South32 Limited (S32) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the South32 H1 F '25 Financial Results Announcement Investor and Analysts Teleconference. [Operator Instructions] I'd now like to hand the conference over to Mr. Graham Kerr, Chief Executive Officer. Please go ahead.

Thank you. Good afternoon, everyone. Thanks for joining us today. On the call with me is our Chief Financial Officer, Sandy; Chief Operating Officers for Australia, Vanessa; and Noel who covers Africa and also Colombia. Look, I'll give a short summary of the financial results and outlook for the first half of FY '25 before taking questions. First, I'd like to talk about safety. In September, we tragically lost our colleague, Jose Luis Perez, who was fatally injured in an incident at Cerro Matoso. An investigation into the incident was completed during December 2024. Key learnings have been shared across our organization and improvement actions are underway to prevent a similar incident happening again. We continue to implement our global Safety Improvement Program, and we're determined to achieve a step change in our safety performance. This includes a significant investment in safety leadership through our LEAD Safely Every Day program. While we have more work to do, this program has supported measurable improvements in our safety performance. We've had a strong start to the year off the back of our improved operating performance. To call out some of the highlights in the half, we increased aluminum production by 5%. Copper equivalent production increased by 21% at Sierra Gorda. And we maintained production guidance across our operations except for Mozal Aluminium. We have updated guidance as we continue to mitigate the impact of civil unrest in Mozambique. As announced yesterday, we now have received primary state and federal environmental approvals for the Worsley Mine Development Project. This project will enable access to new bauxite mining areas that are expected to sustain production to at least FY '36. At GEMCO, we have commenced the phased restart of mining activities and export sales are expected to progressively increase over the June 2025 quarter, subject to further potential impacts from the wet season. Across the group, we remained focused on driving cost performance with lower operating unit costs for the majority of our guided operations expected in the second half of FY '25. In terms of financial performance, we delivered a 44% increase in underlying EBITDA to USD 1 billion and an increase in underlying earnings to USD 375 million. Cash flow from operations improved by USD 361 million despite a build in working capital due to higher commodity prices and the timing of shipments. And we reduced net debt by USD 715 million to USD 47 million, consistent with our focus on prioritizing a strong balance sheet through the cycle. As a result of our strong financial position today, we announced a fully franked interim ordinary dividend of 144 -- USD 154 million at USD 0.034 per share and the continuation of our capital management program with USD 171 million remaining to be returned to shareholders. Turning to our portfolio. The sale of Illawarra Metallurgical Coal in August for up to USD 1.65 billion unlocked significant value and streamlined our portfolio. Building on our previous portfolio improvements, this has also simplified our business, lowered sustaining capital intensity and strengthened our balance sheet. We are investing to grow our future production of critical minerals as we construct our large-scale, long-life Taylor zinc-lead-silver project at Hermosa in Arizona, progressed the exploration decline at the Clark battery-grade manganese deposit and continued exploration programs as we unlock value across Hermosa's highly prospective regional land package with recent drilling at the Peake deposit returning further high-grade copper results. In closing, our operations are performing well, our balance sheet is strong and an unwind of working capital is expected to add cash generation in H2 FY '25. We have an established growth pipeline that can underpin significant growth in zinc and copper, and our unchanged capital margin framework is designed to reward shareholders as our financial performance improves. Thank you, and I'll now hand back to the operator.

[Operator Instructions] Your first question comes from Alexander Pearce from BMO.

So my first question really is can you just remind us how much exposure you've got to the U.S. market at the minute? And can you tell us in a little bit more detail what you're seeing in the global aluminum market following some of the proposed U.S. tariffs?

Yes. Look, I mean, I'd start by saying, look, any one person probably has a sense where U.S. tariffs are going at the moment, so every day there's a little bit of new additional news flow. Certainly, from our perspective, we'll continue to watch because U.S. being such a large economy will have some potential impact on trade flows, in some cases. But I also think the risk of longer term that there are impacts on critical components such as global GDP where anything that sort of stops global growth or the movement of products, I think, will have a detrimental effect -- impact. Look, if you think about our exposure to the U.S., what do we sell into the U.S.? Look, if you look at the first half of FY '25 by region, probably about 9% of the group revenue went to the U.S. If you think about the individual books, it's about 5% of our ferronickel book, so nickel coming out of Colombia. And it's about 16% of our aluminum predominantly coming out of Hillside at the moment or that part of the world. So in the scheme of things, we don't have a huge exposure. I think it will be interesting, it's not like it's not the first time that you haven't seen tariffs appear on aluminum in the U.S., obviously under previous administration. I think the critical piece for us is going to be what does it actually mean. Look, the reality is no matter which way you cut it, the difference it will make, in my mind, in this space is if there's actually a change in domestic production. And the last time we had tariffs in place, we didn't see an inducement of U.S. production. If you think about where the U.S. is today, roughly 80% of the primary U.S. aluminum demand is imports from Canada. And if we see the U.S. tariffs coming in, our general view is that it will reflect a higher premium reflected in the U.S. Clearly, the supplier will obviously have to -- the tariff itself will be lodged on the supplier and collected by the government, but the ultimate price in our view will be paid by the consumer. You can argue that perhaps some of that Canadian production, about 4 million tonnes, sort of move its way into Europe. Not sure it actually will because of the infrastructure in place, et cetera. But I think if it does, then you'll probably see the Europeans go after the regional -- the [ traction ] margin premium, if you like, in the Midwest. So from our perspective, unless you see big inducement of new smelters in the U.S., it's probably not going to make a big difference from our perspective on our book. Sorry, I was going to say if you take a medium-, long-term view of aluminum, we still probably haven't really fundamentally changed our position. The bigger issue was more around what's happening in China around that gap. We see the gap continue to be sort of driven to. Ultimately, it does mean in the last couple of decades new suppliers come on from China to sort of meet that gap between supply and demand. There's actually been an oversupply. I think going forward, for the first time, you'll have to see some new smelting capacity come online ex China. In my view, it's hard to imagine a world where that's probably not driven by more renewable power sources and it's probably more likely to appear in Indonesia or Malaysia than it is in the U.S.

Great. That's clear. And then just a second question on the CapEx changes this year. It looks like it's really on timing. Is that fair to say around Hermosa, et cetera? And should we, therefore, assume the like-for-like increase CapEx in next year and beyond?

Yes. Look, I'll get Sandy to work through that. I mean, to me, the [indiscernible] team has done a good job in pushing down what we -- pushing out what we thought would be some prepayments to get critical slots. But maybe, Sandy, if you could talk about it in the context of this year and what we see going forward.

Yes. So we did see that rephasing effectively of the expenditure. You can expect that now to come through in FY '26. So that was some allowance we put into FY '25 for prepayments for slots for fabrication, in particular. As that negotiations have played through, we actually now expect to see that coming through as just normalized expenditure in the FY '26 period. No other change to phasing on the Taylor expenditure program.

[Operator Instructions] Your next question comes from Tim Clark from SBG Securities.

I've got a couple of questions. Let me just start my first one, just how you're thinking about capital allocation going forward and what the barriers are that you face? Just the context of that is obviously a clear, strong free cash flow expectation for the second half of '25 and then as the Hermosa CapEx comes down, presumably that increases your potential debt capacity over time as the commitment to Taylor reduces. So I just wonder -- so the first part of it is, how much buyback can you realistically get away with over a period? And then how would you think about other forms of capital returns? Would it be like a special dividend scenario that's most likely if there are no other commitments? How would you -- how should we be thinking about if there is excess cash, what you'll do with it?

Yes, absolutely. I'll get -- maybe Sandy can walk you through the dollars and how we're thinking about debt levels in the balance sheet. What I would say from my perspective, our commitment to the capital management framework remains unchanged. We talk about distributing what we would call surplus cash, so after the basic needs, that'd be our first and foremost, having a safe reliable business and keeping that investment-grade credit rating at a minimum 40% payout, if you like, on our underlying earnings. And then all the other options compete. So growth options we have internally already, special dividend, buyback, acquisitions, et cetera. So that whole philosophy hasn't shifted. What has shifted over time obviously is what the balance sheet looks like and then what we guide towards the net debt range, but Sandy can talk to you about how we get that. I think the one thing that I'm very focused on is what we don't generally do too much about is speculation about what the cash flow line looks like. What we've always talked about is when the cash is in the bank is when the Board has to make a decision about where it allocates those funds. So if we have excess cash in the bank as we've had in the past, we've looked to the most efficient way to get that back. Generally, we like the buybacks as we think we trade cheap compared to what we think we're worth. We have the special now and again where we've got a bit to sort of catch up on. But the other thing, which will always drive some of our buying will be what's happening in the marketplace. For example, in the first 6 months of this year, there's been a lot of periods where we've been out of the market because of the Worsley approval process and some of the ongoing conversations and uncertainty or finalization and also the Mozambique civil unrest. But maybe, Sandy, you can talk about the dollars, the cents, the net debt range, et cetera, and how you think about it as a CFO who really [ owns it ].

Sure. So, I mean, as Graham touched on, our capital management framework is unchanged. It is consistent with us having an investment-grade credit rating in a sustained low. So when you asked about what that kind of constraint is, we do actually look at that and model that, going out a number of years to ensure, and particularly with Taylor capital ahead of us, to ensure that we do maintain that investment-grade credit rating in a sustained low. We have $171 million remaining on the buyback. We do consider that consistent with allocating excess capital. And at this price, we do naturally think the buyback is the best value option for our shareholders. We've talked to net debt ranges over time. We're currently holding a net debt target range of between 0 and $500 million, and that is really consistent with it being fairly early in the phase of Taylor's capital program. We're naturally more conservative, and you can expect to see us iterate this over time as we have done in the past. In terms of the way that we distribute capital, we're obviously, first, looking at this buyback. In the event we don't consume all the buyback, we will obviously look at then whether we want to extend it or whether we would consider a special dividend at that time. That would be done on the merits at the time of that decision, as Graham touched on. In terms of what we've put away in the past, it sort of trends between that $50 million and $100 million kind of range over the half period in the buyback. So it depends on where the prices are, thresholds, and of course, blackout periods.

Okay. That's helpful. Just moving across to Worsley, I'm just trying to square -- you had quite a big impairment on Worsley when the sort of uncertainties were in place on the environmental approval. And it looks like most of those uncertainties have gone away. You spoke at the time of kind of higher, longer-term costs, and therefore, sort of -- and reasons for the impairment. The impairment hasn't reversed and yet the circumstances have changed. I heard the answer just on the trigger being sustained low prices. But a reversal of impairment, I would have thought, is to do with having better economics, and therefore, I was surprised by the answer. I wonder if you could just maybe speak to if we took a Worsley before July last year when we received these new conditions and then the conditions being renegotiated, are we sort of halfway in between the two? Or is it -- because I find it quite hard to measure as to the concerns that were there in July. Are they still relevant or have most of them gone away just in terms of longer-term costs, et cetera?

There may be a couple of things, Tim, and I'll get Sandy to walk through the mechanics of the impairments and how we think about it from an accounting standards perspective. Look, when we have a look at Worsley, to be clear, the impacts of the deferred decision are probably felt across multi-dimensions of the business and over multidimensional time frames. It's not like when we announced the impairment, we're -- all of a sudden, we're hit with challenges around the impairment -- around the operation. The time that this has taken compared to what the previous commitment was on the EPA and other bodies has meant that this decision has been pushed further and further out, which has knock-on impacts. So now that we have the actual conditional approvals, so we now have got the approvals of both the state and the federal level, we're absolutely out. As soon as we've got it, we're out there actually starting to put that to work. But the first component that we actually get into is to actually clear additional areas of where we currently have existing mining area, which is Saddleback, Marradong, [indiscernible]. We have to do that because getting in the new areas, which is where you were back to the higher grade, takes time around infrastructure, clearing the mine and setting it up. So we don't actually return now into full production or full capacity at Worsley to FY '27 because of the impacts we've had around cost grade that we've already experience, but also we don't get back to full production to FY '27. And previously, we had given some unit cost guidance where we talked about what it was going to cost us to sort of operate. And we had spoken about $270 to $290 a tonne previously. We have increased that range by about $5 a tonne and that in itself is sort of driven by revised conditions, particularly around monitoring and administration stuff that has sort of stuck through the approval process that hasn't been overturned. That in itself has 3 number NPV impact. So it's not immaterial. But to me, I think about the increase in the operating cost, but I'd also think about not getting to full nameplate capacity of 4 points back to full nameplate capacity to FY '27. Maybe, Sandy, just on the impairment thinking.

Yes, of course. So we're operating under IAS 36 impairment of assets. And we have an accounting policy approach under that, which I think I heard you reference that, Tim, which is that we actually apply our reversal trigger testing under a sustained low commodity price. And on that basis, we don't have a trigger. It'd only be if we had a trigger, we then complete a full fair value update and then update our position in terms of the accounting. But because we didn't have a trigger, we don't go ahead with that scope of work. Of course, informing that range, now there's a range of analysis that goes through that trigger testing done at a sustained low. So of course, we're looking at all the inputs at a point in time. And so there's range analysis that sits behind that as well.

All right. That's really helpful. Sorry, my last question, hopefully a very quick one. Just with the alumina price having rallied in the fourth quarter -- or in the second half of last year so much, I was asked a question time and again and with Brazil and aluminum, I wasn't 100% sure of the answer as to your net long short position in alumina once the full portfolio is running at normal capacity.

So where, I'd say, we're at the moment is historically, over the last couple of years, we've probably been running at about 50% of our alumina is placed in our own smelters across the whole network. That includes Brazil, Hillside and Mozal. For the half, we're actually about 51% this year. Some of that probably, over time, we still say the same. Because while we'll probably ramp up on the smelting side, we've sort of matched our alumina and our bauxite going forward to match what the smelter needs. And that's the way the deals are structured in Brazil, which therefore leaves you -- your biggest exposure is obviously on the Australian side -- or sorry, the Worsley side of the business. And it's not like we're looking to dramatically increase production outside of a little bit of creep in Hillside and Mozal. So you probably still are going to be looking at about 50% going to the market, which generally most of that is on relatively longer-term deals, but index pricing into places of the Middle East.

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

Look, thanks, everyone. Appreciate the time today to sort of dial in here. And obviously, if we've missed anything, just feel free to contact Ben to follow up in our Investor Relations department. Closing message, I believe, which is, look, our operations are performing well and we've done that for a couple of halves now, which is good to actually see. Our balance sheet is strong. We do have an unwind of working capital expected to add cash generation in the second half of this financial year. We do have an established growth pipeline that can underpin significant zinc and copper growth in the short to medium term. Our approach to capital management remains unchanged. It is absolutely designed to reward shareholders as our financial performance improves. And just again, thank you for your time today.

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