South32 : Quarterly Report December 2020

Quarterly Report

December 2020

South32 Limited (Incorporated in Australia under the Corporations Act 2001 (Cth))

(ACN 093 732 597) ASX, LSE, JSE Share Code: S32 ADR: SOUHY ISIN: AU000000S320

• Achieved record year to date production at Worsley Alumina with output above nameplate capacity as the refinery benefitted from on-going improvement initiatives.
• Set a year to date production record at Brazil Alumina as the refinery continued to achieve high levels of plant availability, despite planned maintenance.
• Delivered another record for year to date ore production at Australia Manganese as the performance of our high-grade circuit improved.
• Increased production at Illawarra Metallurgical Coal by 11% in the December 2020 half year as the operation continued to benefit from the return to a three longwall configuration.
• Increased FY21 production guidance at Cannington by 5% with underground performance supporting the accelerated extraction of a higher-grade mining sequence.
• Approved an early development timetable for the low capital, higher-grade Q&P project at Cerro Matoso, increasing FY21 and FY22 production guidance by 3% and 13% respectively.

• Determined not to proceed with development of the

Eagle Downs Metallurgical Coal project, with the project placed on hold while we assess options for our joint venture interest.

• Entered into a binding agreement to sell a portfolio of non-core minerals royalties to Elemental Royalties Corp.
• Progressed the sale of South Africa Energy Coal during the quarter,

receiving approval from the Competition Tribunal of South Africa and advancing discussions with Eskom to meet the material outstanding conditions.

• Following the end of the quarter, completed the sale of GEMCO's shareholding in the TEMCO manganese alloy smelter.

"During the quarter, we adjusted to the

different phases of the COVID-19 pandemic in the regions where we operate, focussing on keeping our people safe and well, maintaining safe and reliable operations and supporting

our communities.

"This was another period of strong operating performance across our business, with three of our operations setting production records for the half year. I'm pleased that the efforts of our people during this challenging period have enabled us to achieve a strong result, and increase our full year productionguidance for Cannington and Cerro Matoso.

"We're in a strong financial position, resuming our on-market share buy-back program in October. Our unchanged capital management framework and disciplined approach to capital allocation is designed to reward shareholders as supportive marketconditions translate to financial performance.

"The ongoing transformation of our portfolio continues to gain momentum as we focus on exiting lower returning businesses and work towards increasing our base metalsexposure."

Graham Kerr, South32 CEO

	Production summary
	South32 share	1H20	1H21	HoH		2Q20	1Q21	2Q21	QoQ
	Alumina production (kt)	2,635	2,716	3%		1,327	1,315	1,401	7%
	Aluminium production (kt)	496	496	0%	248	248	248	0%
	Energy coal production (kt)	12,621	12,077	(4%)	5,898	6,771	5,306	(22%)
	Metallurgical coal production (kt)	2,859	3,262	14%	1,208	1,863	1,399	(25%)
	Manganese ore production (kwmt)	2,813	2,920	4%	1,398	1,461	1,459	(0%)
	Manganese alloy production (kt)	91	51	(44%)	47	27	24	(11%)
	Payable nickel production (kt)	20.6	16.1	(22%)	10.0	10.0	6.1	(39%)
	Payable silver production (koz)	6,164	5,993	(3%)	3,192	2,863	3,130	9%
	Payable lead production (kt)	55.3	57.6	4%	28.8	26.4	31.2	18%
	Payable zinc production (kt)	32.5	30.4	(6%)	14.1	12.4	18.0	45%

Unless otherwise noted: percentage variance relates to performance during the half year ended December 2020 compared with the half year ended December 2019 (HoH) or the December 2020 quarter compared with the September 2020 quarter (QoQ); production and sales volumes are reported on an attributable basis.

SOUTH32 QUARTERLY REPORT DECEMBER 2020

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Corporate Update

• We continue to respond to COVID-19, adjusting to the different phases of the pandemic across the jurisdictions where we operate, focussing on keeping our people well, maintaining safe and reliable operations and supporting our communities. Additional COVID-19 protocols implemented at many shipping ports globally have resulted in congestion and delays, which combined with adverse weather, are expected to contribute to a temporary build in working capital during the December 2020 half year.
• Industry cost curves continue to steepen as a result of US dollar weakness, which provides further support for markets. While our Operating unit costs are tracking to plan on the basis of previously disclosed exchange rate and commodity price assumptions1, we will experience cost inflation should these external pressures persist across the remainder of the year. Updated unit cost guidance for FY21 will be provided with our December 2020 half year results.
• We also expect to see an increase in our US dollar denominated lease balance as at 31 December 2020, with the majority of the Group's lease liabilities financed in Australian dollars.
• We received net distributions2 of US$52M (South32 share) from our manganese equity accounted investments (EAI) in the December 2020 half year as timing differences, that are expected to unwind in the June 2021 half year, resulted in excess cash being retained in our EAI.
• Our strong financial position and operating performance enabled us to lift the suspension of our on-market share buy-back and we spent US$112M purchasing a further 66M shares at an average price of A$2.34 per share during the December 2020 half year. To 31 December 2020 our US$1.43B capital management program was 99% complete with US$9M remaining to be returned to shareholders by way of our on-market share buy-back, ahead of its extension or expiry on 3 September 20213. We also paid our US$48M final dividend in respect of FY20 in October 2020.
• We entered into a binding agreement to sell a portfolio of non-core minerals royalties to Elemental Royalties Corp. (Elemental, TSX-V:ELE) for US$40M in cash and US$15M in Elemental shares. The sale is expected to complete in the March 2021 quarter, following the satisfaction of outstanding conditions.
• Following the end of the quarter we completed the sale of GEMCO's shareholding in the TEMCO manganese alloy smelter to an entity within GFG Alliance. The effective completion date of the sale for accounting purposes was 31 December 2020.
• We received approval from the Competition Tribunal of South Africa for the sale of our shareholding in South Africa Energy Coal to Seriti Resources Holdings Proprietary Limited (Seriti)4 on 23 December 2020. While the transaction remains subject to material conditions including approvals from Eskom SOC Limited5, we continue to make progress towards achieving these and are currently targeting completion during the March 2021 quarter.
• We continue to pursue cost reductions through our exit of lower returning businesses and ongoing simplification of the Group's functional structures and office footprint, to deliver a further US$50M in annualised savings beyond FY22. In support of these changes, one-off,pre-tax restructuring costs (including redundancies and lease break fees) of approximately US$17M (post tax ~US$13M, South32 share) are anticipated. We also expect to a book pre-tax,non-cash impairment charge of approximately US$36M (post-tax ~US$25M) to reflect the deferral of an update to our information technology systems as a result of travel restrictions caused by COVID-19. These unaudited charges will be excluded from Underlying earnings in our December 2020 half year financial results.
• Our geographical earnings mix will continue to have a significant bearing on our effective tax rate (ETR) given differing country tax rates6, while the impact of intragroup agreements, exploration expenditure in foreign entities and other permanent differences will be magnified when margins are compressed or losses are incurred in specific jurisdictions. Until it is sold, South Africa Energy Coal is expected to have an ETR of 0%, with all tax assets de-recognised and no benefit to be recorded for losses made prior to its planned divestment timing. Accordingly, our Group Underlying ETR for the December 2020 half year is expected to be in a range between 45% and 55% (excluding EAI). Separately, we expect the underlying ETR of our manganese EAI to be in a range between 55% and 65% in the December 2020 half year following the de-recognition of certain deferred tax assets in the period.

Development and Exploration Update

• Following completion of the Eagle Downs Metallurgical Coal feasibility study in the December 2020 quarter, we have determined not to proceed with the project at this time. While the study indicated the potential for a long-life operation, the expected returns do not currently support the allocation of capital in accordance with our capital management framework. The project has been placed on hold while the partners assess options that may include the divestment of our 50% interest.
• We directed US$7M to exploration programs at Hermosa in the December 2020 half year despite drilling activity being impacted by COVID-19 restrictions in the state of Arizona. We continue to progress our pre-feasibility study for the Taylor Deposit and scoping study for the Clark Deposit with the Taylor pre-feasibility study expected to be concluded in the June 2021 quarter.
• Consistent with our strategy to partner with companies to fund early stage greenfield exploration opportunities, we invested US$8M during the December 2020 half year.
• We directed US$19M towards exploration programs at our existing operations and development options in the December 2020 half year (US$15M capitalised), including US$2M for our EAI (US$1M capitalised) and US$7M at Hermosa as noted above (all capitalised).

SOUTH32 QUARTERLY REPORT DECEMBER 2020

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Production Summary

	Production guidance		FY20		1H21		FY21e(a)			Comments
	(South32 share)
	Worsley Alumina
	Alumina production (kt)	3,886	2,010	3,965
	Brazil Alumina
	Alumina production (kt)	1,383	706	1,370
	Hillside Aluminium7
	Aluminium production (kt)	718	361	720
	Mozal Aluminium7
	Aluminium production (kt)	268	135	273
	South Africa Energy Coal
	Energy coal production (kt)	22,672	11,243		15,800 - 16,400	Updated to reflect expected production
	Domestic coal production (kt)	12,552	6,561		9,300 - 9,700
		for the March 2021 quarter
	Export coal production (kt)	10,120	4,682		6,500 - 6,700
	Illawarra Metallurgical Coal
	Total coal production (kt)	7,006	4,096	7,700
	Metallurgical coal production (kt)	5,549	3,262	6,400
	Energy coal production (kt)	1,457	834	1,300
	Australia Manganese
	Manganese ore production (kwmt)	3,470	1,834	3,500		Subject to market demand
	South Africa Manganese
	Manganese ore production8 (kwmt)	1,878	1,086	2,000		Subject to market demand
	Cerro Matoso
	Payable nickel production (kt)	40.6	16.1		↑34.6	Approval of an early development
		timetable for the Q&P project
	Cannington
	Payable zinc equivalent production9 (kt)	332.6	167.3		↑347.2

Payable silver production (koz)	11,792	5,993	↑12,600
Payable lead production (kt)	110.4	57.6	↑119.2
Payable zinc production (kt)	66.7	30.4	↑61.6

Underground performance supporting the acceleration of a higher-grade mining sequence

1. The denotation (e) refers to an estimate or forecast year. All guidance is subject to further potential impacts from COVID-19. South Africa Energy Coal guidance is provided for 9M YTD21.

SOUTH32 QUARTERLY REPORT DECEMBER 2020

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Marketing Update

				1H21	1H21
Realised prices10	1H20	2H20	1H21	vs	vs
				1H20	2H20
Worsley Alumina
Alumina (US$/t)	322	269	278	(14%)	3%
Brazil Alumina
Alumina (US$/t)	301	274	277	(8%)	1%
Hillside Aluminium
Aluminium (US$/t)	1,859	1,678	1,882	1%	12%
Mozal Aluminium
Aluminium (US$/t)	1,914	1,723	1,943	2%	13%
South Africa Energy Coal
Domestic coal (US$/t)	23	26	28	22%	8%
Export coal (US$/t)	55	50	43	(22%)	(14%)
Illawarra Metallurgical Coal
Metallurgical coal (US$/t)	154	138	107	(31%)	(22%)
Energy coal (US$/t)	53	49	31	(42%)	(37%)
Australia Manganese11
Manganese ore (US$/dmtu, FOB)	4.49	4.27	3.93	(12%)	(8%)
South Africa Manganese12
Manganese ore (US$/dmtu, FOB)	3.81	3.68	3.49	(8%)	(5%)
Cerro Matoso13
Payable nickel (US$/lb)	6.77	4.81	6.29	(7%)	31%
Cannington14
Payable silver (US$/oz)	17.5	15.6	26.0	49%	67%
Payable lead (US$/t)	1,869	1,445	1,744	(7%)	21%
Payable zinc (US$/t)	1,591	1,231	2,228	40%	81%

SOUTH32 QUARTERLY REPORT DECEMBER 2020

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