Quarterly Report December 2018
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
• FY19 production guidance remains unchanged for all operations with the exception of Illawarra Metallurgical Coal where improved longwall performance has underpinned a 7% increase to our prior estimate.
• Achieved record ore production at Australia Manganese in the December 2018 half year as the primary circuit maintained high utilisation rates and the PC02 circuit operated at 120% of design capacity.
• Increased premium ore production at South Africa Manganese, partially offsetting a decline in fine grained secondary products.
• Benefitted from improved calciner availability and the opportunistic sale of three shipments of stockpiled hydrate with saleable production increasing by 23% at Worsley Alumina in the December 2018 quarter.
• Maintained saleable aluminium production despite an increase in the frequency of load-shedding events at Hillside Aluminium and Mozal Aluminium during the December 2018 half year.
• Finalised plans for the Klipspruit dragline to return to service by the end of January 2019, enabling a strong recovery in export volumes at South Africa Energy Coal in the June 2019 half year.
"We achieved a strong quarter of production, maintaining full year guidance for all operations with the exception of Illawarra Metallurgical Coal where improved longwall performance has underpinned a seven per cent increase to our prior estimate.
"We achieved record production at Australia Manganese as our PC02 circuit continued to exceed its design capacity, delivering additional tonnes into a strong market.
"Our plans to transform the ownership of South Africa Energy Coal remain on track, with binding bids expected in the June 2019 half year.
"As we have benefitted from strong prices for our core commodities we have continued to return cash to shareholders. In the December 2018 half year we distributed US$316M in dividends and allocated US$167M to our on-market share buy-back."
Graham Kerr, South32 CEO
Production summary | |||||||
South32's share | 1H18 | 1H19 | HoH | 2Q18 | 1Q19 | 2Q19 | QoQ |
Alumina production (kt) | 2,541 | 2,542 | 0% | 1,262 | 1,159 | 1,383 | 19% |
Aluminium production (kt) | 495 | 495 | 0% | 246 | 248 | 247 | (0%) |
Energy coal production (kt) | 14,001 | 12,929 | (8%) | 6,987 | 6,560 | 6,369 | (3%) |
Metallurgical coal production (kt) | 1,282 | 3,082 | 140% | 788 | 1,515 | 1,567 | 3% |
Manganese ore production (kwmt) | 2,830 | 2,886 | 2% | 1,526 | 1,447 | 1,439 | (1%) |
Manganese alloy production (kt) | 118 | 109 | (8%) | 62 | 52 | 57 | 10% |
Payable nickel production (kt) | 21.8 | 21.1 | (3%) | 10.1 | 10.7 | 10.4 | (3%) |
Payable silver production (koz) | 5,175 | 6,067 | 17% | 2,412 | 3,185 | 2,882 | (10%) |
Payable lead production (kt) | 49.4 | 48.3 | (2%) | 23.6 | 25.8 | 22.5 | (13%) |
Payable zinc production (kt) | 20.2 | 26.3 | 30% | 9.2 | 13.2 | 13.1 | (1%) |
Unless otherwise noted: percentage variance relates to performance during the half year ended December 2018 compared with the half year ended December 2017 (HoH) or the December 2018 quarter compared with the September 2018 quarter (QoQ); production and sales volumes are reported on an attributable basis.
Corporate Update
• The process to transform the ownership of South Africa Energy Coal progressed in the December 2018 quarter with binding bids expected in the June 2019 half year.
• We received net distributions1 of US$262M (South32 share) from our manganese equity accounted investments (EAI) during the December 2018 half year as achieved prices continued to reflect the respective ore indices2.
• In accordance with our disciplined capital management framework we paid our US$316M final dividend in respect of FY18 in October 2018 and purchased a further 68M shares for a cash consideration of US$167M during the December 2018 half year. To 31 December 2018, we had completed 79% of our US$1B capital management program, having paid a US$154M special dividend on 5 April 2018 and purchased 272M shares at a volume weighted average price of A$3.09 per share through our on-market share buy-back.
• The primary corporate tax rates applicable to the Group include: Australia 30%, South Africa 28%, Colombia 34%3, Mozambique 0%3 and Brazil 34%. The disproportionate effect of permanent differences can, however, impact the Effective Tax Rate (ETR) of the Group when margins are compressed, or losses are incurred in specific jurisdictions given these differential tax rates and intragroup agreements. For this reason, we now expect the Group's ETR (excluding EAI) for the December 2018 half year to increase to between 35% and 40%. This rate is expected to decline in the June 2019 half year, particularly if the alumina to aluminium price ratio falls from its currently elevated level. Separately, the Group made tax payments totalling US$207M (excluding EAI) during the December 2018 half year.
Production guidance (South32's share)
Worsley Alumina
Alumina production (kt)
Brazil Alumina Alumina production (kt)
Hillside Aluminium Aluminium production (kt)
Mozal Aluminium Aluminium production (kt)
South Africa Energy Coal4
Energy coal production (kt)
Domestic coal production (kt)
Export coal production (kt)
Illawarra Metallurgical Coal Total coal production (kt)
Metallurgical coal production (kt)
Energy coal production (kt)
Australia Manganese Manganese ore production (kwmt)
South Africa Manganese Manganese ore production5 (kwmt)
Cerro Matoso
Payable nickel production (kt)
Cannington
Payable zinc equivalent production6 (kt)
Payable silver production (koz)
Payable lead production (kt)
Payable zinc production (kt)
The denotation (e) refers to an estimate or forecast year.
FY18
1H19
FY19e
3,764 1,304
1,906
636 360 135
Comments
3,9651,355
712 271
720269
27,271 15,154 12,117
12,171 7,731 4,440 3,840
29,000 17,500 11,500
4,244
↑6,500
3,165 1,079 3,396 2,145
3,082 758
↑5,200 ↑1,300
Improved longwall performance with two moves scheduled in the March 2019 quarter
1,811 1,075
3,350 2,050
Subject to market demandSubject to market demand
43.8
21.1
40.5
187.2 12,491 104.4 41.3
95.2 6,067 48.3 26.3
188.111,75098.051.0
Marketing Update
Realised prices7 | 1H18 | 2H18 | 1H19 | 1H19 vs 1H18 | 1H19 vs 2H18 |
Worsley Alumina | |||||
Alumina (US$/t) | 354 | 429 | 457 | 29% | 7% |
Brazil Alumina |
Alumina (US$/t) | 370 | 449 | 504 | 36% | 12% |
Hillside Aluminium | |||||
Aluminium (US$/t) | 2,134 | 2,313 | 2,144 | 0% | (7%) |
Mozal Aluminium | |||||
Aluminium (US$/t) | 2,218 | 2,386 | 2,171 | (2%) | (9%) |
South Africa Energy Coal | |||||
Domestic coal (US$/t) | 24 | 25 | 22 | (8%) | (12%) |
Export coal (US$/t) | 76 | 82 | 83 | 9% | 1% |
Illawarra Metallurgical Coal | |||||
Metallurgical coal (US$/t) | 189 | 211 | 207 | 10% | (2%) |
Energy coal (US$/t) | 71 | 82 | 68 | (4%) | (17%) |
Australia Manganese8 | |||||
Manganese ore (US$/dmtu, FOB) | 5.96 | 6.80 | 6.59 | 11% | (3%) |
South Africa Manganese9 | |||||
Manganese ore (US$/dmtu, FOB) | 4.57 | 5.90 | 5.85 | 28% | (1%) |
Cerro Matoso10 | |||||
Payable nickel (US$/lb) | 5.20 | 6.49 | 5.27 | 1% | (19%) |
Cannington | |||||
Payable silver (US$/oz) | 16.8 | 16.4 | 14.7(a) | (13%) | (10%) |
Payable lead (US$/t) | 2,517 | 2,409 | 1,625(a) | (35%) | (33%) |
Payable zinc (US$/t) | 3,192 | 3,176 | 2,120(a) | (34%) | (33%) |
(a)
H1 FY19 realised prices for Cannington reflect the Group's adoption of AASB 15 Revenue from Contracts with Customers, with revenue recognised net of treatment and refining charges, which will no longer be treated as an expense item. These changes result in lower realised prices and Operating unit costs, with no net impact to earnings. Prior period realised prices have not been restated to reflect these changes.
Development and Exploration Update
• We remain on track to declare a Mineral Resource11 for the Hermosa project in accordance with the JORC Code during the June 2019 half year.
• We completed our review of the Eagle Downs metallurgical coal project's development plan during the December 2018 quarter and commenced the feasibility study ahead of a final investment decision scheduled for H2 CY20.
• We invested US$26.9M in exploration programs during the December 2018 half year, of which US$10.6M was capitalised (including US$0.9M for our EAI) and US$7.9M was directed to our portfolio of high quality, early stage greenfield exploration projects.
Worsley Alumina
(86% share)
South32's share 1H18 | 1H19 HoH | 2Q18 | 1Q19 2Q19 | 2Q19 vs 2Q18 | 2Q19 vs 1Q19 |
Alumina production (kt) | 1,865 | 1,906 | 2% | 923 | 854 | 1,052 | 14% | 23% |
Alumina sales (kt) | 1,886 | 1,885 | (0%) | 920 | 850 | 1,035 | 13% | 22% |
Worsley Alumina saleable production increased by 2% (or 41kt) to 1,906kt in the December 2018 half year as the refinery benefitted from improved calciner availability in the December 2018 quarter and three shipments of stockpiled hydrate were sold opportunistically at alumina equivalent rates. FY19 production guidance remains unchanged at 3,965kt with calciner maintenance scheduled for the March 2019 quarter.
The average realised price for alumina sales in the December 2018 half year was a discount of approximately 10% to the Platts Alumina Index (PAX)12 on a volume weighted M-1 basis. This discount reflects the structure of specific legacy supply contracts with our Mozal Aluminium smelter that are linked to the LME aluminium price and the elevated alumina to aluminium price ratio in the spot market. All alumina sales to other customers were at market based prices.
Brazil Alumina
(36% share)
2Q19 | 2Q19 | |||||||
South32's share | 1H18 | 1H19 | HoH | 2Q18 | 1Q19 | 2Q19 | vs | vs |
2Q18 | 1Q19 | |||||||
Alumina production (kt) | 676 | 636 | (6%) | 339 | 305 | 331 | (2%) | 9% |
Alumina sales (kt) | 649 | 619 | (5%) | 316 | 302 | 317 | 0% | 5% |
Brazil Alumina saleable production decreased by 6% (or 40kt) to 636kt in the December 2018 half year as unplanned maintenance and power outages impacted performance. FY19 production is expected to approach guidance of 1,355kt with the refinery anticipated to creep production over the remainder of the year following the completion of the De-bottlenecking Phase One project in March 2018.
Hillside Aluminium
(100%)
South32's share 1H18 | 1H19 HoH | 2Q18 | 1Q19 2Q19 | 2Q19 vs 2Q18 | 2Q19 vs 1Q19 |
Aluminium production (kt) | 358 | 360 | 1% | 178 | 180 | 180 | 1% | 0% |
Aluminium sales (kt) | 344 | 360 | 5% | 182 | 178 | 182 | 0% | 2% |
Hillside Aluminium saleable production increased by 1% (or 2kt) to 360kt in the December 2018 half year as the smelter continued to test its maximum technical capacity, despite an increase in the frequency of load-shedding events. FY19 production guidance remains unchanged at 720kt.
Notwithstanding the smelter's strong operating performance, a reduction in aluminium prices and still elevated alumina, pitch and coke input costs are expected to result in a loss in the December 2018 half year.
Mozal Aluminium
(47.1% share)
South32's share 1H18 | 1H19 HoH | 2Q18 | 1Q19 2Q19 | 2Q19 vs 2Q18 | 2Q19 vs 1Q19 |
Aluminium production (kt) | 137 | 135 | (1%) | 68 | 68 | 67 | (1%) | (1%) |
Aluminium sales (kt) | 147 | 129 | (12%) | 82 | 59 | 70 | (15%) | 19% |
Mozal Aluminium saleable production decreased by 1% (or 2kt) to 135kt in the December 2018 half year as the smelter's operating performance was impacted by an increase in the frequency of load-shedding events. Aluminium sales decreased by 12% with the scheduling of shipments between periods resulting in a temporary build of finished goods inventory during the December 2018 half year. FY19 production guidance remains unchanged at 269kt.
Notwithstanding the smelters strong operating performance, higher prices for alumina and still elevated prices for pitch and coke continue to impact its cost base and erode operating margin. The smelter sources alumina from our Worsley Alumina refinery with approximately 50% of its requirements priced as a percentage of the LME aluminium index, providing it with some relief during the December 2018 half year.
South Africa Energy Coal
(100%)
2Q19 | 2Q19 | |||||||
South32's share | 1H18 | 1H19 | HoH | 2Q18 | 1Q19 | 2Q19 | vs | vs |
2Q18 | 1Q19 | |||||||
Energy coal production (kt) | 13,423 | 12,171 | (9%) | 6,734 | 6,170 | 6,001 | (11%) | (3%) |
Domestic sales (kt) | 7,334 | 7,749 | 6% | 3,546 | 4,103 | 3,646 | 3% | (11%) |
Export sales (kt) | 5,865 | 4,206 | (28%) | 3,117 | 1,923 | 2,283 | (27%) | 19% |
South Africa Energy Coal saleable production decreased by 9% (or 1,252kt) to 12.2Mt in the December 2018 half year. Export production was impacted by the dragline incident at Klipspruit in August 2018, while domestic production benefitted from the commencement of a contract to sell lower quality stockpiled product in the June 2018 quarter.
FY19 production guidance remains unchanged at 29Mt (17.5Mt domestic, 11.5Mt Export), with the Klipspruit dragline expected to return to service by the end of January, underpinning an increase in export volumes in the June 2019 half year. Domestic volumes are also expected to benefit from a further increase in the sale of lower quality stockpiled product and implementation of a new shift pattern at Khutala.
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South32 Ltd. published this content on 17 January 2019 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 16 January 2019 22:53:03 UTC