South32 Limited (S32) Earnings Call Transcript & Summary

I'm Kate McCutcheon. I look after the metals and mining research based in Sydney, Australia. I'm pleased to welcome our next CEO, Graham Kerr of South32. This conference might be Graham's plus 20th conference with us. So Graham, today, has chosen a hybrid format. So I'll hand over to Graham to present some slides, and then we'll have a fireside chat, and we'll leave some time at the end for audience Q&A. Thank you, Graham.

Thanks, Kate. Appreciate it. Good afternoon, everyone. It's a pleasure to be here with you again at the Bank of America's Global Metals, Mining and Steel Conference. This year marks my 11th as CEO of South32, but as Kate pointed, there's many more before that. This will be my last one as CEO, as Matt Daley sitting in the front here, will step into the role later this year. I'll be handing over to Matt with the business well placed for its next phase of growth with a transformed portfolio supported by a strong balance sheet. Over the past year, we've continued to deliver on our strategy by streamlining our portfolio to focus on higher-margin base metals businesses. Our reliable operating performance backed by commodity price tailwinds is supporting strong cash flow generation, giving us a compelling platform to invest in further growth in copper, zinc and silver. This includes our multi-decade Hermosa project in Arizona, which is expected to deliver first production from Taylor in H2 FY '28. We recently provided an update on Taylor's construction progress, which reaffirms its potential to deliver returns from its low-cost production of zinc, silver and lead over an initial operating life of around 33 years, and I'll provide more details on this shortly. Our portfolio has been repositioned to focus on base and precious metals and aluminum, which are expected to benefit from long-term structural tailwinds around renewables, electrification and AI growth. Our strong operating performance for the financial year, coupled with higher commodity prices has seen us generate strong earnings and cash flow, providing earnings momentum and a robust balance sheet from which to deliver growth and returns. Our growth pipeline has the potential to underpin significant long-term base metals production. At Cannington, we're working to extend its high-margin zinc silver production beyond the current reserve life of around 7 years by pursuing both underground and open pit options with the open pit development recently advancing into pre-feasibility study. Sierra Gorda is progressing multiple options to grow our future copper production, including the Fourth Grinding Line expansion project, which is expected to be the subject of a joint financial investment decision in the coming months. Beyond these, we're advancing our Hermosa and Ambler Metals projects in the U.S. At our Hermosa project, Taylor will strengthen our portfolio by increasing our production of base and precious metals. It's the first stage of what we anticipate will be multiple phases of growth and production and will establish significant shared infrastructure for future growth phases. This includes the Peake copper deposit and elsewhere across Hermosa's highly prospective regional exploration package. We're seeing strong momentum at Ambler Metals in Alaska, a district scale base and precious metals opportunities with permitting progressing for the high-grade Arctic deposit and USD 42 million to be spent together with our joint venture partner in calendar year '26 to progress drilling and development studies. At Sierra Gorda, which is our high-margin copper asset, it holds a number of options to grow volumes and extend life. The Fourth Grinding Line has the potential to increase throughput by around 20% and as a brownfield expansion that will benefit from existing power and water availability is expected to be capital efficient and value accretive. A joint final investment decision is expected in midyear 2026. We're also working through life extension options we have, including announcing initial exploration target for Catabela Northeast, while we're looking to unlock further value from 110 million tonnes of stockpiled oxide material. We now turn our attention to Hermosa. Hermosa is a regional scale critical minerals project in Arizona, a Tier 1 mining jurisdiction. It increases our exposure to attractive commodities like zinc, lead, silver and copper. Taylor will add sizable volumes of zinc into an expected market deficit that will require the equivalent of 3 Taylor sized mines each year to meet projected demand and will almost double our annual silver production. Our recent update reaffirmed its quality and returns potential underpinned by a substantial ore body that continues to grow. Successful in-drilling programs at Taylor have extended the initial mine life by 5 years to around 33 years with the deposits still open in several directions, providing further upside potential. In the December 2025 quarter, we completed the exploration decline of the co-located Clark deposit, which highlighted the potential to use Clark's decline for additional Taylor body ore access. Subsequent work has confirmed this opportunity, which is expected to unlock value by enabling first production ahead of shaft sinking, improving operational flexibility and increasing ore handling capacity by 25%, which together with surface infrastructure debottlenecking has the potential to support higher mineral production. As a result of this change in scope and our expectation of delayed completion of the shaft due to contractor underperformance and productivity challenges, Taylor's schedule has been updated. First ore mined at Taylor will now come from Clark's decline mid FY '28 with first production expected in H2 F '28 and nameplate capacity expected in FY '31. As a result of the scope changes, revised shaft construction costs, materially higher inflation, industry-wide cost increases in key inputs such as steel, piping, concrete and electrical and U.S. tariffs, our estimated growth capital expense for Taylor has been increased by approximately $1.1 billion. Even after these updates, Taylor continues to show its quality as a long-life, high-margin project that will substantially increase our production of zinc and silver and deliver returns for decades to come. Based on our updated assumptions, we expect an annual steady-state EBITDA of around USD 650 million and an NPV of around USD 3.1 billion. And this is all before considering the substantial growth potential from near-mine exploration targets such as our Peake copper deposit and the highly prospective regional land package. Our unchanged capital management framework has supported the transformation of our portfolio, while balancing investment in our business and delivering shareholder returns. Our balance sheet is strong and is supported by cash generation due to consistent operating performance and commodity tailwinds, leaving us well placed to continue delivering returns, while investing in our pipeline of high-quality growth options to increase our exposure to base and precious metals. In summary, we've done a lot of substantial work to transform our portfolio and upgrade it for both now and for the future. Today, we have a portfolio of high-quality operations leveraged to attractive commodities that are generating strong cash flow, coupled with great growth options in copper, zinc and silver. Before I close, I'd like to thank you all for the trust and support over the past 11 years. I know South32 will be in very capable hands with Matt, and I look forward to seeing the next phase of growth unfold. Thank you.

Thank you, Graham. There's a lot of growth projects to talk about. So maybe we'll start with Hermosa. This morning, all the presentations have been focused on the dearth of copper supply. But if I think about zinc, Hermosa will be one of the first major zinc projects that the Western world has brought online in some time. What do you think is different about the outlook for zinc now or what has changed?

Yes. Look, absolutely, Kate, good question. But maybe I'll start with, to your point, I think one of the things the team has done well over the last decade when we were first demerged from BHP, we had very little growth options, short life on things like Cannington and GEMCO, which were about 6 years. I think the team has done a really good job extending the life of our existing ore bodies, but also creating a suite of options in those commodities we find attractive. And to your point, we like copper like everyone else, and we like zinc. And obviously, silver at current prices is super attractive to us, underpinned obviously by a strong aluminum business. Look, zinc from our perspective, probably has a very similar kind of story behind copper. There's a story of strong demand. Demand continues to grow. If you think about where zinc is used today, galvanization in places like India and China is still way behind the Western world. And as you think about new applications that are coming for the demand of actually zinc, you're actually starting to see that it's getting picked up in things like wind turbines, et cetera, which are probably a new market. I think the other one for us is the ability to recycle zinc is very different from copper. So you can't do the same amount of recycling. And I think the threat of substitution where you go from copper to aluminum doesn't actually exist in zinc because the replacement of galvanization of the zinc is like a 4x additional cost. So I think on the demand side, that positions zinc very strongly. If you talk about the actual supply side, now it's probably been a commodity that hasn't been loved for a long period of time. But I think what you have seen over many decades is a lack of investment around exploration and project development. A number of mature projects continue to sort of get older, deeper, the grade continues to decline. So you're starting to see that supply-demand gap actually grow. In fact, we think over the next decade, you need 3, if you like, zinc deposits the size of Taylor to come online to actually meet that gap. And obviously, for us, we've got the added bonus of silver. If you add what we're going to pull out of Taylor versus what we're going to bring out of Cannington will double our silver production across the Group. And the other attractiveness for us around Taylor is at the moment, we've got a mine life of about 33 years. We grew that since the FID by about 5 years by simply some infill drilling. We've got a lot more infilling drilling still to be done. And we've also got a lot of extensional drilling to do because Taylor is open in multiple directions where it's not closed off. So I think from our perspective, love the commodity, love the jurisdiction and love the fact that we believe it can be a mine that's around for 40 to 50 years.

Okay. And let's stay on Hermosa. You mentioned in your opening remarks some of the things that have changed since the FID, including tariffs. And then you mentioned the upside around the mine life extension there. What are the key things that you didn't anticipate when you FID that project?

Yes. I think buying and developing a project always comes with risk and opportunity. If you think about the risk for us at the time of buying it, obviously, there's a lot of uncertainty around the geology and the resource. There was an early surprise in the early years around the amount of water we thought was going to be vastly more than we expected it was going to be. And then obviously, you build and study a project over probably 5 to 7 years by the time you do it. And obviously, permitting risk in the U.S. is generally talked about. Whereas, if we sort of tackle these one by one, and then I'll come back to where we're at today, if you have to think about permitting risk, we're on track to get our record of decision in the back half of this calendar year. We can actually build Taylor today and run it for 10 years, but the federal approval will actually -- because that's all state approvals, and we already have those, but the federal approval will allow us to build the next tailing facilities in about 10 years. It will allow us to actually connect power, if you like, across the Coronado state from National Forest, which gives us cheaper access to power, potentially renewable power. But it also allows us to start exploring more, in depth, things like Peake and there's probably about another 15 targets we want to explore on the property. So that's the importance of the federal approval for us. We were the first project in the U.S. mining industry that got into the FAST-41, and it's been a fantastic process for us. It's a dream process. It doesn't change the amount of work you do. There's probably a lot more scrutiny on it, but it certainly accelerates the program and it puts you in a really good position to handle litigation when it comes because of the depth of work that's done. So permitting has been a big tick for us, which is a risk at the start. Water funnily enough was one of the delays and one of the capital cost increase when we actually went to the FID decision for Taylor. It turns out now that we actually got the water wells running, we're probably only going to have about half the water we thought we're going to have, which is great going forward. So less free handling and less worrying around the risk. So I think that's a positive. The resource, like I said, continues to grow at Taylor. If you think about something like Cannington, [ I'll share my age I was even ] when we actually built Cannington. We talked about Cannington has a 15-year mine life. It's probably been going now for about 28 years. We're talking about another 7 to 8 years easily and probably extending another 4 or 5 potentially on that. Taylor has the ability to grow longer and stronger than that and also at a very good production rate of about 4.3 million tonnes through that operating mill. But over time, we think we can probably grow that by 1 million tonnes as well. So I think it has all the optionality, how you make money in our industry. It's a large resource. It's expandable. It's in a good commodity and it's got growth options and [indiscernible]. And that's before we even think about Peake, Clark and the other things that are around it. So I think the resource has been an upside. What has been a challenge for us is sinking the 2 shafts. The shafts have grown slower than we actually expected, not because of geotechnical conditions or water. It's been more a challenge around contractor performance, productivity sort of been more challenging for us. I think if you ask me about how the surface infrastructure was going 4 weeks ago, I would have said that's going really great. So the surface has sort of broken up into 4 packages. The first 3 packages of which the last one we led in February have all come in exactly on the fit estimate. The last one that's come in and also for the underground workshop, steel, concrete, et cetera, we've seen inflation hit in a big way where -- we're seeing cost increases, for example, on installed steel about 2.5x, concrete, electrical all ranging between 2 and 2.5x. Quantities are the same, the prices spiked, while not directly attributable to tariffs, our exposure there has been about $60-ish million. It's been more the general inflationary environment and tariff impact on steel, et cetera, that's had a big increase in our capital costs. But we think we've got that covered now with 80% of the project actually being committed or contracted or priced. And probably the 20% left, there's a large chunk of that, which is owner's cost and about a $230 million contingency and some minor equipment for the underground. But obviously, we need to execute and finish that project as well now.

Yes. And so Graham, you'll have all what South32 will have all this building mine expertise and permitting expertise in the U.S. In what scenario are you able to make the stars align so that team could possibly roll into the Trilogy JV and your Roosevelt project?

So that would be the ideal world. I mean, particularly already, we're having some transfer of skills around the permitting side and working with our JV partner there and trying to leverage some of those skills about how we accelerate that. That's an easy win to get today. I think the fact that you have to build an all-weather road that connects the Dalton Highway to the Ambler district is something in between that we didn't have to do it, Taylor. So I think the execution of that road, the permitting of that road will take a bit more time. It's got really good momentum now with basically AIDEA, which is the Development Corporation of Alaska investing money into the design, but also the permitting. We've got an MOU with the 2 large First Nations Corporations up there about how to take the road forward. That's all positive, heading in the right direction, but I think building that kind of all-weather road will take a period of time. So there's probably a bit of a gap between when we'll finish building at Taylor to when we're probably ready to start building at Ambler. How we fill that gap, I think, is going to be Matt's challenge.

Good. So let's pivot and talk about aluminum. It's been the best-performing commodity year-to-date, and we've seen the highest consensus upgrades. You've got tailwinds from higher pricing. Hillside was a really key cash contributor during the quarter, and it's about 60% of your Group emissions. How is that relationship with Eskom? And how do we think about the future of that asset post 2032?

Yes. Look, I mean, maybe a couple of comments on the commodity. Aluminum for us has always been an attractive story around demand. Demand has never been an issue. And I think that demand continues to increase. It's always been more about oversupply coming out of China. We're a firm believer in that cap of 45 million tonnes is real. We certainly don't see the government deviating from that. And some people ask us, do you think price will make a difference? The answer is no. I think they want to use their energy in a very considered way and exporting energy is probably not the intent of what the government is trying to do. I think that cap will keep tension. You'll see new developments in places like Indonesia, but you'll switch from a world where for probably the last couple of decades, 80% of the development of new smelting capacity has come out of China, where now it's going to switch to ex China. And while you will see some capital compression that the Chinese can take to Indonesia, it's not going to be to the same magnitude. And certainly, you're not seeing subsidized cheap power that you're seeing in China. So I think that reinforces you need a strong aluminum price to sort of induce new supply. In the short term, obviously, in the Middle East, what's going on in Europe is sort of pushing prices up. And potentially, that's got another 18 to 24 months to play out, which for our side, we will continue to see attractive pricing and to your point, will generate strong cash. I guess our one downside is we'd love both Hillside and Mozal to be running because they're both strong cash flow generators in this environment. If we talk about Hillside and take a step back, actually, just came from Hillside's 30-year anniversary. And at that 30-year anniversary, the original opening of Hillside had the passed away President Mandela opened that and talked about the economic transformation of the country. We were really pleased that President Ramaphosa came down for the opening as well as 2 of these big cabinet ministers and a whole lot of other important people that form part of the ANC and [indiscernible] politics. The one message that came out of that from the President and the Energy Minister was a strong belief around how Hillside continues -- has to continue to operate and a key component of that is going to be affordable, lower carbon power. And we have some great photos of the Energy Minister and our CEO, Noel, if you like, on the stage, having a hug. So I think the sentiment was really positive. From our side, Hillside can run for another 30, 40 years. It's technically despite load shedding runs at its technical limit. I think it's some of our best people across the business. makes a really big difference in the local economy, so that's well supported by people there. I think the key is can we get another power contract. The power contract expires in 2031. We've been working with Eskom on this on joint working groups now for about 5 years, and absolutely feels like it's heading in the right direction, but obviously getting pen to paper is the next opportunity.

Okay. Got it. So let's go back and talk about the other hot commodity, copper. Let's talk about Sierra Gorda. So 2 questions for you there. Are we still on track for that FID for the Fourth Grinding Line by the middle of the calendar year? And then how do we think about Catabela East? That exploration target, it seems to have a much higher grade than the current resource, but it seems to be a bit steeper.

Yes. So a couple of good questions. I'll start with what's the one thing we'd love to own more of Sierra Gorda, not because we don't like our partner, KGHM, but we just think it's an asset in the right jurisdiction. It's the right commodity and it has lots of opportunity to improve, not only today's performance around productivity, but also how you can grow that business. To your point, you've got the Fourth Grinding Line now, which is on track to be approved by both joint venture partners midyear this year. We've completed the technical review from both sides jointly. We've had good strong dialogue. It will be self-funded by the joint venture. It's pretty much a no-brainer to actually do that project. So that's the first, if you like, piece of growth. On top of that, we've got about 110 million tonnes of oxide material sitting on the surface, which obviously that's an opportunity for us to sort of take that to the next step. Catabela itself is the current pit. And before we talk about Catabela Northeast, it's worth noting that Catabela itself is still open at depth. So there's an opportunity to grow that. But to your point, we have had a large discovery next door called Catabela Northeast. The grades look attractive at about 0.45, it's about a 1.1 billion tonne resource. It's still open at depth in multi-directions. Our plan over the next 6 to 12 months is to do more step-out drilling to really understand the potential of what we have there. So you've got Catabela, you've got the Fourth Grinding Line, you've got the oxide material. You've got Catabela Northeast, which looks like a very large resource, and that continues to push towards Spence. So there's obviously the question about do you do something together in that shape. That's something that we think over time is worth pursuing as well.

Okay. Got it. And under your watch, the portfolio has been transformed and cleaned up. You've got less assets. You've cleaned up the commodity mix. You've changed the regions where earnings are coming from. Is there anything that you still see as noncore in that portfolio? Or is that something you're handing over to Matt?

Yes. Look, I mean, I think there's always more to be done. To your point, when we started from the demerger from BHP, obviously, we had no growth options, but we also had some challenging assets. We've actually sold out of energy coal, South Africa. We've sold out of manganese alloys, South Africa, manganese alloys Australia, Cerro Matoso, Illawarra. We've brought in more exposure to green aluminum. We bought in Sierra Gorda, bought in Arizona. To give you a sense of that portfolio change in numbers, when we started the business, it was probably 50% bulks, thermal and met coal and 50% predominantly aluminum. Where are we today? It's probably about 80% exposure to base metals, including aluminum, but growing still all the time. But also geographically, it used to be about 50% -- probably about 45% Australia, 40% Southern Africa and the rest is in South America. If you look at where we're going to be in the next couple of years, more than 50% of the earnings will come out of the Americas. And it's a very changed portfolio. There's still things to be done on that space. I mean I think longer term for us, we look at our manganese business, we like GEMCO. It's the best asset in that industry, has been for a long time. Obviously, been a place that's been in with a number of cyclones over the last couple of years and more rainfall than we've ever seen, probably in a year we've got than we've seen in a decade we've had any year. So we're dealing with some water issues on the island at the moment. But it's a Tier 1 asset in that industry. Our South African business, there's always a question about is that better held in someone else's hands around consolidation potentially. But at the moment, our partners in that Ambler not interested in pursuing that. So we're sort of working our way through how do we make the best of what we have -- most of what we have. I think the challenge for Matt and the team going forward is how do we continue to add more copper and zinc units because everyone is chasing pretty much the same thing.

Yes. Got it. I'd like to hand over to the floor for Q&A, just cognizant of time. If you ask a question if you raise your hand and we will get a microphone to you. So while we're waiting for questions, Graham, you're due to step down as CEO and hand over to Matt. What are the key takeaways or advice that you're leaving for him as incoming CEO?

Yes. Look, I think that's an interesting question. I mean, I guess what I've been focused on is how do I set Matt up for success. As you've been in the role probably 12 years almost now and obviously was involved in the set up in the early days emerging from South32. So I think for me, it's a different portfolio than what we started with. It's a different business than what we started with. I think as we go forward, there's still things to be done on the portfolio. But I think my advice to Matt would be to play to his strengths and Matt's strengths really are around his engagement with people, his technical capability and how we can squeeze more out of the operations and make things like Taylor the best it can possibly be. I mean that's really where Matt cut his teeth at things like [ man eyes ] at time. So I think that's the stuff that's really going to create a lot of value for our shareholders. I think we have some really great people for the journey. But obviously, as you move into that next stage of delivering on major projects into operation and commissioning, that's some new skill sets, so we have to continue to update.

Question at the back.

Graham, I remember sitting at a Melbourne Mining Club dinner in London more than a decade ago where Lionel Barber cheekily said to you, how does it feels to be CEO of CrapCo. I'd love to hear what you tell Lionel today with the benefit of hindsight.

Yes, I remember that. I mean that felt like a long time ago now. And in fact, on day one when we demerged, I got interviewed by the ABC in Australia by a lady called Ticky and shared words with her around run Shipco. So I think the names around ShipCo and CrapCo, I mean, obviously, are names that stung at the time, and I think that gave our people some drive to actually make a difference. Look, I think what I would say, today, is the portfolio is very different. It's long in growth options. You've got exposure to the right commodities, to the right jurisdictions. But let's be honest, this industry is not an easy industry. If you think about that transformation and Karen Wood, who is our second Chair, but on the Board pretty much in day 1, stepped down recently, and she found an old note that I wrote about these are all the things that we need to change on the portfolio. And she sort of took a great pride in saying that you've done all those things you said day one. I won't tell you what that one is. But then I said, yes, but I said I could do it in 5 years. It took me 11 years. So it's just a reminder in our industry how hard it is to actually move, change your portfolio base. It's not easy. I think we have been blessed when we demerged from BHP that CEO at the time, Andrew Mackenzie sort of gave me open slather on people, which is great for him. So we really have some high-caliber people run our business that I think have made a real difference over that period of time. And I think what I'd say to Lionel would be, look, the quality of the people, I think, has made a real difference here in sort of upgrading the quality of the portfolio. Still more work to be done, but I think it's been a quantum change by those people, and I'm thankful for that what they have done.

Before we wrap up, thank you, Graham. I'd just like to have a plug for our cocktails at 5:00 p.m. on Level 2 at the rooftop terrace if you want to chat to us some more. Please join me in thanking Graham for his incredible career, and thank you for coming.

Thank you.