South32 Limited (S32) Earnings Call Transcript & Summary

Thank you. 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, Vanessa Torres; and Noel Pillay. Before I give a summary of our financial results FY '25 I'd like to acknowledge the tragic loss of our colleague, Jose Luis Perez, who was fatally injured at Cerro Matoso in September. Our thoughts remain with Mr. Perez's family, friends and colleagues. An investigation into the incident was completed, and we shared learnings across our business with actions taken to prevent a similar incident from happening again. During the year, we continued to implement our safety improvement program, which is supporting measurable improvements in our safety performance. While it's encouraging to see a positive shift in our leading and lag safety indicators, we remain focused on continuously improving and embedding safety leadership across our organization. Nothing is more important than our people going home safely at the end of every shift. Turning to our FY '25 results. We increased our production of minerals and metals critical to the global energy transition, delivering annual production growth of 20% in copper and 6% in aluminum. Our strong operating performance enabled the group to capitalize on improved commodity prices, with underlying EBITDA increasing by 7% to USD 1.9 billion and underlying earnings increasing to USD 666 million. Operating free cash flow increased by USD 272 million, and we improved our net cash position by USD 885 million to USD 123 million, supported by proceeds from the sale of Illawara Metallurgical Coal. At the same time, we invested USD 517 million to grow our future base metals production at Hermosa and returned USD 350 million to shareholders. Reflecting our strong financial performance, today, we've announced a fully franked ordinary dividend of USD 117 million or USD 3.06 per share in respect to the June 2025 half year at a 12-month extension of our capital management program with USD 144 million remaining to be returned to shareholders. We are focused on maintaining our positive operating momentum into FY '26, we are developing new bauxite mining areas at Worsley Alumina after securing primary state and federal government approvals to extend the operation's mine life earlier in the year. Improved bauxite availability is expected to support a 4% increase in production in FY '27 and improved operating unit costs as refinery turns towards nameplate capacity. Brazil Alumina is expected to operate near nameplate capacity in FY '26 and unit costs are expected to trend lower due to reduction in planned maintenance and lower bauxite prices from MRN. In aluminum, Hillside continues to test its maximum technical capacity. And in Brazil, volumes are expected to increase by 16% in FY '26 and a further 3% in FY '27as the smelter continues to ramp up. As announced earlier this month, due to the uncertainty of electricity supply, we have stopped pot relining at Mozal Aluminum and currently expect that the smelter will be placed on care and maintenance in March 2026 when the current agreement expires. Turning to our base metal operations. FY '26 production guidance at Sierra Gorda is unchanged, and we expect a 5% production growth in FY '27 due to [ higher ] copper grades. Sierra Gorda continues to progress, brownfields growth options to increase future volumes and unlock the exploration potential of the Catabela Northeast prospect. At Cannington, we have completed our mine plan review designed to manage more complex underground conditions and deliver reliable mining rates. We are working to embed further cost savings as we optimize contract and equipment requirements and advancing options to extend the current reserve life of 6 years with the remaining underground resource and open pit opportunity providing significant potential. At Australian Manganese, we have completed the operational recovery plan following the impacts of Tropical Cyclone Megan with export shipments on track to reach full capacity this quarter. With the recovery plan now complete, work is underway on options to extend GEMCO's mine life. We continued our portfolio transformation in FY '25, realizing significant value through the sale of Illawarra Metallurgical Coal and exiting lower return businesses. This has further streamlined our portfolio toward higher-margin businesses, reduce complexity and unlock capital to invest in our high-returning growth options in base metals. At a regional scale, Hermosa project in Arizona we achieved key construction and permitting milestones for the Taylor zinc-led-silver project in FY '25 and construction activity for the shafts and surface infrastructure is set to increase in FY '26. Costs for packages awarded to date for Taylor have been within FID expectations. While we have not seen material direct impacts from U.S. tariffs, we continue to monitor potential inflationary pressures as we progress through remaining packages. We are progressing work to unlock value across Hermosa's highly prospective land package and today announced an upgraded mineral resource for the Peake deposit. Exploration results in Peake support the potential for a copper-dominant mineralized system and we are continuing to study work on the potential to add copper -- copper production from Peake, leveraging the infrastructure established for Taylor. In closing, we have simplified and improved our portfolio. Our operations are performing well. Our balance sheet is strong. Our pipeline of base metal options has the potential to underpin significant growth and our unchanged capital management framework is designed to reward shareholders as we capitalize on increasing demand for the minerals and metals needed for the global energy transition. I'll now move to questions.

[Operator Instructions]. Your first question comes from Jason Fairclough with Bank of America.

Two quick ones for me. One on Sierra Gorda and one on Cannington. So on Sierra Gorda, can you just maybe talk to us a little bit about the pathway to first metal production from the fourth grinding line? And is that going to be just a carbon copy of the existing grinding lines? Or will it actually be upsized? On Cannington, I was interested if you could talk a little bit about the decision to derate ore production. And I'm wondering, is there a possibility here just to get some of those open pit tonnes going through the plant in the near term?

Thanks, Jason. And maybe if we start, obviously, at the Sierra Gorda piece. Sierra Gorda, as you know, is a jointly controlled asset between ourselves and KGHM. So it will require both shareholders' approval to actually obviously progress support grinding line in addition to the other improvement opportunities that we actually have. Probably the critical pieces as we think about that fourth grinding line because essentially what it will do a move throughput up to about 58 million tonnes per annum. And it really is concentrating capacity by adding a fourth grinding line and a flotation line. Obviously, you get the copper equivalent production uplift and you get a reduction due to costs. The big one in terms of getting success there is we've installed a third thickener so we have three. And as part of the mining conditions to sort of expand the facility, we need to increase the solids, if you like, or the CP that's going out to the tailings. The first new thickener is actually achieving those on a regular basis now. The other two are sort of a still a little bit hit and miss. So we're doing some work on those around the power recharge and the source of how we actually do that and some general maintenance of sort of fine-tune how we use those. We're expecting to make progress on that, which allows us then to bring forward the study work by the end of the calendar year for the 2 joint venture partners to opine on and make a decision if we want to actually approve the project. From our perspective, we think the project makes sense it's sensible. Logically, there's value in it for us. We've had the same impression from KGHM to be clear. But obviously, as we get closer, that's something we'll get the second writing from them.

Just to push you on that, Graham. So first metal, what's the earliest we could think about it?

So the way I think about it, usually, it's -- we expect that the feasibility and the FID expected in the back end of this half year. Generally, you're talking about a 3-year construction period. CapEx is saying like this is probably somewhere in 100% terms of which would have a 45% exposure around $700 million. The Cannington one, look, is an interesting one. I mean, one thing to always keep minding with Cannington is Cannington, I was lucky enough to be there when we built that, and it tells you how old it is because I was a graduate. That project at the time was designed to run for 14 to 70 years. We're probably in year 28 now. This time last year, we talked about a 5-year underground mine life left. Now we're talking about 6 years, even though we've been through another year. That's about a 2 years addition from where we were. We still think there's potential to maybe add another 2 to 3 years underground. And we do think there's the ability to potentially process some lower-grade stockpile material and do some work in the open pit that potentially opens up the open pit option, which historically has probably been hugely dependent on silver price, whereas now we've got a bit more optionality around it. I think the challenge we've had, Jason, to give you a sense of Cannington is, obviously, we've gone through that transition over the last couple of years where we stopped using the shafts, and we stopped using a shaft because of the age and deformity and the cost to keep them up didn't make any sense. And we've also moved higher up the ore body. So we moved to trucking about [ 2.5 ] years ago. That's worked quite well for us. I think the challenge for us has been the number of stopes that we need to sort of put into action. So for example, if I go back to FY '14, '15, we were probably running at about 50 stopes. '18 to '23, we're up to 64. '24 we got to 80 stopes. This year in the plan, we've got about 70 -- we did about 71 stopes. And next year in the budget, we're talking about getting back up to 80 stopes. We originally thought it was possible to do about 109 stopes, but the reality is when we're getting in there, the stopes are fragmenting and breaking because the way you are on the mine now, you've got the number of balls covered by paste fill. You've got no more solid rock walls. So you don't have the same stability or ability to actually muck it out as quickly, plus you have to apply more pace than we have in the past. So we're working on some efficiencies in that space. So while we have downgraded the throughput, we have extended the life of the underground. We also believe there's more optionality in the open pit that we probably thought before because of some of the metallurgical work we've done. We'll know more about those 2 items over the next 12 months. What we're now turning our attention to is lower throughput, changing mine life cycle. We haven't actually looked at the cost structure yet. That's a piece of work we're just kicking off now. Does that help, Jason?

Your next question comes from Tim Clark with SBG Securities.

Good evening, everybody, and thanks very much from our side for doing this later call. Perhaps I can start just my first question just on GEMCO. Very interested to see those northern leases appearing. We didn't know much about those before. We've been speaking about the southern leases. Perhaps I wonder if you could just talk about the process that you're expecting and what you think can be done in terms of elongating the life of GEMCO. And perhaps just with traditional owners, if you feel like there's better momentum after the recent interruption? And then just my second question on exploration. You guys were the first movers, right? You got into good joint ventures early. You were first movers on exploration. It feels like some of the exploration is just taking the whole industry a lot longer. And I just wondered if you could highlight to us any areas that you think are advancing now or where opportunities are perhaps coming a little bit closer to maturity in your portfolio?

Yes. Look, absolutely. So maybe if we sort of -- and we'll come back to exploration. If we start with GEMCO first. If we look at GEMCO, what I would like to call out is I think we've done a complete rebuild of a wharf in a very pristine environment where you've got a very tiny, small special purpose lease that allows you to use the infrastructure there. And we've still got more to be done, but done the majority of the deepwatering. And for this quarter, we'll be back up to full shipping rates and full production rates. So I think Vanessa and her team have done a great job in actually getting GEMCO back online. Insurance is progressing pretty good. We've had some consistent payments along the way and hope to settle it by the end of this calendar year, but I understand that's always a negotiation. I think when it comes to what do we have left on GEMCO today because while it's getting older and more spread out, that and Gabon are still probably the 2 best assets in the industry by a country mile. If you think about the life today of GEMCO and we sort of focus on what we have, we have about 6 years that's currently in the reserve, which is the Western leases and about 1.5 years for the Eastern lease South. Then there's probably another easy 2.5 years that we think we can take from the resource and convert to, if you like, reserve. And that's really the eastern leases North, and it's also the southern areas. So that sort of gives you a life at the moment about roughly 8.5 to 9-ish years. We've got large pieces of the southern areas that to date have not been accessible to us based on the traditional owners, if you like, their view, if you like, on cultural significance, waterways, white sand, et cetera. That's an opportunity for us to engage with them over time. But for the first time and how it works on the island is obviously, it's the TOALC's Island. We need their absolute permission to do anything. The northern leases was something that was probably talked about 10, 15 years ago. And when you can't come to an agreement, it goes into a concept, which is called moratorium up there, which means you can never talk about it until it's released out of that time. It got released probably around February, I think, this year. So we started having some discussions with traditional owners. And they've certainly given us access, as you can see on Slide 24 of the pack to a part of the northern area to do some exploration work. There's actually a much bigger footprint at the moment for the northern areas, which is not available for access today. Over time, obviously, in line with what they would like, we would like to understand the northern areas, not only the area of interest, but the broader land package, and we still think there's a potential on the southern areas. But we should be clear on both of those areas. This is really land that hasn't been touched drilled before. So it could end up adding 3, 4 years. It could end up 2 years. It could end up having 10 years, it could end up nothing. We haven't done the work there. What I would say is during COVID, obviously, we make large royalty payments for the right to be on the island to the ALC. No revenue, no royalty. So they certainly felt the pain like we did. We work very closely together to sort of manage our way through the cyclone. We think we have a really good relationship with the ALC. There has been a little bit of change over the last 12 months where their long-serving Chairman passed away they're looking for a new CEO. So there'll be little bit of vacuum at the moment, but obviously, they're waiting for some of those key positions to be filled. And certainly, would like to talk about how we extend our stay on the island. But always understand it's absolutely at their discretion and making sure that we have a good strong relationship with them every single day of the week. Yes. Look, on the exploration side, yes, I would say we were quite lucky when we sort of came out of the old owner when they made the decision not to do any exploration. So we had access to a lot of information, some of the best mines around. So we sort of got it when I say, mines, exploration mindsets. So we got very early into those exploration plays. What I would say is, geez, it's got super competitive over the last 4 or 5 years. In the early days, you can get good terms, good earnings and a clear pathway to control. That's much harder now where some of our peers I think, are signing interesting agreements, which probably make. They set new benchmarks move it's challenging. Outside of easy brownfield ones such as what we've got at Sierra Gorda with Catabela Northeast, which you released last year. I think the most prospective one for me, from a pure resource perspective is the Ambler Metals Distric where we have got the joint venture Ambler Metals with basically Trilogy and Roosevelt. Arctic today, if you look at the Arctic at 43 million tonnes of that grade, that strike anywhere else in the world it would have been developed. It's just in the middle of nowhere. That's one of what we hope is a number of VMS style deposits up there. Roosevelt got similar kind of signatures, had probably less work done on it. It's certainly an area where we've not had a focus for the last 3 or 4 years because COVID originally, but also then the Biden administration talked about never opening that area up, whereas you know, the Trump administration is funding up is probably trying to go in there too fast. We think there's a balance between the 2 that will unlock a largely unexplored area, but an area with a hell of a lot of potential. So that would be one of the ones that I'd say that, look, we get quite excited about. Obviously, some of the work we've been doing in Argentina is advanced in terms of resource and size. You're into the next stage of understanding, for example, at Chita Valley, what do the economics look like? Is it for us? Is it for someone else? More work to be done in that space. That would be another one. And the other one, which I think is particularly interested in some of the work that we're starting to do in Namibia and Botswana with Noronex. I think that Kalahari belt, obviously, has got 2 producing assets in there today. But generally speaking, it's been largely underexplored. So we think that's another opportunity. That's ignoring again some of the brownfield more stuff like at Sierra Gorda with Catabela Northeast. Short term, the one that I think will be most interesting is going to be around the Peake deposits at Taylor because, a, it will be approved under the current structure. Two, it is outside of the site copper circuit. In deepwater, you've done the shaft, you've already got 95% of the plant in there. It's just about how big the resource is going to be. It's been a fourfold increase with this reporting period and I think there's probably something similar still left to be discovered there.

Your next question comes from Alex Bedwany with Canaccord Genuity.

I was a little bit surprised to hear you say that you haven't been seeing material inflation for the Taylor project. Just on that, how much of the budget has or how much of the project has been progressed in sort of percentage terms, would you say and do you think there is scope for things like steel imports and what have you to impact the overall CapEx budget? And then I've got a second question, but I'll come back to that.

Yes. Look, absolutely. I mean maybe if you take a step back and let's talk about what the positives are of Taylor. One is it's great to see the approval process continues to go through its speed and probably this time next year, we've already got all state approvals. We'd expect to have almost all our federal approvals to allow us to do the tailing facility and connect to power or run a power line through an easement area of the Coronado Forest. So I think that's a real positive. Obviously, we spoke about Peake, there's Flux, there's Clark. There's a whole lot of other things on top of Taylor. On Slide 28 in the Peake, we actually talked about where we are in terms of the project itself. The absolute critical path has been dewatering, which has gone to plan and probably better than we expected. The second thing I'd say is when you look at the vent shaft and the main shaft, they're now the 2 items on the critical path. The process plan for us is less on the critical path. It's more about the vent shaft and the main shaft. We're probably at this stage, if you think about the vent shaft, that's the one we've been the most advanced on, and we've made pretty good progress on that one. We're probably about -- I think it's -- I just find the exact number. Yes, we're about 47% complete and the main shaft are about 7%. So for the vent shaft, we've done 370 meters of 824 meters. The main shaft, we've done 7 meters of 898 meters. We have laid the foundations, if you like, for the surface process plant facility. We are at the moment building the admin support facilities. We've got the first package out for the processing plant, which is -- and it's 4 packages left to go on top of that for underground infrastructure, axillary infrastructure and lateral development. So far, we're seeing that the estimates are holding to our FID. Keep in mind that our FID estimate was done post COVID. What we're seeing today is the steel that we got for the vent shaft and the main shaft and we've already sourced a fair bit of steel for the actual process plant, that sort of come in pretty well as we expected. I think our risk now is on the remaining pieces of work because we probably only spent about 33% of the capital. The remaining pieces of the work is -- there are some impacts around tariffs. But as you can appreciate, tariffs are changing every single day. I think what worries me more is a general impact on tariffs and what does that mean for things like labor rates? What does that mean for concrete? Ultimately, what does that mean for steel, if you have to buy it in North America, we've already seen some of the windows start to push out. Now outside of the windows for steel pushing out, we haven't really seen any increases in the first pieces of packages we've let around labor rates and concrete. But as you know, projects occur over multiple years. If the tariffs do become a push on inflation, that's something we will have to watch. To date, not overly concerned, but we're watching it very closely. What I would probably focus on all the time is based on experience of seeing other people do this, vent shaft, main shaft feels comfortable at the moment, but we've got a long way to go. You never feel comfortable in either shaft here at the bottom.

Okay. Fair enough. And just the second one is a quick one. What do you reckon is the drop dead date for a deal on the Mozal power contract?

I'll be honest, as every day goes by, it becomes harder and harder because obviously, there's a series of raw materials such as pitch and coke that we need to provide. But also, while we absolutely see value with Mozal from an economic sense, we see value consistent with our purpose around jobs and employment opportunities. There is strong demand for Worsley's Alumina out there. And ultimately, we're going to think about how we place that. So I think as we get closer towards the back end of the calendar year and the start of new calendar, we'll have to start making some decisions. Not where we want to go. But at the moment, there's probably not a lot of -- we're as much involved in the deadlock or an impasse as we were 2, 3 weeks ago when we made the announcement.

Your next question comes from Myles Allsop with UBS.