South32 Limited (S32) Earnings Call Transcript & Summary

Yes. Look, absolutely. And I guess, like everyone in this space, we're watching to see what goes on because how medium to long-term policy sitting in China is probably a mystery to most people. I mean I guess it all depends on a view in the short term about how you actually see how much the correction will be, how long it lasts for and what the rebound looks like. The house view that we would have would certainly see, we think, some kind of fiscal stimulus in the second half of the year. The unknown is how do they come out of Chinese New Year. What we are seeing at the moment, I guess, across the 3 commodities that we actually particularly have exposure to in China, we spoke about alumina, which is 5% to 10%. If we talk about manganese ore, it's about 64%. If we talk about met coal, it's 10% to 15%. Manganese ore is probably in an interesting position in terms of -- it basically hit a low price, if you look at what happened in November. In November, you saw price hover around the $3.60-over mark. What it's rebounded to in January '20 is about $4.30. And to be honest, based on what we're seeing in terms of demand at the moment, we would expect that to maybe increase again. While we do see stocks on the ground of about -- just about 4.5 million, 4.6 million tonnes, it's important to understand that, that stock balance we used as a guide a couple of years ago to talk about oversupply has really changed. And the big fundamental driver there has been the fact that now China will import 90% of the order it actually needs. So if you sort of think about that stock in a different way, it's probably about 1.5 months' supply, which is probably around the norm. So on the manganese side, they are very reliant on imports. It's not a strong domestic market anymore. And certainly, a lot of the high-cost trucking fell out between November and January. For example, in the first half of the year, we were probably trucking about 27% of the product out of our Manganese South Africa business. We have dropped that down to 6%. We are starting to see a little bit of that trucking come back into the marketplace at these prices. But at this stage, it's still providing enough tension. Now obviously, medium to long term, the big driver will actually be what happens in the actual steel play; it's steel demand in terms of production in China. And that will drive a lot of, obviously, a lot of the bulk, including manganese. I guess the one advantage manganese always has, again, is that they don't have a large domestic supply. And the other advantage you always have is when it comes to recycle, you can't recycle manganese ore; you've got to add it in there. If you talk about the other major commodity met coal, our book is probably somewhere between 10% to 15%. And met coal's in an interesting place at the moment because I think, obviously, one of the key things people are watching for is, again, what's happening in domestic production in China and also what's happening in terms of quotas. Now the one added tension, I guess, we are seeing on the met coal side is there's a continued flight to high-quality coking coals to make sure they get value in use. The other thing we're seeing is, obviously, some continued pressure on the supply side, both in the U.S. when it comes to economics of thermal and met coal for the companies that produce both as they battle with the pressures of what's going on with cheap shale gas in the U.S. And if you look at the Bowen Basin in Australia, obviously, you've got Moranbah North with the roof fall. You've got some other operating challenges around flooding that's occurring, and there's another cyclone sitting off the coast. So from that aspect, again, we're probably a bit more optimistic, if you like, on where met coal is today. And the other factor, obviously, on the met coal side that provides some support is India coming out of the monsoon, probably didn't buy as much as we expected as they waited to see what happened with price. And the reality is the market's timed a little bit more. So they are still going to have to come back into the market.

That's great. If I could just ask another question. On the capital management program that you've let up that you gave us good color for the next 6 months. How are you thinking about the following 6 months? And are you willing to pay -- or to do buybacks out of it? Or if you get to your net cash level, would you stop?

Look, I mean Katie is the best one to answer that. She's the CFO. She manages that. Katie?

Yes. Look, I mean our capital management framework is pretty clear, and we haven't changed that through time. So we really talk to, as we move through the period, understanding what our excess cash position is. And if we have excess cash, we've said we will return it to shareholders. So in terms of -- we've got $198 million outstanding on our capital management program for the next 6 months. The pace of return of that will be dependent on market liquidity and price. If you take a look back over the last 6 months, we got away roughly $190 million to $300 million through the buyback. But certainly, as we approach the end of retaining that volume, we'll continue to reassess whether or not we have excess cash available. But the important thing to note, I think, is that our focus is really on how do we optimize our cost activities? How do we optimize our capital profile to ensure that we can actually sustain a program? Because longevity is really key for us through the cycle. And that's the way we maximize value in the program, and that's right from the outset, that's been our objective.

And certainly, we're not looking to go into the net debt territory to sort of fund buybacks. So I mean to Katie's point, for us, it's all about what we can do on running the business better, and it's great to see a strong first half of operating performance and even a stronger second half. Yes, there are some benefits, obviously, between what's happened with the Aussie dollar, but on the flip side, there's some downside from what's happened with the range, but there are some real tangible changes that the teams have put in place around labor, materials, energy and production that are having a positive impact on unit costs.

We do not have any more questions at the moment. I would like to hand the conference back to our speaker, Mr. Graham Kerr, for any closing remarks.

Okay. Well, thank you, and thanks, everyone, for your questions today. I recognize it's actually a busy day. And maybe just to summarize, if you like, before we log off the call. From a commodity price perspective, there's no doubt the first half of the year was tough. Interesting enough, if you look over the last 2 months, the prices for our key commodities have actually moved up. But the first half of the year was very tough. If you think about the things that we can control, production and costs, it's really good to see the underlying performance of the business in the first half. And again, as I spoke about earlier, there's some real momentum on some of those key items that will come to play into the second half of the year. If you think about some of the response from the tough markets, I think you can continue to see that we do respond. And that's happened in probably 3 easy examples I can call out. One with Hillside. We made the tough decision roughly 12 months ago to start a process to dramatically reduce the costs of Hillside and dramatically decrease the workforce there and actually eliminate some of the consumables. And that showed through in the half when they continued to stay earnings positive despite a low aluminum price. And that was done without any industrial action after a good job by Mike, Calvin and the team in getting that away. In South Africa Energy Coal, we took out that trucking that I spoke about. We moved from a number of 20% -- 27% trucking down to 6% very rapidly. And in South Africa Energy Coal, Mike and the team have done a good job there, basically. While the production is on the lower end of guidance, it's important to understand what we've eliminated in the current pricing environment is those tonnes that weren't actually making any money. So we're optimizing the cash margin, which is good as well. On the flip side, I think our portfolio upgrade journey continues and to pick up speed. That's reflected by the progress we're making with SAEC, where the divestment is still on track for the end of the calendar year; the review that's underway for both the manganese smelters in Tasmania at TEMCO and Metalloys in South Africa. And at the same time, we started 5 years ago, we were short of options in the group. Today, we've got Eagle Downs. We've got Hermosa, with Taylor Phase 1, Phase 2 in a much broader land package and potentially the Clark deposit. And now we've also added, with the JV with Trilogy, Ambler Metals, where we have added bornite plus a very large exploration position, plus the other 20 exploration projects that we're working through. What it's all underpinned by is a strong belief that we have been maintaining a strong balance sheet through the cycle, underpinned by the absolute belief around capital discipline that we'll direct our money to where we get the highest return to our shareholders. But thank you for your continued support and interest.

Thank you. This concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.