SOUTH32 LIMITED - 2018 annual report

Release Date: 07/09/2018 08:30
Code(s): S32
 
Wrap Text
2018 annual report

South32 Limited
(Incorporated in Australia under the Corporations Act 2001 (Cth))
(ACN 093 732 597)
ASX / LSE / JSE Share Code: S32 ADR: SOUHY
ISIN: AU000000S320
south32.net




2018 ANNUAL REPORT

South32 Limited (ASX, JSE, LSE: S32; ADR: SOUHY) (South32) advises that the following documents have today
been submitted to the National Storage Mechanism and will shortly be available for inspection at:
www.morningstar.co.uk/uk/NSM.

     •           Annual Report 2018

     •           2018 Corporate Governance Statement

     •           Appendix 4G: Key to Disclosures – Corporate Governance Council Principles & Recommendations

These documents may be accessed via South32’s website:
https://www.south32.net/investors-media/annual-report-suite or www.south32.net

Additional information

The following information is extracted from the 2018 Annual Report (page references are to pages in the Annual
Report) and should be read in conjunction with South32’s Financial Results and Outlook for the year ended 30 June
2018 announcement issued on 23 August 2018. Both documents can be found at www.south32.net and together
constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a
Regulatory Information Service. This material is not a substitute for reading the 2018 Annual Report in full.

1.         Principal risks and uncertainties

Risk management

We continuously develop and enhance our risk and control procedures to improve risk identification, assessment and
monitoring, and to embed risk management into our decision-making processes. Our effective management of risk
ensures the achievement of our strategic objectives, the realisation of opportunities and enhances our resilience to
change. We have a dedicated global risk function that assists in identifying and recording strategic risks facing the
Group, and monitors mitigating actions.

The Board is informed about the strategic risks facing the Company at each scheduled Board meeting. The
identification and assessment of these risks is informed, amongst other things, by an understanding of our business
model, significant trends in our operating environment and the relevant interests, expectations and concerns of key
stakeholders that are most likely to influence our ability to create sustainable shareholder value. Each risk will be
revisited in FY19 to consider emerging trends and new impacts from internal and external factors.

We have identified 15 strategic risks that have the potential to significantly impact the performance and sustainability
of our business, as listed below. Elements of those risks may be relevant across the entire Group, whilst others may
be specific to a commodity group or operation.



Registered Office Level 35 108 St Georges Terrace Perth WA 6000 Australia
ABN 84 093 732 597 Registered in Australia                                                                                                 1
Fluctuations in commodity prices, exchange rates, interest rates and the global economy
Risk: Industry earnings, balance sheet and cash flows are affected by the volatility of commodity prices, currencies
and interest rates. Financing costs, currency impacts, input costs and commodity prices are managed based on
floating indices. Prices are determined by the balance of supply and derived demand for commodities. Costs are
impacted by the local currencies of operations. Significant deterioration in commodity prices or unfavourable currency
movements have the potential to adversely impact the value of our operations and our ability to declare dividends.
Mitigation:
    •   Commitment to a strong balance sheet
    •   We maintain a diverse commodity portfolio and geographical spread to provide resilience against volatility
        relative to single commodity, single mine and single geography competitors
    •   We actively monitor the markets in which we operate
    •   We have a centralised marketing team
    •   We continually review our operating and capital expenditure plans


Actions by governments, political events or tax authorities
Risk: The value of our investments depends on long-term fiscal stability and may be affected by political, economic,
tax and legal changes beyond our control. The resources sector can often be subject to unpredictable, higher direct
and indirect taxes and royalties in our countries of operation that can negatively impact on cash flow. The decisions of
regulators relating, for example, to nationalisation of mineral resources, renegotiation or nullification of contracts,
leases, permits or agreements, may impact our business model.
Mitigation:
    •   We have specialist external relations teams
    •   We have a comprehensive stakeholder relations strategy in place in all our countries of operation
    •   We monitor policy, legislative and regulatory changes whilst actively engaging with relevant authorities, for
        example, through written submissions and International Council on Mining and Metals (ICMM) membership
    •   We have specialist tax management capability and seek expert tax advice as needed
    •   Our annual Tax Transparency and Payments to Governments Report demonstrates how we meet our
        regulatory obligations


Cost inflation and labour dispute impact on operating margins and expansion
Risk: Inflation of input and capital costs could adversely impact financial returns. Labour is a significant operating cost
that may vary depending on industrial action and scheduling delays. Our need to reduce operating costs may impact
negatively on previously communicated labour commitments.
Mitigation:
    •   Our strategy seeks to optimise our operations and sustainably lower operating costs and capital expenditure
    •   Our investment decisions are governed by a robust capital management framework
    •   All discretionary investments compete for capital, based on assessed risk and value
    •   We engage proactively with all trade unions and our people in line with local labour laws
    •   Enterprise bargaining agreements are in place and the internal and external environment is continually
        monitored to identify any possible industrial action




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Access to water and energy
Risk: Water and energy are critical to our operations, however scarcity of supply, counterparties, change in
government policy and increasing cost of natural resources can impact our operations and supply chain.
Mitigation:
    •   We work closely with suppliers of water and power, on a long-term, mutually beneficial basis
    •   We actively work to secure water and energy resources within our control to strengthen our operations’
        resilience to water and power security risks
    •   We explore opportunities to secure alternate, reliable water and energy sources


Failure to maintain, realise or enhance value due to inadequate knowledge of our resources and reserves
Risk: We aim to maximise shareholder value by continually optimising our operations. Failure to maintain technical
and economic understanding of our Mineral/Coal Resources undermines our ability to identify the right opportunities to
optimise and enhance our operations. This will detrimentally impact on shareholder returns and, ultimately, the
sustainability of the Company.
Mitigation:
    •   Our resources and reserves are estimated by mineral industry professionals who have relevant experience to
        act as Competent Persons in accordance with the JORC Code. We strengthen this process by applying our
        governance framework using internal and external subject matter experts
    •   We seek to identify the opportunities that derive maximum value for each operation in our long-term planning
        process
    •   We have a capital prioritisation process that assesses our entire portfolio allowing us to invest in those
        opportunities that enable us to maintain balance sheet strength as well as maximise returns to shareholders
    •   Our short-term planning processes aim to translate these value opportunities into granular executable plans


Deterioration in liquidity and cash flow
Risk: External factors may adversely impact cash flows. If we compromise our balance sheet, liquidity and cash
reserves, interest rate costs on borrowed debt and future access to financial capital markets could be adversely
affected.
Mitigation:
    •   We are committed to a strong balance sheet, maintaining an investment grade credit rating and strong
        liquidity throughout economic cycles
    •   We manage our balance sheet and cash flow within strict financial criteria


Climate change impacts
Risk: Climate change may result in physical impacts and transition risks on our operational infrastructure, decreasing
natural resource availability and increased occurrence of extreme weather events that can cause disruption to our
operations, as well as increased operating and capital costs. Climate change driven by worsened greenhouse gas
emissions may force a change in government policy about carbon taxes and/or trading which will impact on our
operating costs.
Mitigation:
    •   We have established greenhouse gas emissions reduction targets
    •   We utilise the latest climate modelling data to inform us of the level of risk to our life of mine assets and
        disruption of operations
    •   We identify and implement greenhouse gas reduction and energy efficiency projects
    •   We prioritise our land management efforts to minimise land disturbance and maximise rehabilitation efforts
    •   We engage with stakeholders and decision-makers in the design of national carbon regulations
    •   We are transparent with our disclosure of climate change-related risks in our annual Climate-related Financial
        Disclosures




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Health and safety risks in respect of our operational activities
Risk: There are inherent health and safety risks across the mining operations value chain. Apart from physical harm to
our people and contractors, failure to maintain a high standard of safety may impact negatively on employee morale,
the achievement of production targets and our licence to operate.
Mitigation:
    •   The well-being of our people is at the forefront of all our considerations and is fundamental to everything we
        do
    •   We have established comprehensive health and safety policies and associated performance requirements
        that are designed to prevent and mitigate exposure to health and safety risks
    •   We focus on significant events and critical controls
    •   We engage, develop and align our people to ensure we have disciplined execution of well-designed work
    •   We continuously improve our work environment to make it safer and more productive for our people


Water, waste and environmental risks
Risk: We recognise that our operations have the potential to significantly impact biodiversity, air, land and water
resources. Advances in scientific understanding of these impacts, regulatory requirements and stakeholder
expectations may prevent or delay project approvals and result in increased mitigation costs, offset or compensatory
actions, weakening the overall sustainability of operations.
Mitigation:
    •   We have established policies and standards which are designed to prevent, monitor and limit the impact of
        our operations on the environment
    •   We actively address known contamination resulting from past activities
    •   We are committed to stewardship in water and waste water management
    •   We use water responsibly, taking into account natural supply variations


Unexpected operational or natural catastrophes
Risk: Our operations and transport networks can be disrupted by events such as fire, explosion, flooding,
geotechnical failures, loss of power supply, mechanical equipment failures and unexpected natural catastrophes. The
frequency and severity may be exacerbated due to climate change.
Mitigation:
    •   We use robust risk management tools to analyse risks and design plans that prevent or limit business
        disruption impacts
    •   We incorporate the latest climate impact parameters into our planning, risk and investment model
    •   We have established and tested business continuity and disaster recovery plans to facilitate rapid response to
        significant events and ensure the safe restoration of operations
    •   We maintain insurance against many, but not all, potential losses or liabilities arising from operating risks. As
        such, our insurance coverage may not be sufficient to fully cover us against potential loses arising from such
        risks
    •   We provide transparent reporting in our Climate- related Financial Disclosures to provide stakeholder
        assurance


Commercial counterparties that we transact with may not meet their obligations
Risk: We contract with commercial, government and financial counterparties, including customers, suppliers and
financial institutions who may fail to perform against contracts and obligations, impacting cost or price performance.
Non-supply or changes to the quality of key inputs may impact costs and production at operations.
Mitigation:
    •   We proactively engage with our counterparties to manage instances of non-supply or quality control prior to
        occurrence
    •   We use counterparty credit ratings and level of exposure to set counterparty limits


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•   Our insurance program mitigates the financial consequences of supply disruption, subject to availability and
    cost




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Fraud and corruption
Risk: We are exposed to the risks of fraud and corruption, both within and external to our company. Fraud and
corruption may lead to regulatory fines, financial loss, litigation, loss of operating licences or reputational damage.
Mitigation:
    •   We have a Code of Business Conduct which confirms our commitment to upholding a unified approach to
        ethical standards of behaviour
    •   We have “zero tolerance” for fraud and corruption, with clear tone set by the Board and Lead Team
    •   Our ethics and compliance framework incorporates policies, procedures, training, and guidelines that help
        ensure that activities are conducted ethically
    •   We perform risk assessments as a critical part of our anti-corruption compliance program
    •   We maintain a system of internal controls to mitigate the risk of fraud and corruption
    •   We provide our people and third parties with mechanisms to safely report suspected fraud or corruption


Breaches of information technology security
Risk: Information technology systems may be subject to security breaches resulting in theft, disclosure or corruption of
information. Security breaches might also result in misappropriation of funds or disruption to operations.
Mitigation:
    •   We maintain network and physical control frameworks and deploy up-to-date anti-virus software to provide a
        level of protection
    •   We monitor our networks and undertake ethical hacking and data analysis to identify suspicious activity and
        potential exposures
    •   We have established business continuity plans, inclusive of IT disaster recovery plans


Failure to retain and attract key people
Risk: The loss of key personnel or the failure to attract, develop and retain talent could affect our operations, financial
position and growth.
Mitigation:
    •   We have designed an inclusive workplace and specific initiatives to engage and empower our workforce
    •   We focus on having the right people in the right roles, developing future leaders and maintaining a workforce
        with deep functional expertise
    •   We engage with our people at all levels to improve connectivity, support decisions and continuously improve
    •   We have policies and guidelines in place for talent and recruitment management, remuneration, skills
        development and succession planning


Support of our local communities
Risk: Our social licence to operate is dependent upon the engagement and support of the communities within which
we operate or seek to operate. Community dissatisfaction can result in failure to attract people and business partners,
operational delays and disruption and litigation, which can affect cost, production and, in extreme cases, the viability
of our operations.
Mitigation:
    •   We have established policies and procedures designed to identify and understand our stakeholders, informing
        our stakeholder engagement plans and community investment approach
    •   We maintain regular and open dialogue with our stakeholders
    •   We work closely with communities and government to identify and manage impacts, build shared value and
        align stakeholder expectations to current economic reality




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2.      Related party transactions

Extract from Note 31 ‘Key management personnel’, page 150 of the 2018 Annual Report

Key management personnel compensation

US$’000                                                           FY18           FY17

Short-term employee benefits                                      6,806          7,334

Post-employment benefits                                            219            129

Other long-term benefits                                            305            306

Share-based payments                                              6,961          7,761

Total                                                           14,291         15,530


Transactions with key management personnel

There were no transactions with key management personnel during the year ended 30 June 2018 (FY17: nil).

Loans to key management personnel

There were no loans with key management personnel during the financial year and as at 30 June 2018 (FY17: nil).

Transactions with key management personnel’s personally related entities

There were no transactions with entities controlled or jointly controlled by key management personnel and there were
no outstanding amounts with those entities as at 30 June 2018 (FY17: nil).

Extract from Note 32 ‘Related party transactions’, page 150 of the 2018 Annual Report

Transactions with related parties


                                                                Joint ventures                Associates

US$’000                                                          FY18            FY17         FY18          FY17

Sales of goods and services                                   207,560        165,455         2,851          2,920

Purchases of goods and services                                      -               -      54,101         66,289

Interest income                                                  4,864        6,902            -               -

Dividend income                                               393,635        313,180           -              -

Interest expense                                                 8,585        6,522            -               -

Short term financing arrangements to/(from) related
parties                                                        58,250      (110,347)              -            -

Loans made to/(from) related parties                         (168,817)     (131,175)        15,866         29,812




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Outstanding balances with related parties


                                                                  Joint ventures                  Associates

US$’000                                                            FY18            FY17           FY18           FY17

Trade amounts owing to related parties                                  -               -          607           3,219

                                         (1)
Other amounts owing to related parties                          321,223         379,473               -             -

Trade amounts owing from related parties                          61,980         35,987               -             -

Other amounts owing from related parties                                -           218          4,453              -

                                               (2)
Loan amounts owing from related parties                                8        168,825         93,539         82,126
        (1)
          Amount owing relates to short-term deposits and cash managed by the Group on behalf of its equity
        accounted investments. Interest is paid based on the three month LIBOR and the one month JIBAR.
        (2)
           Amounts owing from associates include loans to Port Kembla Coal Terminal Limited. An interest free loan
        repayable by 30 June 2030 and an interest bearing loan repayable by 30 June 2020. Interest is paid based on
        the BBSY and is secured against other shareholders of the associates.

Terms and conditions

Sales to, and purchases from, related parties of goods and services are transactions at market prices and on
commercial terms.

Outstanding balances at year-end are unsecured and settlement mostly occurs in cash.

No guarantees are provided or received for any related party receivables or payables.

No provision for doubtful debts has been recognised in relation to any outstanding balances and no expense has been
recognised in respect of bad or doubtful debts due from related parties.

3.      Directors’ Responsibility Statement

The following statement was prepared for the purposes of the South32 Group's 2018 Annual Report and is repeated
here for the purposes of complying with DTR 6.3.5. It relates to, and is extracted from, the South32 Group's 2018
Annual Report and is not connected to the extracted and summarised information presented in this announcement.

“The Directors state, that to the best of their knowledge:

a)      the consolidated financial statements and notes that are set out on pages 97 to 153 were prepared in
accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position
and profit and loss of the Group and the undertakings included in the consolidation taken as a whole; and

b)       the Directors’ Report includes a fair review of the development and performance of the business and the
position of Group and the undertakings included in the consolidation taken as a whole, together with a description of
the principal risks and uncertainties they face.

This Directors’ Report is made in accordance with a resolution of the Board.”

David Crawford AO, Chairman and Graham Kerr, Chief Executive Officer.




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4.      No Change Statement and Notice of Annual General Meeting

Shareholders are advised that the financial statements in the 2018 Annual Report do not contain any material
changes to the South32’s Financial Results and Outlook for the year ended 30 June 2018 announcement issued on
23 August 2018 on RNS and SENS.

Notice is hereby given that the Company’s Annual General Meeting will be held at 10.30am (AWST) on 25 October
2018 in the Golden Ballroom, Pan Pacific Hotel, 207 Adelaide Terrace, Perth, Western Australia 6000, Australia to
transact the business as set out in the Notice of Annual General Meeting to be dispatched no later than 26 September
2018.

About South32

South32 is a globally diversified mining and metals company. We produce bauxite, alumina, aluminium, energy and
metallurgical coal, manganese, nickel, silver, lead and zinc at our operations in Australia, Southern Africa and South
America. We are also the owner of a high grade zinc, lead and silver development option in North America and have
several partnerships with junior explorers with a focus on base metals. Our purpose is to make a difference by
developing natural resources, improving people’s lives now and for generations to come, and to be trusted by our
owners and partners to realise the potential of their resources.

Further Information

Investor Relations
Alex Volante                          Tom Gallop
T +61 8 9324 9029                     T +61 8 9324 9030
M +61 403 328 408                     M +61 439 353 948
E Alex.Volante@south32.net            E Tom.Gallop@south32.net

Media Relations
James Clothier                        Jenny White
T +61 8 9324 9697                     T +44 20 7798 1773
M +61 413 391 031                     M +44 7900 046 758
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
7 September 2018




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