South32 Limited (S32) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Chen Jiang. And I work in the Australian metals and mining research team at Bank of America in Sydney, Australia. I am very pleased to introduce our next company, South32. Presenting from South32, we have Graham Kerr, Chief Executive Officer and Managing Director. Graham was appointed CEO of South32 in 2014 and led the company through the demerger from BHP in 2015. Prior to this, Graham joined BHP in 1994 and was appointed Chief Financial Officer of BHP in 2011. We will be having a fireside chat with Graham, and we can also take questions from the floor.

Hi, Graham. Our conference team this year is pivot to growth. South32 has been increasing its base metal exposures since the demerger. Can you please talk us through what the portfolio looks like today both in terms of commodities and geographical preference compared with the portfolio you inherited back then? And how do you see this evolving further?

Thanks, Chen, and, hello, everyone. I guess I'd start by saying, look, South32 has been around now for about 8 years. And the company is very different now compared to when we started. When we started, we obviously had a set of assets that didn't fit the BHP model going forward. Some of those, which we're happy to have, others which are a little bit more probably not for the long-term plans. But to sort of put it in perspective, we probably had about a 50% exposure to the baux, thermal coal, manganese, metallurgical coal and 50% of the base metals, including aluminum. Geographic split of value was probably about 45% Australia and 40% Southern African and a small piece in South America. And probably the other notable point at the time is because of the nature of the demerger, we had no brownfield projects in the group, nor did we have any exploration or greenfield opportunities. Now 8 years into the journey, the portfolio has changed a lot, and that's been triggered by a series of acquisitions, but also divestments. So we're sold South Africa Energy Coal, we sold manganese alloy producer TEMCO in Tasmania. We shut down Metalloys, which is another manganese alloys producer in South Africa. We bought the Arizona Mining Company, which we'll sure we'll talk about later. Sierra Gorda increased our stake in Mozal and also increased, if you like, our ownership in Hermosa bauxite project in South America and Brazil and also with Alcoa restarting the aluminum smelter there. So if you put that into numbers now, we're probably about 75% base metals, including aluminum. If you think about our geographical split, probably in the next 4 or 5 years as we go into execution for Taylor and Clark, which we'll talk about later, I'm sure. We're probably going to have the majority of that value, we'll actually end up in the Americas. Probably the other notable point for us as well would be that this year, we've got very strong production growth. And probably over the next 2 or 3 years, we have a lot of projects sitting there in execution, both from a greenfield perspective, but also a brownfields perspective. So the company is very different from where we started.

Right. Talking about acquisitions, it has been now more than 12 months since you acquired share of Sierra Gorda copper mine. Can you please tell us a bit how you see that transaction? And are you happy with the performance today from operations?

Yes. So that's an interesting 1 because I'm sure everyone will go to majority of talks and one-on-ones this week, and what does everyone want more of? Copper. Everyone wants say more of those commodities, it's going to be critical for that decarbonization or energy transformation and copper is right up there. We've been chasing copper pretty much since the inception. We have a number of exploration projects where we're actually pushing copper hard, particularly in Alaska and also in Argentina. But we've always been looking for that entry point to find an operating asset as has most of our competitors. Sierra Gorda was an interesting acquisition for us because probably like a lot of people in the industry, we knew about its challenging commissioning. We knew about its capital overrun during construction. I think what -- the first time the business development team actually brought it to the table to be looked at, the initial response was why you want to touch that, it's had a difficult life. But I guess the more work we did on understanding Sierra Gorda, and there's an advantage in terms of like KGHM, which is the other 55% owner. They're a Polish company, don't really publish a lot. There was not a lot of information about the commissioning and the actual joint venture had been operating. The reality is the team at Sierra Gorda, while they had an initial very difficult commissioning, they had a really good, if you like, piece of work to ramp up the business finally and actually get it going. So having owned this for about a year now, I described it to our Board, originally it was like an onion. We didn't like the look of it, but the more layers we took off, the more we actually saw value opportunities. But we've been very pleased with our partners, a jointly controlled operation, so it takes -- both of us take things forward, and that cooperation has been strong. Safety performance has been great. Production performance has been great. During the process at the moment of delivering a debottlenecking project, which will lift their plant throughput up to about 48 million to 49 million tonnes. By the end of this calendar year, we'll have a look at the fourth grinding line, which will probably make another 15% to 20% jump in processing capacity to about 57 million to 850 million tonnes. And on top of that, we've got some other work to look at around about 110 million tonnes of oxide material on the surface. A new pit called Pampa Lina, where we believe there's a lot of potential that needs a bit more exploration work. So not only do we lock the base business today, we can actually see a path to actually grow the business over time.

Right. Hermosa, would you please give us an update about Hermosa? And with the U.S. government policies, how the U.S. government policies are impacting your value proposition? You mentioned now a lot of earnings are coming from U.S.

Yes. So most is certainly, if you like, a big part of our future. The acquisition of Arizona Minerals occurred probably early on in our lifestyle -- life. And what we sort of really targeted, I guess, was looking for something like a Cannington style deposit. So in Australia, we operate Cannington, which has been running for 25-plus years. It's a lead, silver and zinc mine. We're going to use the same mining method for Taylor. We're going to use, if you like, the same processing method and the same customers. So Hermosa itself always had 3 pieces of value. The first one being the Taylor project, which is like Cannington. The Clark deposit, which is a separate deposit that sits across the top, and then a very broad land package. If you sort of look at where are we today with progress, there's been the ups and downs. Certainly, one of the challenges in the early years was there was a lot more water to shift out of the project than we actually expected to access the material at Taylor. And we're in the process at the moment of completing that dewatering, which allows us then to start the shaft work. But on the upside, the resources continue to grow. So Taylor itself, we see a mine life of at least 20-plus years. And we believe that mine life will continue to grow with multiple decades to be added as the deposits still open at depth and laterally in a number of directions. The actual work at the moment is we're up to about the feasibility stage study. We were planning to bring that to the market probably about almost this year to actually talk about a final investment decision. At the same time, in the background, the Clark, which is a manganese oxide deposit, there's been a lot of work done on that to grow that over time. Where we've actually landed with Clark is actually really exciting. So Clark, we see as being the only domestic manganese supplier in the U.S., which has the potential to sort of fill that gap that's driven a little bit by the IRA legislation, which we'll talk about later in the U.S. But importantly, driven by the switch, if you like, in the manganese content in batteries, where if you look at an NCM622 today, you probably use about 60% manganese. The new battery technology, you're talking about 60% manganese. And Clark would allow us to produce HPMSM product, which we produce about 60,000 tonnes a year, but has a mine life of about 60 years. So the development of Taylor and feasibility in Clark further behind actually gave us the opportunity to actually apply to go into the FAST-41 process in the U.S. So for the FAST-41 process, for people who don't know, it is really a process that brings a level of coordination, planning and transformation when you're looking for federal approvals. So we'll be the first mining project that's actually in that FAST-41 process, which got announced the other week. For us, that allows us to continue advance Taylor and Clark. And in particular, we'll look at permitting and how we look at the regulatory piece as 1 project. So that will probably add a couple of months to the actual feasibility for Taylor. So we expect to finish the feasibility by the end of this calendar year. And Clark, we expect to sort of go into the stage of doing decline, getting a bulk sample and continue to actually work on what the final product will look like with the customers. On top of Taylor and Clark, we're got a broader land package. We've got a deposit called Peake, which is predominantly more copper rich. We've put about 11 holes into that. We expect to have another 5 into that over the next 6 to 12 months. And we also expect to start looking for totally new ore body called Flux, which is an exploration project, which is targeting a similar kind of Taylor deposits. So to date, we've been really excited, if you like, by the opportunities that Hermosa presents. It has been supported, if you like, by application of FAST-41, but also the inflation reduction act opens up, if you like, particularly for Clark 2 pools of capital to help actually develop the projects and then put the project into actually commissioning, which we'll look to access over time.

Right. Talking about the battery raw materials. You mentioned manganese from Clark. What's your view -- are you happy with the commodity mix with South32? Or would you like to add more battery raw materials such as lithium and cobalt into your portfolio?

Look, I think if you sort of take a step back, what we would say is it's undisputed that the world is going through that transformation of different commodities that are used to decarbonize and become greener that is going to drive unprecedented demand for things like copper, zinc, lithium, cobalt, et cetera, nickel. We probably -- of those commodities like -- we probably like nickel -- sorry, we probably like zinc and copper the most just based on the supply-demand fundamentals. The existing operations that we think are going to have continuing challenges around grade as they get older. And the fact there's been very little, if you like, exploration in that space. So the primary tool that we do look at are copper and zinc, we like nickel, but obviously, we're watching with interest how Indonesia develops around converting Type 2 to Type 1 nickel or Class 2 to Class 1 nickel. Lithium. Look, I think that will be a commodity that we'd say we probably got wrong 3 years ago. We didn't expect to see the EV penetration rate that we've seen. We'd always like to add lithium to the portfolio, but the reality is the pricing of equities today probably makes it difficult to find a point where we believe we can create value for our shareholders.

Yes. Thanks, Graham. There's a lot of M&A activities in the mining sector. We've seen [indiscernible], BHP acquired OZ. And you've been doing M&A acquisition in the last few years. Where does South32 sit with M&A now? And how we expect to say and can further investment in South32?

So 3 decades of working, I guess, in the industry, I've seen the different cycles of huge M&A, then lots of fuss when no one does, no M&A, and it's all about balance sheet strength. I guess we've come back to the fundamental belief that we already have live leverage to the commodity cycle. Chinese policy, U.S. policy, we don't determine, but it has a huge input on what happens to our prices. So we're very cautious about combining financial and commodity leverage. So from day 1, we've been very proud of having a strong balance sheet. We still believe in having a strong balance sheet. The reason I'm making that point is, as we look at M&A opportunities, like everyone else, we'll always use 2 lenses; one, we won't put our balance sheet at risk; and the second thing is we don't actually look at M&A for growth sake. It's going to be through creating value for our shareholders. So we've got a team that still continues to look at lots of opportunities, but it's always through the lens of never blowing up the balance sheet or making sure that it's something about value, not about ego.

Thanks, Graham. Let's see if we have any questions from the floor, please. There you go, the lady over there.

Can you talk to us about Hillside smelter, and what is profitability? Is -- how profitable can it be? And how that gets balanced in society between the conflicting needs of South Africa of job creation and this desperation for power?

Yes. Look, I think that's a great question. It's something sort of on my mind and the Board a lot as we talk about what do we do with Hillside as we take it forward. For the audience who don't know, we actually have 3 smelters. We have the 1 with Alcoa in Brazil that's in the middle of [indiscernible], which is driven by renewables. We have Mozal in Mozambique, which is also based off hydro, so renewable. And we increased our stake in Mozal with the restart of [indiscernible], we've doubled our green aluminum production. The challenge for us is Hillside, which is the largest smelter in the southern hemisphere, it has been a smelter despite some depressed aluminum prices has continued to generate strong cash flow through the cycle. Despite record load shedding in South Africa at the moment, it continues to operate at it's technical capacity. And the team there do an amazing job. But it's more than just an operation. For us, as you rightly point out, it's an important part of South Africa's economy. We employ directly, indirectly, there are about 30,000 jobs. We sell roughly 30% of the product domestic [indiscernible], which creates a series of other jobs in a part of the country that's really struggling. We're the largest paying customer for Eskom on the power grid today. We also provide the ability to start, back up the network if it falls over almost like a reverse battery. And the way they actually loadshed at the moment is to talk to our people on a daily basis about when and how they will actually give us how much power to the smelter. So on that, we think very carefully about the future of Hillside. We have a current power block at the moment that runs to 2031. We have publicly stated that, look, we will not run another power block that isn't green. So we're working closely with Eskom, the ANC and other stakeholders in South Africa how we can ultimately move Hillside to more renewable power. Short term, there's some opportunity to leverage the nuclear. But longer term, the 1 thing South Africa is not short of is wind, solar and other forms of renewables. But certainly, our objective is to run a green smelter beyond 2031 because the reality is, for South Africa, for the people we employ, I don't believe a brown power-fed smelter will be competitive in the future.