South32 Limited (S32) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the South32 Update Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Graham Kerr, CEO. Please go ahead.

Thanks, and good morning, everyone, and thanks for taking the time for our call today. I'm joined by our Chief Financial Officer, Katie Tovich; and our Chief External Affairs Officer, Kelly O'Rourke. And after some brief introductory remarks, we will open the call for questions. As you would have seen yesterday, we announced the divestment of South Africa Energy Coal to Seriti Resources is now unconditional, and we expect to complete the transaction on June 1. Exiting thermal coal is a transformative milestone for South32. With fewer operating sites and reduced head count, we are a significantly simpler company. Today, we have released our update on our business and strategy going forward, including a plan to halve our carbon emissions by 2035. We are optimizing our business with a strong focus on safety while reducing our controllable cost base and delivering an overall improvement in our operating performance and stability. We are also unlocking value at our operations through projects including bringing our alumina refineries in nameplate production, improving energy efficiency at our aluminum smelters, growing nickel production at Cerro Matoso through the Q&P and OSMOC projects and advancing studies to extend the life of GEMCO and bringing forward higher-grade material at Cannington. At Illawarra, we are assessing the IPC decision on Dendrobium Next Domain. And we'll be clear on our pathway forward by the end of the calendar year. We have added multiple growth options to our portfolio and have a pipeline of greenfield exploration projects and partnerships with a bias to base metals. In Arizona, the Hermosa team are nearing completion of the pre-feasibility study for the Taylor zinc, lead and silver deposit and are progressing a manganese battery scoping study for the Clark deposit. The Ambler Metals joint venture in Alaska, where we have a 50% shareholding, is progressing a pre-feasibility study for the high-grade Arctic copper and zinc deposits. We have set new medium targets to halve our operational emissions by 2035, and we're strengthening our commitment to reach net 0 by 2050. We will deliver the 2035 target through decarbonizing our existing operations, securing green energy, designing our growth projects to be carbon neutral and low-carbon technology. Our business is in a strong position. And today, we have announced a USD 200 million expansion of our capital management program, with USD 316 million remaining to be returned by 3rd of September. As you look to the future, we have a great foundation to build from with well-performing operations, a strong balance sheet, high-quality growth options in attractive metals and jurisdictions and a plan to decarbonize our business. We have a video and presentation available on our website, which talks to these plans in more detail. And we will now open the call to questions.

[Operator Instructions] Your first question comes from Kaan Peker with RBC.

I just wanted to dig a little deeper on the capital allocation. I understand it's driven by South32's focus on maintaining an investment-grade credit rating. But just on roundabout calculation, it suggests sort of $500 million to $600 million of capital is freed up on the balance sheet post the completion of the SAEC sale. With $200 million allocated to the buyback, how should we view the remaining $300 million to $400 million-odd? And I'll circle back with another question if that's okay.

Yes. No, look, I appreciate the question. I'll get you Katie to take through the details of the calculations because I think that's important to understand. I would start with the overarching comment that nothing has changed in our belief that having a strong balance sheet is critically important to us as a business. Our capital management framework remains unchanged. And we've always said that we'll return cash back to our shareholders when it's excess and it's actually in the bank, not prospective. But maybe, Katie, you can talk through the calculation.

Yes. No, thanks, Graham. And thanks for the question. Probably -- we do have a slide in the pack that's a good reference slide, Slide 25, when you have time to look at it. But if I step you through our net cash count at the moment, so at the end of April, we closed with a net cash number of $464 million. And then post the sale completion, we would expect that net cash number to reduce by about $250 million. And that's off the back of, broadly speaking, the present value of the package that we're putting forward in terms of the promissory note and also on the assumption that the $50 million restructured facility will be drawn by Seriti at or around completion date or at least in the several months thereafter. So you'd expect to see about $250 million come out at that point. And then if you think about our capital management announcement this morning, that additional $200 million, effectively, we assume is committed. And so that brings us to $316 million of committed capital management activity from here on in. And that brings you, broadly speaking, to around about $100 million net debt number. So that's -- in terms of our forward portfolio outlook, our forward capital profile, that's about the position we want to be in right now.

And the way I think about it, again, nothing has changed as we -- if commodity prices continue to remain strong, we'll continue to accumulate excess cash. And like we've always done, we'll look at the most effective way to get that back to our shareholders.

Sure. And that $200 million expansion of the buyback is just for -- until in September?

That's right, yes. I mean we have the flexibility to move that base. And certainly, as we look at the full year announcement, we'll consider what we've managed to return between now and the end of June before we head into the blackout period and reassess what the right form of returns is to shareholders at that time in terms of any remaining balance.

Sure. And just sort of on the second one, just looking at Slide 21, I think which shows South32's greenfield exploration footprint, there's a lot of copper targets there. And it does look like it's the commodity where most of the spread is being allocated. Can you please talk through how you're considering sort of that build-versus-buy decision in the space?

Yes. Look, absolutely. We've always talked about -- look, when it comes to thinking about future growth opportunities, we've always had that bias to base metals. And clearly, everyone likes copper. We've invested a lot, if you like, in exploration and early-stage development projects. If you look at those exploration projects, there, you are correct, on Slide 21, there's a strong focus on copper. While we talk about Hermosa, we focus on Taylor and Clark at the moment, we did start to call out that the other property, if you like, prospective targets on the property of Hermosa, which obviously have -- we're targeting copper. And also, the big one for us obviously is Ambler Metals, the 50% ownership we have in the joint venture with Trilogy where you've got the Arctic deposit, which we think in itself is a great deposit and certainly provides a basis to continue to search for more copper in that space. So look, I would say, look, you'd expect to see us to be very active actually in the drill bit side of it, continuing to progress Ambler Metals. M&A has always been opportunistic. But the reality is today, everyone's chasing copper, the push on copper price is higher. In my mind, it's hard to find a project that you could actually go out there and buy or a business where you're going to deliver an acceptable return to your investor. Never say never. It will always be opportunistic, but it will always be done through the lens of value.

Your next question comes from Rahul Anand with Morgan Stanley.

A couple for you, Graham, and one for Katie if that's okay. The first one I had was the FY '35 target to reach half of your emissions, operational emissions. Have you done any analysis around sort of what the capital costs or operating cost impacts might be on the back of that? And I mean how does Hillside fit into that future?

Yes. Look, I mean one of the things we absolutely call out is when you look at the Scope 1, Scope 2 emissions, 90% of it comes from 4 of our operations. And as you'll see in the pack, there's one slide there that actually shows that energy generation is a big contributor to Hillside and also Worsley. As we think about Hillside, part of the reason we talk about 2035 is that we're very conscious about managing our way through this process because Hillside is an important part of the South African economy. Now roughly 30% of the actual product gets sold downstream to companies like Hulamin, which creates more jobs and more reliance in South Africa. We're also very conscious, if you like, there are a number of ways to work Hillside, is, one, Eskom has got a public stated target of actually doing more about renewables in their own supply of energy. So that's obviously something we're working with Eskom and very keenly seeing how that develops over the next decade, which is a time frame they've given themselves. At the same time, we're also exploring a number of options through projects, what we call green shoots at Hillside. And we're really focused on 2 elements. One is just around energy efficiency, which will be how we actually use, if you like, energy once we have an insight to Hillside. And the easy one there is the AP3XLE, which have already rolled out at Mozal. We're looking at the application of that at Hillside. There are other things we're looking at there in terms of waste heat recovery, automated anode changes. There's a whole lot of new technology that's developing quickly in that space, which we think will help on the Scope 1 around energy efficiency. On the other side, we're working with obviously other parties in South Africa, including Eskom, to see how they sort of go on some of the energy source work they're doing when they're particularly looking at wind and solar. And we think that offers quite a large opportunity in South Africa. But 2035 gives us time to actually get this right. The reality is I'm guessing most of the sell-side or most people that have models typically would only value the next power block, which runs through up to about 2031-ish in terms of time frame. And clearly, this gives us enough time to transition to 2035 to a more renewable supplier of, if you like, power. And certainly, that's our intent. I don't know, Kelly, if you want to add anything particularly on Hillside.

Not really. Just to your point that we've got a program that was stood up being green shoots, and we're actively studying green energy solutions, but will probably be some time off talking to what those options are. But they'll primarily be the operating cost differential, but studies are advanced to understand what the commercial options are there.

And just to your question around what does that look like for capital, I mean probably the focus in the short term will actually be at Worsley where we have a number of projects that we're sort of looking at. In the short term, the most obvious one is what we call the mud-washing project at Worsley. And that has the ability to have a big impact, if you like, on energy intensity and requirements but also how we use water. So that's sort of progressing through the study phase. And the other one longer term is looking at how we actually convert from an energy source of coal to gas. And that's certainly something that the team is working on down there at the same time. We did give some guidance in the pack when you looked at the actual targets about what we expected to actually spend in the next 2 years. And that was roughly $40 million to $50 million in terms of capital.

Perfect. Okay.

All well?

Sorry?

No, just checking that covered the question you had.

Yes, yes, it does. And then the second one I had for you, Graham, was around the sustaining capital guidance. Perhaps could be for Katie as well. $450 million to $550 million was the previous number. I'm citing $420 million to $520 million today in the pack. Is it fair to assume that you've probably tried to pay back a bit at Illawarra given the Dendrobium decision? And what's the update there as well?

So I'll let Katie talk about the capital realm, then I'll tell you where we're up to with Dendrobium.

Yes. So sure. So the $420 million to $520 million really is a number where we've carved out probably innovation and improvement projects from the previously $450 million to $550 million number that we had talked to. And also, we've adjusted for FX. So the previous $450 million to $550 million was at $0.69 Australian dollar, and we're now assuming a $0.78 Australian dollar at this level. So that number is exclusive of any material changes in terms of our thinking around Illawarra. And we will certainly at the full year come back with an update in terms of what our total capital looks like. But you would expect, sort of as Graham said, $420 million to $520 million for sustaining CapEx, roughly $40 million to $50 million over a 2- year window for decarb CapEx. And then you will see incrementally life extension capital, which will encompass any decision we make around DND, any decision we make around GEMCO eastern leases through time, et cetera, and then incrementally, any innovation and improvement projects that hit the appropriate [ build rate ].

And I think Katie's point is critical there because unlike when we started this journey 6 years ago, not only we have those external options we've added to the group around Arctic and Hermosa. We've also got some strong internal projects, which are basically giving us the opportunity to invest in our business in high-returning projects. When you think about things like OSMOC, Q&P, obviously, what we can potentially do at Cannington to bring forward, if you like, some of that high-grade material, so they're all the kind of things that will compete for capital. So I think that's an important part of where we are today in terms of having options to actually create value for our shareholders. Look, when it comes to DND, as I sort of said in the opening comments, we will have greater clarity by the end of this calendar year. And the reason I sort of give you that background on that time frame is there are a number of developments that are underway. You would have seen that we talked earlier about we have a number of options in front of us. One included appealing the decision. Another one was government intervention. And both of those are options that are being pursued at the moment. So we actually have the appeal, if you like, currently running through the land court. The big, I guess, change for us is you would have seen the New South Wales Legislative Council has passed a motion that considers DND state-significant infrastructure. And that really allows the minister to consider a revised proposal outside of the IPC process. So it's still an approval process, but it's not the IPC approval process. So the focus between now and November for us is to look at a revised mine plan that basically takes into consideration some of the issues that were raised by the IPC. Upon actually completing that revised mine plan and the feasibility study, we would then go through with the government to getting the approval process on that, which is generally inclined about -- it looks like about a 24-week period upon receiving the application. So there is certainly some -- if you like, a clearer path forward. For us, it's more about now developing and taking to feasibility level the revised mine plan at DND.

Okay. Perfect. Okay. And then just the final question was a follow-up from Kaan's. Katie, you talked about sort of how you've determined that $200 million number and how it leaves you at about that $100 million net debt post payments of commitments for SAEC and the buyback. I mean should we take that $100 million net debt number as your target going forward?

No. Look, I think we've talked to the fact that we want to maintain that investment-grade credit rating through the cycle. And particularly the way we test that is in a forward sort of low price scenario based on that forward view on our capital profile. So you will expect to see that number move around somewhat as our capital profile matures, as we make decisions around Hermosa, Illawarra and so on. But for now, as at today, look, we think that's the right net debt number for us to maintain that investment-grade outcome on a forward view.

[Operator Instructions] Your next question comes from Lyndon Fagan with JPMorgan.

Just to expand a bit on the emissions side of things, I'm just wondering whether you would consider direct ownership in renewable power assets to try and reduce emissions at your assets and whether you think there could be a return there through lower OpEx.

Yes. Look, Lyndon, a good question. And obviously, we'll have a look at every one of those on a case-by-case basis. To be perfectly honest, I'm not the person who would be willing to invest in renewables in South Africa when I think there are better people potentially set up to actually do that. So I think they're going to probably be better at actually building a renewable facility and actually running that. It doesn't mean you might not sign a longer-term offtake commitment that actually underpins it, but we wouldn't be the people executing or putting our capital into the country. But somewhere down like Worsley, it might be a little bit different depending on what the opportunities are that present themselves down there. I think there is certainly, if you like, a large availability of green finance money across the world. And I think that's probably where the best bang for the buck is going to be.

And maybe just to sort of cover off a bit on Hermosa and Ambler Metals, there's obviously a bit of material in the slide pack on those assets. Just wondering if you could give us an update on potential production scope and timing.

Yes. Look, I mean if we sort of take it into steps and take a step back, maybe if you start with Ambler Metals, there was quite a detailed release that went out yesterday, would had been our time this morning, that actually mapped out the Arctic exploration program for this year. And the way I think about, if you like, the exploration project for this program for this year, it's focused on basically 3 things. One is basically understanding more about the resource at actual Arctic and getting greater confidence around that. The second piece is there are a number of VMS-style targets in that VMS belt that we've been very clear that we like, and we showed that on the slide pack. There's going to be some work around understanding them, there's drilling on about 3 of them, and there's a fair bit of sampling on the others to sort of get a sense of where to zero in on. And then there's a little bit more work around the Bornite deposit. So Arctic to me is the key to this. Arctic itself today will absolutely be developed. If you look at the size and you look at the quality of that material, it's going to be developed by someone. So it's a question of when. I guess the key focus point for me is if we can find another Arctic-style deposit in that VMS belt or even just add more tonnages, then I think you've got a real winner in terms of a project there. And this field season, which actually kicks off today, is going to be an important part of that. The challenge out there obviously is we lost last year with COVID what we couldn't get on the ground. We've got the right protocols and systems in place this year. And there's been quite a high vaccination rate in the vulnerable communities. That gives us confidence about going back in again. But really, can we add to Arctic is going to be the key to that one, Lyndon. When it comes to Taylor, we called out today that we're on track to complete the pre-feasibility study around the Taylor deposit, and we'll talk to the market about that in July. In that, we'll be very clear around CapEx, throughput, timing, et cetera. I think there are some positive developments sort of coming legislatively, potentially, if you like, in U.S. We've already seen part of the reason that Clark is attractive is because obviously, it's leaning towards battery technology. But manganese is actually on the critical list, if you like, of minerals in the U.S., which helps you potentially fast-track the permitting process. And there is some talk now that zinc will also be added to that. So they're all the things that will weigh up as we complete the pre-feasibility study. We certainly plan to have a deep dive in July, which we'll talk, if you like, about the capital component, the production rate, the timing, et cetera. I think the one thing that's certainly not disappointing is around the resource. The resource continues to be open at depths, but also the material where we're actually going to be doing a lot of the work particularly as we go in with shafts, will allow us to actually access that high-grade material quicker. But again, we'll go into much more detail when we complete the pre-feasibility study.

Your next question comes from Paul McTaggart with Citigroup.

So just 2 things. Firstly, just to firm up on the provisions that get passed across with the sale of SAEC, so I think it's $900-odd million, if you can just turn that up. And around Worsley, potentially transitioning from coal-fired to gas, I mean that's okay as a kind of a transition, I guess. But beyond that, I mean gas probably doesn't cut the mustard for many people. So do you have plans further down the track or longer-term plans to use an alternative source to gas?

Yes. So absolutely. I mean I'll get Katie to talk to the provisions, Paul, and then I'll talk about the second piece, if you like, around how we're thinking about that down at Worsley.

Yes. Paul, just in terms of provisions, I mean as we've said, it is -- yes, it is a share sale, so all assets and liabilities will transfer on completion on the 1st of June. And with that, the $875 million of provisions that we reported at half year will move across.

Paul, with regards to Worsley and maybe taking a step back in 2 fronts is, one, absolutely, we believe gas is obviously a transitionary energy source. We don't think that will be the permanent one, and obviously, we'll look longer term at the southwest around what can be done around solar and potentially hydrogen as well. So that's certainly on the mind of the team. The transition from coal to gas is also not going to happen overnight because we need to manage a just transition around Collie. We're also very conscious with the suppliers about coal, also feed, if you like, some of the offtake we take, some of the offtake goes into the power basis that provides the grid with power. So sort of pulling the pin on that is obviously problematic, and we need to work through that piece of work. I think that taking a further step back, though, you would have seen now Alcoa recently talked about their EcoSource, and they talked about the alumina carbon intensity. And now you talked about the fact that out of Kwinana, Pinjarra, Wagerup, that we're probably running at about 0.6, if you like, CO2 emissions per tonne of alumina, the global average is about 1.2. Today Worsley runs at about 0.83 because of that dependency on coal. But certainly, we believe that the move to what we're doing around mud washing, what we're going to do around the conversion from coal to gas will actually allow us to get in the ballpark of a similar kind of number of what you're talking about that Alcoa has today. Should have, sorry, added, but already in Brazil, we're at 0.54. So that's something we shouldn't lose sight of as well.

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

Well, thanks, everyone, for joining us today on the call for short notice. The overriding message I'd leave with, look, our business is in a strong position. We've got a great foundation to build from with well-performing operations. We have a strong balance sheet. We have high-quality growth options in attractive metals and jurisdictions and a plan to decarbonize our business, and the removal of SAEC from South32 vastly simplifies the group. And it certainly puts us on a trajectory to continue to actually move towards that low-carbon future. But thanks, everyone, for your time today.

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