South32 Limited

Good morning everyone and thanks for joining us today for our financial results conference call for the year ended June 30, 2021. I'm joined on the call today with our Chief Financial Officer Katie Tovich and our Chief Operating Officers Jason Economides and Mike Froser. I'll give a brief summary before handing back to the operator for questions and just as a reminder there is a short video summary of FY21 financial results available on our website. Look, this year has been a challenging year for everyone as the impacts of COVID-19 continue to be felt globally. At South32, we've remained focused on keeping our people safe and well, maintaining safe and reliable operations and supporting our communities. Despite these challenges, our operations have performed very well. We set free production records at Worsley, Illumina and Brazil Illumina and Australian Manganese. We also exceeded initial market guidance of South African Manganese, Ceramitosa and Cannington. And it's great to see that that strong operating performance has been combined with improved commodity prices has been translated into a 153% increase in our underlying earnings. I'd also like to note that substantial progress has been made in reshaping our portfolio with the divestment of South Africa Energy Coal and Temco and a portfolio of non-core precious metals royalties. This greatly simplifies our business. It reduces capital intensities and will improve our margins. In terms of our growth projects and the way forward, at Hermosa we continue to progress studies of both Taylor and Clark. At Ambler Metals we commence a summer field season drilling program and continue to progress a study at Arctic. We announced our medium-term target to half our operational carbon emissions by 2035 from our 2021 baseline, supporting our pathway to net zero by 2050. To achieve this, we'll invest in efficiency projects, shift to lower carbon energy, apply low-carbon design principles and adopt new technologies. At the same time, we continue to increase our exposure to the base metals required for a low-carbon future. Looking ahead, we expect to see strong volumes at our base metal operations, Moselle Aluminium, Ceramotos and Kennington, with improvement projects designed to increase production into favourable markets. At the same time, we continue to pursue cost and volume efficiencies to offset stronger producer currencies and cyclical inflation. We believe we are well positioned to take advantage of improved commodity markets and continue to transition our business for the future. backed and underpinned by our strong operating performance, our high-quality growth options, and our disciplined approach to capital management. Thank you, and I'll hand back to the operator for questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you are using a speakerphone, please pick up the handset to ask your question. The first question today comes from Khan Peker from Royal Bank of Canada. Please go ahead.

Thanks, Graeme, and morning, team. Just great to see a step up in the dividend, but just wanted to focus on the buyback. So since restarting the buyback, South32 has averaged roughly around $250.50. Given free cash flows stepping up in FY22, it's really relative to FY21. Why only 250 committed? And also, just wondering if that's more of a half-year number than a full-year number, talking about September 2022 for the program. First question.

Yeah, thanks, Tom. Look, I'll get Katie to sort of drill in for some of the detail I am at being the CFO. I mean, the comment I've made is, look, what we are applying is a consistent approach to our capital management framework. We've always talked about looking at the cash when the cash is actually in the bank, not in terms of prospective cash flows. But maybe, Katie, you can unpack that a little bit more about how we think about the timing and the amounts.

Yeah, sure. Thanks, Graeme. Maybe just to recap, just in terms of our capital management framework, once again, it's an unchanged framework and you do see our ordinary dividends starting to flex with increased earnings. So that's coming through in our returns this half that we've announced. Look, the announcement today brings total returns in respect of FY21 to $670 million, a final dividend payout ratio of 73% of underlying earnings, and total returns in respect of FY21 to 81% of free cash flow, including equity-accounted distributions. I think really the point to reflect on is, as we've said in the past, and as Graeme mentions, that we won't give cash back prospectively. but we do continue to reassess our excess cash balance on an ongoing basis. And obviously, you know, our goal is to create competition for capital, but should there not be alternatives for that capital allocation, we will continue to return excess cash to our shareholders in the most efficient and timely manner. So I think to your point around the volume, look, we've increased the volume by 120 mil to that 252 million. remaining balance, and that is indicative of what we're able to get away in terms of the on-market share buyback, broadly in a half, as you've mentioned. If you look back in the last half, I think we got away something in the region of $230 million. So it's about what we expect to get away in a half-year period.

And I think... Sorry, I'll only go to Canada. If you look at slide 16, I think that's a really good slide in the pack that actually talks about You know, our net cash position, our adjusted net cash position, it takes into account commitments, which is pretty consistent. And the other thing I'd add is it's great to actually see, you know, internally we're creating some competition for capital for brownfield opportunities as well. And, you know, you've seen that at Ceramotos with QMP, the furnace rebuild on the Osnock project. We've seen it at AP3XLE at Moselle. And we're actually looking at AP3XLE now for Hillside, particularly when you think about where those aluminium markets are And the other opportunity potentially in that space, you would have heard Alcola talk about potentially restarting Smelter. But Al, you know, that's something else we've got to consider as we go forward as well.

Sure, thank you. And just a second one, just on Worsley costs. Just wondering if you could give a bit more of a breakdown on the cost increase and maybe some of the underlying assumptions around FX that are captured in that list.

Karen, you want to cover that one?

Yeah, look, I mean, wordly cost, if I look more broadly in terms of our cost outcomes as a group, sort of in the FY21 year, I mean, I think we did a great job in terms of managing costs through the year, coming in broadly in line with guidance. What you will see in our pack is we've shown the half one, half two comparisons of our cost breakdowns. And we have seen cost inflation coming through into the second half, which we did talk to at the half year. Worsley in particular, you'll see Worsley's cost at $2.24 and a half. And it's probably worth calling out if you actually look at the Brazil Illumina second half costs coming through at $201. But if you add back the benefit of the historical tax credits that they picked up there, Actually, their costs are broadly in line with Worsley's at $2.25. So I think that's indicative of the fact that we're seeing broad-based inflation across refineries globally. More specifically, that uptick from that half-year number to the higher guidance number in FY22, about half of that relates to costed price increases. And freight, for us, is a net nil outcomes. Other people don't necessarily capture the freight cost in their numbers. But so we are seeing a fairly big hike in caustic prices, or we're expecting to see that come through. I think the other thing to note there is certainly in terms of Worthley itself, we are moving into a new mining area. And with that mining area, we are seeing a different ore type, which is resulting in higher caustic consumption into the second half and into calendar FY22. So that is something and unfortunately it's combining with higher caustic prices and that is creating probably some more pressure for us into 22. So probably at least half of that relates to caustic inflation and it's in line with what we're seeing across the sector.

And I think to this point is it's a relative gain in alumina as well. If you think about our consumption, the Chinese probably sit on average somewhere between 120 or 130 kilograms per tonne. You know, Worsley's still floating around that 100-ish mark, slightly up, if you like, in 22, around the 105 number compared to where we have been previously in those different areas. But, you know, it's worth just noting I think that's a relative gain as well.

Just quickly to close out on your FX question, look, it's not a significant impact coming through. It's probably a couple of dollars a tonne.

Okay, thank you. And just before I pass it over, could you just remind us of the lag for your caustic, rough lag for your caustic price contracts?

Yeah, it's roughly priced on a quarterly basis.

Thank you very much. Thank you. So the only one I'd close up on that one as well, Cam, slide 33, while we focus specifically on Worsley, I think slide 33 in the PAC was a real good example of what we've been doing to the cost basis simplification of the group in that it's a nice slide that talks about FY21 to basically FY21 excluding SAIC and TEMCO. And you really see almost a billion dollars comes off the cost base. And if you look forward to FY22, you see our DNA charges were reduced, you know, by about $9 million. Our underlying net finance costs, you know, were reduced by about $42 million. And you see a return to normalised tax rates. At the same time, by taking SAIC, et cetera, out of the business, you increase the margins by about 6%. So while some of the cost is driven by inflation, some of it's driven by higher price royalties, I think the things that we can control, the teams continue to make big steps in that space.

Thank you. The next question comes from Paul Young from Goldman Sachs. Please go ahead.

Good morning, Graham team. First point, great to see the dividend payout ratio above 70%, and also great to see some pretty positive production guidance for for FY22 and FY23. Graham, can I dig into some of the capex and incremental, I guess, creep or growth projects that you've outlined? Can I start with Illawarra and the step up in capex to 215 million FY22? That's a little bit above where it's, quite a bit above, I should say, where it's been over the past sort of five years. Can you maybe just step through what's in that number?

Yeah, Paul, thanks, and thanks for the question. Probably the two biggest items of sort of changing, if you like, in Illawarra is we've always talked about going, if you like, to... Obviously, we've got successfully back to that three-long-wall configuration at Appen. We've also talked about where we want to get to is the optimised mine plan at Appen, which would involve two long-wall faces into FY24, and then we'd transition in FY25 to a simplified layout and longer panels. And as I've spoken about in the past, that brings lots of benefits around productivity, cut time, et cetera, less continuous mines, less development metres. What that does require, though, is some investment in coal clearance and ventilation infrastructure at Appen, in particular some work around the shields in terms of moving to the new area, and also some additional vent shafts to sort of open up the ability to do that, if you like, simplified mine plan. They're probably the two single biggest drivers in that space.

Yeah, okay, that's great, Graham. Then moving on to Hermosa, obviously pretty difficult getting people on the ground up in Arizona and, you know, just getting study work done and obviously with COVID on the ground there. I know your CAPEX guidance is 45 million for the year, but that doesn't include, you know, a bunch of, I guess, additional expenditure, assuming, you know, post the approval of the PFS or release of the PFS. Can you step through, again, just where we're at with the study work and the PFS?

Yeah, look, absolutely. And Paul, the first thing I would acknowledge is the challenge of the team. I mean, we only got the team back in the office for the first time probably about six weeks ago. So you can imagine trying to complete a pre-feasibility study has been incredibly difficult in that space when you're all working remotely. And particularly if you go through our own internal review process, doing that remote is also not ideal as well. I think on the positive side, you continue to see the mineral resource you know, sort of get greater confidence around that with the drilling we've actually put out there, particularly the updated mineral resource where we talked about the zinc equivalent rate increasing from about 7.6 to about 8.6. While there is a reduction in tonnage in that, that'll actually change as we continue to work through the model. And that'll come back as we sort of do some more drilling, particularly as the deposits still open at depth and laterally. I think the other thing we gave some clear guidance around is that we do see the opportunity to actually sort of and actually look at a dual shaft system. And we certainly feel that allows us to actually prioritise nearly access to high-grade mineralisation. I think the other thing we're flagged out here, and that's probably the point that you were talking about, But it does exclude, if you like, our expectation around the full FIO22. And the big item there is we want to finish the pre-feasibility study. And my expectation is we've talked about in the past that we'd have to build a water treatment plant number two. So that's the thing we need to finalise through the PFS study. And the other piece that we'll probably look to finalise is there is some material amounts of water. We're dealing with deep water from the ore body. So they're on the critical path around the development and the approvals process. So certainly they're the things that we'd like to iron out before the half year end and then come back to the marketplace of that when we finish the PFS study. On the positive side, you know, Clark continues to develop well. You know, what we've been very confident around is the technical viability of a flow sheet to produce battery-grade manganese. Two alternatives we can actually do that for, but both of those have tested well. The next piece for us is working more on some of the marketing side and the end customer opportunities. And obviously if that progresses well as we get into the feasibility stage of Taylor, we'd look to combine both the Taylor and Park resource models to understand the opportunities around integration. So by the end of the calendar year, we'll have a greater sense on what water treatment plant number two looks like, and that's the watering pool, as we actually finish the PFS.

Okay, thanks, Graeme. We'll wait for that. Last question for me is around the incremental growth capex. I think you've outlined US$100 million. on incremental growth costs across Worsley, Cerro Matoso and Manganese, etc. Great to see the additional detail, by the way, on those projects in the presentation and we'll work through all of that. But just high level, can you maybe just give everyone a sense of what sort of IRR returns all these sorts of projects just on average sort of generate?

Yeah, and I think, look, that's a really good question, Paul. I'll start by saying that, look, what is really good to see is, you know, when we started the journey a fair while ago now, we didn't have a lot of opportunities to actually grow internally within the business because the cover was pretty bare. It wasn't really a focus. I think now you've obviously seen things like AP3XLE at Moselle, which allows us to increase production by 5% by 2024. You've actually seen AP3XLE also going through the same study phase now at Hillside. We expect to finish that in the last six months. But I think the standout story for us has really been around what work has occurred at Ceramitosa. And some of those projects, I think, really talk about the benefits of, if you like, a brownfields opportunity versus greenfields. And particularly on slide 38, we spoke a little bit about QMP, which is a satellite deposit north of the current Ceramitosa plan. And obviously, that has a very low capex of around $13 million and has a very high IRR. And you see something similar as we actually move into the next phase of development there, which is really around, you know, the concentration planner, as we call it, the OSMOC, or the All Sorting Mechanical Concentration Project. And that really replaces the current upgrading circuit and allows us to deliver a 50% increase in processing capacity. So, you know, they're both really high IRR projects in excess of 100%. The other projects, you know, sort of weigh them up as they individually go through the toll gating process. Maybe as the chair of the IC, you know, Katie, you can talk a little bit about how you think about those opportunities.

Yeah, thanks, Graeme. Yeah, probably just a couple of comments to add to that. You know, in terms of the dollars flowing through that improvement of life extension bucket, we do expect that to sit around that $100 million mark over the next couple of years as we move forward. We do have DCARB capex also in those numbers. albeit relatively low volumes for the next couple of years as we work through study phases on the various projects including the mud washing projects and some of the energy efficiency projects across the group. As Graeme mentioned, look, I think in terms of our goal here it's about competition for capital. We're allocating capital predominantly towards our base metals and alley value chain businesses and looking to ultimately drive production growth and production creep across that group of businesses. I think Cannington's probably one also to call out in terms of the transition to trucking and the longer term outlook there and the medium term targets there. But I think, look, ultimately, Paul, it's about generating that competition, allocating capital wisely in that space and really looking for those productivity improvements across the group. And life extension, there's probably some worth calling out, Eastern Leases and Worsley Hotham North, also captured in the early phases of study, and they will come through sort of over the next three, four years, in terms of you'll start to see some more information around what CAPEX looks like for those projects over the medium term. MRN is probably the other thing that's still on the radar in that window, and we'll continue to work with our partners around options in terms of life extension for MRN as well.

I mean, I think Katie's examples around the Cannington Trucking Study, low CAPEX, higher return, QMP, Osmoc, You know, they're the kind of things that we're really trying to eat out of the portfolio, Paul. I mean, I think those ones, such as the new mining areas at Worsley and D&D Adapt, you know, obviously as we get more detail around the PFS, that's what we'll sort of outline in more detail.

Yep, understood. I'll work through it all. Thank you, Grant. Thanks, Katie.

Thank you. The next question comes from Lyndon Fagan from JP Morgan. Please go ahead.

Thanks very much. The first one is just to focus a bit on the rehab charges. Can you maybe walk through what's driving such a high charge at Worsley? I did see the discount rates come down, but can we maybe flesh that out a little bit? Katie, you want to take that one?

Yeah, no, happy to do that. Look, we did at the half year in December. It's probably where the bulk of that movement came through. Certainly at the half year, as part of our annual discount rate review process, we did make an amendment to our discount rate, which did flow through into increased provisions. Provisions were up $875 million from June 20 to December 30. So that's where you see the large bulk of the movement. The other thing that came through at the half year was also a considerable uptick in terms of FX impact. What we're seeing now from the half through to June 30 is an uptick ex-safe of about $113 million. The bulk of that does relate to Worthley and it really relates to mine life adjustments and cost adjustments at the back end as we've reviewed our rehab provision.

Okay, thanks. And the next question is just on the dendrobium extension project, can you maybe provide an update on the latest thinking for Illawarra and what degree of certainty there is now on any kind of project proceeding?

Yeah, look, Lyndon, good question. We tried to put a slide in the pack to actually address that. If you focus on slide 44, I'll probably use that as a reference point. As we've spoken about in the past, there have been a couple of developments over the last six months, in particular since we had the refusal by the IPC. One of those is we're going through an initial review of the IPC decision with the Land and Environment Court of New South Wales. You know, as that progresses, that's something we think we need to do because we didn't agree with some of the findings of the IPC. But if that's successful, that's more than likely to kick you back into... The second thing that obviously... ..puts around, you know, the state-registered cancer path and requesting that any future developments of D&D be declared a state-significant infrastructure. So that really gives the minister, once we finish looking at the Dendro and ADAPT project, to actually look at the project and run it through its own kind of approval process. So what we sort of outlined on slide 44 is there's three options that exist. One is to go with the original D&D line plan, and that would be based on being successful at the traditional review, and that would mean you'd have minimal changes potentially to that plan, and we outline a CAPEX or timeframe on that. The second one, which I think is probably more likely than anything, is the D&D Adapt process. The D&D Adapt is really taking the original Dendrogynex domain plan and saying, okay, if we listen while we don't agree with some of the technical findings of the IPC, how can we actually adjust the line plan that sort of deals with lots of those issues and allows the Minister to be in a position to say, look, we've responded to some of the concerns. That results in a mine plan that is slightly different. It focuses much more on high quality coal. It probably has less land disturbance. It's further away from water tributaries, et cetera. We're doing that mine plan at the moment. We expect the PFS and feasibility study to be completed towards the back end of this calendar year. That then allows us to actually talk to the Minister. Obviously, if the D&D ADAPT numbers don't stack up economically or we get kicked into an IPC process after a successful judicial review, the other option we've got is to actually have a look at an app and own, and that's another exercise that the team is working on. How do we change the cost base? How do we look at the productivity to make app and only a potential option? Part of the reason we took the impairment is the uncertainty around dendrobium next domain and what does it actually look like, but certainly the team's working hard to finalise the feasibility study on the D&D ADAPT and then we'd be looking to talk to the Minister.

Thanks Graeme. Just a final one, just more broadly on the portfolio, obviously growth is a focus. I'm wondering whether you would ever consider a lithium asset in the portfolio?

Look, I think we've always talked about, you know, we've got a bias to base metals. We like the bias to base metals because we think of a low-carbon future, you know, that makes sense. Lithium is obviously a commodity we've talked about over, you know, internally a lot over the journey. You know, the view we have today is it's priced reasonably well. You know, if you could get the right asset which sat in the right position in the cost curve, you might think about it, but I think it's probably hard to get that at the current price today. So I'd never say never, but I'd also say it's not the commodity we're knocking down the door to get into.

Thanks very much. Thank you. The next question comes from Rahul Anand from Morgan Stanley. Please go ahead.

Hi, Graeme and Katie. Thanks for the opportunity. Can I perhaps start with a capital allocation question, perhaps ask the question a different way? SAEC is out of the group now and I was hoping that we'd be able to see a target net debt range being provided. How should we think about that going forward? And I'll come back with a few after that. Thanks.

Okay. Why don't you take that one first, Katie?

Yeah, sure. Look, I think probably the best way to talk through that is what we've said is the right level of, or the right balance sheet for us is one that enables us to maintain an investment grade credit rating through the cycle. And that's based on our view of our portfolio, our forward earnings in a low profile, and our capital profile going forward. So what the capital management decision today has done is brought us to a net debt position around about $150 million, which right now, as I said, based on our current portfolio and our forward profile of CapEx, we believe is the right starting position for us at this stage to... ensure we can maintain that investment grade credit rating through the cycle. And I think sort of going back to, I guess, the point in terms of generating excess cash, we will continue to reassess our balance sheet for excess cash. And as we have done in the past, we will continue to look to return that excess cash to shareholders in the most efficient and timely manner possible.

Okay. Thanks for that. And then perhaps a couple for Graeme. In terms of the Worsley alumina costs, I just wanted to understand how long should we expect for you to stay in those low-grade zones? That's the first one. And then perhaps the second one for you, Graeme, was around the cost of consumption that you talked about in terms of China being 120 to 130 kilos per ton versus Worsley at 100. In terms of Shandong, which uses the Ghanaian bauxite, do you have any stats around what they might be using per tonne?

Yeah, so maybe I'll let Katie answer the cost one first, because she's an ex-CFO down at Worsley as well, so she knows that intimately. So why don't you do that one first, Katie, and I'll do the second one.

Yeah, so I think, I mean, in terms of how long we're in that zone, I think it's an area that we're going to be in for some time. and we're going to need to look at opportunities to further optimise our cost outcomes to help mitigate some of those increased consumption rates over the next couple of years.

Hang on for one second. Look, with regard to the balk site coming out of Guinea, I mean, I guess what I'd start with first and foremost is That's certainly a trend that we've actually seen continue, as you've seen China actually continue to basically import bauxite coming out of Guinea or other places and do the heavy processing in China. We don't expect that to actually change, but obviously there's not only the cost of mining, there's the cost of transportation actually getting it there. And certainly when we think about our long-term price around alumina, it's very much informed, if you like, to see continuing happening. And we expect probably two things to continue to happen. One, that we do expect to actually see that China continues to basically import material out of Guinea in terms of bauxite and doing the refining on the coast in China. But we also expect to actually see Indonesia do the refining and potentially they'll do the refining actually in Indonesia and maybe the smeltering, but more than likely send the smeltering back to China as well. That's actually built into our numbers when we actually think about it. In terms of reactive silicon levels, I think they're more comparable to what we see in Worsley, but that's something I'll probably chase it up a little bit with the team and circle back to you. I don't know, Alex, if you're on the line and you can recall by any chance.

No, Alex is not in the room. Okay, no, I can get a follow-up on that. That'd be great. All right, final question from me was just around the working capital release. We saw about $170 million released this period. Just wanted to quickly follow up and see, are we at normalised levels now, Katie, or do we expect some of that to go back into the business going forward?

Yeah, look, I think probably the best way to answer that is that price and FX at these levels are going to be the key drivers of working caps for us as we go forward. Certainly in terms of data days, they're broadly normalised. In terms of our inventory pipeline, that's also comfortably within our operating window now. So I think really price and FX are going to be key variables. Probably one thing to call out, though, we will see... an unwind of the hillside accrual for energy from FY21. That unwinds, it's about, it's almost $90 million. It unwinds over two years in monthly increments from August of this year. So you will see that unwind going forward.

Okay, perfect. That's very helpful. I'll pass it on.

Thank you. The next question comes from Paul McTaggart from Citigroup. Please go ahead.

Morning. So maybe could we just circle back to D&D ADAPT for a moment, because you said it might be the most likely outcome. In terms of tonnage, you've sort of got broadly the same tonnage as the original plan, if not marginally higher. So how should we, and you'd have to be steering clear of some of the reserves that you're going to mine in the original plan. So how should we think about mine life under the ADAPT model compared to the original plan?

Yeah, I think that's one of the opportunities that we continue to work through, Paul. I mean, as I mentioned before, that actually is in the feasibility study at the moment. You know, it certainly does target higher-grade material than what we have in the original D&D mine plan, so it concentrates on the higher-grade material and leaves some of that lower-grade material behind. So as a consequence, you get a better product coming out. I think the thing we're still working through at the moment is what does the unit cost look like in terms of panel sizes, length of long walls and productivity rates. So that's the other piece of working on at the moment. Because when you look at this problem of facia, and it's part of the reason I said D&D, that is probably a more sensible case. The more we've actually worked through that, the more D&D ADAPT looks probably better than the original D&D project. But again, we have not finished the study around that piece yet. But it's less tons you disturb overall, higher quality tons. What we haven't quite worked out yet is what's the optimal size of long walls, the amount of productivity rate that runs from that.

Okay. Thanks, Graeme.

Thank you. Once again, to ask a question, please press star 1 on your phone. The next question comes from Matthew Hope from Credit Suisse. Please go ahead.

Hi, yeah, thanks for taking the question. Just wanted to focus a little more on aluminium and just to start with on hillside. Just wondering what the cost would be to implement that AP3LXE and what benefits would have that for efficiency? What would we see out of that?

Yeah, I mean, probably a little bit of a difference, I guess, between the AP3XLE that we'd actually put in at Hillside versus Moselle. The Hillside, as we actually look at that project, it's probably far more around energy efficiencies and, you know, rather naturally production increase. The project itself is subject to final investment decision towards the back end of this calendar year. We'll actually look to run a 20 pot trial which will conclude in January 2022 with an execution started in FY23. Again, probably similar to what you saw at Nozella. We haven't given the exact number yet, but you're not talking about a magnitude of capex in that space. There's obviously the money that you spend around rewiring the pots. There's a licence fee around the technology, but you're not talking about vast amounts of capital.

Okay, thanks. Quickly to add to that. So if you look at Moseale, Moseale was around about $18 million to roll out. So that will give you a bit of perspective. Hillside's just marginally more than that given size.

Okay, thanks. And then you talked about pot lining at Hillside. Was that to be higher next year? Is that part of this project?

Look, certainly there's some red line going in or trawling the pots, but there's naturally a sequence of how we line the pots as well where you do see some natural variation up and down just depending on the life.

Right. And then secondly, I just wanted to look at the CO2 issue. Obviously, you want to cut by half through to 2035, and I guess that really is all about the aluminium dropping, because that's so much of your portfolio. Now, what confidence do you have that you can actually hit that target, given you're really dependent on ESCOMM? And is there anything you could do or South32 could do yourselves to actually help in reduction of CO2 emissions from South Africa?

Yeah, look, I mean, I think maybe I'll get Mike to answer the specific questions. We've got a project called Green Shoots at Hillside in a second. But maybe if we take a step back and, you know, if we look at where we are in our portfolio and what our carbon emissions profile looks like, I think we had a pretty good slide that sort of talked about some of the projects we're working on on slide eight of the pack. And obviously it's not just around hillside. There's some things that we'll do around hillside for the energy efficiency. Then there'll be some things that we've got to work with partners outside the fence. I'll get Mike to talk about hillside, but, you know, some of the things that we're driving across the rest of the business, obviously, is at Worsley, we're looking at mud washing. We're also looking at a change in energy supply there to go from actually coal to gas and ultimately to other greener forms such as hydrogen. We're also, if you like, doing some work around Illawarra in particular, our efficiency around drainage, and also, if you like, working with CSR on some... They have a technology to basically take out the ventilation methane. So there's a number of fronts we're working on, but you are right, the big one we have to make some progress on is around hillside. And maybe, Mike, you can talk about some of the work ESCOM and the government are doing and then some of the work we're doing on green shoots.

Yeah, thanks, Graham, and thanks for the question. Look, we... One of the things that's really helped us with Hillside is securing the 10-year extension of the power contract from ESCOM, because what we do believe is it just gives us time to actually study and explore what that transition will look like. And as Graham has said, I think it's coming from multiple fronts. So first and foremost, ESCOM is driving a renewable strategy of their own, which will see a reduction in the carbon intensity of the of the grid emissions, which will be helpful. And we should see some of those benefits emerging over the next decade. But if we truly want to deliver a zero-carbon product, we're going to have to move a lot faster than probably what Esken can move. And we're addressing it in a number of fronts. You know, firstly, on the Scope 1 emissions, so looking at opportunities and as technology advances, you know, how can we improve the Scope 1 emissions? profile of the asset, but the biggest by far is the Scope 2 emissions, which needs to be addressed. We have initiated a project in pre-feasibility on that project, looking at a number of options that could be available. We believe on a model basis that there is a technically feasible solution that can be achieved. using a combination of solar PV, wind, as well as modulation technologies for the smelter. And that would give us the ability to moderate what is still not available. I think there's a couple of things that we have to work through there. In particular, given our significant... proportion of the grid that we make use of is how do we work with ESCIM on that transition because we do realize that we will both still need each other, both on a backup power as well as from an ESCIM point of view in terms of the load shedding that they utilize us for to stabilize the grid. Obviously, there's a significant deregulation that needs to take place. There's already been a lifting the self-generation to 100 megawatts for a smelter that uses 1205 megawatts of continuous power. This is a significant transition that would be required. But at a conceptual level, we believe it can be delivered. But it's just going to require a significant amount of work on the deregulation to enable that and in the partnership with the primary generator to make this this work. But from a high-level technical and economic perspective, we believe over the next decade this will be achievable. But it's going to, yeah, it is a big project to deliver.

And I think the key point is it's not around the technical aspects. There are some challenges and technology continues to develop quickly over the next 10 years. It's our ability to influence government policy and we have seen some of those shifts already where the government is sort of surprised on the upside about giving people the capability to do self-generation, which wasn't what we expected to see. They came back with a much higher limit than people expected. I think the other piece would be even this week you've seen Andre Derrida, who's the CEO of Eskom, talking about how they plan to green the network. So we need to continue to help them actually do that. As Mike says, we're very joined at the hip around this. But to be very clear, 10 years of the power contract gives us time to do that. We need to have a green power contract going forward because hillside is roughly 89% of our scope to emissions.

Right, thanks. And just one follow-up on that, of course. Obviously, you've seen the proposed CO2 border tax equalisation in Europe. And if that comes in around 2024, how would that impact hillside, do you believe?

To be perfectly honest, when the teams have done the work around that and had a look at it and sort of, you know, had not just across aluminium but all our commodities, I guess the good attitude is that it's more symbolic and impactful in the short term, mainly driven by the fact that it's a gradual implementation, which is phased in from, you know, calendar year 26 to 35. And if you think about our 10-metre power block, it fits in with the time that we need to get things actually right. And certainly if you think about the impact on aluminium price, it is limited due to global average direct emissions that tend to be about two tonnes of CO2 per tonne of aluminium. And, you know, we think that's something that we can manage over that timeframe. So we don't think it's going to have a huge impact on us.

Probably one thing that I'd just jump in and add there is if you think about hillside, about 30% of hillside volume is domestic as well in terms of market. And Moselle having hydropower access and delivering into Europe is well placed.

Sure. Thanks very much. We'll pass it over.

Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr Kerr.

Thank you. And look, thanks everyone for your time today. Maybe just a couple of really quick messages to sort of wrap it up. And obviously, if you've got any follow-up, reach out to the IRT. Our operations are performing strongly, and I think we are positioned to take advantage of strong commodity markets. We've really seen that in the second half of this year. And if you look at Scott, compared to the second half of the year, they're stronger, even stronger. We do continue to reshape our portfolio for a low-carbon future by exiting those low-returning operations and investing in base metals for the future. And the important thing, we've talked about it a fair bit, but our approach to capital management remains unchanged. And it's working as we intend it to work. You know, we're rewarding our shareholders as financial performance improves and we're consistently applying that. But look, thanks for your time today and stay safe and stay well.