South32 Limited

Thank you and good morning everyone and thanks for joining us today. I'm joined today by our Chief Financial Officer Katie Tovich and our Chief Operating Officer Jason Economides. I'll give you a summary of our results before handing back to the operator for questions. And just as a reminder, the presentation is available on our website. The most important commitment we make at South32 is that everyone goes home safe and well. This year we did not achieve that. We are deeply saddened by the loss of our colleagues, Mr Desim Menez, a contractor who was fatally injured while undertaking electrical work at our vessels mine at South Africa Manganese in November. Our deepest sympathies are with Mr Menez's family, friends and colleagues. We provided them with our support following this tragic incident and undertook a detailed investigation to understand what happened. The learnings were shared across our business and we held stop-for-safety conversations to discuss, and learn from them to prevent a similar incident occurring at any of our operations again. Moving to our results. During the first half of FY22, we undertook a review of our safety performance and identified areas for improvement. This formed the foundation of our Safety Improvement Program, a three-year global program of work designed to achieve a step change in our safety performance. When it comes to our operations this year, we delivered stable operating performance, despite a challenging external environment which included managing the ongoing impacts of COVID-19, labour availability and extreme weather events. We achieved record production of Worsley alumina and at Hillside Aluminium and Moselle Aluminium continued to test their maximum technical capacity. At Ceramitosa, we achieved a 22% increase in nickel production. And at Cannington, we exceeded our already increased production guidance as you transition to a new operating configuration. We delivered record earnings in cash flow as our stable operating performance, the implementation of logistic solutions and recent portfolio improvements enabled us to capitalise on significant price tailwinds. We generated a record underlying EBITDA of $4.8 billion and record underlying earnings Free cash flow increased by more than 200% to $2.6 billion and we finished the period with net cash to $538 million after funding $1.5 billion of investments to improve our portfolio during the year. As we continue to transform our portfolio, our capital management framework remains unchanged. A strong balance sheet is at the core of our strategy and our framework is designed to reward shareholders as our financial performance improves. Reflecting our strong financial position and disciplined approach to capital management, the Board has resolved to pay a record 648 million US dollar fully franked ordinary dividend in respect of FY22, and 139 million US dollar fully franked special dividend, taking total dividends to a record 25.7 US cents per share for the year. Our total shareholder returns of $1.3 billion in respect of FY22, including our ongoing on-market share buyback, was also a record. And today, we have further expanded our capital management program by $156 million to $2.3 billion, leaving $250 million to be returned by September 2023. During the year, we accelerated our portfolio transformation increasing our exposures to the metals critical to a low-carbon future. We acquired a 45% interest in the Cerro Gordo copper mine in Chile. We also acquired an additional 16.6% shareholding in Moselle aluminium, which benefits from access to hydro power. And we achieved first production from the restart of the Brazil aluminium smelter using 100% renewable energy. These investments in our aluminium value chain have increased our low-carbon aluminium production capacity by 100%. Our attractive commodity mix also includes a growth pipeline across development assets and exploration properties in lead metals. Looking ahead, we are well positioned heading into FY23, given our growing production profile and strong balance sheet, and we are well placed to capitalise on the increasing demand for base metals as the world transitions to a low-carbon future. Thank you. And I'll now 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 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Green from Credit Suisse. Please go ahead.

Hi, good morning, Graham and Katie. Can I just start off with asking a question on the cost base of the African smelters? I note on slide 46 that raw material inputs across both smelters are around 52% of your cost base. But then in the release, it's saying about 77% for hillside and 74% for Moselle are power and raw materials. So do I interpret that as based on the FY22 cost that about 25% and 22% of your cost base is related to power? at Hillside and Moselle, respectively. Is that a fair observation? And if not, perhaps can you just provide some comments on how much of your absolute cost base is currently power-related, and how often is this price reset to reflect what we're observing in the PPI space? Thanks.

So maybe I'll hand it over to Katie to give you some of the background on that, but I would start off with one of the advantages we do have in our smelters is compared to what's happening, particularly in Europe at the moment, is we do have longer-term contracts. And while they do have inflationary increases tied to PPI indexes, they don't have the same exposure to spot prices. But maybe, Katie, you can talk about the breakdown of the actual aluminium smelter costs.

Yeah, so thanks, Matt. Yeah, look, you're spot on the money in terms of your observation in terms of the cost base, around about 25% being related to electricity. And those PPI adjustments are made on an annual basis in relation to hillside. They're reset every August.

Okay, that's great. That's very helpful. Thanks. And then if I could just move on to Worsley, just your comments about the performance of the third-party coal supplier. Can you just elaborate on what challenges are being faced there?

Yeah, maybe if you take a step back, obviously we have a combination of different energy sources that feed Worsley. Predominantly, we use the coal for steam generation. We have two coal suppliers at the moment, and both of those coal suppliers are obviously going through a period of change with the government announcing, if you like, some closure of their power stations long-term by 2030. And I think the other piece at the moment, it's been traditionally a wet time of year in the southwest of Western Australia, which has probably had a bit of an impact on the mining and productivity rates. There is some ongoing discussions around the longevity of both of those suppliers with the changes in government requirements, if you like. But that's something we continue to engage with. Don't know, Katie, do you want to add anything to that? No, she's fine. Does that help, Matt?

Yeah, that's helpful. Thanks, Graeme. And just lastly on the unit cost guidance, if I recall, I think controllable costs are up 3% in FY22. What are you assuming on the controllable cost front into FY23?

Yeah, what you're seeing is actually a 2% uplift in our controllable costs relative to our total cost base in terms of FY22. I think, I mean, probably, and it may be worth just touching on cost guidance as we're looking into FY20, because I'm sure it's going to be topical. But certainly what we have factored in is the relevant inflationary pressures that we're expected to see within the business, particularly in the raw materials input price sites. And to call out probably in terms of, say, Worsley Illumina, that's probably where we're seeing the biggest sort of uplift in terms of FY22 to FY23 guidance. And of that, probably a couple of things to point out in terms of Worsley. One is our unit cost, and it's across the board, capture freight. And so that's a pass-through for us, and you should expect to see that come out in revenue. So if you look at Worsley cost guidance for 23 at 296, Once you back up freight, we're looking at about 270. I think the other point on Worsley is we're seeing about 65% of the cost uplift from 22 to 23 directly related to our caustic price assumption. So again, what we're seeing in the market at the moment is caustic prices have certainly come off compared to the assumption that we had made there. So for every $40 a tonne reduction in caustic, you would expect to see a $4 a tonne impact on our unit costs. coming through there. Probably the other ones to call out, CERO, we have provided guidance at $4.97. That's pretty sensitive to currency and FX assumptions. And if we run our spot FX through CERO today, you come in at somewhere around $4.66. So that is pretty sensitive in terms of FX assumptions. The other one I wanted to probably call out is Australian manganese, which is the other element of cost guidance that's moving up. In terms of Australian manganese, it's probably the key takeaway. I think there is, while we're seeing an increase in strip ratios year on year coming through, we are continuing to benefit from PCO2 price realisation. And what you're seeing is that over FY22, in fact, we saw price realisations across all of our products coming in at index. So you're seeing PTO2 prices really mitigating some of that erosion that we might see in margin associated with increasing strip ratios.

And maybe just worth adding to Katie's couple of points there, I mean, I think the broader industry is pricing strong inflationary pressures at the moment. If you look at the work we've done over the last 12 months and the work ahead, and you take some of those examples at Canton, you've seen us actually change, if you like, the way to get material out of the actual underground to actually give ourselves more flexibility, more access, if you like, to the high-grade material. At Ceramitosa, you've seen a series of projects such as the QMP project, the Osmoc project, that allow us to lift productivity. Worthy, despite the cost increases we're seeing with caustic soda, which are large, we have seen the team continue to actually, you know, creep and push that production record that we saw this year. And then if you sort of take a look at places like Moselle and Hillside, we've got the rollout of the AP3XLE. So I think while there are some things outside of our control, I think the teams are taking some really positive steps to mitigate those impacts. And that's obviously an ongoing push within our business around self-help.

That's very helpful. Thanks. Thanks very much, Graeme. Thanks, Katie.

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

Thanks. Good morning, Graham and Katie. I hope you're both well. Graham, can I just focus on some of the projects? To start with the Illawarra and the decision not to proceed with D&D, which, you know, listen, I think it's the right call. It's better to buy back stock and allocate capital into base metal projects. But I just wanted to understand the decision on this. Was it purely that other projects in the portfolio have a better IRR? or is this a combination of the difficulty of actually getting approvals and also you wanting to increase exposure to other base metals? I just want to understand what was the number one thing that actually probably drove the decision?

Yeah, probably the number one thing is always picking one thing in isolation is not necessarily a challenge, but I think it's a bit of a narrow view. I think the way I look at it is, As an organisation, we have a bias to the base metals because we do believe that the world is going to need more of those metals as they decarbonise, which drives better supply-demand fundamentals and hence stronger pricing. So if you have two kind of equal projects, we're always going to push more of the base metals than we are perhaps the bulks. I think the other comment I would make is we also recognise that capital is scarce and putting, if you like, capital to work in the most efficient way is how we actually, if you like, get in a position to outperform our peers. When we sort of look at Illawarra and take a step back, it's been a journey for us. And if you recall, probably over the last 12 months, we've talked about the various pieces of work we have underway. One was to continue to look at a D&D revised project and work that through our project system. The second one was to look at how we optimised Appen by going to that single long-wall configuration from FY25. And that's actually on track to sort of be completed. And the third piece was, you know, looking at the alternatives for dendrobium next domain. And in particular, we've talked about Area 3 that exists, if you like, in the current mining area where we have consent. We've always spoken about it has gas in there, so CO2, not methane. And one of the things we've been running in the parallel is testing to understand how that would work in terms of distractions and how many long walls that the land have access to And I guess what it's come down to, Paul, is the trade-off of putting the capital into Dendrobium next domain versus actually continuing to actually mine in Area 3 but at a slower rate because you've done enough work around the gas to understand how you extract it. And in SQL Economics, staying in current Area 3 and extracting at a lower rate because of the gas, the material there made better sense. You know, we've definitely got plans up to 2028 that are a lock-in. The team now is working on how we extend that to at least get to 2032. And if you think about what we have, if you like, in Appen, we've got a life at least to FY39. So I think if you look at the decision in isolation, first off, it was clear that it made better economic sense to stay in Area 3 and mine those eastern panels. they have longer, if you like, attractive supply and demand fundamentals and hence pricing.

Thanks, Graeme. I like all that detail. And then moving on to Sierra Gorda, it had a tougher June quarter and grades are falling in FY23. You were over there in June. So I guess what I'd like to know is just your thoughts on the performance and what you saw over there in Chile today and how it compares to what you expected during the DD process. So just the growth of this asset with the fourth milling line and the timing around that and maybe potentially capital efficiency of that project. But just curious around just your observations really post that visit and touching on those points.

Yeah, look, if you take a step back and we'll sort of break into components, the visit was actually really good to spend time with the management team there and understand their capability and skills. And it is important to know that it's a joint control, joint venture, and the management team has some really strong people that have come out of Escondida, they've come out of other parts, good, if you like, operating mines in Chile. So you've got some really good, strong, if you like, bench strength in that place. So we spent a couple of days with the management team there and then had about three or four days of technical meetings and planning going forward. If you take a step back and look at the bigger view, if we could acquire the rest of that asset of what we paid for it, we could do that today absolutely every single day of the week. We like the commodity. We like the exposure. We like the fact that we actually think this has got an opportunity to actually grow in time through the currently bottlenecking work that's underway through the fourth line, as you mentioned, but also some other opportunities around the oxide material sitting on the surface. and then, if you like, largely unexplored rest of the land. So we think there's lots of upside opportunity there. You are right, if you look at the fourth quarter, you know, we had a lower copper grade than we actually expected as the mine plan basically moved into the next phase, or phase six, if you like, of the catabella pit. At the moment, in FY23 and 24, we're doing a bit of mining, if you like, on the shoulders of the ore body. The deep bottlenecking project that we've spoken about in the past that essentially lifts the 3 foot by 6% to about 50 million tonnes per annum is on track to be finished by December 22. And the fourth line is currently in the feasibility study, which is expected to be finished around mid, you know, towards, let's say, the calendar year 23. And for us, you know, installing that fourth grinding line makes a lot of sense because it allows you So from that side, we think there's a lot of attractiveness in what the asset has to offer, being impressed by the management team, and certainly happy with what we've got today.

Excellent, Graeme. Thanks very much.

Thank you. Your next question comes from Lyndon Fagan from J.P. Morgan. Please go ahead.

Thanks very much. The first one is just to try and understand the long-term outlook for Illawarra. So I understand the production guidance is now around about 5.5 million tonnes to 28. Can you maybe talk a bit about the cost outlook that's associated with that given the lower output and also just to confirm that beyond 28, assuming you don't get that Area 3 extension, we're at the 4.8 million tonnes that's associated with Appen, and again, how should we think about costs with that lower production base?

Yeah, I think, look, the point to sort of note out first is obviously when you talk about our guidance for next year in 23, we do get back up to that 7.4 million tonnes, of which roughly 3.9 comes from Appen and 3.6 comes from Dendrobium. As you quite rightly point out, as we actually move into those gassy areas, you know, the mining rate coming out of Dendrobium will actually slow down. And that's the balance, if you like, the extraction of the CO2 gas versus the productivity rate. I think the flip side that sort of works for you on the productivity side is that you are moving into that single long wall from about FY25, and that will actually bring further operating and capital efficiencies. In particular, you know, that single long wall operation that happens allows you to dramatically reduce the complexity, get rid of the delays on long-wall changeovers, less, if you like, gas crews, less development crews, and that makes a real big difference. For example, you go from, you know, seven to four continuous miners and you have a development reduction, which is material. But it does require you spend a bit of money, if you like, on bench shafts seven and eight, and that expenditure is about the $260 million we've spoken about in the past. And you would spend the bulk of that money over FY23, 24 and 25, which is why we have elevated sustaining capex numbers. Now, there's still further opportunities to obviously improve in both Dendrobium and Appen. But if you focus particularly on Appen, as you look at Benchart 7 and 8, I think there is a real opportunity to have a look at how close we get to the actual operating development areas. Because at the moment, because of the age and the layout of Appen, it probably takes our crews As we look at those vent shafts, we'll look at ways to get quicker access to where they need to be to actually reduce that tramming time. So we believe that's one opportunity to actually improve, if you like, the productivity rate that we actually have. I think, look, the second piece that I'll talk about is that sustaining capex does come down from that peak that you see in 24, 25 to more normalized levels beyond 25. And I'd like to see that the team probably gets somewhere around an all-in operating costs, including sustaining cap access, somewhere around $130 a tonne. We've talked about a little bit of a range in that space, all-in costs for $135 to $150 a tonne, but I believe they can get closer to that $130 with some of the work we're looking at in that city we were pushing them towards.

And Graeme, just to confirm, once Dendrobium's out of the picture, With those efficiency gains at Appen, what is the nameplate of that beyond FY28?

So if you think about Appen, you can probably run Appen around 4, 4.1, 4.2, around that kind of mark. But again, I wouldn't say that Dendrobium 28, we think we're finished. You know, what we're talking about now in Area 3 is we have very clear plans and extraction rates to actually take care of, you know, extracting material up to 2028. If you look on the picture that we actually had, if you like, in the slide pack on Illawarra, you'll see in Dendrobium there is a large already approved area that we don't currently have in our mine planning process. And on top of that, there's remnant mining. So that's the kind of material that the team will now start focusing on. As you'd expect, over the last 12 months, they've been very much concentrating on the work that we spoke about earlier. the trade-off between Dendrobium Next Domain versus the current Area 3, and also optimising what we have at Appen. I'm confident that teams, now they turn their attention to beyond 2028 at Dendrobium, they'll find enough material to at least get to 2032, if not more.

Great, thanks. And just switching tack to Hillside, I just wanted to revisit some of your previous comments around the power contract. So I'm assuming it's up for renewal around 2030. You mentioned before that if ESCOM doesn't have sufficient renewables on offer, you're not really interested in signing that. So I guess I just wanted to try and explore that a bit further. So if we run the scenario that for whatever reason ESCOM doesn't have the renewables available, What are your options at Hillside post-2030? You've kind of sort of mentioned it's not necessarily an asset that you want in the portfolio under that scenario. So I just wanted to explore that a bit, please.

Yeah, so the current contract we have in place runs to 2030. From our position, we've always been strong that we believe over time you'll see green premium in aluminium. You know, Moselle has the benefit today of having a hydro contract. You know, we'd like to be in a position where all of our aluminium production is green, because we think premium or discount in the future, there's going to be a differential in the marketplace, so it's important to capture that. You know, we have time to work through this in South Africa. What we have been very clear to the government is that, you know, Hillside today played an important, if you like, role in the stabilising of the ESCOM grid in terms of we're the largest off-taker, we're the largest paying customer. We've given them the ability to actually load shed by working with us. We're also the reserve battery if they need to restart up again. So there is a lot of, if you like, connection between ourselves and ESCOM. And the day-to-day working relationship is actually fantastic in terms of how we manage the load shedding. And despite the fact we're having record load shedding, you're really seeing Hillside operating close to the maximum technical capacity. And that's a function of our team on the ground, but also the ESCON team. So I think it's a really positive relationship. What we're working on, if you like, is two aspects. We're working closely with the government about how they can continue to actually change policy to open up their network to more than just coal. And you've seen that recently with government announcements to actually encourage independent third-party power producers, and that's included removing some of the restrictive caps, putting out their tender work, and you will actually... ESCOM, particularly Andre Dureta, who's the CEO, talking about their 10-year plan to decarbonise their network. We've also done a lot of work, which is shared with the Department of Trade and Industry, but also ESCOM, which talks about it's very... You know, it's not... not technically a challenge to actually have the smelter running on renewables, and also done a lot of work with them, if you like, about how that progression can actually happen. And the reality is, while we don't want to invest our capital, providing a long-term off-take agreement is something that many of the, if you like, the producers will be looking to actually have when it comes to independent power. So we're working closely with ESCO on the long term. In the short term, we still think there's opportunities to actually look at some of the different power that goes into the ESCOM system, because today you're already seeing the green stuff grow, the unallocated nuclear. So we're working to try and actually work with the government and ESCOM about how instead of getting allocated coal power, we could work with them to increase that third party, if you like, renewable sources, have also access to nuclear, but to achieve, if you like, a totally green power source by 2032.

Thanks, Graeme. I'll pass it on.

Thank you. Your next question comes from Khan Pekka from Royal Bank of Canada. Please go ahead.

Morning, Graeme, Katie and team. A few on Illawarra, if that's okay. Just wanted to get an understanding, the cost guidance that you provided, I think 105 to 120 without D&D. Can you maybe provide the split of what comes from the operations and what comes from the increasing import costs?

The increase in what cost, sorry?

Port.

Yeah, look, we actually ship out... If you think about where our product goes, it goes to two sources. One is PKCC, where we basically export it overseas and be high-quality coke and cola swell sought after. The other piece of our product goes domestically to Blue Scope Steelworks, and that's a combination of athene and dendrobium. When it comes to those logistics, costs and port costs, we don't see those actually shifting materially. I think the biggest increase at the moment is in assets, probably twofold, is one, the sustained capital that we're putting into the business over the next couple of years to actually shift to that single long wall configuration from FY25 in Appen. And dendrobium, obviously the unit cost is actually shifting as we actually produce less tonnages as we actually extract reduced at a slightly lower rate. Now the flip side to that, as I mentioned earlier, I still think there's some improvement opportunities that we haven't got baked into our numbers as we look at bench shaft 7 and 8 to get our people easier access to where they need to be from a productivity perspective. But certainly the port costs aren't planned to increase. Kate, I don't know if you want to add anything to any of that?

No, I think probably the only thing I'd say is Illawarra as a complex has a pretty high fixed cost base. So really the driver for us over the next couple of years is to look at opportunities to push down and optimise that fixed cost structure as we reduce volumes.

Does that help? Yeah, definitely. Thank you. And just on Illawarra as well, with the Illawarra blends, I mean, without dendrobium, do you expect an impact on that?

Impact into the objects... No, we don't see there's a big change in that aspect. I mean, I think what you might have heard is Blue Scope talked, if you like, about the quality of material that we produce. And for them, they're looking for a combination of what's called Scene 1 and Scene 3. Scene 3 comes from Dendrobium in Area 3. Scene 1 comes from Appen. So they're probably more the one that will talk about the blend that they want, which is configured, if you like, for their steelworks. And we achieved that in the current mine plans. I think when you actually look at the broader export material that we have, and a good reflection is if you look at the LB high coking coal, you know, if you look at the index, you know, we're beating the index by about a 1% premium today. And I think that's reflective of the quality we have and the quality we expect going forward.

Just to confirm that, don't expect any impact of the Illawarra blend?

No. If you think about energy coal... we have a small fragment of energy coal that comes out of the dendrobium area. If we stop producing it dendrobium ultimately, whatever that date would be, then that small fraction of energy coal actually vanishes.

Thank you. And just last year on Sierra Gorda, just wanted to get an understanding on how long you think the low copper, high grade part of that ore body is expected to be mined.

Yeah, so we're working with obviously the team there to look at the mine planning and look at what it looks like longer term as we actually obviously have our ownership interest and start to work through that. What we have seen obviously in the fourth quarter of FY22, we saw the copper grade at 0.4 was lower than expected and that really reflected the mine plan move into the new phase six of the Caterpillar PIF. What we do expect in FY23-24, we'll be mining some of the shoulders of the ore body as we sort of set it up for the future. back in the central part of the ore body. So in that, you should expect to see the grades lift back up again. Again, I wouldn't ignore the fact at the same time in the background that the Bollinecking project is on track to be completed by December 22, and that will list 3.5 out of 6% to 50 million tonnes per annum. And then we've got the fourth line, which is currently a feasibility study, and we believe that that will actually allow you to lift that concentrated capacity to 58.4 million tonnes per annum, which is about another 14% increase.

I suppose following all that, so we should expect above reserve grade in 24 and 25 and possibly 26?

So 25, 26, you should be seeing it there and you'll see a transition if you like towards it back into 24.

Thank you. Very helpful.

Thank you. Your next question comes from Lachlan Shaw from UBS. Please go ahead.

Morning, Graeme and team. Thanks for the briefing. So just a couple of questions on me. So just quickly on costs at Worsley. Costing prices have obviously come off. Are we right to think that it might be maybe a six-month lag until you see that coming through the business?

Yeah, look, I'll take that one. Look, we effectively buy on a market basis. and we don't have significant volumes of storage capacity in terms of costings, so you'll probably see a two- to three-month lag in terms of that pricing coming through.

Okay, got it. Thank you. And then just going to returns, dividend, buyback, can you just give us maybe a bit of insight around how the board is thinking about that at the moment. Obviously, share price has come up a little bit or it's rallied recently, but what's the thinking in terms of that split going forward?

Yeah, I'll get Katie to take that one, but I'll be honest, I think the IR team have a fantastic slide in the PAC slide 18 that sort of, if you like, overlays share price and our buyback activity versus our dividend, which I think talks about it. But maybe, Katie, you can sort of pull out some of the details.

Yeah, look, I think, I mean, what you would expect to see is nothing different than what you've seen in the past. I think in terms of our ordinary dividends, you know, a record ordinary final dividends this time around, and it reflected our dividend policy of a minimum of 40% of our underlying earnings. But what you have seen, of course, is the step up in terms of our capital management program by $156 million. That brings us to $250 million outstanding as we go forward from today on that program, which we are still looking to execute in the form of an on-market share buyback. We certainly see value in our shares today, and you will see us execute that program, which is reflected pretty well on slide 18, I think, in terms of our value accretive approach in terms of how we execute that program through the cycle. So you'll see it's by smaller volumes at higher prices and increased volumes as the price moves down. And certainly, you know, we've brought back 13% of shares on issue to date at an average price of $2.93 a share. So I think certainly, you know, a well-executed program today, you wouldn't expect us to do anything different going forward, but you do see that shift between the on-market share buyback and dividends as our share price moves through the cycle.

And the critical point, I think, that Katie made a couple of times is consistency. And certainly we've got no intent to build any kind of war chest or cash. We'll always look, as we have been, to return excess cash back to the shareholders in the most efficient mechanism.

Yeah, but probably the only other thing I'd add there as well is with that top-up to the... to the buyback and also with the ordinary dividend. That brings our adjusted net debt to $499 million, which we see is the right balance sheet position for us going forward from today in reflecting our current portfolio and our forward capital profile.

Great. Thank you.

Thank you. Your next question comes from Hayden Bester from Macquarie. Please go ahead.

Good morning, guys. Graeme, just a question on Worsley and the broader alumina market. Just interested to get your thoughts on, you know, we haven't really seen a change in the ratio of alumina versus of aluminium, really. The power costs in aluminium have gone up a lot. So have your caustic soda prices. I know they've come off a bit, but they're no longer sort of $200, $300. Do we need to think about, you know, effectively there's just going to be a lower margin in the alumina industry if you are unable to pass these costs through, or do you think it's a shorter-term issue with, power prices in aluminium that will enable you eventually to push alumina higher versus alloy to offset some of these high caustic prices?

Yeah, look, good question, Hayden. I think maybe let's start with the pieces that are within our control. Certainly from our perspective, you know, over time and having watched the industry for many decades, we do see the value sort of move up and down the chain. I think with the additional stake we've taken in Moselle, the restart of the alumar smelter on renewable power in Brazil has allowed us to double, if you like, effectively our low-carbon aluminium production. And the additional acquisition, if you like, in MRN has really actually, if you like, taken out some of the leakage we actually had in the chain. So we've got a much more holistic covered chain now. Look, what you have seen, obviously, is some spike in price. You've seen some low levels of prices over the last couple of months. You know, if you talk about some of the charts that we've had in our pack, And if you talk about aluminium, based on the CRU numbers, you'd probably say in aluminium space that about 30% of the actual chain at the moment is loss-making. And in the alumina side, it's probably about 35%. So that is telling you we are seeing a squeeze, if you like, on pricing in the short term. We are starting to see, if you like, some capacity shuts coming in both the alumina and the aluminium side. As a consequence, there is some short-term pain that we're seeing. But to be perfectly honest, our long-term view of where we see alumina and aluminium going hasn't dramatically shifted. If you look at aluminium space and you have a look at the long-term signposts that are important, particularly around China, not over-investing in capacity and actually scarring back capacity to that cap, nothing's changed in our view in that space. We still see all the right signals. And if you talk about the alumina side, While you are seeing, if you like, an impact at the moment around caustic sodium, that's come up a little bit, we're still well positioned when you think about the shape of the cost curve with the levels of reactive silica we have. And long term, we're still confident in the price. It's above today's spot price. And we've talked historically about a price around that $3.90 mark. That probably hasn't shifted from our position yet. So, you know, while we don't have large-scale, you know, we're creeping in both of our refineries and we're creeping slowly in our smelters for efficiency projects, we think that's the right way to continue to invest in the business. But we will see the value shift up and down, but we're really close, if you like, some of the leakage in that value chain.

Sorry, you go, Katie.

Just to reiterate the point I made before as well in terms of our cost guidance, we do have that freight component in there. So if you back that out, you're looking at around about $370 a tonne.

Okay, great. And just on the manganese market, Graeme, it had a pretty extraordinary pricing period for the early part of the year. It's sort of come right back now to where it sort of averaged last year for most of the year. Just keen to understand the dynamics of that and where you guys think the outlook for manganese might be? Is there sort of risks of a further price downside from here in the short term?

Yeah, look, the one thing we've always talked about, you would have heard us talk about a lot in manganese as it goes up, it comes down. That's really a function, if you like, very much of the swing production that you see come out of South Africa. And if you're thinking at the moment what drives that, well, today it's the marginal cost of trucking, which on a 44% SIF equivalent base is probably somewhere between $5 to $5.50. You know, obviously, in the short term, you're right. We have seen, for example, the August prices decline quite significantly, about 27% below the peak that we're seeing earlier in the year. And the three big drivers, I guess, of that have been, one, the reduced steel demand that you're actually seeing in China, but also ex-China at the moment. And the second piece is you've had strong exports coming out of South Africa and also Gabon. So we think that's sort of what's putting some downward pressure, obviously, on the price. I think, look, for the balance of this year, there's a potential that you actually see a growth in the stockpiles or a surplus in the marketplace, particularly with the, if you like, not large uplift that you'd expect to see in steel production in China or some kind of stimulus not sort of playing out at the moment. So that's something we watch with interest. Long-term, look, we still believe that you'll see a long-term price that really is driven by the marginal supply coming out of South Africa. but that'll probably be a move away from trucking, where we talk about the $5 to $5.50, to more of a move towards an underground mine, which is lower grade, which lets you set, if you like, the price going forward. Still makes an attractive industry for us, but certainly you're seeing some of those steel dynamics at the moment having some pressure. When it comes to Gabon, we probably don't see them dramatically increasing their production. We think they're probably at that plateau point now, which will hold for a fair period of time. but we'll continue to watch South Africa swing in and out based on price.

Yeah, terrific. Thanks for that. I'll leave it there.

Thank you. Your next question comes from Rahul Anand from Morgan Stanley. Please go ahead.

Hi, Graeme and Katie. Thanks for the opportunity. Look, perhaps if we start with Sierra Gordo, it's a two-part question. I wanted to perhaps understand, I saw the tax disputes with the seller of the asset that you had, but then I also wanted to touch upon how does that NPV adjustment mechanism look like in the case of royalty changes? If you could perhaps provide a bit of light to understand whether there's enough securities built into that agreement for you to be reimbursed in case that NPV does change materially. That's my first one. Let me come back with a second.

Yeah, I'll get Katie to talk through the royalty tax changes, but I would flag at the moment there's a lot of uncertainty what they look like, not only around the royalty changes, but also the constitutional referendum. And if you look from two fronts, at the moment you're seeing probably not a strong level of support to support the constitutional referendum. And the royalty stuff is an ongoing discussion between, if you like, the Minerals Association slash Council in Chile and also the government. So we wouldn't expect that what the current numbers that are out there is where it actually ends up landing. If you talk about the dispute with Sumitomo, and Kay, you'll come back to the royalty and how the exemptions work. You know, we are in a dispute with Sumitomo at the moment of $130 million of pre-closing tax liabilities. We're recognising a contingent asset for this, but we're very clear in our mind that that's money that Sumitomo will owe us. And we'll work through that process with them as we go through the dispute. Maybe, Kay, are you talking about the indemnity and the royalty changes and how that would work?

Yeah, look, I think, I mean, probably a couple of key points around what's happening at the moment in Chile. Certainly what we have seen is that Chilean ministry has confirmed that the stability agreements will be respected, so I think that's a fairly key point for us, which means no impacts until 1 January 2029 in relation to Sierra Gorda there. And then in terms of the tax indemnity, look, the indemnity... provides for payment to South City 2 at the time of any changes of law enacted prior to December 2025. So it is a cash payment determined at the time on an MPV basis. And the intent of that indemnity is to protect us from the introduction of any new mining royalty tax changes or changes to existing mining taxes and changes to corporate tax rates if they primarily relate to the mineral industry. So we will make an assessment once the proposal becomes law and we have a better understanding of what that looks like.

On Sierra Gorda, the oxide circuit, Graeme, when do you expect that project to come online and perhaps what sort of capex should we be looking at?

Yes, I'm talking about, from memory, about 130 million tonnes that are sitting on the surface. It's not a complicated process. You know, obviously, in that part of Chile, you see a number of different operations are already doing that. To be perfectly honest, though, in the short term, our focus is more on completing the deep bottlenecking work that's due to be finished by the end of December 2022. And then the next piece that we think gives the best bang for the buck is actually around that fourth line expansion. And we're currently in the feasibility study of that. They're probably the two major focuses. The oxide work has been worked a little bit slower in the background.

Perfect. Look, final question is around Hermosa. We've seen the inflationary environment, and I just wanted to touch upon perhaps the CapEx estimates you last put out at the start of the year. I know production is some time away still, but How are you seeing the market in the US and the general level of inflation and what type of risks do you assess at Hermosa in terms of any sort of long lead items? Have they already been ordered?

Yeah, so maybe there's, I guess, different levels of impact, if you think across that business, but maybe start off with where we are in FY20s, where are the activity under way? You know, at the moment, we currently are in the feasibility study, and that's on track to be completed by mid-calendar year 23. And as part of that process towards the back end of this year, we would typically go out and revisit our numbers to understand what they look like in terms of inflationary impact, but we'll come back to that. What we have also in 23, getting and expecting, we've got our state permits received for deep watering. The water treatment plant number two... is actually on track and to date is scheduled to be commissioned in the fourth quarter of FY23. We're seeing some small inflationary impacts, but nothing that the team can't manage and nothing that isn't, if you like, covered by the contingency we have on place. Six of the nine deep watering wells, they're needed before you actually get into the ore body and the shaft sinking. We expect to finish those in FY23. And on the positive side, you know, we're seeing the client PFS study progress well. We expect to finish that by the end of this calendar year. And that's obviously something that's getting a large piece of support in the US when you consider that manganese now is, if you like, you know, sort of being declared, if you like, a critical mineral and how that's being treated in the US. And at the same time, in FY23, you know, we're continuing to drill peak And also we'll start drilling in flux in early, you know, probably January, February next year. So I think there's lots of positive stuff that's going on at Mosa. Probably the interesting piece is if you think about that capital estimate, and again, we'll update it as part of the feasibility study, but I know one piece of work that the team's looking at the moment is around shaft sinking. And while shaft sinking, you know, obviously there'll be some inflation impacts in the broader marketplace, in many ways we've got our timing right because there's very few shafts getting sunk in North America at the moment. so there's actually an abundance of excess people and equipment. So I think we're going to have to look at it piece by piece about how we do the work, but clearly we'll be looking at the inflationary impacts as we consider the project. But the most important thing for us in the short term is the dewatering, and that includes Building Water Treatment Plan No. 2 and actually putting, if you like, six out of those nine dewatering wells, and at the moment they're not being impacted by inflationary pressures at all that's even managing that well.

Perfect. That's very helpful. Thank you very much.

Thank you. Your next question comes from Peter O'Connor from Shore and Partners. Please go ahead.

Good morning, Graeme and Katie. Back to dendrobium. So the proportion of labour across Illawarra in general, but dendrobium specifically, which is labour-based of your costs,

Yeah, so it's about, I mean, Katie will go and look at the numbers, but it's about 500 people that work at Dendrobium. We had probably about 19 people who were working on the project, of which three were our people, and 16 were contractors. You know, some of that 19 people will be reallocated to some of the bench shaft work. If you sort of think about a breakdown of the operating costs and what we look at, total work, so about the Dendrobium, The total workforce is probably around 2,100 people, of which, again, 500 are probably at Dendrobium. What else do you want to understand, sorry, Rocky?

So what proportion of the cost base is labour?

I'll have to come back to you, Rocky.

Give me a second. Okay, so stepping ahead then. When you step down Dendrobium to the 1.5 million tonnes rate, And then you talked about going beyond 28, maybe to 32 or beyond. I imagine that would step down again, because you're starting to talk about remnant mining. What step down does occur at that point? To what level?

And I would say at the moment, Rocky, what we're very clear about is what are the numbers of flights to 2028? You know, what will give more clarity as the team does more work is what does it look like beyond 2028 as we do that work? There are a number of panels that will still be, if you like... similar to what we're mining up to 2020 to have higher levels of CO2, which means your extraction rate will be slower as you actually gas drain. It doesn't mean from 2028, for example, to 32 years straight into remnant mining. There's some more panels that we look at that will be conventional mining, but we just haven't done the work to firm that up yet because of the concentration on understanding the new domain piece versus the existing area. Katie, the operating cost piece?

Yeah, so, Rocky, of our total operating costs in 2022, 44% related to labour, including our contractor workforce.

With that in mind, Katie, and you mentioned before earlier that your fixed costs are lower or higher. It's not surprising. And you stepped down production, was it to 2025-ish or whenever? How many... What proportion of that labour needs to be retrenched... To maintain a cost base, which is within the guidelines you've talked about.

Yeah, look, I mean, we're still working through the levers that we've got in terms of cost optimisation, and that's a process we're going to go through over the next 12, 24 months. So it's probably too early to comment.

I think that's the right answer, but I'd also say at the moment probably costs are reducing business. Our vacancy rates are really high, Rocky. You're probably looking at an average of $100-ish 100-plus in most of our operations. And I think if we actually think about the timeframe between now and 2028 and 2032, I think if you look at the turnover rate that you're actually seeing in the industry and the ageing of the workforce, I think there'll be a transition plan that will allow you to manage that movement of people.

Okay, so it may be the case that there are trenchments naturally occurring, which is a good thing for you.

Yeah, I think that's right. I think, you know, that might be in place for a period of time, same as that. And there's naturally turnover we're seeing from attractiveness, but we're also naturally seeing as age comes into play, people start retiring. And we've got quite large vacancy rates at the moment. So I'm not worried about we're going to put up a lot of people. I think that'll naturally work itself through.

Okay, that's great feedback. I'm a little minute to Hayden's question. So you gave a really detailed answer. Thank you. Just back to the point about the link, the old aluminium versus alumina link, it does sound like it's the numbers we used to think about are not there anymore. And as a long alumina producer, you're missing that potential that's gone to the aluminium side. So is that short-term, medium-term, long-term, that that link stays different to what we've been used to? Yeah, look, okay.

I think, again, the comment around vertical integration I think is important because, you know, we have obviously increased our stake in the smelters of the Moselle acquisition. And even though we talk about our sales to Moselle, obviously we still actually sell to the other parties in Moselle as well. So, yes, we are slightly long in the Illumina position, not so much in the Americas part of the country now. And you'll also see we've got the Elva deal, which actually was designed customer which means you also don't have that large exposure and it's not about price risk because it's tied to the index, it's more about performance risk which you've taken away.

Okay, thank you. And lastly on Chile, consultation sounds like it's been high with the government in Chile relating to the mining industry. What level of participation of South32 or Sierra Gorda as a company had with the government ahead of potential changes to the constitution, the mining code or royalties?

Yeah, I mean, clearly when it comes to industry-shaping events, we work very closely with the National Mining Agency or Council, whatever you want to call it. So we're, you know, KJHN and Sarah Gord are an active participant in that. You know, obviously we have strong connections to Rio and also BHP, but also, you know, Antifagas that we work through on that side. So, look, we're actively involved in those discussions. We're very keyed into, if you like, some of the talents that's going on in the country. To Katie's point, we have probably one of the longer stabilisation agreements in place that finishes in 2028. But clearly, from our perspective, from the industry, you know, Chile's been a good place to invest. I think it's important for their own economic growth. They continue to make it a good place to invest. I think the flip side, if you want to be pessimistic and say that it goes, price curve and the cost curve.

So to be clear, you haven't had direct discussions, but through the mining council and your peer group, you're closely related to what's going on on the ground?

Correct. And look, the Sarah Gordon management team has had direct conversations and they're the appropriate people to have it. We manage it through the committees behind the scenes and also some of our people, if you like, that have experience in Chile.

Thanks, Graeme. Thanks, Katie.

Thank you. Your next question comes from Glenn Laucott from Baron Joey. Please go ahead.

Good morning, Graeme. I joined a bit late, but I believe you touched a little bit about aluminium and the smelter cost, but more the breakdown of the historics. Could you maybe give a little bit of quantitative discussion around where the costs sit today? And I think from memory, you reset the power contract every August. So maybe just in that quantitative commentary, talk a little bit about how high the power prices have just gone up if they have been reset. Thanks.

Kat, you can talk through that detail. I think just to your point, it is important to note that, you know, obviously we have seen the smelter margins move up and also the costs have moved up, particularly when you think of things like pitch, coke, et cetera. But it is interesting, if you look at the percentage, if you like, if you look at the percentage, In FY22, we're probably looking at somewhere around 37%, whereas the average in the previous year was probably a couple of years was around 40%. The power itself generally makes up about a percentage of the smelter costs. 25%. 25%. We have two long-term contracts, which I think is important to note. We're not exposed to the spot price. but we do have inflationary impacts in Hillside as a PPI, which is done about every August, which is a 12-month renewal based on when we signed the contract. Katie, maybe talk about what that's looked like over the last period of time.

Yeah, I mean, probably the only other comments I'd add to that, we do have the PPI linkage in relation to that agreement, and it is a ZAR-based agreement, which is different from what we had in the past. So we are exposed to movements in the South African RAND as well there I think probably just looking half on half, Glenn, too, in terms of H1, FY22 to H2, FY22, we have actually seen efficiency improvements at Hillside in terms of energy use and therefore a cost reduction in our electricity costs, half on half. And again, at Moselle, we have a similar construct in place in terms of what that pricing structure looks like.

If you think about an increase, it's probably been around the 80% mark when you look at the PPI for the country.

Sorry, Graeme, what was that? That was 8%, did you say?

Around 8% is what the general PPI has sort of been flagged in South Africa at the moment.

So my question was quantitatively, though, if I looked at where we sit today, so we're in August, you've had your 8% lift in the PPI. but you've got a Lumina price obviously flowing through now much lower.

Yep.

Is the cost... Quantitatively, costs somewhere between second half and first half then now for both smelters, Hillside and Moselle, or...?

Yeah, you've probably hit the nail on the head. That's roughly where it would be.

OK, cool. And then, second question, just... Katie mentioned earlier in the Q&A about... I think the question was $499 million adjusted net debt is appropriate. When we were talking about getting rid of SA Energy Coal, there was talk about, you know, we get rid of the big provision on the balance sheet, we might be able to move to a net debt position. Is your thinking changed now? And if so, why?

Yeah, I think, Glenn, that $499 that I'm referencing is our adjusted net debt position post the allocation of our ordinary and special divvies and the Capital Management Program. So we do see that we've shifted, I guess, the positioning somewhat in terms of our balance sheet. But we do, as I said, as we assess the balance sheet, we do it on an ongoing basis in light of the portfolio changes and our forward capital profile in a low scenario. So at the moment, our view is that that $499 million adjusted net debt position is the right starting position for us today.

And what hasn't changed is we don't do projections on prospective returns. We focus on very much the cash and the bank, which is what we're talking about, those obligations we have now around those special dividends and dividends.

Apologies, I misunderstood what you said, Katie. Sorry. And just a final question, Graeme. In light of everything that's happening, the cost inflation, some of it's sticky, some of it's not. And you've talked a little bit about what it might mean for long-run pricing, your comments. Are you making changes to your long-term prices? Where do you think the biggest risks are to you needing to maybe revise up long-term pricing, given what you're seeing in the marketplace?

Yeah, look, I would start off the position, Lyndon, I don't think there's been a better time to be in the industry when you think about the medium to long-term. And, you know, we talk about this bias to base metals, and whether you believe in a one and a half degree world or a two degree world, the one thing you do know is whether it's copper, nickel, zinc, manganese, as you decarbonise, you're going to need more of it. What you do also know is for the probably past decade plus, there's been a lack of investment in new projects, a lack of investment in exploration, and we all know that taking a project from talk about seven years, it's a much longer process now when you think about permitting. So medium to long term, I think the supply-demand gap, and people talk about it in copper, but I think it's going to be equally, if not worse, in zinc. I think that is going to create opportunities for people. So we've got to position ourselves for that. We probably haven't seen a major shift, if you like, in our long-term pricing for a period of time. It's relatively consistent, to be honest. I do think some of those inflationary impacts will come and go. I think probably more where the risk is, and the question was asked earlier, is when you're building a large capital project, is when do you choose to actually build that to avoid the inflationary impact? That's the thing that I think is probably the biggest challenge for the industry at the moment, and it wouldn't surprise me if across the board you'll continue to see projects be deferred until some of that inflation comes out of the market. There will be a little bit of stickiness in the market for a period of time, but I also think the market adjusts relatively quickly as well. A classic example for us, as I mentioned earlier, is we think about shafts thinking in the US. While there are inflationary impacts on steel and cement and general labour, there's not many people thinking shafts at the moment, so there's probably no better time to start thinking about thinking of shafts.

All right. Thanks, Graeme.

Thank you. That does conclude our time for questions. I now hand back to Mr Kerr for closing remarks.

Thanks. And thanks, everyone, for your time today and your questions. Just a quick recap. Look, for us, FY22 was a really strong year in terms of record earnings, free cash flow from operations, return on invested capital. And, you know, we actually returned in shareholder returns with the $1.3 billion return. We've changed the portfolio over the last 12 months with the Sarah Gorda, the MoVal, the MRM, the OMR restart, which I think is positioned very strongly for the future and actually hasn't in any shape or form weakened our balance sheet. It's still a real strength for us. And we've dramatically increased our exposure to those critical metals for the future, which I think is important. In the short term, we've got strong growth, 14% copper equivalent production growth FY23. Mid to long term, I'd argue we have one of the best suite of projects out there to actually deliver on, which will help, if you like, reap the benefits of some of that supply and demand gap I spoke about in copper, zinc, et cetera. So I think we're really well positioned for that. I wanted to thank you for supporting your questions. Thank you.