South32 Limited (S32) Earnings Call Transcript & Summary

Thank you, and good morning, everyone, and thanks for joining us today. I'm joined today by our Chief Financial Officer, Katie Tovich, and our Chief Operating Officers, Jason Economidis and Noel Pillay. I'll give a summary of our results before handing back to the operator for questions. And just as a reminder, the presentation is available on our website. The most important commitment we make at South32 is that everyone goes home safe and well. This year, we did not achieve that. We are deeply saddened by the loss of our colleague, Mr. Desmin Mienies, a contractor, who was fatally injured while undertaking electrical work at our Wessels Mine at South Africa Manganese in November. Our deepest sympathies are with Mr. Mienies' family, friends and colleagues. We have provided them with our support following this tragic incident and undertook a detailed investigation to understand what happened. The learnings were shared across our business, and we [indiscernible] safety conversations to discuss and learn [ from them ] to prevent a similar incident occurring at any of our other operations again. During the first half of FY '22, we undertook review of our safety performance and identified areas for improvement. This formed the foundation of our Safety Improvement Program, a three-year global program of work designed to achieve a step change in our safety performance. We will never be truly successful until we eliminate fatalities and significant incidents. Turning now to operating and financial results. We delivered stable operating performance despite a challenging external environment, which included managing the ongoing impact of COVID-19, labor availability and extreme weather events. We achieved record production at Worsley Alumina and the Hillside Aluminium and Mozal Aluminium, we continue to test the maximum technical capacity. At Cerro Matoso, we achieved a 22% increase in nickel production. And at Cannington, we exceeded our already increased production guidance as we transition to a new operating configuration. We delivered record earnings and cash flows as our stable operating performance, the implementation of logistics solutions and recent portfolio improvements enabled us to capitalize on significant price tailwinds. We generated a record underlying EBITDA of USD 4.8 billion and record underlying earnings of USD 2.6 billion. Free cash flow increased by more than 200% to $2.6 billion, and we finished the period with net cash of $538 million after funding $1.5 billion of investments to improve our portfolio during the year. As we continue to transform our portfolio, our capital management framework remains unchanged. A strong balance sheet is at the core of our strategy and our framework is designed to reward shareholders as our financial performance improves. Reflecting our strong financial position and disciplined approach to capital management, the Board has resolved to pay a record USD 648 million fully-franked ordinary dividend in respect of FY '22 and USD 139 million fully-franked special dividend, taking total dividends to a record USD 25.7 cents per share for the year. Our total shareholder returns of $1.3 billion in respect of FY '22, including our ongoing on-market share buyback was also a record. And today, we have further expanded our capital management program by $156 million to $2.3 billion, leaving $250 million to be returned by September 2023. During the year, we accelerated our portfolio transformation, increasing our exposure to the metals critical to a low-carbon future. We acquired a 45% interest in the Sierra Gorda copper mine in Chile. We also acquired an additional 16.6% shareholding in Mozal Aluminium, which benefits from access to hydro power. And we achieved first production from the restart of the Brazil Aluminium smelter using 100% renewable energy. These investments in our aluminum value chain have increased our low-carbon aluminium production capacity by 100%. Our attractive commodity mix also includes a growth pipeline across development assets and exploration properties in these metals. Looking ahead, we are well positioned heading into FY '23, given our growing production profile and strong balance sheet, and we are well placed to capitalize on the increasing demand for base metals as the world transitions to a low-carbon future. Thank you. And I will now hand back to the operator for questions.

[Operator Instructions] Your first question comes from Peter O'Connor from Shaw and Partners.

Graham, what's going on? I think we are hanging around for this Q&A. Nobody is here. What's -- they missed the call, have they?

No, I think we answered it all this morning, Peter.

Okay. Look, I'm not going to waste your time, but I have got a few follow-ups. So the first one is going back to Dendrobium [indiscernible] I was looking at the details of this, and this is a little bit quirky and a little bit of micro, but now that I've got you. You have done a lot of development towards that 5 Area. I just noticed on the plan that you presented in the pack today. When was that done? How long ago or how recently was that development done [ heading ] out towards 5 Area when you pulled it up? Is that [indiscernible] last February? Or is that something you were doing over the last year just in case? I just noticed that there was a fair bit done there.

Yes. Look, there was a bit of work done in that space to obviously [ allow ] the optionality. Maybe, Jason, you can talk about the time and effort that's gone into that.

Yes, no problems, Graham. So when we got the rejection in February of last year, we decided to review where we're at. There is actually a boundary that we could have mined to, in any case, that was further out than that, but we decided to stop and make it safe. We actually mined the last pillar at the ventilation and then we stopped. So that was only after the rejection in February of last year.

[Operator Instructions] Your next question comes from Brian Morgan from Morgan Stanley.

I'm sorry if you've quoted this morning already, but I haven't had a chance to go through that yet. But when you talk about -- at Worsley, you're talking about the coal supply [ risks or ] energy supply risks. Could you just give me a bit of background there, just a bit of color in terms of what you mean by that?

Yes. Look, absolutely, Brian, and thanks for the question. Look, we have a mixture of energy that we actually used at Worsley, a combination of gas, biomass and coal. The coal is predominantly used at the moment in steam generation. There's 2 different, if you like, suppliers that we have of coal in the Southwest of Western Australia. Those 2 suppliers supply us, and they also help supply, if you like, some of the energy coal-driven power stations owned by the government enterprises down in the Southwest. One of them has always have a little bit of financial challenge, and they're continuing to work through that. Probably the bigger 2 things that are on their mind at the moment, one is the government in some way has announced that they don't intend to renew those thermal coal power stations in 2030. So that sort of puts a longevity of both the coal operations in jeopardy. The second short-term and [ naive ] issue, which we're really seeing, if you like, some wet weather conditions or storms in the Southwest of Western Australia, which is making access to the pitch problematic. So it's a combination of long-term government sort of pulling away from coal for a major power source. Short term, you got one of them that [ spent ] a little bit of financial [ strain ], and both of them [indiscernible] hit basically, if you like, by weather impacts. So [ it does mean our team ], you'd expect to really investigating all the opportunities around alternative power sources, including more gas, but also potentially if you're have to import a small amount of coal to sort of make up the difference if things didn't go to plan.

Your next question comes from Myles Allsop from UBS.

Sorry, I joined the call slightly late, but I apologize if this question has already been asked. But just first of all, in terms of strategy looking forward, obviously, it's been a very, very successful kind of 18-month period in terms of sort of repositioning the group and pushing forward some acquisition opportunities. Do you think there's more opportunities like that in the market going forward? Or do you think that the Sierra Gorda, the Mozal stakes are all quite unique. And as we look forward, that is kind of less -- increasingly less likely rather than kind of still very much on the agenda. And from a restructuring perspective, obviously, the news around Dendrobium maybe makes Illawarra look less competitive medium term. Is that now seen more as a noncore asset? And are there any other noncore assets potentially in the portfolio?

Yes. Look, I mean, Myles, I'll always start with the comment, which probably sounds a bit mercenary, but every single asset [indiscernible]. So we're always clear that we exist to create value for our shareholders. It's not about having onto an asset because we like it. We have talked strategically that we have applied the base metals. And if you think about transformation of the portfolio over the last couple of years, and we'll come back to that in a second. That has really been about pivoting the group to get far greater exposure to those metals that are going to be critical in a world that's decarbonizing. Obviously, high metallurgical coal prices this year are probably slightly skewed [indiscernible] there's been a conscious effort to really push towards those base metals because we do believe the supply-demand fundamentals, shortage of product, high demand is that you're going to drive good pricing outcomes from a producer perspective. Met coal, we've been also clear about -- we don't see met coal and thermal coal the same way. Thermal energy coal today, there is substitution through wind, hydro, solar. There is a substitution at the moment in using tracking coal in the steelmaking process. Now in saying that, we believe innovation will come and probably somewhere beyond the next 2 decades, you'll see the commercialization and broad adoption of things like green steel via hydrogen, but it's not here today. So from that aspect, as we think about the met coal price, we see it as something that makes sense for the next 2 decades. Beyond that or building something new probably becomes far more problematic. So look, there is no doubt the configuration, we did a trade-off of if you go into a new mining area, you spent $700 million [indiscernible] lower operating costs or the work that we've done over the last 18 months to sort of prove out that we can actually drain the CO2 gas like we need to, but [indiscernible] production rate. Is that a better investment than the $700 million? And the simple answer is yes. For us every day, [indiscernible] doing the continuation of Area 3 now that we can extract gas, even at a lower production rate up to 2028, and we believe there's potential to actually take that beyond that, and the team will start now focusing on that. And Appin already had [indiscernible] FY '39. Now in Appin, we are going to that single longwall configuration. And that's due to be completed by FY '25 and it requires a little bit of investment around [indiscernible] between. So that's how we think about it. To your broader question, yes, the transformation of the portfolio, I would sort of say in 2 ways is, one, it's been a lot of work, but the results are sort of, if you like, sort of just come over the last 12 months. But the flip side of that is some of those results are actually opportunities. So it's a combination of the 2. So we wouldn't necessarily expect that the Mitsubishi was going to sell out and get such attractive price from someone else that we can preempt on. So some of the things you see coming, some of the things you don't see coming. But I think being prepared with a very clean strategy, being prepared with a team that's [ matched it ] and has the capability of executing is important, but nothing is more important than having the lens of a value [ trade ]. And the other piece for us is never jeopardizing our balance sheet. So we've [ observed ] the Sierra Gorda acquisition, balance sheet is back to what I'd call the state it should be, which is very strong for a company like us. And where are we positioned now? If you look over the next 12 months, we had 14% copper equivalent growth, which is probably, I think it's one of the really good ones in our industry. Medium to long term, I think the investments we have made in things like Taylor, Clark, Trilogy, now with Sierra Gorda, with fourth line of debottlenecking project, et cetera, I believe we actually have a good medium-term pipeline of projects that's going to generate healthy growth, which many of our peers don't have. It doesn't mean that we won't continue to look at opportunities to add to the portfolio. But they're always going to be through the lens of a, [indiscernible] value and, b, never putting our balance sheet at risk. Does that help?