South32 Limited (S32) Earnings Call Transcript & Summary

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

Thank you. Good morning, everyone, and thank you for joining our call to discuss this morning's announcement of our conditional agreements to acquire 45% interest in the Sierra Gorda copper mine in Chile. For those of you who are interested, there is a short video available on our website. On today's call, I'll be joined with our Chief Financial Officer, Katie Tovich; our Chief Development Officer, Simon Collins; and our Chief Commercial Officer, Brendan Harris. Before we get into the questions, though, I'd first like to start with some opening remarks. I'd like to draw your attention to the investor pack we released, which is also on our website, and I'll refer you to some of those pages. I've always said from day one that M&A needs to be opportunistic. While we exist to create value for our shareholders, we need to be disciplined in how we approach that and any decisions we take around allocating capital. We have a team that is regularly reviewing opportunities to improve our portfolio, but often they are discarding more opportunities than we progress. The challenge is to find an opportunity that is not only undervalued, but also has a clear path to realize the full value. With our agreement to acquire Sierra Gorda, we believe we have identified an opportunity and agreed a deal to purchase and own of its on fixed share of an asset that can deliver a real, identifiable value to our shareholders. We expect our transaction and funding structure will support us in realizing that value. As can be seen in Slide 8 of our pack, our upfront consideration benchmarks favorably to historical investment, valuation and production multiples. Looking at this, not just from the assets and historical investment but also from the increasing capital intensity across the industry, you can see again on Slide 9, how well this benchmarks against other builds. This profile has been increasing over time and is only expected to increase further in the future to offset industry grade and resource decline. By splitting our consideration between upfront and contingent consideration, we have also demonstrated the acquisition is not based on near-term copper pricing. We have secured an important tax indemnity from Sumitomo up to an agreed cap, while our funding structure maintains our balance sheet strength and flexibility. As can be seen on Slide 15 of our pack, the acquisition meaningfully lifts group margins. Looking forward, we expect the investment to immediately contribute to group earnings, improve our portfolio and further strengthen our balance sheet through the cycle. In terms of the asset, it benefits from USD 5 billion of historical investment, high-quality modern infrastructure. It is on track to produce in excess of 200,000 tonnes of copper equivalent production this year. At a cost profile that benchmarks favorably with other similar assets in down to Antofagasta region, and it's a long life with greater than 20 years of reserve. Beyond that, it has a number of opportunities in resource life extension, oxide project potential and regional mineralization. Looking at Slide 28, you can see the significant improvement in the operations performance. It has been derisked through its build and following a tough commissioning is now fully ramped up. It's starting to benefit from the significant historical investment made by the joint venture partners and the current debottlenecking project is starting to realize a next leg of efficiencies. This view has been validated through our 9 months of extensive due diligence, including multiple site visits by our seeing operational management teams in the Americas. Specifics of the history of the plant improvement and the current work is summarized on Slides 26 and 27 at our investor materials. We see this as a compelling opportunity to acquire an asset at an attractive valuation that would be earnings accretive from day 1 and support our efforts to reshape our portfolio for a low carbon future. It provides immediate, meaningful exposure to copper, a critical metal for green energy transition. It improves our portfolio by lifting margins and further increases our exposure to base metals, building on the recent decision to increase our ownership in the green aluminium smelter, Mozal. Slide 7 of our pack, which excludes the impact of our decreased ownership in Mozal demonstrates how the substantial the shift in our earnings will be with the inclusion of Sierra Gorda. Using our FY '21 earnings, based on threshold metals account for more than 80% of our earnings. The acquisition will be funded from cash on hand and an underwritten debt acquisition facility. Our business is generating strong cash, and this will help to minimize our debt draw once conditions to the transaction are satisfied. The impact on our balance sheet is best shown on Slide 21 of the pack. As can be seen, our gearing remains modest with more than half of our pro forma debt related to very long-dated liabilities, including worthy multifuel generation lease. Looking ahead, we will continue to flexibly execute our capital management program, which has USD 231 million remaining to be returned. While our capital management framework remains unchanged, we'll continue to prioritize an investment-grade credit rating and our strong balance sheet remains core at our Sierra Gorda strategy. The announcement today is another important milestone for South32 in what has been a busy year. It further improves our portfolio, will be immediately earnings accretive, supporting higher dividends and creating longer-term value for our shareholders. I will now turn the call over to the moderator and look forward to taking your questions.

Your first question comes from Rahul Anand from Morgan Stanley.

I've got 1 question on the transaction value obviously looks like a good price. I just wanted to understand the process. I mean, if you can provide a bit more visibility in terms of how many other parties were there. And also, I wanted to understand that $500 million that's contingent. Is that all payable in any given year as soon as the price goes up? Or is it staged over the brief time period that's been pointed out? That's the first one. I'll come back with a second.

Thanks, Rahul. I appreciate the first question. Look, in terms of the projects, I mean, obviously, other people will talk about who was involved in the process, what I can talk to you about how we approach this. As I said in the opening comments, we've always started position that M&A is opportunistic from our perspective. We'll do it where we see the opportunity to add value for our shareholders. And the challenge really is to find something which the market undervalues and we see there's a clear pathway to value. Sierra Gorda clearly falls in that, if you like though, from our perspective. It's an asset that isn't really that closely followed. If you look at KGHM, there's not that many brokers that follow them in that much detail. Sierra Gorda started commissioning in 2014, and had a number of early challenges that have been fixed over time through redesign or real change to the plan and now is going through quite a detailed debottlenecking project. And we can talk about that in a bit more detail. But again, the key here is to find an asset that we think the market is undervaluing and we believe there's a pathway to value. The process itself, obviously was a competitive process. We get asked a question why you? Why not someone else? Look, I think there are a number of people that obviously interested in copper assets. We've said from day 1, we're not driven by ego. So what does that actually mean? For us, it means we will find that where we think we can create value. The second piece is we don't know we have to be the operator. There are a number of players out there in the marketplace today that insist on being the operator. From our perspective, we participate today in a number of joint ventures, whether it be in our manganese business in South Africa or Australia, Mitsubishi, we, if you like, at Mozal. Obviously, the joint ventures we have with Alumar mining in Brazil, we're very tangible operating in that environment for us, it's more about choosing the right partner. And in that space, certainly KGHM, as you know, showing a good, strong track record from our perspective, in particular, the management team on the ground is super impressive. From our perspective, I'll be brutally honest, we started this process about 9 months ago. We have had a very detailed due diligence process that has involved multiple site visits and we'll talk about that composition, if you like, in a little moment. But I would have started the vision when the team first raised is probably about 14 to 16 months ago that I'm convinced that this is something we should have a look at. But I think every piece of work that we've done along the journey, every site visit has actually allowed us to actually, if you like, if you like, take some of those layers of the onion where people haven't understood. And certainly, from our perspective, if you look at the performance over the last 3 years, whether it's throughput, whether it's mining efficiencies, whether it's recoveries, there's a number of slides in the chart that really show how they're on the pathway to improvement. And again, we can dive into that in a little bit more detail later on. Your second question around the structure of the deal, obviously, investing in a new project, new jurisdiction, there some risks that we need to manage. One of them obviously is around tax. And obviously, we've spoken about the tax indemnity to sort of help support us in any potential changes in the tax regime, keeping in mind as a taxability agreement 2028 to support Sierra Gorda. The other aspect that we wanted to manage is price, because we have the belief that the price at the moment for copper is probably running hot. When we think about an acquisition, we're thinking about our long-term price on the short-term price. But we think the way we've designed the price participation is an important component that manages some of that price risk. And Slide 6 in the pack, if you have a look at footnote D, it really outlines with clear transparency as we always do what the thresholds are around that. And the threshold themselves are too bold, they're measured on an annual basis, and you need to meet both thresholds. So the first one is a production hurdle and the second one is that a price threshold for copper. And then you basically designed to share 50% of any incremental revenue that's realized above those metrics. So they're quite clear, if you like on Slide 6, Rahul.

Okay. Perfect. Look, that was going to be my second question around the indemnity. You did talk about that. I mean would you be comfortable talking to perhaps how that indemnity is in terms of the order of magnitude? I mean, should we think about that in terms of that flexible 500 million component? Or how can we sort of draw some kind of understanding of the risk potentially of those law changes.

Yes. As you would expect, that's been an area of focus. I mean, obviously, there's a little bit of noise coming out this week at our May Week where the Chilean government are talking about how that's probably going to be moderated versus some people's expectations. But if you'd expect we're catering, if you like, to make sure that we can manage that risk and maybe Katie can talk a little bit about how we approached the tax indemnity and that tax risk.

Yes, sure. Look, I think we're probably to cover tax more broadly just while we're on the tax topic, Sierra Gorda just from a modeling perspective for most 27% corporate tax rate. And Sierra Gorda benefits from a deferred tax asset of $1.6 billion. So with only tax losses of $4.97 billion, we don't expect that there will be corporate tax payable for an extended period. The second tax that's relevant for Sierra Gorda is mining tax, which is based on production and operating margins. And there's some detail in the pack, I think at the back in the appendix. And also, I'd encourage you to reach out to the guys to walk through in some detail how that mine impact works. But at a high level, as a guide from a modeling perspective over the medium term, we see that loading tax being roughly 75% of EBIT, which is the mining taxable income and a 5% mining tax rate. But that mining tax is not offset with the DTA, so value tax is payable and will be included in income tax expense. In terms of your question around tax risk, there's probably a couple of points to note. One is that there's a tax stability agreement in place, and that agreement is in place until December 2028. I think there's been maybe some different takes in the market there, but certainly December 2028 is the date for that stability agreement. And then in terms of the Sumitomo tax indemnity, that's in place for potential changes in the current Chilean mining tax and also the introduction of a new mining tax royalty. Any of those changes must be enacted prior to December 2025. And as we have said, there's an agreed cap in place. If you think about how that indemnity works, if it's triggered, The amount will be paid to South32 equivalent to the NPV impact of the change in tax law after the cap. So it would be effectively a life of mine indemnity for changes prior to December 2025. At the time of that event or when the tax is enacted, that's when we would receive the cash payment. So we would actually receive cash in advance of having to pay any higher tax rate. The indemnity also covers any amendment or exploration or termination of the stability agreement prior to December 2025, albeit our modeling assumption is that we expect that stability agreement to remain whole. So if you think about overall from a tax rate perspective, the joint venture stability agreement, together with the indemnity, we believe, provides us with protection against potential near-term changes to the Chilean tax regime. And our assumption, therefore, would be that you would effectively model Sierra Gorda on the basis the tax regime in place currently, which I referenced that will remain unchanged.

Does that help?

Yes, yes, it does a lot. One quick follow-up for Katie. That 2028 stability agreement, does that mean -- any changes in Chile that come through would not be enacted before '29? Is that the right way to think about it?

So we have the indemnity in place till December 2025 in relation to any changes to the stability agreement. But we -- our current assumption is that stability agreement will hold until December 2028.

Okay. Perfect. Look, one final question before I pass it on, is just around -- if you've had time to perhaps liaise with KGHM, how they are thinking about the projects and the potential sale? Obviously, they have first right of refusal here. Have you had any sort of communication with them? And if you have any sort of understanding of how they're thinking about the sale price and whether they'd be interested?

Yes. Look, we're obviously able to have lots of communication with them. Obviously, in the world of COVID there's been a lot of hearsay both on the ground with the team at Sierra Gorda, but also back in the head office in Poland. We've had a lot of discussions about how we want the joint venture to work. And it's important to understand that while we talk about not necessarily having to be the operator, it's important that we have the ability to actually influence and have joint control of where this is going to actually realize, if you like, that value that has in the market appreciates at the moment. And we sort of outlined that on one of the slides in the pack that really sort of go went into some of that detail. And if you think about some of the critical points from our perspective, it was about finding a partner that we were really comfortable while in terms of safety performance, culture performance, that continuous mindset for improvement and absolutely the team on this -- on the ground in Sierra Gorda has been critically important. So we give us comfort around that. But if you go back to that joint control, we have equal representation with KGHM on the owner's council. There are a number of subcommittees, health and safety, technical finance, marketing and tailings where that also applies. The actual chair rotates between South32 and KGHM in every 2 years. As I mentioned, I think the team at Sierra Gorda, we've been really impressed by the team on the ground there. And there are a number of key decision-making points or new resolutions, budget approvals, production curtailments that basically require both parties to agree. So we're really comfortable of this joint control. I think one of the other things we have a lot of discussion with KGHM about is, because it is an asset that probably is in that sort of well understood by the marketplace is about how do we bring a little bit more light or transparency to some of I think what's been really good performance over the last couple of years there and the plan going forward. And as part of that, we will sort of -- in our reporting include these numbers in underlying EBIT, so people can see with clear transparency about how it's actually performing. But at the same time, as you change the way we manage our manganese joint venture to bring that into underlying reporting as well in the earnings, so people can see a clear line of that. With regards to what KGHM does, hardly has sort of been on the record talking about they're quite happy with what their position is today and they're not really looking to exercise. But who knows, they have contractual rights. And we'll see what decision they make over the last period of time. But certainly, we've had very extensive engagement over the last 9 months and particularly the last 3 months. And it's been a really good working relationship from our perspective. They always to the flip side, if they ultimately decide to start to leave the joint venture, we have the opportunity to acquire their share underwriting joint venture agreement actually works.

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

Graham, Katie and Brendan, congratulations on a major transaction. Graham, can I focus in on -- and you covered a lot of ground already. But can I focus in on the due diligence process and the asset itself in a bit more detail. A few observations. You say it's not well understood, but it's been a tough asset since the get-go build at really at the top of the cycle by floor, and 3-stage crushing circuit HPGR, sort of unconventional, nonconventional, if you call it, for Chile. From a flow sheet perspective, it's lower grade, it uses seawater, other assets do in Chile, of course. The high end, all-sustaining cost at around USD 2 a pound. And the assets improved recently, I get that. But -- so I'm just trying to understand that the history here, what you've got you guys comfortable? You mentioned 2 site visits. But just on that, can you step through 2 things here. One is why was the asset problematic? What's been improved? And secondly, on your DD site visits, who did you use? I mean, because this is a next scale asset that my understanding is interpretation is technically inside South32, there's not a lot of, I guess, knowledge on big processing circuits like this, despite of being milling site. So who did you use from an expert perspective to really get comfortable with the plant and the operation?

Yes. Look, Paul, they're both really good questions, and maybe I'll tackle those in the past, and I'll start off with like around the due diligence and then talk about how we have seen, if you like, performance of the team at Sierra Gorda and where we see maybe they're going in the future. So we can talk a little bit about that in detail. Look, from a perspective around due diligence, I mean, again, I'd go back to that opening comment that I personally and probably the other people on this call started this process rather skeptically, because of some of the noise around performance in the past and reputation of Sierra Gorda as an asset. So making sure that we had the appropriate level of due diligence into this was going to be super critical to actually get that right. And it is interesting to your question, I guess, around copper experiences in the portfolio. If you look at my lead team, Jason's been involved in copper projects. Vanessa, she has had background at Vale and she had her teeth on, if you like, a number of different of their base metals projects. Marco who leads our projects has worked at Rio Tinto, Vale and a few other companies where his primary focus has been on building and developing cost projects. And then as you get further into our organization, for example. Brendan into his [own for] now, used to be the General Manager of Mining at Olympic Dam. So we actually have a lot more extensive, if you like, copper experience of how people recognize. Now in saying that, we also have the belief that Sierra Gorda, Cerro Matoso, there's a lot of similar things around processing and technology where we can apply actually skills around that. And certainly, we can use some of the experience in that space to sort of work through the process. But we did also rely on external consultants. Some of those external consultants, if you like, on the ground, obviously, based in Chile because they are experienced, and keeping in mind that Sierra Gorda is surrounded by about 4 other operations that actually use similar kind of technology. Admittedly, not all of them use seawater processing, but they're not the only one there that is using seawater processing if you like, in that hotspot of operations. I think the other important piece for us is, and certainly from my perspective or would be that there was a number of people that obviously all have a fair degree of confidence in. One of those is we certainly sent the team down from Cerro Matoso. And Ricardo, who actually runs Cerro for us for a number of years and has done a great job as you're aware about turning that asset around. Even a number of his technical people went down and actually had a review of how the operation is going as well as the external consultants. At the same time, we use a general called Carlos Pavissich, I've known Carlos for probably 20 years. He used to run its conveyor for BHP, then he ran their base metals projects. Not in South32 this time, but he's ran Mozal, he's ran Cerro Matoso. He's had 15-years plus in the copper space. And like that last 15 years is predominantly based in Chile. So he's an experienced copper operator, and we relied on him to basically work with Ricardo and the rest of the team to do a complete due diligence and actually covered everything as you'd expect from mining, processing, health safety, culture, debottlenecking plans, also doing a large deep dive on the talent space. So we had a very extensive program that was done over multiple sites as a sort of getting our minds around what do those metrics look like. I guess a couple of things when you sort of talk about some of your comments, I mean, we would probably argue that the actual processing there is not dissimilar from what other people are doing in that region, its generally the same approach and technology. We'd also, again, make the point that we're not the only persons using seawater there. And obviously, the impact of seawater on infrastructure was a big focus for us and that was -- they're managing that really well. And we did fair to the benchmarking to get comfort around that. I think one of the challenges is, as you pointed out, there isn't probably too much information there that you can talk to the market about in terms of how it looks. But maybe if we sort of go through some of the history problem, it's probably worthwhile starting with Slide 26. If you think about Sierra Gorda today, the problem with extra capacity is actually concentrator throughput. The operation has surplus capacity in mining and infrastructure. The concentrator is actually conventional in design. It was undertaken and constructed by Fluor. Certainly, from our perspective, they did it using Tier 1 equipment. The actual layout is actually well laid out in terms of space with a view to actually build expansion over time. Look, they started commissioning in 2014 and '15. And to your point, it was a tough commissioning for them, and they experienced a very slow ramp-up to native flight capacity. The operation had to overcome certain issues in both the crushing and milling areas, and they did that through a systematic approach to reduce the unscheduled breakdowns, resolving the material handling constraints that have been probably built into the design around screen capacity, shoot design, et cetera. And in doing this the plant availability increased, which reduced the process disruptions, improving operating performance of the downstream flotation circuit. Also the copper and moly recoveries have progressively improved. And if you look at Slide 26, you can really see some of those basic metrics such as old mill and plant availability that sort of showed performance over a sustained period of time. That worked really now then to achieve the concentrate to achieve its initial design through to about 100,000 tonnes per day in 2018. It's interesting at that stage, the original proposal when they actually put forward Sierra Gorda was to go from 110,000 tonnes per day to roughly 190,000. But they made the decision at that time to approach it other on the debottlenecking project, which is referred to as the DBN project. And this is progressively focused on increasing the capacity of each of the constraints that actually exist, if you like, in the plan. Probably saying that's not it's been seen for the industry, it's a current practice to achieve capital efficiency capital capacity increases. And from 2018 to 2021, this DBN project has increased the capacity to 130,000 tonnes per day and has increased both the copper and the moly recoveries at the same time. If you sort of move on to Slide 27 in the pack, and 28, you can see that in a little bit more detail. This improvement has been achieved through a series of incremental upgrades, including increased power utilization of the high-pressure grinding rolls, increased ball mill power drill, increased cycling capacity and capacity is a cleaner flotation circuit and given the increase in concentrate production, also the addition of the fourth copper filter. The DBN project has been really successful in our view in increasing capacity and metal recovery so far, and it's currently, if you like, implementing upgrades to the primary grinding circuit conveys in the crushing circuit and tailing sticker capacity, combined will allow them to achieve a mill capacity of 140,000 tonnes per day and increased copper recovery by around 2%. And really, if you flow on to Slide 29, you sort of see what that means from, if you like, the financial benefits, from the stable performance of the debottlenecking. From our perspective, look, it's been great work by the team on the ground. But they had used not only their own people, but they've also used some of the key consultants in the region of Chile. And it's certainly been something that the joint venture owners historically, if you like, independent period use to check that it's on the right track, particularly with Hatch engineering. And certainly, from our own perspective, as part of the due diligence we want to really understand it and we use, again, I've spoken about Carlos, I spoke about Ricardo. But we also use [ Gomez ] engaged about our own view of the operation and how the actual debottlenecking project was performing. So from our perspective, we are supportive of that. There's still some more work to be done. But we think it's a real good example of there's tangible things that you can point to at your physical changes in the plant that actually show that the work has actually been done in change, which is how it allows themselves to get over some of those initial hurdles, and continue to actually in a low capital intensity way creep production capacity. The other thing I'd point out, Paul, is we were really interested in understanding capabilities there. And certainly, if you look at Sierra Gorda, you look at the stability of labor relations, that's been a real strength for the team here. It's probably one of the few places in Chile where they had no strikes to date. The EBA process has been closed on friendly terms. They've currently got an agreed in place for 2024, and we were really impressed by the quality of people there that have been drawn from a number of the major operators. Sierra Gorda is a very well-run operation. KGHM, they're super impressive. I think they're doing a really good job. And I think we talk about that piece about selling, I don't think the market is appreciated. I think they've got a good track record of delivering these improvements. And going forward, the debottlenecking plan has still got some work to be completed, which continues to add capacity.

Thanks, Graham. Great to hear. There's a lot of internal and external bodies involved to do with this process a additional information gives me a little bit of comfort. The next question, Graham, is actually just about the valuation process and how you formulated your valuation. And looking at, I guess, some upside in this project, you mentioned the debottlenecking project, the 140,000 tonne a day. There's also an oxide -- feasibility study on the oxides at the moment. I've always thought the oxides as a set of steak knives and spent down the road. So that's always interested me. But more around -- the question is around what you included in your valuation process as far as oxide or your valuation ranges, did you include any value for the oxides. And is your base case within that, that they do achieve 140,000 tonne a day consistently?

Yes. Look, I mean, Paul, good question. I mean, to your point, there are a number of, if you like, outside potentials on this. For example, [ Caterballar ] we think there's more resource at depth with some of the early drilling is sort of indicated. We haven't included that. the oxide project, to your point, there is a number of those, roughly 100 million tonnes stockpiled ore oxide material already. That's actually going through, if you like, a study phase now. We haven't sort of included any value for that. And then obviously, you've got [ Pampelina ] the broader exploration package, which we haven't included in our expected value for that. I mean, they are all opportunities we think to add value to the portfolio, but they are not materially impacting any shape or form how we think about it now.

Last question, you wouldn't consider copper hedging?

Look, it's a debate we actually had internally. We think the price participation is probably the better way to actually manage this. And obviously, at the moment, the copper price has been really hard and what's surprised of that. Brendan, you can maybe talk a little bit, if you like, at a high level about how we're viewing the market, Brendan?

Thanks, Graham. Look, I'll take a short conference of the queue. But look, frankly, you look at the deal structure. And I think the first key point is you can assume that we haven't embedded any real assessment of the current forward curve. We're not, if you like, basing the valuation on current market dynamics. Look, I think, Paul, as you know, if you talk to a number of different commentaries at the moment, there is always a divergent set of views. Those, that see deficits persisting into next year, increasing levels of disruption on the supply side. versus those that see surplus. And I guess from our perspective as we look into next year, as you'll see in the past. We do see the skew, if you like, to a modest surplus next year with significant capacity coming on, if you like, to the middle part of this decade, [the quebeco, ] [ the otis, ] [indiscernible], QB2 expense, obviously net relative to the oxide, those sorts of projects coming through. So a propensity to a modest surplus. But again, that still already assumes a relatively modest supply disruption. But once we look beyond that, we think the market looks increasingly tight. And in fact, we see a very large deficit emerging with regard to identified projects and at least, I'd say, 3 million tonnes of a supply gap towards the back end of this decade, which, again, for us means we'll stay firmly in inducement pricing territory. The market, therefore, may even all through the modest surplus that we see in the short term. And so again, if you look at the deal structure, I think from our point of view, and I think from Katie's point of view, this is the right way to structure whereby we've got some degree of conservatism in the way we think about value. And there's certainly a lot of upside if markets doing them indeed turn out being tighter than we assumed in our base case.

Your next question comes from Glyn Lawcock from Barrenjoey.

Just a quick couple of questions from me. Just on the sponsor loans, I mean, it's $5 billion and you're going to acquire Sumitomo's. Are they on an equal footing to the ownership, so you'll get 45% of what's outstanding there? That's the first one. And the second one, just a quick one. The 5% tax rate you said you were paying, I noticed that the rules are greater than 50,000 tonnes between 5% and 14%. Does it slide as you slide production? I'm just curious because that wouldn't be covered by, I guess, Sumitomo because that's not a change. So I'm just wondering why you're at 5% when you will be not well above, but you are above 50,000 tonnes per annum?

Well, maybe both questions for Katie around structure and the tax rate. That structure one, Katie, do you want to take that too?

Yes, in terms of the funds, spot loan change, is that right, they are on a proportionate basis with ownership interest, and that's how you should think about them. In terms of the 5%, look, that is our assessment over that 4 year, we know FY '20 -- calendar year '22 to '26. So that's our best assessment at this point.

Your next question comes from Hayden Bairstow from Macquarie.

Well done, and that's a great acquisition. Just trying to understand, Graham, just with the JV, how many sort of South32 do you think you're going to be injecting sort of directly on site or it's just going to be the management team from Perth that are talking with the JV partner? And beyond the sort of debottlenecking projects, where do you see the easiest opportunities? Is it the oxide process, putting something in there? Or where do you think you've got some upside from beyond the debottlenecking plan?

Yes, absolutely. Thanks. I mean, the way I'll think about we have the MRN joint venture and the Alumar joint venture in Brazil. There's no way we run that actually out of Perth. It's just impossible around language but also time. From our perspective, we will have a team on the ground. Carlos will help us set that up and initially be responsible for putting that in place. Look, from our perspective, there will obviously be a number of the key committees that we'll put members on. They will be actually based in country in terms of Chile. We'll have made -- some will be obviously the senior first one because it's in the time line jurisdiction, but we will have a team of a small team, if you like, in Chile that will actually help drive this. And we have the ability to second some people if you like into that, and we'll make an assessment of where we think we can add value. But all the committees are obviously equally stacked with our people and KGHM. So getting the right people or expertise, we think there is going to be important. And as I mentioned earlier, the Chair at KGHM rotates every 2 years and making sure we're positioned that well. Should make the comment while KGHM is the operator, they actually have a really good track record of that, choosing the best person for the job. So when you look at the critical parts of their business, there's a combination of KGHM people but there's also a lot of local talent that exists there. But certainly, we will use Carlos to help put the right people and the right Chairs over the next period of time. And we're confident we can have access to those people pretty quickly.

Great. And then the opportunities beyond the debottlenecking?

Yes. So absolutely, look, probably the way I think about it is if you look at the debottlenecking project, obviously, there is more work to be done on executing the current plan. That's probably the first piece. The second piece is we think there's potentially a Phase 2 approach of that, which can add with some more value. And then thirdly, there's the oxide as that actually goes through the study phase.

Thank you. Your next question comes from Lyndon Fagan from JPMorgan.

First question is just on the stockpile strategy. So if we look at Slide 24, this year, you're mining 76 million tonnes of ore, but milling 47 million tonnes. So there's obviously quite a big difference there. And I'm wondering for how long does that big differential play out? That was the first one.

Yes. Thanks. Look, I mean, you will obviously see there's a number of metrics that we have there, and there's no doubt that FY '20 this calendar year, you actually see they are producing more out of the mine, and they're actually processing some of the high-grade material and also stockpiling some of the other material. It's something that obviously, we had a close look at and we think NPV is the right way to look at it when you look through that lens. It's probably not something we'll continue to see them do on a long-term basis. It's probably something that I think occurs to memory, if you think about the life of the operation is probably over the next 8 years, you'll see them sort of approach at strategy, but I think calendar year '21 probably had the biggest numbers in that space.

Okay. The next one is just on the grade profile. It looks like the reserve's at 0.4% and you're doing 0.48% this year. I noticed Slide 28 talked about 0.43% medium term. But how many years can you stay up at that sort of 0.48% level?

Yes. So if you look at Slide 24, we actually talk about some of the key metrics about what we actually expect to see. And we also talk about some of the grade if you like on Slide 28. And to your point, 0.48% this year is actually a large, if you like, increase in the grade versus prior years. We probably see that 0.43%, which is above the reserve grade of 0.4% been around for roughly 5-ish years. And then you probably post that, you sort of more sort of moving towards the reserve grade. I think from our perspective, we also think there's opportunities to adhere, like continue to optimize that. And we do think that's one area we can sort of have to work with from around the mine planning. The other thing is obviously consider in that place is the moly grade and what that actually looks like in the early years as the operation in moly grade was quite high as they chase some of the pockets of the moly.

And I guess following up on that, Graham, in which year do you go below the current reserve grade considering that you're above it for a number of years?

So like I mentioned for the first 5 years, you're probably running at about 0.43%. I'll just -- one second, I'll check on it. I think it's way beyond 2030, just looking at the numbers of the mine plan here. Then that sort of pushes out probably around 2030 onwards, you can see that grade. So that grade starts to drop off. And obviously, you've got time in that process to look at further debottlenecking and it's slowly sort of gradually move down that reserve grade for the rest of the life.

Right. And just couple of other ones, if I may. So payability, is that just standard?

Yes. Look, I mean 1 thing about the payability standard. I think the other thing for the [ concentrate ] are relative to a very clean [ point ]. It's quite attractive because obviously, many of the other smelters need to sort of balance that. So from that perspective, it's quite attractive. The concentrate grade is about FY '21 as sort of moved itself up to about 25%. Historically, it was probably more around 22% to 23%. What's been important to note, it's really clean.

And just another quick one. This is going to be an equity accounted unit just to confirm that.

Katie, why don't you talk about the reporting? Because I think it's worth drawing out the transformation we'll give people to model this, but also the flow on impact of what treat manganese in a similar way because I think that's something that the market does not want give full value to you, Katie?

Yes. No, absolutely. So we do have a couple of slides in the pack on the accounting treatment, Slides 35 and 36, but that's really to make kind of the high-level point. Yes, we will be capturing Sierra Gorda as an individual segment from an underlying accounting perspective. You'll see what to capture the underlying EBITDA, EBIT and underlying earnings on a proportionately consolidated basis. And I think Graham referenced at the start, concurrently, we will actually include manganese on an equity accounted basis to be proportionately consolidated to align our approach on material equity accounted investments in the group. In terms of the static counter treatment, Sierra Gorda will be recorded as an equity accounted investment, but with zero carrying value. And what you will see is we recognize a credit impaired receivables in our accounts, which will be grossed up for tax liabilities on completion. In terms of balance sheet adjustments, you will see balance sheet adjustments coming through in relation to the revaluation of the credit impaired receivable each half year and full year. And you'll see any of the movements that comes through on the income statement might have an impact on underlying earnings based on how we intend to capture the reporting. We will report a clear reconciliation between underlying earnings, stat income and balance sheet each half year and full year period. But really, essentially, the key is both manganese and Sierra Gorda will be captured in our underlying reporting at half year and full year.

Thanks for that. And just a final one for me. It does seem like a fairly capital-intensive asset. If I look at Slide 29, it's had $1 billion or so in the last 4 or 5 years. A lot of that's from deferred stripping. Can you maybe talk about the opportunity to get that down a bit? I noticed the medium-term target is pretty similar to the '17 to '20 kind of average. But is there anything that's driving that up that can be looked at?

Yes. So maybe let's break that into parts. I mean to your point is if you look at the medium-term target, we gave capital guidance of roughly $270 million to $310 million, and that really covered deferred stripping and improvement -- sorry, say, reliable capital. On top of that, between calendar year '22 and '23, we think the debottlenecking project, there's roughly $200 million to $250 million to spend, which is obviously listing your throughput. Look, from the longer-term spec, if there is an opportunity to basically look at how that is actually done. Certainly, from our perspective, we've had a look at the way they do some of their mine planning. And while there's no fault in the way they're doing that, we do believe there's an opportunity to basically optimize that a little bit more. And certainly, through the technical community, that is one area that we think we have the opportunity to add value. We have to build it into our base case. But we certainly do believe there's an opportunity to further improve in that space.

Great. And sorry, I did have another one, sorry for all these questions. Just with the lower grades as we model that, how should we think about factoring in lower recoveries, i.e., how much lower the recoveries trend with lower grades?

Yes. Maybe I wasn't super clear. I mean, obviously, we've given very clear guidance on what the actual grade looks like for the couple of years in terms of that medium-term target. I didn't want you to walk away with the fact that the grade actually drops off a cliff. The grade sort of goes back towards reserve grade and really holds in that position 2032, 2040, around that space, and then it gradually declines after that. But it's not like a drop-off of the cliffs. Certainly, from our perspective, normal modeling we've seen, you see they're actually taking a step up in their recovery of copper from 83% to 85% as part of the current debottlenecking project. We think they even hold that 85% flat pretty well through the life of that despite the slight shift in grade. But don't sort of walk away at perspective, the grade drops off the cliff. And certainly, that's starting, Alex and the team can go through a little bit more detail on that when we get a chance then.

Your next question comes from Peter O'Connor from Shaw and Partners.

Congratulations. First question on the owners' council and related councils, you talked about equal representation. What is the voting structure at the owner's council for day-to-day stuff will also have a major capital decisions such as the oxide project? Is it [indiscernible] or is it?

Yes. Slide 23, probably the way I think about it. The owners council, the management, if you like, via those technical mines and the subcommittees is essentially each member on that has a vote. So it's essentially equal voting, if you like, on the committee. The committees can also interact if you like, the Chairs of the committees can interact with the actual management team. really set the agenda in the plan. If you look at some of the key decision-making, the ordering special resolutions require both parties to support, so one can't push over the other. And that's reflected by the fact that for all new resolutions, you need 60%. You also need both parties to agree to management appointments, budget approvals, any change in production, any change in debt financing and capital expenditure. So from our perspective, this is absolutely, if you think about it, something where we have joint control and very strong governance rights. And to be very clear, the question was asked earlier interaction we had with KGHM. It's been a lot of interaction with them to sort of talk about how we're going to work, how this will sort of go going forward. But also the feedback from Sumitomo has been that they have obviously had people on the ground to come to the business and about the technical committee is a really useful way to help improve performance. So it's not like we're asking for something new in that space. There are some things that we've been strong about around tailings and safety where we'd probably like a little bit more active involvement with Sumitomo, but that's something KGHM's had a good discussion around the dialogue, and there's been no difference of opinion. So if I look about our different joint ventures that we have in our business ranging from MRN, Alumar to the manganese joint ventures, obviously this is by far the one that has the most joint control and has the governance rights to make sure to protect our interest. And we certainly hardly dragged along in anything.

To work through this process, we've had a few hours. Just to synthesize some of the detailed comments you've given us, which is really insightful. The key levers, it sounds like it's the mill capacity getting to 140, #1. Number 2 is recovery from the up 2%; and 3 would be life of mine, would they be 3 of the key levers?

Yes, I would say in between the last 2, there's still an opportunity for Phase 2 of debottlenecking and the oxide, which is relatively low risk and low capital. But we certainly do think kind of has the ability to extend the life of the mine by some of the early drilling and that's more work to be done. But from our perspective, a good entry into an asset at a good price when you think about what historical prices look. But also if you look at some of our major diversified peers that are about to commission projects in calendar year '22, they're paying well in excess of probably around $20,000 in terms of value. We've got it at a good entry price here and so that we think there's a clear pathway to realize value.

So, with that in mind and knowing the details you just told me are fairly straightforward, I guess, that you dug into a lot of detail. And as a competitive process, do I conclude you've paid full in fair value?

Well, you work your own numbers to that. But if you look at the metrics, and obviously, we had a couple of slides on that to clearly map that out. And you look at those metrics are a number of different lenses. If you look at it from a upfront DB versus historical cost, we think we're getting at a discount. If you look at what it looks like from a multiple getting it at 3.3. If you look at an upfront DB copper equivalent payable production we draw on Slide 8, we think we're getting in very cheaply compared to what these new builds look like in that's before you consider permitting and construction ramp-up risk. And I think the other piece that we would draw out very quickly, here you look on a consensus basis, it's value accretive in FY '22. I actually think in this space, and again, I would start to position that when we started this process, Simon can tell you, I was the most skeptical about this, we didn't think this was going to go anywhere. The reputation of the asset wasn't great. But every time we took up the latter at the annual, we were surprised by the work that have been done over the last couple of years, and b, the potential of this still exist. So I think we did the hard work. We put a lot of effort over the last 5 months that some of the other counterparties probably didn't. And again, I think we're driven by the ego that we believe we have to be the operator, we're the best operator in the world. We're comfortable around the joint control and we can exercise our rights and our influence to realize that value. But from our perspective, we think we've got it at a very good price, there's more upside. We've looked at a number of different opportunities over the last 6.5 years extensively. And this is by far the best one we're seeing despite the initial skepticism of probably myself, Katie, Brendan and Simon. I think it's a credit to the team. We've continued to do the work and see some value in such that other people will pass over really quickly.

And Graham, what do South32 or team started to bring to the partner. You've talked a lot about the partner and how high you value them. If they were sitting reflecting on this, what would they say that you bring to the table?

Yes, look, it's an interesting one because it is one of the questions I asked us. I mean, if you're all looking at it from KGHM's perspective, they could have done this deal with the trading house or pushed in [indiscernible], they could have looked at the Chinese and each partner has their strength and weaknesses. Look, from our perspective, we do have a deep experience in joint ventures. It's not like we haven't done that before. It's not like we don't have a track record in that. We think if you look at some of the people that will look to move into some of these roles that we have in the Cerro Matoso business, they actually have worked in Chile before. So we'll have the ability to move people up and down from that perspective and add some value from that process. I think there's still opportunity for them on some of the mine planning side, and we have some really experienced people in the mine planning side who have a good working knowledge on how to develop a couple of porphyries and work through that. And again, if you look at some of this processing, it's some like we're talking about things that are unusual in this space that we don't actually have the experience in, the exploration potential on the property and some of our team in the exploration area had really good experience for a couple of copper grades and deposits. So we actually -- certainly, from our perspective, we think we put our best foot forward with KGHM, and they certainly saw a value from their perspective working with us.

My last question, just to do with the existing capital management. You did mention on the call, but I just couldn't quite type as quickly as you spoke. The current program, it continues to run, did you say?

Yes. I mean, look, from our perspective, our approach to capital management remains unchanged. The framework design, the belief and a strong balance sheet, we believe that we have excess cash, we'll look at the most effective way to return this back to our shareholders. Clearly, what we think is good value entry price. Clearly something where it's value accretive, 9% on consensus in FY '22. We believe that we'll be in a position to continue to return excess cash back to our shareholders. We will have the same flexibility to exert over the last 2 or 3 years, so the philosophy and approach to capital management manages out.

Your next question comes from Matthew Hope from Credit Suisse.

I just wanted to check a couple of things. On the balance sheet, would it be right in sort of calculating you're going to be looking at something like $1.6 billion of net debt once we add in, say, $250 million from Mozal, the capital management, Sierra Gorda and probably the dividends available need to be paid in the second half? Is that where we're at?

So maybe Katie can talk to that. I mean, obviously, where we end up at the end of the year will be very dependent on where the prices are going. But Katie?

Yes. Look, I think, I mean, if you take out end of September, net cash number of $650 million. And to your point, make the relevant adjustments in relation to Sierra Gorda, it should all be taken up the full 25% option there. Capital management remains at $231 million at FY '21 you think that's coming out in October or has come out in October. You do take the balance sheet to a net debt position of $1.6 billion. But certainly, we are generating strong cash flow at the moment. And we do believe if we extrapolate out some -- in the positive scenario, extrapolate out our current cash generation capacity over the full year, you would expect to see that we're back into a [Audio Gap] over the full year now. Certainly, we're not relying on that. We believe that the funding approach is consistent with our capital management framework. We do maintain a strong balance sheet and investment-grade credit rating through the cycle, post completion of the transaction. And we do expect to retain our BBB+, Baa loan credit rating completion, and we may face significant access to liquidity. So the transaction is earning a margin accretive. There's further resilience in our balance sheet, and we feel we're in a pretty good position.

Okay. And then I just wanted to understand how do you see this business? I mean, what is South32 really? Because it's now looking at a very complicated and already, we've got bits of operations scattered around the world in multiple diverse commodities, bits of equity counted material. And now we've added a minority ownership in a new commodity, really a small Tier 2 copper asset in the other side of the world, I mean, with no synergies. I just -- why would you go ahead of it? I get the point about the value accretive and the earnings credit. But I guess you're almost heading towards being an aluminium company, but now they've suddenly turn away from that. So what do you see South32 is? How do you get investor interest in it? Because it's just such a complicated company.

I'll take this one, Matthew. I'll give you probably a slightly different take over the last couple of years of the investment. [indiscernible], the exit of the alloy business, it's simple, if you like, acquisition of an additional share in mobile and an asset that we actually operate today, I think we're going the opposite way. Our liability are vastly less, our operating people that we have our operating sites have dramatically reduced. If you look at the composition of the company now with this acquisition and obviously very dependent on prices that's on Slide 7, roughly 80% of our EBITDA earnings in FY '21 would have come from base metals and precious metals. And if you think about where the long-term demand for the minerals is coming from as the world decarbonizes and go through that green energy transition, that's probably the composition of what you want to actually have. And if you look at the position we have left, which is more in the bulks of our manganese, we're the world's largest manganese producer, we're going to give you more transparency about the way we're going to report it now through underlying earnings. The met coal business is a small portion of our business, and that's really tied largely to a domestic contract that we actually have in Australia. So far, I think we are diversified both in commodity and jurisdiction, that's not a bad thing. But I think the flip side, the group is actually getting much simpler, not more complicated.

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

Really quick remarks because I know everyone sort of made time available at short notice today. Look, I'll go back to the starting position. This is opportunistic. We see this as something that creates value that's not understood by the market. There's a clear pathway to the value. It is a long life open-pit copper mine that better fit some significant historical investment. You don't have great infrastructure in place, including access to renewable power, it's immediately value accretive from an earnings perspective. If you look at all the other metrics, we think we've got it at a good price. There's more opportunities in, on top of our base case to unlock value through plant, debottlenecking the oxide project, mineral resource growth, regional exploration. It is absolutely consistent with our strategy from day 1, so there's no deviation from that. Our capital management framework remains unchanged. We still believe in a strong balance sheet. We still believe returning excess capital back to our shareholders. And thanks for your time today and your support.