South32 Limited (S32) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the South32 2023 Full Year Financial Results Investor and Analyst Call. All participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to Mr. Graham Kerr, CEO. Please go ahead.

Thank you, and good morning, everyone, and thanks for joining us today. On the call with me is our Chief Financial Officer, Sandy Sibenaler; and our Chief Operating Officer, Jason Economidis; and Noel Pillay. I'll give a short summary of our results before handing back to the operator for questions. Before I go into detail about our results, I'd like to talk about safety. Nothing is more important than the health, safety and well-being of our people. Tragically, 2 of our colleagues, Tonela and Alfredo lost their lives at a fatal incident at Mozal Aluminium in November. Our deepest sympathies remain with their families and colleagues. In response to the incident, we continued our work to fundamentally shift our safety performance and implement our multiyear safety improvement program. We are working to enhance our safety culture through the use of our safety guarantee, an internal approach where each of us stop and ask themselves so we can guarantee our own safety then of our colleagues before undertaking each task. Turning now to FY '23 results. Our teams delivered strong production growth in aluminum, base metals and manganese during the year and achieved annual production records at 3 of our operations. These strong results were underpinned by our recent portfolio improvements in copper and low-carbon aluminum, commodities are critical in a low-carbon future. This growth, coupled with our ongoing focus on cost efficiencies has resulted in one of our largest underlying financial results to date, with underlying EBITDA of USD 2.53 billion. Despite a challenging backdrop and decline in commodity prices, and industry-wide inflationary pressures. A record USD 1.2 billion was returned to shareholders during the year. And today, we have announced a fully franked ordinary dividend of USD 0.032 per share and expected the June 2023 half year. Looking ahead, low-carbon aluminum production is expected to increase by 12% in FY '24 and Sierra Gorda is executing projects to increase future copper production. Our Mozal project in Arizona presents a significant opportunity to sustainably produce commodities critical for a low-carbon future for decades to come. As the Taylor zinc-lead-silver deposit, we are on track to make a final investment decision towards the end of this calendar year. Separately, we confirm the opportunity to produce battery-grade manganese at Hermosa's Clark Deposit and have signed multiple MOUs to potential customers for future potential supply into North American markets. We continue to unlock value from Hermosa's highly prospective land package, recently returning our best copper results to date in the peak copper prospect. We're also continuing investing in greenfield exploration options to discover our next generation of base metals mines. During the year, we consolidated our position in Argentina's highly prospective SUN Mining region, exercising our earning right to acquire a 50.1% interest in the Chita Valley copper prospect and acquiring a strategic interest in Aldebaran Resources. In closing, the outlook is positive as we continue to execute our strategy. We are well positioned to capitalize on the transition to a low-carbon world. Thank you. I'll now hand back to the operator for questions.

[Operator Instructions] Your first question comes from Sylvain Brunet with BNP.

My first question is on the net debt and more precisely on the moving parts in your working capital, just if you could just remind us what -- whether the one-off effects? And what we should expect in the year -- in the next half? My second line of question is on manganese. First, maybe to get a little bit more color around the comments you made about rail bottlenecks in Australia. And second, if you could give us your best estimate of the marginal costs in South African manganese for the market there, competitors at the moment under current conditions, please?

So just the first one, Sylvain, I think it was about the working capital, correct? The first 2 part, up a little bit.

Yes. Because that was a price market upon it.

Sandy, do you want to talk to those?

Yes, absolutely. So our free cash flow was affected by a number of one-off items and timing so we did have an inventory build of $126 million over the course of the year and is predominantly related to the Brazil aluminum restart, along with some temporary impacts at Brazil. We also had one-off portfolio impacts including the Sierra Gorda, precompletion taxes and the royalty sales taxes accounting for $147 million. And the CMSA life extension payment, the Mozal Aluminium acquisition payment and the Aldebaran acquisition payments cumulatively just under $100 million of these portfolio lines. We further had the lag effect from prior period record profitability on cash tax payments. And we had a relatively modest distribution from Sierra Gorda where cashflows have been directed to the debottlenecking projects there. We do have a positive outlook for cash generation beginning from FY '24 with an uplift in production, unit cost holding across the majority of our operations. And with the aluminum value chain, raw material prices moderating, we do expect to see support for our margins.

Thanks, Sandy. So maybe for the next piece. Look, Australian manganese at the moment in terms of life has about 11 years on the resource at about 4.7% in the reserves. Of the reserve life, which is up to FY '28, there's about 3 and a bit years on the current areas. And the Eastern Leases South projects has approximately 1.5 years. In the resource, we included about another half to 1 year for the East Leases North and then there's about 2 years for the southern areas for the work that we've done so far. There is still a large piece of subleases that remains, if you like, are not available for exploration. As potentially as we get closer to the end of the mine life, that same lot continue to engage with the ALC on particularly as so the average land corporation is they obviously get quite a strong check out of us. Look, if you talk about what does it look like in terms of breakeven costs in South Africa for trucking, you probably -- we always talk about in terms of the 44%, you're probably looking at the spot price around $4.40 at the moment at today's spot price. That's what the breakeven would be, but it fluctuates generally between that $4 and $5 a tonne. The market itself, obviously, is a bit flat at the moment. [indiscernible] was out in the first quarter, you still saw price declines. There's not obviously a strong pull for alloy at the moment coming through from the steel industry. So that's something we'll continue to watch. We do have obviously potential to do more work at vessels in terms of the expandability, but that, to some degree, is constrained by how Transnet performs and how they develop in the next piece of their plan, if you like. Does that answer both of those questions?

Yes. Graham, maybe a follow-up on cooking coal, sorry, this is where I meant the rail logistics bottleneck you mentioned in Australia, if you could give us a little bit more color there, please?

Rail bottlenecks in Rio? Yes. For cooking coal, that's more of an issue in Queensland and obviously, is where we operate in Illawarra. We've actually got some challenges we've spoken about today, along more, 19A, which is resulting in a bigger offset than we expected around a slump feature called 15A, which sort of adds a bit more time to the planned outage on that space. The met coal market in itself, you're right, has been tight in Queensland, if you like, over a period of time. But you're seeing a lot of that rebound in the last quarter. In the last quarter, we saw about 7 million tonnes sort of come back in, which is about a 9% increase quarter-on-quarter. The challenge, obviously, in Queensland is, obviously, you've always got the risk of the balance of what happens on the supply side through whether industrial action, rail, et cetera. I think the positive that we see in met coal is obviously coming out later in the fourth quarter of this calendar year. Typically coming out of monsoon season where there's a little bit more stronger demand.

Next question comes from Myles Allsop with UBS.

Just to clarify on the net debt, first of all, to be a solid investment-grade credit rating, what sort of net debt threshold should we expect? Where does the ceiling kind of sit? This is the first question.

Sure, I'll take that one. Look, we have a peak number for that in terms of investment-grade credit rating, but we do like to think about our net debt position ranging around the plus $500 million to minus $1 billion in terms of the net cash to net debt range. That really informs our risk appetite around that rather than necessarily a hard metric where we consider a number of them that make the criteria for credit rating agencies.

So if net debt continues to creep up closer to that $1 billion level, should we assume that the first year to drop will be the buyback? And then it will be around CapEx? Or how should we think around the priorities of cash flow as net debt creeps up or if it creeps up?

So I think the priorities, Myles, remain unchanged. So for us, [indiscernible] is going to be around the safe, very liable operation of our plan, the investment grade -- investment-grade credit rating, then it's going to be basically around the payout ratio. Then in the excess cash, obviously, we look to basically return to our shareholders or to put it to work, depending on what the most attractive returns are. From our perspective, look, last year, obviously, particularly Alumar, Illawarra and Cannington had a negative impact on cash flow because of their performance, but we still feel we've got enough lease in the portfolio and other things to continue to sort of drive that far to capital. What we do have coming up near the end of the year is obviously the financial investment decision for Taylor and that's saying the [indiscernible] decide when we get closer, where we put all our money, how much money do we have. But it'll always be based on money we have in the bank, not prospective money.

Maybe on the unit cost as well. I mean, I guess the new guidance for FY '24 looks pretty punchy for like Worsley and Illawarra stood out -- has been looking at it quickly this morning, but those assets look increasingly marginal. I mean as we look out into FY '25 and beyond, is $290 million the new norm for Worsley? Or is the further kind of relief from raw material costs there? And with Illawarra at $140 million, does that step down again in FY '25? I think you talked about that before. And surely, at this level, it's a pretty marginal asset and just wondering how attached you are to Illawarra?

Yes. So let's maybe break that into [ compass ] by first talking about Worsley. One of the big drivers in Worsley is obviously going to be, a, what the consumption of caustic is either kilograms per tonne and the other one is going to be price. For example, in FY '23, consumption was about 107 kilograms per tonne. That falls to 2024 to about 95, the caustic price is probably -- if you look at FY '23, the average caustic price in our part of the world is probably hovered around including freight around $659. In FY '24, we probably see that coming down, actually spot considerably lower than that at the moment. Our cost numbers are built around $600 a tonne of caustic, where it's probably trading closer at the moment to $330, $350.

So spot is $330, $350?

Around that mark, is the way I'd be thinking about it.

So there's significant downside risk to the Worsley unit cost guidance as we stand?

Probably the unit costs have more, if you like, for us to sort of come down in that space. So if you sort of did roughly the math at today's spot rate, if that applied for the whole year, you see our operating cost drop for probably about $290 to closer to the $270 per tonne mark. I think it is important to also understand, Myles, that when we compare -- a lot of people are starting to compare our cost to what you see out of our competitors in the Southwest. They actually don't include freight and royalty in theirs. We do, to put in perspective the freight is roughly about $20 a tonne.

Okay. That's helpful. And the other one...

Illawarra really, we talked about earlier in 19A. So what we are definitely seeing at the moment is with 19A, that's the next longwall move that we had planned to occur in Dendrobium. That longwall move now is originally scheduled to be about 32 days where we've got the latest substance management plan approval back, if you like, in the regulators, they're asking us to push the setback from what's called 1215A from 61 meters to 121 meters to minimize the risk of substance and its impact on the actual slump. As a result, that means that, that outage for the longwall goes to 32 days to 103 days. So it does have a negative impact on bringing our production guidance down, large business, which is largely a fixed cost base. That's why you see, if you like, in FY '24 in particular, there is a little bit of an increase in the cost. That's predominantly being driven by that. What we do talk about, though, is we do the other work at Appin in terms of we're investing, obviously, in things like the shield, coal clear and ventilation, you will -- and we have elevated capital for a couple of years, we do ultimately see the single longwall reducing complexity, reduce the delays that happen, longer panels to [ truce ] development. And as a consequence there, we'd see the unit costs sort of coming much more down to a realistic level about what we'd expect to see. So at the moment, we've given a unit cost guidance roughly about $140 a tonne for FY '24. As you get back to more normalized levels between '25 and probably '27-ish, '28 of about 5.5 million tonnes, you'd expect to see cost guidance more around the $110 to $115 kind of margin.

That's helpful. Maybe just a last question as well on Alumar, it seems to be taking a lot longer to ramp up the smelter than originally planned. I know it's not kind of operated by yourself, but what's going wrong with Alumar and how is it in terms of kind of marginal kind of cost position? And is it -- with hindsight, was it the right decision to restart smelter, I guess, is...

An exercise recently about wasn't a good or a bad decision to restart the smelter because to your point, it has been an under impressive performance in terms of the restart. The answer for that is, yes. When we've done the review on that quite easily, if you recall, our color as the operator started the actual smelter restart in June 2021, and it was actually put into care and maintenance in 2015. I guess a couple of key issues to date, in the early days, we're seeing a lot of issues around the alumina quality, the [ Barker ] compressor area. And then we had a number of the pots were actually considerably worse than they anticipated, which is causing significant early values. That issue was sort of worked on. Where are we today as we look at the ramp-up? The ramp-up probably the big constraint at the moment is around crane availability. They've got one operating at around 70%. It probably needs to be about 90%. That's 70%, you see an impact on no change out, metal tapping on the pipe restart program. Now in saying that, again, we're very clear. Longer term, we absolutely see the value generation from this. Line one was completed in August 2022. Line two about 65% ramped up and we got to the completion actually in March 2023. And we started to ramp up being Line 3 in [indiscernible] County about 55%. So overall, we have about 500 pots out of 710 in operations. But to be very clear, it's a disappointing performance on the restart that's [ settled ] that we've obviously given feedback to [indiscernible].

[Operator Instructions] Our next question comes from Alexander Pearce with BMO.

Graham, maybe could you provide an update on the power situation in South Africa and maybe just a little bit more color on some of the alternative power options, obviously, you flagged you're looking at for?

Look, absolutely. I mean, we've got a current power block that's in place to 2031. When you look at where we are today, that is predominantly allocated in terms of thermal coal being the primary source feed. What we have started to do is have some engagements with that's come around and we've got a nonbinding MOU in place to look at the use potentially for a couple of years of some nuclear source power. And that really is to test what that would look like, but also to make sure we have market access, as you say, Europe in particularly car manufacturers pushed to that, if you like, lower carbon aluminum. In the meantime, we've been doing a lot of work over the last couple of years that technically prove the renewables by wind, by around solar can deliver the power that we actually need. For those studies also show that, that market needs the time to develop in South Africa to be built out. So the concept would be the nuclear and it's early days, a lot of work to go, that nuclear could fill some of that gap to the renewables on available level at an affordable level. To be very clear, we've got to 2035, which has been we committed to half in our operational emissions from our climate change targets. For us, it's more about the short term, how you get to -- you get access to the European market.

Next question comes from Izak Rossouw with Barclays.

Graham, just to follow up on one of the questions in the previous call about longer-term costs in alumina, Worsley versus in Brazil. And you mentioned obviously about the bauxite for the cost differentials and also caustic soda costs, how long should we expect these to start to converge? I think you mentioned a number of $10 a tonne. I wasn't sure if that was -- how far out that was in terms of expectations.

So I'd probably think that $10 a tonne convergence around that market start to see in FY '24. Again, one of the big differentials there, for example, caustic price, the Gulf of the -- the U.S. Gulf, that sort of in FY '23 was about $722 a tonne and the consumption of Alumar about $94. Next year, as you move into a better part of the mine plan, that consumption per kilogram a tonne goes to $94 down to $78. And the spot price at the moment for caustic in the Gulf is now probably about $465. When we cut the budget numbers in the guidance here is about $665. The other thing you're naturally getting over time at Brazil Alumar the refinery side is we've got a debottlenecking project in place that continues to creep up volumes to FY '25.

And just if you do the same exercise for Brazil applying spots, what would that cost be versus the guidance of what it's 382?

Off the top of my head, I haven't got it in front of us, but my guess is you've probably got a bigger differential than what we've actually slow. You've probably got a similar kind of differential of somewhere around $10 to $15 a tonne if I just did the math quickly. But that's me doing it really quickly in my head.

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

Look, thanks, everyone. I appreciate you taking the time today. A couple of closing points is, one, look, our outlook continues to be positive. Our strategy has continued to actually help us evolve our portfolio if you get more exposure to those base metals compared to when we started the organization. This year is an exciting year for us as we have a number of projects that will sort of go to our board for approval around Taylor being one. And obviously, some of the projects to help grow our copper position at Sierra Gorda. And on top of that, we have a number, if you like, development opportunities in the business around exploration and the broader portfolio. Look, thanks, everyone, today for your questions and support and have a safe day.