South32 Limited (S32) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the South32 FY '24 Results Investor and Analyst Call. [Operator Instructions] I would now like to hand the conference over to Mr. Graham Kerr, Chief Executive Officer. Please go ahead.

Thank you, and good morning, everyone, and thanks for joining us today. On the call with me today is our Chief Financial Officer, Sandy Sibenaler. Financial year 2024 was a pivotal year for our business, a year in which we accelerated our portfolio transformation towards commodities critical for a low-carbon future. Before I go into more detail on the milestones we achieved this year, I'd like to talk about safety. We assess our safety performance through a range of both leading and lagging indicators. During the year, our significant hazard frequency, a leading indicator increased by 34%, indicating a positive reporting culture and increased hazard awareness. At total recall injury frequency for FY '24, a lagging indicator also improved by 14%. However, our lost time injury frequency rate increased by 19%, underscoring that while we've had a fatality free year at our operations, we are still seeing too many serious injuries and we must be relentless in our pursuit of a safe workplace. During the year, we also continued to embed our safety guarantee across our business, which is used to instill a belief that everyone can go home safe and well, and create a sense of chronic unease and to assist to reduce risk tolerance. Turning now to FY '24 results. Improved operating performance, disciplined cost management and higher commodity prices supported stronger financial results to finish the year. We recorded FY '24 underlying EBITDA of USD 1.8 billion and underlying earnings of USD 380 million and lowered net debt by $320 million in H2 FY '24. Reflecting our strengthened financial position and disciplined capital allocation, the Board has resolved to pay USD 140 million fully franked ordinary dividend in respect of H2 FY '24. The Board has also resolved to allocate USD 200 million to our ongoing capital management program to be returned by an on-market share buyback. During the year, we achieved significant milestones that have transformed and simplified our portfolio. Construction at Hermosa's Taylor zinc-lead-silver deposit is progressing to plan, following our final investment decision earlier in the year. Taylor is expected to deliver attractive returns over multiple decades, increase our supply of commodities critical to a low-carbon future while sustainably lifting margins due to its first quartile cost position. As the first stage of our regional scale opportunity, Taylor will unlock value for future growth phases at Hermosa, such as the Peake deposit, where additional exploration results announced today highlight the potential for a continuous copper system connecting Peake and Taylor. The sale of Illawarra Metallurgical Coal for up to USD 1.65 billion completed earlier this morning. This will unlock value for shareholders and streamline our portfolio to be focused on base metals, zinc, cobalt and aluminum value chain while also simplifying our business reducing our sustaining capital intensity and strengthening our balance sheet to self-fund our growth options at Hermosa, Sierra Gorda and our pipeline of options in study and exploration phases, improving our portfolio and providing shareholders with high-quality exposure to growth in attractive commodities. FY '24 was not without its challenges. At GEMCO, we suspended operations following a significant damage to critical infrastructure and widespread flooding due to tropical cyclone Megan. We have commenced a phased return to phase mining activities and expect to recommence Wharf operations in the Q3 FY '25, returning to normalized production rates in FY '26. Our insurance have confirmed the damage from tropical cyclone Megan is covered under our property damage and business interruption insurance, and we continue to work with our insurers to assess the timing and value of recoveries under these policies. We expect to receive the first insurance installment this quarter. At Worsley, following a 5-year process, the West Australian Environmental Protection Authority recommended that a development proposal in respect of the next mining areas to be implemented subject to conditions. Several of these conditions go beyond reasonable measures for managing environmental risks at the proposal based on scientific assessment and decades of operating experience. They are also not practical and inconsistent with our other government regulations and policy. We have lodged an appeal and we are working to collaborate with the WA government to secure environmental approvals with reasonable conditions by the end of 2024. Despite these challenges, I'm pleased to report we've had a strong finish to the year with improved operating performance, a strengthened financial position and the restart of the on-market share buyback. We remain focused on driving operating performance across our business. We have transformed our portfolio and have a strong balance sheet to self-fund that growth in highly attractive end markets. And our unchanged capital management framework is designed to reward our shareholders as our financial performance improves. Thank you. I'll now hand back to the operator for questions.

[Operator Instructions] Your first question comes from Paul Young with Goldman Sachs.

Graham, good to see the buyback being reinstated and also the completion of Illawarra. Few questions actually on Worsley. No doubt you'll have a few more. Just the first thing to point out some good cost guidance, I think, for FY '25, and I know you've given a target, I think, from FY '27 on production of 4.6, which is good to see, but I assume that -- I presume that assumes that you obviously will get your permits from the EPA. So just to ask the question, just the confidence around why you think you could -- you'll see a resolution on this by the end of this calendar year? And how do you actually find middle ground here with EPA?

Thanks, Paul. Look, really good question. I mean just to sort of cover some of the context for the people on the call, the current approval we are seeking will cover the next 15 years of bauxite mining from our perspective. It has been a process that began with the EPA in 2019. And it's fair to say it's been a long frustrating process where we've had multiple chairmen, multiple case officers. And it's the own WA government report outlined at the end of last calendar year, the EPA has some serious challenges and needs to be fixed. We got a hold of those conditions on the 8th of July. And those conditions from our perspective were a surprise, were not as expected and certainly go beyond what we believe is good scientific evidence. And also, if you like, some of the discussions that were held along the way. A great example of that would be around greenhouse gas emissions where the addition of Scope 1, Scope 2 and Scope 3 is quite alarming, particularly some of it's been measured, but also that it goes well beyond the federal safeguard mechanism in terms of changes we're looking for. And because of the nature of scope to electrification of the system that is ultimately required in the Southwest, we put a lot of the businesses in the Southwest of WA at risk. That's just one example of the things that we think, if you like, are very disappointing and really ignore scientific assessment. To date, the government has been quite clear that there is a process that is legislated that needs to follow. The process has been for the EPA, which is an independent body to make their assessment based on various public submissions in their own scientific work. What we have seen from the government now was a commitment around the appeals process and a commitment to come back with the final decision on the appeals just before the end of November -- sorry, the start of November. So they can then actually ensure that the minister can make a decision then. The appeals process, we based purely on scientific evidence. It won't take into account things like social impacts, job impacts, community, et cetera. But the appeals process will make recommendations to the Environment Minister. The Environment Minister then, for the first time, has the ability to consider all those other issues. What we are confident by is there's been a really strong engagement at various levels by the WA government, which has been really good. I've had a lot of those meetings with the Premier as well as our other senior people. They have certainly committed on the schedule. They've provided enough resources to ensure that the appeal process runs smooth because that's one of the challenges for the API, and they've certainly been very forthright on their commitment that this will be resolved in early November, which then allows us 30 days for a Federal approval. We really need the approval by the end of the calendar year. That then allows us, if you like, to be in a position that we can start seriously getting into the new mining areas in the first half of the next calendar year towards the back end of that. We could always run the refinery under these conditions, but that very much puts it under, if you like, economic viability of threat, in particular, the greenhouse gas issues. But there are other issues well that we'd look to see to be resolved. There are broader implications if this is the path they go down the EPA in terms of offsets, but also greenhouse gas emissions that will impact every other resource and potentially infrastructure projects in Australia -- in WA, sorry, so it is very alarming for the WA government. And also in the background context when you look at a number of our competitors in lithium, even iron ore, nickel have been shedding a lot of jobs in WA, which is probably not something that the WA government has seen before. And particularly, if you think about a stable action coming up in the first half of next calendar year.

Okay, good context. And then maybe moving up to GEMCO. Good to see that, I guess, you've got the confidence that you can get up and running again in the June quarter next year and also the insurance offset. It's probably the fastest agreement I've seen from insurance company post an event like this. So interested in your views there, but just on actually the rebuild of the berth, what actually can you tell us around the contractor mobilization and the confidence about actually getting this project, which is quite a specialized project actually completed by March next year and through the wet season.

Yes. Thanks, Paul. Maybe a little bit of context, I think, is also useful there because I think it sort of leads into your story, your question. I mean, when you think about that GEMCO, it's not like GEMCO is immune to cyclones. This is a regular event that occurs multiple times a year up there. What is very different in this situation was the size and the speed at which this cyclone actually came in. To put it in perspective, we had 681 mm of rain in a very short period of time. Second highest set of wind gusts, which were recorded at 87 kilometers an hour, and that resulted in mass flooding, storm surges and attenuated waves and wind conditions in the port. To put it in perspective around water volume, typically coming out of a wet season, we'd be moving about 10.5 gigaliters. We're actually, this year, having to deal with 36.3 gigaliters of water post Tropical cyclone Megan. So that's -- if you think about the percentage terms, that's 346% above the norm. So the wharf is not the only piece of work that needs to be done here. There is a large piece of dewatering. There's a large piece of rebuilding bridges, et cetera, that connect to different mining areas to get equipment and people back and forth. The wharf itself, the contractor is engaged. Some of the long lead items have sort of been already ordered. Barges are set to sort of arrive, et cetera, et cetera. When we look at the dates, there's probably 3 things that are obviously on our mind. One, obviously, is we do expect more weather events and cyclones up in that part of the world. So we will have an allowance for the wet season and cyclone activity. Demolition to me will be the biggest issue. So demolition, there's a nice visual diagram that we have. There will be a series of existing pillars of the old wharf that will work off the back of. But then there will be a series of other pillars, if you like, are damaged beyond use and some of the infrastructure will still be connected to both of those pillars. So the first part of demolition will be actually cut away a number of those interconnecting pillars and the infrastructure that's worked around that. And we will simplify the design of the port. Ultimately, we have 230 poles at the moment, and we'll go to 28 polls with a new design. So from that perspective, the demolition piece, for me, is the most critical piece. That's not too far away from being started. That is a big focus for us on the safety perspective, in terms of understanding the stored energy as we cut away some of those pieces of equipment. The good thing is we have a highly experienced contractors work in this part of the world. They are mobilized. They're up there on site now, and we'll keep updating the market to that. We are certainly aiming to get back to the poor use by the third quarter. We'll start producing, obviously, but won't get to full production to the following year.

Your next question comes from Rahul Anand with Morgan Stanley.

So first one, I just wanted to follow on from Paul on Worsley. Look, in terms of, obviously, the EPA process, I think you're working out closely as we can with the government to sort that out. But I wanted to understand that how do we think about the impact if you do have delays. So are you able to provide any sort of sensitivity in terms of how we should think about your OpEx at Worsley. And if you don't get the approvals in time when do you start seeing some of those impacts, just noting your FY '26 guidance as well, which is below nameplate again at 3.75 million tonnes at Worsley. So that's the first one. I'll come back to the second.

Yes. Look, maybe if we sort of think about this in components, the Worsley business has a large fixed base in terms of its cost business. So volume makes a big difference in that space. In FY '25 and '26, to your point, we're not at nameplate capacity as we sort of have restrictions about the current mining areas that we can mine in, but also the quality of the material we are mining where you have lower grade and you have more reactive silica levels. As there are consequence, you'll be using more caustic soda than what were they would typically use. This year, in '24, we sort of ran at an operating cost around $269, that includes marketing. If you back out the marketing number, we're running at about $260, which means we'll probably be running next year we've given guidance around the $280-ish kind of number. And as you get into some of that lower quality material in the following year, you're probably looking around $300 a tonne, a worst-case scenario. That's probably a year round the mark that you have in terms of lower aluminum or alumina content, but also what you're seeing for reactive silica. I think the bigger issue for us is this is such an issue for the long-term viability of the business that we would be stronger probably in our position if we don't sort of get where we need to be, which we think is a sensible logical outcome. You'll have a look at other options you have around Worsley in terms of do you have to consider curtailing for a period of time. So we think we've got a bit of time up our sleeve to sort of mine this area in terms of the delays and approvals. But anything that probably went beyond the 12 months would be much more challenging for us. Now again, I would sort of -- if you think about what we're looking at here, these offsets are not unique just to Worsley. The greenhouse gas emissions target for the EPAs come out and not unique just to Worsley. This is a much bigger issue for the West Australian government to deal with and just Worsley.

Got it. No, that's very comprehensive. And look, the second one is around South Africa manganese. So if we think about that business, we talked about the trucking volumes for some time now and how we've kept them in the system given the economics. Could I perhaps get a quick recap on sort of where the manganese price needs to be to keep those trucking volumes in the system for you, i.e., what's the cost sensitivity there? And then any sort of update on the Transnet volume spend? .

Yes. So maybe let's go into components. If you look over the last 12 months, it was great to see that HMM actually had a production record come out of the business. Obviously, it's been a favorable market around price that we've seen over the last period of time with GEMCO closed in. If you think about what sort of trucking we look at, we will put where it makes economic sense, volume on the trucks. But where we can, we opportunistically take as much as we can in terms of rail capacity. Now there is a new major contract coming into play that they made a decision last year to allocate about 15% of the actual rail component or capacity, if you like, towards junior producers. That was not something that junior producers are able to take up at the moment because they certainly don't have the, if you like, load-out facilities and the loop facilities to actually handle that. So that's something this year or the year just past, we manage to get opportunistic trains and not really lose any of our slots on the rail. As we move into FY '25, the bigger challenge at the moment for Transnet is they've got a number of issues around port congestion at Port Elizabeth. And that probably is meaning that while we're not seeing that juniors take up any capacity, we are seeing challenges about actually getting the throughput that you would normally expect to get on the rail line subject to that 15% being allocated to juniors. So as a consequence, we have a bit more of an assumption around trucking, which really pushes up, if you like, our unit costs. Now in that, I think there's more upside than downsides and if they can sort through that congestion issue with Port Elizabeth. And again, I would struggle to see that the juniors come online in time to use some of that 15% capacity. I do believe there's an opportunity for us to get more volume on the actual rail. But until we've sorted the congestion issue at Port Elizabeth while they have, we're not banking that into our base numbers. You're talking about where is the cost efficiency? Look, it sort of fluctuates between that $4.30 to $4.60, $4.65 depending on your fuel assumption and your exchange assumptions. As a general rule [ 44 SIP ] equivalent, we usually talk about $4.50 is kind of the number.

Next question comes from James Redfern with Bank of America.

I was going to ask about Worsley and GEMCO, but I think we've covered that pretty well. So maybe if we switch to your end markets, so aluminum and alumina have 2/3 of your pro forma revenue. Can you please talk to your outlook on those 2 commodities, please?

Yes. Look, absolutely. I mean obviously, when you look at the alumina space at the moment, we've had a good market over the last period of time. And some of that obviously is being driven by some of the restrictions you're seeing on the supply side. obviously, the [indiscernible] came into effect fully at the end of last financial year for us. You've obviously seen some of the challenges in Queensland around production, but also there's been some challenges in China. So as a consequence, we're seeing alumina has actually been quite strong in terms of demand. We're seeing a few more force majeures happening at the moment and we're seeing lower Guinea bauxite coming out mainly due to rain season. So we're seeing stronger demand probably, if you like, in the short term coming out of Indonesia, Europe and China. So we would probably expect to see those prices remain elevated in the second half of this calendar year because of those supply side risks. If we think about second part of the calendar year, we probably still see the market in deficit around alumina with 100% of the supply making money. And then we'll probably see it flipping into a slight services calendar year '25. So I'd say for the next 12 months, you'd probably see a pretty healthy alumina price sitting in the marketplace. Aluminum on the other hand, has been a bit more interesting. I mean, aluminum has had some prices. If you think month-on-month, it's probably fall roughly 4% to 3% depending on which exchange you look at. And that's been driven by demand concerns, especially with regards to U.S. EU trade tensions with China and declining investment fund demand, which is down about 10% month-by-month. However, we probably do expect to see some of those prices improve, mainly driven by U.S. dollar weakness. We're seeing some improvement investment demand, and we're seeing some buying interest, if you like, coming from China. And also, we're starting to slowly see a little bit more coming from the other part of the world, particularly Europe, but at a low base. We don't believe that China will move away from some of the stabilization measures they've got in place and their adherence to that 45 million tonne of capacity cap, and we continue to believe that, that will actually stay in place. So alumina strong for the next 12 months. Aluminum, probably a bit more upside on economic demand, but also some of the substitution from copper to aluminum.

Maybe just one on Worsley, if we return to that, please. So I mean, the share price reaction a few months ago was pretty brutal when you made that announcement around the EPA ruling. The reality is that you do have approval to mine for another 15 years for bauxite mine at Worsley, but the issue is deep high cost. Can you please maybe talk to will provide some color around those costs with regard to other unit cost of production? Or is it cost of buying carbon offsets to meet the EPA's, I guess requirements, if you like?

So it's probably across, James, in a number of different areas. You know clearly, it's reflected in the unit cost. Part of that will be driven by the fact that you do have to buy carbon offsets, that will probably be the biggest one by quite a magnitude. I think the other piece is some of the restrictions around buffer zones and making green corridors and offsets almost become unworkable in some mining areas. So you're sterilizing large amounts of material, which obviously has an impact on the economic development of an area. Probably the third area that will continue has an impact on cost is the reporting in compliance is increased by a magnitude that comes at a cost. But I would say, if you're thinking of the big one and it really will hurt the unit cost, it really is around the greenhouse gas emissions and what you need to do to offset those.

Our next question comes from Kaan Peker with Royal Bank of Canada.

Graham, Sandy, just wanted to have -- just a question on Cerro Matoso. Maybe if you can give an update on cost initiatives there. Seems like the unit costs were a little bit higher than expected sort of flagging lower grades. But just an update on Cerro Matoso, please, and I'll circle back on the second.

Yes, no problem. Just sort of useful in that space. There's a little bit of offset maybe a little bit of context before we get into some of the work that people are doing to offset the deflating price that you've seen. Cerro itself, we've had a strategic review underway now for a period of time, but we always talk about that being broken to 2 parts. The first one was to make sure for the financial year just finished, that they could actually turn the ship around, if you like, and get to a cash positive position, which has been the focus and which they actually achieved in the second half of the year. Longer term, we've been looking at ownership options and we're looking at the flexibility of the business. Cerro, was a business, obviously been running for a period of time, has grade decline occurring naturally in the main pits. And over the last 5 or 6 years with things like La Esmeralda, Q&P, we've managed to bring in satellite ore bodies to sort of prop up the grade. You probably need to produce roughly 41,000 tonnes at nickel a year to make that place profitable through the cycle. With the grade declining, that's the challenge. So the value-add opportunity they're looking at is: Are there more satellite ore bodies we could bring in local, but also a little bit more in terms of distance. The other piece we're looking at is, could you, with some support under the IRI Act, contemplate producing MHP style product, particularly with the agreement that exists with the U.S. on the trade agreements. I think, ultimately, the other question for us is also, do you want to be the owner of that business long term? The single biggest thing that's been in the way of that has been some of the disputes that have been going on with the government around royalty and tax changes. If you recall, probably about 12 months ago, they rolled out a series of changes that probably hit the NPV by about 1/3. That included changing withholding tax rates, changing how royalties work. We have been working under an arbitration dispute with them to try and resolve some of those issues. The good thing is just after -- well, towards the end of our financial year just after, we had that case heard and we won that case. So that sort of takes away some of the uncertainty long term around some of those proposed legislative changes, particularly around the royalty. We have 1 more legal dispute going on around the [ rate ] that we hope to resolve in the next period of time. I think then that creates a very clear option about what you do with the business. So you look at the value-add products such as the additional ore source, you look potentially at selling it or you actually look at putting into care and maintenance to see what happens with the nickel price. But I think resolving those legal cases is critically important for that. The biggest one of those we have resolved. We will now move on to the second one while completing the review in the background. The challenge on the business, obviously, in that period of time is to stay cash neutral. And Ricardo and the team, if you think about entrepreneurial spirit and adjustment to market conditions, they've had really good, strong track record of doing that, but there are certainly some challenges in front of them on that.

Sure. Very clear. And maybe the second one on Sierra Gorda. I saw the mail in joint reserve. Just wonder -- I haven't gone through it all, but just wondering how this supports the fourth grinding line decision.

Yes. What I would say is we think about what's going on with Sierra Gorda and we think about that. Obviously, the work that we've done has been very much around the compliance exercise to actually for an estimate and move it, if you like, into the first time we produced an ore reserve and a mineral resource update. What I would say is the reserve life is 16 years. Is it about 48 million tonnes? Well, that gives us roughly an operating life of 24 years. That 24-year life is underpinned by 1.1 billion tonnes of mining inventory comprising 70% of ore reserves and 30% of inferred resources. Yes, that broadly is aligned with the deflated foreign reserve for an acquisition. What we do still see is significant growth potential and resource conversion as we continue to do further infield drill programs. But on top of that, there's also some exciting exploration projects around future ore bodies there and extension of ore bodies. So I think it's a good first step to keep watching that space for it to grow.

Next question comes from Lyndon Fagan with JPMorgan.

Just back to Worsley and the $0.5 billion impairment charge. You've obviously said in the release today that we're back at nameplate in FY '27 potentially and that the major cost issue is the greenhouse gas emission offsets. Like what have you assumed or what are the auditor assumed in formulating that impairment charge. Just be good to get some color on how we model that. And I've got a follow-up after that.

Okay. I'll let Sandy, you could go with the impairment and how the auditors look at it.

Great. Thanks. So you recall we carried a significant book value at the merger. So looking at the impairment, obviously, we consider that book value relative to the ultimate valuation. It does reflect that increased uncertainty created by the EPA recommendation. And as we've noted, that's linked to those operating challenges, which will flow through ultimately to unit cost. It's not a single point estimate. So there isn't one single number used in that. We consider a range of scenarios, assumptions and risking, and you'll see that disclosed in the financial report released today. But obviously, the accounting standards aren't looking at market multiples. And so I think there is a recognition there that, obviously, the considerations look more to kind of raw NPV outcomes, which are then naturally heavily influenced by those kind of unit cost input numbers. I think we obviously have disclosed our operating assumptions with those increased haul distances from 29, so that was released with our strategy pack earlier this year. And Graham this morning talked some of the impacts that will flow in the event we aren't able to resolve these challenges with the EPA.

Okay. All right. So in terms of what do I put in for greenhouse gas costs?

Yes, we haven't provided any numbers. Obviously, there is just a range analysis in there, and then we ultimately have to find a center point on that.

Okay. And then just a couple of quick follow-ups. Firstly, would you be interested in the minority stake at GEMCO if Anglo was selling that? And just finally, any color on the Mozal power situation?

Yes. Look, first and foremost, we know that operation well, GEMCO. On the positives, when it's back up and running, it sits really well on the cost position, it's still one of the highest quality operations, so that's closest to our customer and makes a good margin. At the moment, we've obviously got the main mining area. We're opening up part of the eastern leases. We think there's an opportunity to add to that, at both the southern leases and the northern part of the eastern leases. And ultimately, there's some more resource on the island we will be interested in acquiring. From our perspective, we're in control of that asset today. So if you were going to buy a Anglo's share, if it was for sale, you said, we would be interested in buying at control premium because we're the operator. Anglo have been a great partner today and continue to be a great partner as we go through the restart of GEMCO. If they're willing to sell at the right price, we'd be interested. If the price is not what we consider value accretive to our shareholders, well, there's no compelling reason for us to actually do it. That same argument to me would extend across to our HMM business in South Africa. But to be clear, Anglo have been a good partner to date and we've had no indication they're interested in naturally selling, but we'll watch that space. Second question around Mozal. Look, Mozal is an interesting one for us. That contract that sort of expires April -- sorry, March next year, One thing that is very clear, I've been to Mozal a couple of times over the last 12 months and spent time with our President, but also senior ministers. And Noel and his team have been doing a lot more engaged on that side. They absolutely recognize the importance of Mozal. We're roughly 4% of the GDP. The government of Mozambique owns 3.9%. The IDC owns 24%. It's roughly 1,150 full-time employees and another 1,200 contractor jobs. Indirect jobs that creates about 21,000. So almost 1 in 3 manufacturing jobs in Maputo are tied up with Mozal. If Mozal didn't exist, they would have a large abundance of energy, which they wouldn't be able to utilize in the short to medium term in terms of not making any money on it. We are very conscious that they're about to go through an election at the moment. This involves a discussion with 3 parties, ourselves, Eskom and the Governor of Mozambique because the power line doesn't run directly from the hydro source to Mozal. It goes via the wielding infrastructure in South Africa. We're making good progress on some of those discussions. We had the Eskom CEO across at Mozal recently, and he's been hugely supportive. The Governor of Mozambique is doing some of their own work around Mozal future industry in Mozambique that we're working with them on. So it feels like it's heading in the right direction. Sometimes things in that part of the world just go a little bit slower than we'd actually like, but the indications we received to date have been really positive and certainly supportive when I've been there.

Your next question comes from Rob Stein with Macquarie.

Just a question, capital allocation. So you're going to get $1,050 million from the initial proceeds of the coal sale, of which $200 million is coming back by the buyback. How do we think about the resulting $850 million in terms of allocation to growth projects, allocation to net debt targets? And how can we then think about further proceeds on the following payments. This provides a good insight into how you think about cash flow allocation.

Yes. And I'll get Sandy to talk you through it. What I would say is our -- the way we approach capital management overall, the balance sheet management, et cetera, remains unchanged, so it should be no surprise. What we've always said is we'll have a look at the appropriate debt levels based on where we are at the time. But if you think about the organization in 10 years, you've had major changes to the portfolio. We started day 1 with no growth options, but also heavily intensive businesses in terms of South Africa Energy Coal, Illawara, cash loss businesses such as Metalloys. GEMCO, they've all left the portfolio now, something gets a different composition. But I'll get Sandy as the CFO to talk you through how we think about it. But what I would say consistency and no change since day 1 about how we think about it.

So the capital management overall is unchanged and it does maintain our approach to an investment-grade credit rating in a sustained low. But of course, we have always the lead in competition for capital, and this is a commitment to that. Allocated $300 million, which is consistent with that approach of allocating excess capital. And at this price, we do consider the buyback the best value option for shareholder returns. It does bring our capital management program to $3.5 billion. We expect to see our target range for net debt being between that $0 million and $500 million in its early stage of the Taylor Capital program and naturally more conservative in this phase in the capital program. We'll continue to iterate this over time and in light of portfolio action, as Graham just spoke to. Our capital management, of course, will continue to reward shareholders in accordance with performance.

So I'm reading between the lines there. You're being naturally conservative by the capital build and it most times sort of kept a little bit in reserve for that. And then if you were able to execute that on budget or god willing underbudget, then investors could expect to see some more money coming back.

I'd love it to be underbudget, and that's right. So we obviously continue through that program. We can obviously continue to assess where the balance sheet needs to be. But at this stage, you'll expect to see us fairly conservative, but consistent with our framework.

But I'd say that, approach again is consistent with how we've spoken about it. We'll run -- we test our balance sheet in terms of investment grade against a sustained low case. And for us as a business that can have low margins, it's important that obviously, we keep control of the business when the tide goes out. So a combination of high financial leverage and commodity leverage, I think, would be a problem for us. We've always talked about when the money is in the bank. So I think what I would say is every single time we have a reporting period. It's a discussion we have with the Board and we do the same kind of calculation. And we certainly appreciate that consistent strategy from day 1, we think, is an important part of our DNA.

So then just a follow-up to, I think, some good points you raised then on portfolio evolution. When you -- when it all came in, very highly leveraged business, loss-making businesses, focused on different parts of the mineral value chain. Now you're left with aluminum, which is sort of the midstream to downstream commodity and then all your growth and then upstream commodities and LatAm, other side of the world to the aluminum businesses. How do you think about, I guess, managing the business in a way where you can align growth to, I guess, where you're headed that from an operational standpoint, they are very different businesses to run and operate.

Yes. So look, it's a good challenge actually. And obviously, the portfolio has evolved a lot. And some of that stuff we talk about in the pack when we talk about the portfolio and even in discussion with our auditors, I think, I've sort of got the feedback that they've probably never seen a company that's changed so much in 10 years with lots of little transactions. We will -- if you look at our underlying revenue, 90% including the aluminum value chain, which will come from the base metals. If you look at illustrated FY '24 on Slide 7, when we demerged that was probably about 55% was coming from energy coal, met coal and a little bit of manganese. So that's quite a transformation from that side. I had no growth options. Now you're right. If you look about the next couple of years, we have the opportunity to increase our copper production by 15% in '25, another 6% in '26, and our low-carbon aluminum coming out of Brazil and coming out of Mozambique will increase 17% in '25 and a further 8% in '26. And that's before you actually think about what could happen with the fourth grinding line and before what can happen with Taylor coming online, particularly with Taylor first, but then if we can bring copper in on the Peake side, which we should have a good sense of that within 12 months' time. What I would say is, look, over the last probably 24 months, myself and a number of the team has spent a lot of time in the U.S. on a regular basis. And that's not only about project development community engagement, it's also about time in Washington as you understand, things such as the IRI Act and how you get the approvals fast track, which I think we've achieved. Spent a fair bit of time, obviously, in Chile at Sierra Gorda. I was there about 4 weeks ago and looking at the progress, but also understanding the size of the prize here, which I think is considerable. We've managed to do that over the last 18 to 24 months, while we've actually set production records at HMM. Regular production records, if you like, at Hillside, I think 3 over the last 5 years. And returning back to nameplate capacity at Mozal, while dealing with the power contracts. And part of that is, I think, the investors don't already see it. But for example, Noel, who runs our African business. I think he's done an amazing job over the last couple of years to manage those government issues, but also to keep the business humming along. So I have a high degree of confidence. We can continue to perform well in Southern Africa, while actually growing our business in the Americas at the same time.

Your next question comes from Paul McTaggart with Citigroup.

So we've touched a little bit on [ alley. ] But I wonder, just have we made any progress in terms of how to kind of get a different source for energy for the Hillside operation? I'm conscious that time stepping away and we've got still some time to resolve that, but we just never seen here but much in terms of progress. Can you update us, please, Graham?

Yes. Look, absolutely happy to talk through that. Look, from my perspective, I'm actually -- what I would say is, we did a whole lot of work over the last 12 to 18 months at Hillside to understand the options of green. And that's a combination of solar or wind. If you think about South Africa and Northern Cape, Western Cape, you have great access to both those critical markets. So I think longer term and what we're seeing when we went out for some of these requests proposals was the cost of producing green energy in South Africa has come down dramatically. I think the challenge for us is, as a smelter, we need that consistent reliable power. So while we could have invested through third parties a lot of money to build out that renewable infrastructure, we would still need to rely on a large amount of standby power from Eskom, which would be a combination of coal, which is what we're fully allocated today. But perhaps more of an allocation of the new fleet that doesn't get allocated to the smelter. I think ultimately, the right solution for South Africa and where they're heading is a much more integrated grid where they can provide a one top stop shop, where they bundle the nuclear shrinking component of coal and a growing presence of the renewables. Time is on our side on that, Paul. So the current power contract runs to 2031. We have talked about halting our Scope 1 and Scope 2 emissions by 2035. So I'm much more comfortable around the time we have to get that right. Certainly, much more comfortable with the Government of National Unity and how they're thinking about industry. And to be honest, the brutal reality that when it comes to Eskom, we're one of the remaining largest paying customers. They don't have a whole lot of, if you like, other options in that space. Now one of the challenges for load shedding over the last probably 4 or 5 years is most businesses have sort of set up their own independent power sources relying on renewable and wind, so less reliance on Eskom, which means Eskom had less paying customers. So I think the significance to Eskom of Hillside has dramatically increased over that time. The appointment of a new minister under the government of National Unity and the focus there has been really positive. I absolutely think we're heading towards the right direction over time there.

Your next question comes from Lachlan Shaw with UBS.

Graham and Sandy, a couple from me. So just to follow on Hillside. So I'm just wondering, obviously, the EU is moving down the pathway of carbon border adjustment mechanisms on imported goods with embedded carbon. Have you done any work on potential risk to realize pricing at Hillside given the importance of the downstream automotive fabrication industry exporting to Europe from that plant?

Yes. Look, it's a -- maybe taking a step back, it is a broader issue for the South African economy, in general. We do sell a portion of our product domestically downstream, which gets paid mainly into auto parts. It also feeds into Europe, so it impacts people like Hulamin, impacts many other people who actually sell there. What we are seeing, if you like, the first part of CBAM is really focused on Scope 1, not so much the other aspects of that yet and we're comfortable in that space that Hillside still has a position to actually sell product into the market there. I think as we see longer term, there'll be greater clarity on scope 2, that stuff that we'll have to think about. But I think that's more in the time line that we actually see rolling out with the energy transformation in South Africa potentially where CBAM is going. Now in saying that, on the counter to that, we have seen some of our customers in Europe already pushed towards a green product. But in saying that, Hillside has a strong track record also with selling into the U.S., but also emerging markets into Asia. So unlike Mozal, which presells most of its product, if you like, into Europe, Hillside is a bit more diversified on the book and has been for a period of time. So we think not only is CBAM manageable, but we have multiple markets to your side that allow us to navigate that energy transition.

Just on Cannington, a quick one here. Obviously, nearing end-of-life complexities increasing as you've described, but FY '26 guidance is up year-on-year. Just how should we think about the remaining life of mine plan and production in the next little while?

So the way I think about it is Cannington is now and it's probably 27th, 28th year. It was never designed to sort of go for that period of time in terms of the infrastructure, just why we've moved away from the actual shafts to actually trucking. Probably the bigger impact is the number of stopes we now handle is more, and the size of those stopes is actually smaller. To sort of put that in perspective, when you have a look at the stope count, the average in '18 to '23 was probably about 64 stopes. We'll be doing 100 stopes in '25 and that increases by another quantum in '26. That's all stuff that's built into plan. Part of the reason '25 guidance is actually down as we're actually building from ROM stocks back up to create the buffer after we saw the cyclone go through in January, February this year. So we need to rebuild some of our stocks there. But what I would say is stope increasing number of stopes, rehandle increasing, but probably the biggest thing is you're going to see from quarter-to-quarter, real big movements in metal produced because the grades actually swing quite dramatically from stope to stope and it just takes one of those stopes to move a week and it goes into another quarter. So while the annual number will hold, you will see quite large fluctuations. We've got about a 5-year reserve for the underground still existing there. We are doing some more drilling around remnant orders so if we can add to that. There's about a 5-year open pit option in the resource, which economics are probably still borderline, if not questionable at the moment. So that's something we'll continue to monitor. But I guess what I would say, it still be a high-margin mine, but the variability in metal produce will be quite large compared to what you've seen in the past.

That's really helpful. And look, just one final one. Just on the Worsley impairment. Just to be clear, is that the best estimate of the impact of the current conditional approval that you're now appealing? Or is it a probability weighted estimate of where you think you might get to under that appeal?

It reflects the existing conditions, although we have allowed for some optimization of the mine plan, the proposed conditions.

Your next question comes from Glyn Lawcock with Barrenjoey.

Look, I appreciate you're still in discussions with the insurers, but I think I heard you say that you've got some money coming in this quarter from the insurer. So is it fair to say that you've already resolved the construction side of the discussions and now you're actually going to get all the money back as you spend it, that $125 million?

Well, Sandy, it's your...

Yes, sure. So it's a base process, Glyn. So effectively kind of as we incur the cost, we put them through in a phased process. And so obviously, some of these capital costs are going to come through earlier, and we're starting to see some of those costs going through and that's what we're submitting now. And of course, the business interruption insurance will naturally lag that as we kind of work through the operational outage period.

So probably fair to say, Glyn, the capital on hard things like road rebuilds, bridge rebuilds and berth is much clearer. I think the business interruption ultimately always becomes an agreement if we look back historically what we've experienced when we lost the dragline at Klipspruit in the early days.

Yes. So I should get the $125 million back in full and then maybe, let's call it, 60% of your business interruption case. Maybe that were...

I think we can comfortably recover the CapEx and then, of course, the balance will be up for negotiation.

Okay. And then just the second one, just as an adjunct to Lachlan's question. That onwards, well, you mean, if you have no success with the EPA and the WA Premier, I mean, you still got a $2 billion book value. So I assume you still go ahead like it's still got value. And as you said, you've pretty much accounted for the EPA ruling in your revision to book value.

Look, I think obviously, you've got a business that has value and creates value for you. But I think you've got, I think in the context, is this is a long-life asset. This is 15 years. You've got multiple mining areas after that. I think it has broader implications on not only in the mining industry, but the broader industry in Western Australia. I would be inclined to think that, look, we need a resolution to these issues, rolling over them and accepting, I think, longer term beyond the 15-year period put Worsley and the other businesses under severe pressure in that part of the world. We would be looking to take a very hard stand if we don't see progress from the WA government on this.

Your next question comes from Paul Young with Goldman Sachs.

Graham, a couple of questions on a couple of the other assets and the first one being Hermosa. There was a lot of questions on Hermosa in February, not one on this call so far. So -- but just curious around how you think construction is going. The look on Slide 31, it looks like it's going quite well. I know you're spending $500 million this year of the $2.5 billion budget, but can you just talk through how you think construction is going? And anything you can call out on where things are coming out so far versus plan and budget.

Yes. Look, I'd say, what I'd describe it now, Paul, at the moment is, everything is sort of going to plan. I mean, obviously, this is a project constructed over many years. We've obviously done a lot of the surface work and the precollar work on the shafts. So that's largely completed. We're making good progress on the state permits to allow full construction of surface facilities. We're seeing really good progress under the FAST-41, which is the fast track piece of the federal government. So they're hitting every single deadline. And a big one for us is, we've done most of the dewatering wells. They're all being completed now. They're all connected up to water treatment plant #2. And we have multiple trains in there. We would not be having the capacity of water where we have to run all those trains. So I think that's been a positive side on the water piece. What we are seeing is when we're ordering some of the -- particularly around the process plant and the energy side, some of those critical pieces, equipment's long lead items, we're not seeing any kind of inflationary pressure on those yet, but obviously, there's more to be ordered. We're also -- the vent shafts themselves and the main shaft will start cutting the rock with the Galloway probably towards the back end of this calendar year. That's probably the next critical piece as we start doing that work. On Clark, we've actually started to decline. What I can say is the first part of the ground conditions, if you like, in Clark on the decline have been better than we expected, that probably bodes pretty well for the shafts in the initial part because that's the area where we're a little bit worried about more choppy ground and that shares a similar kind of ground conditions. The other piece is we had some good results on flux in terms of drilling. I think the one for me, which we know a lot more about in the next 12 months is Peake. We released a few more holes on that to continue to show that with our belief that we think that Peake joins out to the bottom of Taylor's Deep and Taylor's Deep has a lot of copper that we don't include at the moment. If we can prove that over the next 12 months, then you have the option to spend about $50 million extra on CapEx, and that, if you like, a third product that comes out of Taylor, so zinc lead, and copper. So to date, I think everything is going to planning to date, but I'm very conscious this is a multiyear project.

And then on Brazil Aluminum, I said, registered or reported, I should say, negative $115 million of EBITDA in the year. Operating cost of $3,500 a tonne. It was running at 70% nameplate, so it's carrying all the fixed costs, of course, and ramp-up hasn't been smooth by any count. I know alumina prices are sitting at $500 a tonne or so pitching coke are rolling over. But I guess the question I have is that where do you think unit costs can get to? I know you at a normalized alumina price if you achieve the ramp-up because I know you said second quartile, but this smelter is losing cash.

Yes, absolutely, it's losing cash. And we've been obviously really disappointed with the pace of the execution of the restart. Bill, from Alcoa, will actually talk to you. Perhaps he can sort of quote the comments we have given him. What I can say with Bill moving into that CEO role, there's certainly been a much more focus on central excellence project and putting in place the right experience people down there. So we are seeing some progress starting to be made on that side. What the biggest issue probably to date has been around crane availability, which continues to edge back to where it needs to actually be. We're probably still a little bit more conservative on the ramp-up than they are, purely because we've been burnt a couple of times, but we'll watch our plans in the next 6 months. But we feel that they do definitely have the right people on the ground now and we are seeing progress. We still believe, if you think about cost performance, it should be somewhere around the same mark as roughly Mozal.

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

Yes. Look, thanks, everyone. Look, I appreciate the time today, which obviously is a busy reporting day. Look, I would just sort of remind people of the high-level takeaways. As a business, we've probably never been in better shape in terms of balance sheet. Focused on the assets, so we have those commodities that are critical for decarbonization of the future. We also have strong near-term production of growth in copper, 15% up in '25 and 6% in '26. Low carbon aluminum is 17% in '25 and 8% in '26. Taylor, as I mentioned, at Paul's question, is progressing to plan, and we're seeing some of the major risks around water fall away, but also the resource continue to grow. I do believe absolutely that Illawarra has been a very good deal for us in terms of reducing complexity, lowered our sustaining capital intensity, strengthened our balance sheet. And in the simple metrics, it was 13% of our employees, 26% of our Scope 3, 35% of our sustaining CapEx over [ 26, 24. ] So it's been a game changer for us. And it really puts us in a strong position to fund our growth options outside of the short term. So that's the most Sierra Gorda fourth grinding line and some of the early-stage development options. So from my perspective, the organization has a really bright future. It's well positioned. And I just want to thank everyone for their time and support today. And again, the restart of our buyback, that allocation of $200 million just reinforces our confidence in the business and where we think we can add value. But thank you, everyone.

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