other Comprehensive Income/(loss) 1 1
Gains/(losses) on pension and medical schemes 4 8
Tax benefit/(expense) recognised within Other Comprehensive Income (1) (2)
Total items not to be reclassified to the Consolidated Income Statement 4 7
Total Other Comprehensive Income/(loss) 143 27
Total Comprehensive Income/(loss) 1,475 1,258
Attributable to:
Equity holders of South32 Limited 1,475 1,258
The accompanying notes form part of this financial information.
Consolidated Balance Sheet
as at 30 June 2018
US$M FY18 FY17
ASSETS
Current assets
Cash and cash equivalents 2,970 2,675
Trade and other receivables 826 718
Other financial assets 80 103
Inventories 886 781
Current tax assets 8 27
Other 51 28
Total current assets 4,821 4,332
Non-current assets
Trade and other receivables 248 365
Other financial assets 613 465
Inventories 76 81
Property, plant and equipment 8,196 8,373
Intangible assets 221 252
Equity accounted investments 697 569
Deferred tax assets 245 276
Other 16 20
Total non-current assets 10,312 10,401
Total assets 15,133 14,733
LIABILITIES
Current liabilities
Trade and other payables 830 850
Interest bearing liabilities 333 391
Other financial liabilities 2 -
Current tax payables 135 116
Provisions 360 383
Deferred income 4 4
Total current liabilities 1,664 1,744
Non-current liabilities
Trade and other payables 5 4
Interest bearing liabilities 596 644
Deferred tax liabilities 445 518
Provisions 1,705 1,577
Deferred income 9 11
Total non-current liabilities 2,760 2,754
Total liabilities 4,424 4,498
Net assets 10,709 10,235
EQUITY
Share capital 14,493 14,747
Treasury shares (83) (26)
Reserves (3,333) (3,503)
Retained earnings/(accumulated losses) (367) (982)
Total equity attributable to equity holders of South32 Limited 10,710 10,236
Non-controlling interests (1) (1)
Total equity 10,709 10,235
The accompanying notes form part of this financial information.
Consolidated Cash Flow Statement
for the year ended 30 June 2018
US$M FY18 FY17
Operating activities
Profit/(loss) before tax 1,619 1,624
Adjustments for:
Non-cash significant items (31) -
Depreciation and amortisation expense 742 763
Employee share awards expense 40 37
Net finance cost 100 171
Share of (profit)/loss of equity accounted investments (521) (312)
Fair value (gains)/losses on derivative instruments 76 (194)
Other non-cash or non-operating items (12) (21)
Changes in assets and liabilities:
Trade and other receivables (153) (119)
Inventories (99) (60)
Trade and other payables (22) 137
Provisions and other liabilities (118) (63)
Cash generated from operations 1,621 1,963
Interest received 64 41
Interest paid (70) (73)
Income tax (paid)/received (306) (127)
Dividends received 14 15
Dividends received from equity accounted investments 394 313
Net cash flows from operating activities 1,717 2,132
Investing activities
Purchases of property, plant and equipment (430) (316)
Exploration expenditure (40) (27)
Exploration expenditure expensed and included in operating cash flows 38 25
Purchase of intangibles (4) (1)
Investment in financial assets (273) (331)
Investment in equity accounted investments - (21)
Cash outflows from investing activities (709) (671)
Proceeds from sale of property, plant and equipment and intangibles 1 16
Proceeds from financial assets 407 344
Distribution from equity accounted investments - 22
Net cash flows from investing activities (301) (289)
Financing activities
Proceeds from interest bearing liabilities 4 109
Repayment of interest bearing liabilities (77) (20)
Purchase of shares by South32 Limited Employee Incentive Plans Trusts (ESOP Trusts) (84) (27)
Share buy-back (254) (211)
Dividends paid (708) (244)
Net cash flows from financing activities (1,119) (393)
Net increase/(decrease) in cash and cash equivalents 297 1,450
Cash and cash equivalents, net of overdrafts, at the beginning of the financial year 2,675 1,225
Foreign currency exchange rate changes on cash and cash equivalents (2) -
Cash and cash equivalents, net of overdrafts, at the end of the financial year 2,970 2,675
The accompanying notes form part of this financial information.
Consolidated Statement of Changes in Equity
for the year ended 30 June 2018
Attributable to equity holders of South32 Limited
Retained
earnings/ Non-
Share Treasury (accumulated controlling
US$M capital shares Reserves losses) Total interests Total equity
Balance as at 1 July 2017 14,747 (26) (3,503) (982) 10,236 (1) 10,235
Profit/(loss) for the year - - - 1,332 1,332 - 1,332
Other Comprehensive Income/(loss) - - 139 4 143 - 143
Total Comprehensive Income/(loss) - - 139 1,336 1,475 - 1,475
Transactions with owners:
Accrued employee entitlements for
unexercised awards - - 45 - 45 - 45
Dividends - - - (708) (708) - (708)
Purchase of shares by ESOP Trusts - (84) - - (84) - (84)
Employee share awards exercised - 27 (14) (13) - - -
Shares bought back and cancelled (254) - - - (254) - (254)
Balance as at 30 June 2018 14,493 (83) (3,333) (367) 10,710 (1) 10,709
Balance as at 1 July 2016 14,958 (3) (3,555) (1,977) 9,423 (1) 9,422
Profit/(loss) for the year - - - 1,231 1,231 - 1,231
Other Comprehensive Income/(loss) - - 20 7 27 - 27
Total Comprehensive Income/(loss) - - 20 1,238 1,258 - 1,258
Transactions with owners:
Accrued employee entitlements for
unexercised awards - - 37 - 37 - 37
Dividends - - - (244) (244) - (244)
Purchase of share by ESOP Trusts - (27) - - (27) - (27)
Employee share awards exercised - 4 (5) 1 - - -
Shares bought back and cancelled (211) - - - (211) - (211)
Balance as at 30 June 2017 14,747 (26) (3,503) (982) 10,236 (1) 10,235
The accompanying notes form part of this financial information.
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. Certain members of the Lead Team (the chief operating decision makers) 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 the Group's management to assess their performance.
The principal activities of each operating segment as the Group is currently structured are summarised as follows:
Operating segment Principal activities
Worsley Alumina Integrated bauxite mine and alumina refinery in Western Australia, Australia
South Africa Aluminium Aluminium smelter in Richards Bay, South Africa
Mozal Aluminium Aluminium smelter in Mozambique
Brazil Alumina Alumina refinery in Brazil
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
Australia Manganese Integrated producer of manganese ore in the Northern Territory and manganese alloys in
Tasmania, Australia
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, Australia
All operations are operated or jointly operated by the Group except Brazil Alumina, which is operated by Alcoa.
(b) Segment results
The 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 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 Group basis and are not allocated to operating segments.
FY18 Segment Information
Year ended
30 June 2018 Group and
Illawarra unallocated
Worsley South Africa Mozal Brazil South Africa Metallurgical Australia South Africa Cerro items/ Statutory
US$M Alumina Aluminium Aluminium Alumina Energy Coal Coal Manganese(1) Manganese(1) Matoso Cannington elimination adjustment(1) Group
Revenue
Group production 724 1,583 629 551 1,366 686 1,111 489 559 584 - (1,600) 6,682
Third party products(2) - - - - - - - - - - 870 (3) 867
Inter-segment revenue 749 - - - - - - 14 - - (749) (14) -
Total revenue 1,473 1,583 629 551 1,366 686 1,111 503 559 584 121 (1,617) 7,549
Underlying EBITDA 588 285 133 192 353 103 710 215 209 230 (64) (438) 2,516
Depreciation and amortisation (166) (72) (34) (56) (77) (165) (59) (29) (89) (47) (36) 88 (742)
Underlying EBIT 422 213 99 136 276 (62) 651 186 120 183 (100) (350) 1,774
Comprising:
Group production excluding 423 213 99 136 273 (56) 652 186 128 185 (105) (838) 1,296
exploration expensed
Exploration expensed (1) - - - - (7) (1) - (8) (2) (20) 1 (38)
Third party products(2) - - - - - - - - - - 25 - 25
Share of profit/(loss) of equity - - - - 3 1 - - - - - 487 491
accounted investments(3)
Underlying EBIT 422 213 99 136 276 (62) 651 186 120 183 (100) (350) 1,774
Net finance cost (123)
Income tax (expense)/benefit (324)
Underlying earnings 1,327
Earnings adjustments(4) 5
Profit/(loss) after tax 1,332
Exploration expenditure 1 - - - - 7 1 - 9 3 20 (1) 40
Capital expenditure(5) 52 28 10 12 164 89 48 17 22 51 2 (65) 430
Equity accounted - - - - 12 1 - - - - - 684 697
investments
Total assets(6) 3,516 1,507 685 756 1,036 1,655 596 496 764 450 4,239 (567) 15,133
Total liabilities(6) 488 305 132 112 1,059 247 307 199 213 240 1,669 (547) 4,424
(1) The segment information reflects the Group's interest in the manganese operations and is presented on a proportional consolidation basis, which is the measure used by the Group'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 the equity accounting position.
(2) Third party products sold comprise US$206 million for aluminium, US$49 million for alumina, US$290 million for coal, US$198 million for freight services and US$124 million for aluminium raw materials. Underlying EBIT on third party products
comprise US$11 million for aluminium, US$2 million for alumina, US$12 million for coal, (US$1) million for freight services and US$1 million for aluminium raw materials.
(3) Share of profit/(loss) of equity accounted investments includes the impact of earnings adjustments to Underlying EBIT.
(4) Refer to Earnings adjustments.
(5) Capital expenditure excludes the purchase of intangibles and capitalised exploration expenditure.
(6) Total assets and liabilities for each operating segment represent operating assets and liabilities which predominantly exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax balances.
FY17 Segment Information
year ended 30 June 2017 Group and
Illawarra unallocated
Worsley South Africa Mozal Brazil South Africa Metallurgical Australia South Africa Cerro items/ Statutory
US$M Alumina Aluminium Aluminium Alumina Energy Coal Coal Manganese(1) Manganese(1) Matoso Cannington elimination adjustment(1) Group
Revenue
Group production 630 1,324 521 304 1,103 1,133 851 387 377 768 - (1,238) 6,160
Third party products(2) - - - - - - - - - - 792 (2) 790
Inter-segment revenue 476 - - 81 - - - 4 - - (557) (4) -
Total revenue 1,106 1,324 521 385 1,103 1,133 851 391 377 768 235 (1,244) 6,950
Underlying EBITDA 326 287 113 123 273 548 521 140 74 364 (21) (337) 2,411
Depreciation and amortisation (167) (68) (37) (57) (61) (190) (54) (30) (90) (56) (37) 84 (763)
Underlying EBIT 159 219 76 66 212 358 467 110 (16) 308 (58) (253) 1,648
Comprising:
Group production excluding
exploration expensed 160 219 76 66 216 363 467 110 (12) 310 (56) (578) 1,341
Exploration expensed (1) - - - - (5) - - (4) (2) (14) 1 (25)
Third party products(2) - - - - - - - - - - 12 - 12
Share of profit/(loss) of equity
accounted investments(3) - - - - (4) - - - - - - 324 320
Underlying EBIT 159 219 76 66 212 358 467 110 (16) 308 (58) (253) 1,648
Net finance cost (136)
Income tax (expense)/benefit (366)
Underlying earnings 1,146
Earnings adjustments(4) 85
Profit/(loss) after tax 1,231
Exploration expenditure 1 - - - - 5 1 - 5 2 14 (1) 27
Capital expenditure(5) 43 15 6 20 64 112 28 9 14 36 6 (37) 316
Equity accounted
investments - - - - 10 - - - - - - 559 569
Total assets(6) 3,564 1,478 630 860 936 1,667 597 493 800 371 4,011 (674) 14,733
Total liabilities(6) 521 273 96 169 1,020 261 278 186 189 156 2,017 (668) 4,498
(1) The segment information reflects the Group's interest in the manganese operations and is presented on a proportional consolidation basis, which is the measure used by the Group'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 the equity accounting position.
(2) Third party products sold comprise US$282 million for aluminium, US$133 million for alumina, US$169 million for coal, US$113 million for freight services and US$93 million for aluminium raw materials. Underlying EBIT on third party products
comprise US$13 million for aluminium, (US$4) million for alumina, US$2 million for coal, nil for freight services and US$1 million for aluminium raw materials.
(3) Share of profit/(loss) of equity accounted investments includes the impact of earnings adjustments to Underlying EBIT.
(4) Refer to Earnings adjustments.
(5) Capital expenditure excludes the purchase of intangibles and capitalised exploration expenditure.
(6) Total assets and liabilities for each operating segment represent operating assets and liabilities which predominantly exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities and tax balances.
Earnings adjustments
The following table shows earnings adjustments in determining Underlying earnings:
US$M FY18 FY17
Adjustments to Underlying EBIT
Significant items(1) (31) -
Exchange rate (gains)/losses on restatement of monetary items(2) (15) 37
Fair value (gains)/losses on non-trading derivative instruments(2)(3) 73 (194)
Major corporate restructures(2)(4) 58 2
Earnings adjustments included in profit/(loss) of equity accounted investments(5)(6) (30) 8
Total adjustments to Underlying EBIT 55 (147)
Adjustments to net finance cost
Exchange rate variations on net debt (23) 35
Total adjustments to net finance cost (23) 35
Adjustments to income tax expense
Tax effect of significant items(1) 1 -
Tax effect of other earnings adjustments to Underlying EBIT (34) 42
Tax effect of earnings adjustments to net finance cost 7 (9)
Exchange rate variations on tax balances (11) (6)
Total adjustments to income tax expense (37) 27
Total earnings adjustments (5) (85)
(1) Refer to Significant items.
(2) Recognised in expenses excluding net finance cost in the Consolidated Income Statement.
(3) Primarily relates to US$57 million (FY17: (US$183) million) included in the South Africa Aluminium segment and US$16 million (FY17: (US$8) million) included in
Group and unallocated items.
(4) Primarily relates to US$12 million (FY17: nil) included in the Illawarra Metallurgical Coal segment and US$45 million (FY17: nil) included in Group and unallocated
items.
(5) Recognised in share of profit/(loss) of equity accounted investments in the Consolidated Income Statement.
(6) Primarily relates to (US$6) million (FY17: US$5 million) included in the Australia Manganese segment and (US$24) million (FY17: US$3 million) included in the
South Africa Manganese segment.
Significant items
Significant items are those items, not separately identified in earnings adjustments, where their nature and amount is considered
material to the consolidated financial statements. There were no such items included within the Group's (income)/expense for the
year ended 30 June 2017.
Year ended 30 June 2018
US$M Gross Tax Net
Unwind of the investment in Dreamvision(1)(2) (31) 1 (30)
Total significant items (31) 1 (30)
(1) Recognised in other income in the Consolidated Income Statement.
(2) Attributable to Group and unallocated items.
Unwind of the investment in Dreamvision
The Group's investment in Dreamvision Investments 15 (RF) (Pty) Ltd (Dreamvision) originated in 2006 through the formation of a
Broad-Based Black Economic Empowerment (B-BBEE) transaction. The transaction contained a lock-in period which expired in
November 2016 and the process to unwind the investment was triggered. Consequently, the Group elected to receive shares in
Exxaro Resources Limited in exchange for its shareholding in Dreamvision. The net valuation gain on the available for sale investment
in Dreamvision has been transferred from the financial assets reserve and recognised in the Consolidated Income Statement.
Net finance cost
US$M FY18 FY17
Finance expenses
Interest on borrowings (18) (21)
Finance lease interest (52) (52)
Discounting on provisions and other liabilities (105) (98)
Change in discount rate on closure and rehabilitation provisions (3) 6
Net interest expense on post-retirement employee benefits (10) (9)
Fair value change on financial asset (3) (3)
Exchange rate variations on net debt 23 (35)
(168) (212)
Finance income
Interest income 68 41
Net finance cost (100) (171)
Income tax expense
US$M FY18 FY17
Current tax (expense)/benefit (333) (269)
Deferred tax (expense)/benefit 46 (124)
Total tax (expense)/benefit (287) (393)
Australia (134) (220)
Southern Africa (124) (129)
Rest of world (29) (44)
Total income tax (expense)/benefit attributable to the geographical jurisdiction (287) (393)
Equity accounted investments
The Group's interests in equity accounted investments with the most significant contribution to the Group's net profit/(loss) or net
assets are as follows:
Country of Ownership interest
incorporation/ Acquisition
Significant joint ventures principal place Principal activity Reporting date date
of business FY18 FY17
% %
Australia Manganese (1)(2) Australia Integrated producer of 30 June 2018 8 May 2015 60 60
manganese ore and alloy
Integrated producer of 3 February
South Africa Manganese(1)(3) South Africa manganese ore and alloy 30 June 2018 2015 60 60
(1) Whilst the 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.
(2) Australia Manganese consists of an investment in Groote Eylandt Mining Company Pty Ltd.
(3) South Africa Manganese consists of an investment in Samancor Holdings Proprietary Limited.
The following table summarises the financial information of the Group's significant equity accounted investments:
Share of profit/(loss) of equity accounted investments
US$M FY18 FY17
Australia Manganese and South Africa Manganese 503 287
Individually immaterial(1) 18 25
Total(2) 521 312
(1) 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).
(2) Includes Underlying earnings adjustment of (US$30) million (FY17: US$8 million). Refer to Earnings adjustments.
Interests in joint operations
Significant joint operations of the Group, which are those with the most significant contributions to the Group's net profit/(loss) or net
assets, are as follows:
Effective interest
Acquisition FY18 FY17
Significant joint operations Country of Principal activity date
operation % %
Brazil Alumina Brazil Alumina refining 3 July 2014 36 36
Aluminium smelting 3 July 2014 40 40
27 March 2015
Mozal Aluminium SARL(1) Mozambique Aluminium smelting 47.1 47.1
Worsley Alumina (2) Australia Bauxite mining and alumina refining 8 May 2015 86 86
(1) This joint arrangement is an incorporated entity. It is classified as a joint operation as the participants are entitled to receive output, not dividends, from the
arrangement.
(2) Whilst the Group holds a greater than 50 per cent interest in Worsley Alumina, participants jointly approve certain matters and are entitled to receive output from the
arrangement.
Subsequent Events
On 23 August 2018, the Directors resolved to pay a fully franked final dividend of US 6.2 cents per share (US$317 million) in
respect of the 2018 financial year. The dividend will be paid on 11 October 2018. The dividend has not been provided for in the
consolidated financial statements and will be recognised in the 2019 financial year.
On 10 August 2018, the Group completed its acquisition of the remaining 83 per cent of issued and outstanding shares of Arizona
Mining Inc. that it did not already own via a plan of arrangement.
The transaction was completed for a total consideration of US$1.3 billion via a fully funded, all cash offer at CAD 6.20 per share. With
the acquisition now complete, Arizona Mining's shares have ceased trading on the Toronto Stock Exchange (TSX) and were delisted
from the TSX on 10 August 2018. The acquisition will be treated as an acquisition of assets as it involves the acquisition of exploration
licences and some exploration surface facilities.
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,
Basic Underlying 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.
Further information
Investor Relations Media Relations Media Relations
Alex Volante James Clothier Jenny White
T +61 8 9324 9029 T +61 8 9324 9697 T +44 20 7798 1773
M +61 403 328 408 M +61 413 391 031 M +44 7900 046 758
E Alex.Volante@south32.net E James.Clothier@south32.net E Jenny.White@south32.net
Further information on South32 can be found at www.south32.net.
JSE Sponsor: UBS South Africa (Pty) Ltd
23 August 2018
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