South32 Limited

Thank you for standing by and welcome to South32 Half Year Financial Results and Outlook Investor and Analyst Call. All participants are on listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Graham Kerr, CEO. Please go ahead.

Good morning, good afternoon everyone, depending on where you are and thanks for joining us today. On the call with me is our Chief Financial Officer, Sandy Sabanala, our Chief Operating Officers, Jason Economides and Noel Pillay, and our President of the Hermosa Project, Pat Reisner. I'll give a short summary before handing back to the operator for questions. I'd like to begin with our most important commitment, that our people go home safe and well every day. We continue to embed our safety guarantee across our business. to enhance our safety culture and fundamentally shift our safety performance. Quite simply, nothing is more important. Today we've announced a major milestone for our business, the final investment approval to develop the Taylor Zinkled Silver Deposit, the first phase of our regional-scale HOMOSA project in Arizona. Since the merger, we have worked to improve and reshape our portfolio for a low-carbon future. We divested South African energy coal, exited manganese alloys, invested to grow our production of low-carbon aluminium, added copper through the acquisition of Cerro Gorda, and embedded high-quality options to compete for capital. Executing the development of Taylor is an important next step in our strategy that will further improve our portfolio by increasing our production of critical metals needed for the global energy transition. We expect Taylor will lift group margins due to its first quartile battery-grade manganese development option, and exploration prospects in our highly prospective land package, which has already turned high-grade copper and zinc results. The combination of Taylor-Clark and the regional land package gives us a platform at Hermosa to produce critical commodities from multiple different deposits for decades to come. The Taylor Feasibility Study confirmed its potential as one of the world's largest, lowest-cost producers of zinc, a critical commodity for the global energy transition. that we expect will deliver value for our shareholders for decades to come. We expect strong demand market fundamentals for zinc, with global demand growth expected to outpace production by about 3 million tonnes in 2031. An industry challenge of similar magnitude to copper. We expect higher incentive prices for zinc as Taylor ramps up to main plate capacity from FY30. Taylor has been designed to minimise environmental impact We've applied next generation mine design principles using automation and technology to drive efficiencies and lower operational greenhouse gas emissions. In line with our goal of net zero greenhouse gas emissions by 2050. The feasibility study confirmed Taylor's position as a large scale, highly efficient underground mine with conventional processing in the first quartile that the industry's cost curve. The initial operating life has been extended from 22 years to 28 through additional drilling and geological modelling for the first time or reserve underpinning the first 19 years of the operating life. We expect to invest US $2.16 billion in direct and indirect capital expenditures with the first production in the second half of FY27, establishing a modern, long-life operation. Most will benefit from being the first mining project added to the US government's FAST-41 permitting process which is expected to deliver an efficient and transparent process of federal permitting for Taylor and Clark. The construction of Taylor is expected to be funded primarily by the group's operating cash flow. Any required external funding would be consistent with our commitment to a strong balance sheet and an investment-grade credit rating. Turning now to our half-year financial results. Macroeconomic conditions created headwinds for our commodities during the half. We delivered group underlying EBITDA of $708 million US dollars and an operating margin of 19%. Operational highlights included a record half-year aluminium output and sequentially higher zinc and nickel production in the December quarter. We continued our rigorous focus on cost during the period and completed a group-wide review that supported operating cost efficiencies and reduced expenditure. This focus supported FY2 operating unit cost guidance being lowered or held unchanged across the majority of our operations. at a 6% reduction FY24 operational capital expenditure guidance. We remain focused on driving operational performance and cost efficiencies across our business. We continue to prioritise a strong balance sheet and investment grade credit rating through all price cycles. As part of this focus and to maintain our balance sheet position, we have taken the decision to cancel our on-market buyback, which was due to expire on 1st March 2024. Consistent with our unchanged capital management framework and in the context of our financial position, we will continue to assess opportunities to return excess cash to shareholders in the most efficient and value-accreted manner. Despite experiencing some challenges during the period, we are expecting a strong second half. We are well positioned to capture higher margins off the back of our expected 7% production uplift and ongoing focus on cost management, coupled with strengthening market conditions for key commodities to start the calendar year. We continue to invest to unlock value from our high quality operations and growth options in commodities critical for a low-carbon future. In closing, I'd like to thank our teams across the world for their hard work and commitment. Looking ahead, we are committed to safely delivering improved operational performance and cost efficiency across our business, and we are unlocking value in our high quality operations and growth options to further improve our portfolio and strengthen our exposure to the increasing commodity demand required for the global energy transition. Thank you. 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. We'll now pause a moment to allow for questioners to register. Thank you. Your first question comes from Tim Clark with SBG Securities. Please go ahead.

Hi there. Good evening. Thank you very much for the time. I've just got a couple of questions please. You've done a formal review and I'm just reading through the cost guidance changes. Some of them look like, you know, caustic soda and various other sort of, you know, kind of input cost changes. I wonder if you could speak to the outcome of that cost review either from a cost or a capex side. you know, what's changed in the organisation? Where have you rationalised? Where have you taken, you know, projects out or made sort of active decisions beyond just sort of the sort of following of normal input cost materials? That's my first question. I'll come back on the second one.

Okay. Sandy, probably one for you.

Sure. So when we think about cost, obviously we're looking at both efficiency opportunities there and then obviously targeting kind of better contractual commercial outcomes as well. And so we've targeted both of those elements. It's obviously very different across the range of our business. But for example, we look at improved kind of efficiency in the way we look at our maintenance program or the types of maintenance, the maintenance program that we're running in different operations. So I think they're probably some of the bigger elements that focus on costs. Obviously we've also looked at any vacant roles, we've looked at all your discretionary expenditure components as well. So fairly comprehensive view of cost across all of the controllable elements and then on top of that we've got the, as you noted, the market input factors that are driving some of the costs as well. On a CapEx front, that's really been focused on efficiency of capital, so where can we combine projects and achieve better outcomes. and also looking at different ways to contract that work or phase that work. Some of the work also, once we looked more deeply at it, didn't return at the same levels because of the capex escalation we have seen across our industry broadly, and as a result, we've put some of those projects into recycling.

Jim, do you want to? Yeah, thanks. It just sounds like a sort of active cost view across the whole organisation. rather than any very specific things. The second one just on Moselle, I was very worried when I sort of saw that Bloomberg article a couple of weeks ago about the 2026 date and I was nervous coming into this result that there could be an impairment even or a risk that that operation is facing significant risk. I wonder if you could just give us some sense of your comfort levels? Because 26 is not far away. It's just around the corner, right?

No, that's true. It's not far away. It's probably something that's been out there for a period of time now. So it's not like we're, and we've talked to the market about it before, and it's not like we're actually all of a sudden dealing with this today. So we have been in discussions for a period of time and have a dedicated team. Noel and myself, even in December, we were with the government and the president of Mozambique And part of that work is putting together, if you like, a working group from our side and a number of key advisors and ministers from his side to continue to actually track this through. You know, if you talk about the economic benefits of Moselle, Noel, maybe just outline some of them for Tim. Yeah, very much so, Graeme.

The economic benefits, as I said, Moselle contributes just under 4% to the GDP of Mozambique. It employs some 5,400 employees. Of course, there's a knock-on impact across the industry with much more than that. A significant play in the Mozambican economy. That's the message we're trying to... On that basis, we're engaging the government of Mozambican-related stakeholders on how to co-create a solution that can preserve that. As Graham outlined, there's an inter-ministerial tasking that's been put together. like Graham's shared, has been ongoing now for the past few years. But again, like you said, you know, 2026 is not far away, and so we want to push that to closure as soon as we can. So that work is underway, and I think, you know, by the end of this FY, we'd have a clearer direction in which way that's going.

Okay, thanks. That's helpful. Thank you. And then just my last question. I would imagine that when you took the Taylor to the board, that you ran a scenario in a sort of almost assuming a spot price scenario, discount rate of whatever it is, 10%, something like that. So just ran a fairly benign scenario through. I wonder if you could speak through whether you, because I would imagine that scenario is not very attractive. So it's obviously a difficult kind of tension point. I wonder if you could just speak through your scenario thoughts around around value at Taylor?

Yes, certainly we can do, Tim, and I'm not disputing that fact and we'll come back to the sensitivities, but I do think zinc is one of the commodities where a number of people, because of the size of the market, don't do the same equivalent work that you see in the copper space. So when we talk about our base case, if you like, that we use, it is not dissimilar from a number of our large competitors. One large North American producer and another one a large trading house. They certainly float numbers out there that are very similar in the timeframe. Wood Mackenzie, when they did a similar kind of inducement methodology, come up a similar price. And then a fair few of the analysts that do a fair bit of detailed work on Zinc also have a very similar price. Now in saying that, price like most projects has a very large sensitivity. We do run a variety of different scenarios on a number of variables, and obviously price is one of those. We have run sensitivities for our board, obviously, on things like consensus pricing, which is lower than ours, if you look at the average of consensus pricing. We've also run our own low case. We also run our own high case and our mid case. So we test a variety of different scenarios to actually test the robustness. I think the critical one for me around zinc is obviously at the moment the spot we don't think is actually a reflection of where we see the market actually being long term. And you can argue for a number of different commodities. Obviously, you get spot price prices at the time that aren't really where you expect things to be. Now, in saying that, when we think about this investment as well, morning, so apologies if you heard it already or people have. You know, what do you really look for in a resource project? You know, you look for something that has a long life. You look for something that has a low position on the cost curve. You look for something that has multiple options to grow, if you like, in the basin over many decades. And ideally, you want it in a safe jurisdiction. If you think about the Hermosa Basin Play, that ticks all the boxes for us. Now, there is no doubt that the first piece of this project is actually, when I say this project, Taylor, it is picking up substantial capital around things like infrastructure, such as water, power, dewatering, tailing facilities, road wallages, etc. In fact, it's roughly around 27% of the capital that's been spent since the pre-feasibility. is around joint infrastructure that will allow us to look at something like Clark. And Clark, for example, has a range of uncertainties. Well, maybe let's talk about the optionality we have in the basin. So I'll start with saying that, look, first off, when you look at Taylor, you know, Taylor, we've added 31% more metal between the pre-season feasibility study. That sort of takes the mine life out to about 28 years. Taylor itself is still open at depth. and it's still open in multiple directions. On top of that, we've obviously got the Clark deposit that sits at the top. That's the Manganese project now that we've just finished halfway through the pre-feast and we're looking to actually do the decline and a bulk sample to give enough material to the 19 plus different people we have MOUs slash NDAs with to try and develop that product. And Clark could actually be our most valuable thing on that property or it could actually be worth nothing, depending on how that actually pans out. Peak is where we've been having some great intercepts, if you like, recently, when we've been doing some work there. Peak itself, at the moment, we sort of gave you a sense of what the resource target could look like. What we're ultimately hoping to see is, as we do more exploration work, that Peak actually goes all the way from where it is now and joins back up to the bottom of Taylor's Deep, where we actually had high copper content The other one is five kilometres away. We just actually started doing some work on what's called the Flux Prospect, and Flux is really built off the back of very similar geological ground host conditions as Taylor, and it also was built off an old shallow mine. It is actually much shallower than basically Taylor. The first hole was around 250 metres, and we've hit strong mineralisation in that, and the next couple are looking good as well. So I think this is the point we're trying to make sometimes, Zinc. Yes, this feels like a 12% IRR sensitivity price, but I think it does set you up for many decades to basically add all these options in. Unfortunately, on both an NPV and an IRR perspective, that doesn't necessarily translate well out of the model because anything beyond 15 years probably gives you very little value. Now, the market itself on Zinc, just to go back to your spot question, look, it is not... You know, we're not really obviously seeing strong demand out of Europe or China at the moment. But in saying that, we expect that to continue to shift. The reality is over the last 10 years, the average ink rate is probably half. And the only real major discovery has been Taylor. And as we all know, bringing new projects to the market is getting harder and harder. Over the last probably five to 10 years, you've seen elevated prices of zinc. And the world's largest producer, which is China, has failed to actually bring new tonnes to the market due to their own grade degradation and increasing, if you like, environmental regulation, which is very similar to what we've seen in the manganese market that occurred probably about five years ago. So even if you think about the short term, and I'll say short term here after 2031, and I say short term because if you think about the life of the optionality here, it's many decades beyond this, we would actually see that there's going to be about a three million tonne shortage 2031, when you compare supply versus demand. If you think about the demand, it's not like you can go from galvanised steel to aluminium. The cost jump is way too big. So really, zinc is the commodity to go through in this space. And I think what you expect to see there, if you're going to try and bridge that gap, between now and 2031, you actually need about three tailor-sized projects to actually be developed, which is really hard to see that occurring. No doubt that the last six months, zinc price has been tough. I think that is a reflection of power costs, other things going on in Europe that we don't think are sustainable. China is probably the biggest one to watch, so obviously on the actual supply side. Does that sort of help give some colour to you?

Thanks, Graeme. That's very helpful. Also, thank you for the detail you released from the feasibility. It will help us a lot to work through that. Thank you very much.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Glyn Lawcock with Baron Joey. Please go ahead.

Glyn, you can't have two bites of that cherry morning and afternoon. You're putting me through the paces.

Oh, well, you never know. Maybe I'll try and be a bit more direct the second time round. Look, you said in your opening preamble you expect a strong second half. Can you maybe put some meat on that bone? I mean, you know, is the business now generating positive operating cash and positive free cash flow? And given what you've said about, you know, 250 headwind working capital in the first half and CapEx is going to be 100 million lower in the second half relative to the first and costs are down, volumes up, does that mean net debt, all else being equal, if prices stay where they are, net debt should fall over the half?

Yep, I'll take that one Glen. So just to capture the key elements, I think some of which you've already noted there. So we do expect a 7% uplift in volumes in the second half. We do expect the working capital normalised, ideally in the March quarter, although in terms of actual cash receipts it may roll into June quarter and we have already seen those volumes being cleared out of the Richards Bay port. We obviously held our cost guidance or reduced across the majority of our operations, so we're comfortable with where we're at on the cost front. Capital, as you know, we've seen that 6% reduction with the kind of prioritisation and deferral of non-critical projects work we've completed, so $100 million there. And look at our view of commodity prices, do hold where they are, then cash generation will be stronger in the second half and with that would come a reduction in net debt.

So are you, as we sit here today then, you're positive free cash flow as a business?

We're very comfortable in the second half. The basis of these fundamentals will be free cash flow positive in the second half.

Okay. And then maybe just, Graham, turning back to Hermosa and today, just, you know, Clark, I think, can you remind us what you've said previously about what Clark could look like and the value it could bring? I think you've quantified it in the past.

I think in the past I've talked about a range of as little as zero or up to $2 billion, depending on which manganese case you believe panned out. So one of the challenges at the moment is obviously it's about that shift of battery technology, both in the LFP type of battery but also in the NCM622. So you see a shift where if you take the NCM battery, for example, you would actually see the manganese content significantly actually shift in a position where you're looking at an amount where it's more likely to be around 69% versus 17% today. And the LFP battery, if you look at what's going on in China now, they're doing the LMFP battery, which actually has a manganese content of 65%, which actually has a zero content in an LFP battery today. What that means when you think about demand is It's actually obviously a broad range of what that actually looks like. So what we have said in the past, and our position hasn't really shifted on this one, so I'll just run through that again. If you look at the EV component, what we are saying when it comes to batteries, you could actually see a market that could be, if you think about long-term, how big could it be? It could be as small as the demand of 230,000 tonnes. or it could be as large as 1.8 million tonnes. You know, what we're actually doing at the moment, keep in mind that Taylor covers a fair bit of these costs, we're also in the position, for example, as we do work on the decline in the bulk sample, and that's designed to get enough material to work with the 19-ish customers we've been talking to, some on MOUs, some on NDAs, to give them enough material to actually get the final product right. you know, that $60 million that we've outlined, we would expect to get some kind of support from the government on that in the form of a grant claim. So that's probably looking at probably around $20-ish million to help de-risk it. And that would come from the Department of Defence. As we move into the second stage and do a larger, if you like, demonstration plant, you know, in that situation, we'd be talking to the Department of Energy to sort of look for a grant there and, Pat, to give me a sense, what kind of number would people generally be getting these days in those applications?

At the minimum of $100 million investment up to as high as $250 to $300 million, so that range.

We'd probably be looking somewhere between $150 to $200 depending on the plan in terms of assistance on that. We need to help de-risk it as well. But the key for this, it's different for probably most mining commodities because we're the only manganese deposit that's even close to ready to go in the US. We know manganese is, you know, a lot of the actual different battery makers as well as the NK users are looking for it. Our job is to try and provide enough, if you like, material to lock in a long-term agreement. And that's certainly the objective over the next six to nine months. Now, when it comes to those grants, obviously we don't include any of that, including the upside of Clark in this valuation. Likewise, there are some other potential tax credits that come through purely on the Taylor side that we haven't applied for yet until we go into execution. They're probably worth $60 million potentially. They're also not included in the valuation yet as well. So all that kind of stuff is some of the optionality we've spoken about in the past and not included in the numbers today. Does that help a little bit, Glenn?

Yeah, no, that's much better color. Thanks, Graham. I appreciate it.

Thank you. Your next question comes from Conrad Aniewskiwicz with mBank. Please go ahead.

Hi. One question from my side regarding Sierra Gorda. If I understand correctly, the final decision will be made in the fourth quarter, 2024. And could you give us some color as to the timing of potential new copper production from this fourth line? That's the first one. And the second one related to that, what's your capex estimation for this fourth production line? Thank you.

Yeah, so look, appreciate that. Maybe we're just touching on Sierra Gorda because one of the other things that's come up has been performance around the grades. And then FY23, because we've been in the shoulders of the ore body, as planned, we're hitting probably a grade in 24 of about 0.38% copper, whereas it's about 0.42 in 23. As we get back into the main ore body in 25, you see it sort of get back to that 0.43 and then edge up for probably the bulk of the mine life to about the 0.46. The other one in the first half of this year in this shoulder area, In Phase 6, which is the transition zone, we've had quite high clay content and lower molly grade, so we haven't seen, you know, the molly recoveries you would have seen in the past. We expect that to start returning this year. That's the base business. When you actually talk about the fourth grinding line, that's designed to sort of lift the throughput up to about 57 to 58 million tonnes. So that's about roughly an 18, let's say 15 to 18% potential increase. The capex on this in the past, we've talked about generally a three-year kind of construction period. We would have actually talked about a capital number historically about $500 million. That's probably edge close to the 550 as we're actually getting close to finalising the feasibility study to enable the decision to be made, if you like, in the last quarter of our financial year. So while the capital has crept, it's low capital intensity in the scheme of things. And we're in the process now, really, of scrubbing the feasibility study with an independent peer review. Does that help on that?

Yeah, if I understand you correctly, then, so about $500 million additional potential capital expansion.

It was $500. It's now roughly $550. That's the 100% basis, just to be clear. So our share would be 45%.

Yes, obviously. So 550 is on the 100% basis, right? Yes. Okay. And in terms of volumes, what's the accretion from this portfolio?

So we've said about, if you think about where we are today, it's going to push the number up to 50 to 70 to 58, which would be roughly a 15 to 18% increase.

Sorry, could you repeat, please, on a 100% basis?

100% basis. It would lift the actual free put up to 57 to 58 million tonnes per annum, which is roughly, let's say, close to the 15 to 18%. The number's obviously moving a bit now as we're finalising the devoloning work as well.

All right. OK. Thank you all.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Mitch Ryan with Jefferies. Please go ahead.

Good evening, Graeme and team. Thanks for taking my questions. First question just on Clark. In answering Glyn's question, you said the valuation range could be $0 to $2 billion. Obviously, you've only done the final decision on Taylor this morning, but can you give us sort of a timeline on studies and when we should sort of start to see some meat on the bone around all the optionality that's been unlocked here and give us a better sort of line of sight on some of that?

Yeah, the one I'd probably, you know, if I sort of break this into components, I mean, obviously flux is early stage exploration. We're up to about our fourth hole on that piece. So that's got a bit of time to go. It's probably about, you know, five kilometres from the tail of the deposit. So you'd look to potentially feed that through tailgate. about 1,200, whereas flux from memory is about 250. Pat?

That's about right, yeah.

Yeah. If we think about the timeline, we did actually talk about the timeline for Clark. Clark itself, obviously, I made the point that it's about getting enough product and locking in enough customers to basically get buy-in to this material. and then moving to long-term agreements, because that will suit us and them, because they're going to build large facilities that are designed to produce batteries with, if you like, this kind of material. We would expect that, you know, we're going to sort of finalise the decline by H1 FY26, and once we have the material out of that, we will actually talk to the customers. We are currently engaged at the moment with the Department of Defence about the grant for the decline in the bulk sample. And I'd like to think that we will have some news flow on that probably in the next three to four months. And then when we move to the next stage of the demo plan, that's also going through a process now where we're starting to talk to the Department of Energy on that. I think the critical piece is getting enough from this bulk sample and actually sort of doing that option to give it to the customers. And then you can look at how you manage it. If this actually worked to what we think could be the highest frequent rate, which would be up to about 185,000 tonnes per annum of HCMSN, that would give you a mine life of about 70 years based on the work to date on the pre-feasibility study. Pan, I don't know if you wanted to add anything to that?

Yeah, no, I think the key on timing is we're in the pre-feasibility definition phase now, and to move into the feasibility phase, which would be that next phase of study, We really need to run material through the demo plan and get results. So that calendar 26 timeframe that Graham talked about is when we're aiming to be running that bulk sample through the demo plan. That's how the field work links to the study work.

Thank you.

The other one we didn't cover off on that probably is, you know, I'm very interested in is around the peak defaulted and how that's sort of playing out. You know, we had a page in our presentation that actually mapped out... Let me just grab the page. It was page... Give me one second. It's on page 46 of the presentation pack and that's probably a nice visual way to represent this. If you have a look at the green blob, that's essentially where we are with the work that we've actually done today. And if we look at the work that's done today, that's identified a potential target of 30 million tonnes that we believe could be there. We're trying to prove that basically that green blob connects back to the bottom of Taylor Beach in the purple, where we have actually seen in the assays and the work there, higher copper concentrations. in that part of the world. So we've actually allowed, in the process plant, the ability to add that copper circuit in. I think the critical piece for us is, as we do some of that drilling, if peat continues to grow and develop, well, then we'll look at opportunities to actually bring the copper circuit quicker and sort of change the mine plan to access it. If it stays around a certain size, it'll still be attractive before we get down to Taylor Deep. Pat, I couldn't recall off the top of my head, but ballpark what it would cost to add the additional copper circuit?

Yeah, I don't recall that, Graham, off the top of my head. I'd have to go find that.

That's something we'll find for next week, but it's not huge in the scheme of things because it's an addition to the circuit. It's not like another major piece of configuration. It would certainly allow the engineering for it in the space.

It's tens of millions.

So that's just the start of some of the optionality. Then we've got a whole new area, the shire, where we're doing some exploration up there at the moment as well, and probably about 20, what is it, about 14 other targets, I think, roughly, that we're looking at across the property. So this is where we talk about this basin play. That's why we like this area. We think there are multiple options there.

Okay. I appreciate your time.

Thank you. There are no further questions at this time. I'll now hand back to Mr Kerr for closing remarks.

Thanks, everyone. Really appreciate you taking the time to dial in today. I know you're all very super busy. We know that the first half of this year we had a number of different headwinds, which means we weren't generating the cash flow that we like to see as part of the group. But we do expect in the second half of the year with tight cost control, refocus on capital, unwind of working capital, as well as a 7% increase in production, as well as some of our key commodities either keeping high prices like met coal or rebounding like aluminum will be generating more cash in the second half of the year. Equally important for us is if you look at where we are now in terms of the portfolio transformation, we do believe that the Hermosa play with Taylor being the first stage sets us up for a base and play with a large, long life, low cost asset in a really safe jurisdiction that we believe can underwrite cash flow and shareholder returns in many decades to come. But really appreciate your support and time today. Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.