South32 (ASX:S32)

Graham Kerr
Market Cap (AUD): 9.45B
Sector: Materials
Last Trade (AUD): 1.95 +0 (+0%)
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1. About

South32 is a globally diversified mining and metals company. The Company produces bauxite, alumina, aluminium, energy and metallurgical coal, manganese, nickel, silver, lead and zinc at its operations in Australia, Southern Africa, and South America. The Company is also the owner of a high-grade zinc, lead and silver development option in North America and have several partnerships with junior explorers with a focus on base metals. Its purpose is to make a difference by developing natural resources, improving people’s lives now and for generations to come and to be trusted by its owners and partners to realise the potential of their resources.

2. Business model


The Company operates the following divisions:[1]



Revenue ($M)

% of total Revenue

% of Profit (before Int, Tax, Depn & Amort)

Profit drivers[2]

Worsley Alumina




  • Underlying EBIT increased by 165% (or US$263 M) in FY18 to US$422 M. A 36% rise in the average realised price of alumina (+US$388 M) was partially offset by an increase in the caustic soda price (-US$66 M), lower sales volumes (-US$21 M), a stronger Australian dollar (-US$13 M and higher contractor costs (-US$12 M)
  • Sustaining capital expenditure increased by US$9 M in FY18 to US$52 M as the Company invested in additional bauxite residue disposal capacity and boiler maintenance

South Africa Aluminium




  • Underlying EBIT decreased by three% (or US$6 M) in FY18 to US$213 M as a 20% increase in the average realised price of aluminium (+US$262 M) was offset by higher alumina, pitch and coke input costs (-US$199 M), a rise in aluminium price-linked electricity costs (-US$31 M) and a stronger South African rand (-US$19 M)
  • Sustaining capital expenditure increased by US$13 M in FY18 to US$28 M

Mozal Aluminium




  • Underlying EBIT increased 30 % (or US$23 M) in FY18 to US$99 M as a 20% increase in the average realised price of aluminium (+US$106 M) was partially offset by higher alumina, pitch and coke input costs (-US$47 M), and a rise in South African rand-linked electricity costs (-US$8 M)
  • Sustaining capital expenditure increased by US$4 M in FY18 to US$10 M and is expected to rise further to US$18 M in FY19.

Brazil Alumina




  • Alumina Underlying EBIT increased by 128 % (or US$88 M) in FY18 to US$157 M as a 40 % increase in the average realised price of alumina (+US$159 M) was partially offset by higher caustic soda (-US$18 M) and bauxite (-US$22 M) costs
  • Aluminium Underlying EBIT decreased by US$18 M in FY18 to a loss of US$21 M as its obligation to purchase electricity from Eletronorte was fulfilled during the period, following termination of the contract in December 2015

South Africa Energy Coal




  • Underlying EBIT increased by 30 % (or US$64 M) in FY18 to US$276 M as higher average realised prices (+US$228 M) were partially offset by general inflation (-US$43 M), an increase in activity and labour costs (-US$37 M), a stronger South African rand (-US$35 M) and a drawdown of inventory (-US$54 M)
  • Sustaining capital expenditure increased by US$46 M in FY18 to US$102 M as the Company continued to invest in new mining areas at the WMC
  • The Company also invested US$62 M in FY18 to progress the 4.3 B South African rand KPSX project

illawarra Metallurgical Coal




  • Underlying EBIT decreased by US$420 M in FY18 to a loss of US$62 M as lower sales volumes (-US$525 M) and one-off costs associated with the Appin mine restart plan (-US$23 M) more than offset higher average realised coal prices (+US$78 M), lower selling and distribution costs (+US$30 M), and lower price-linked royalties (+US$30 M)
  • Sustaining capital expenditure decreased by US$15 M in FY18 to US$89 M as underground development was impacted by the extended outage

Australia Manganese




  • Underlying EBIT increased by 39 % (or US$184 M) in FY18 to US$651 M. Higher realised ore and alloys prices (+US$202 M) and an increase in sales volumes (+US$58 M) were only partially offset by a rise in raw material input prices (coke, energy, diesel) (-US$16 M) and additional freight and marketing costs (-US$13 M)
  • Sustaining capital expenditure increased by US$20 M in FY18 to US$48 M and is expected to rise to US$75 M in FY19 as the Company continue to invest in additional tailings storage capacity

South Africa Manganese




  • Underlying EBIT increased by 69 % (or US$76 M) in FY18 to US$186 M as a significant improvement in ore and alloy prices (+US$107 M) was only partially offset by a stronger South African rand (-US$14 M), an increase in costs associated with opportunistic trucking (-US$14 M) and higher price-linked royalties (-US$5 M)
  • Sustaining capital expenditure increased by US$8 M in FY18 to US$17 M and is expected to rise to US$35 M in FY19 as the Company invest in mobile fleet and extract a boundary pillar at its Mamatwan mine.

Cerro Matoso




  • Underlying EBIT increased by US$136 M in FY18 to US$120 M as the higher average realised nickel price (+US$114 M) and rise in sale volumes (+US$68 M) were partially offset by an increase in price-linked royalties (-US$20 M) and energy costs (-US$9 M), which were mitigated by its energy optimisation strategy (+US$6 M)
  • Sustaining capital expenditure increased by US$8 M in FY18 to US$22 M as the higher grade La Esmeralda ore body was connected to the broader operation with the completion of a permanent access bridge





  • Underlying EBIT decreased by 41 % (or US$125 M) in FY18 to US$183 M as the decline in sales volumes (-US$221 M) was partially offset by higher average realised prices (+US$37 M), a reduction in negotiated treatment and refining charges (+US$38 M), lower royalty (+US$10 M) and logistics costs (+US$10 M)
  • Finalisation adjustments and the provisional pricing of Cannington concentrates increased Underlying EBIT by US$0.1 M in FY18 (FY17: US$4.1 M, H1 FY18: US$5.5 M)

Group and unallocated items/ elimination





Statutory adjustment





3. Strategy


Key strategies include:[3]


The most important thing the Company can all do is make sure that everyone goes home safe and well at the end of every shift. Together the Company will achieve this by creating an inclusive workplace where all work is well designed, and the Company continuously improve and learn

The Company will work together as one company. The Company will enroll all its stakeholders - its people, the communities where the Company work and their governments, its customers, contractors, suppliers, partners, and its shareholders - in its purpose by communicating openly and delivering on its commitments.

The Company will be the safest and a leading operator in its industry, recognised for stable and predictable performance that maximises the potential of its operations. The Company will do this with well-designed work that is supported by systems that provide smart data and are easy to use.

Its functions will be high performing. The Company will focus on the critical elements that support its strategy and governance and the stable and predictable performance of its operations.

The Company will transform the way the Company work by connecting its people and enabling better decisions. Its technology, innovation and improvement mindset will enable us to work safely, be more inclusive, improve performance, reduce its environmental footprint and future-proof its strategy.

The Company will continually find ways to reduce its land requirements, biodiversity impacts, waste, carbon and water usage. Its climate change strategy will guide us to ensure its business is resilient. The Company will progress initiatives in collaboration with its host communities that will deliver enduring social, environmental and economic benefit.

The Company will position ourselves for the next phase of growth in demand by creating a pipeline of opportunities to compete for capital, with a bias towards base metals.

Managing South Africa Energy Coal as a stand-alone business has allowed us to simplify the Group, delivering US$50M in annual savings from FY20, further mitigating industry wide inflationary pressure.

The Company can explain strategies on the basis of segment level


Worsley Alumina

Operating unit costs expected to decrease:

  • Lower Asian caustic soda prices
  • Reduced caustic consumption rates (-10% to 93kg/t) as bauxite feed from West Marradong(a) ramps-up


Brazil Alumina

Caustic soda consumption rates are expected to decrease with less reliance on third-party bauxite feed


South Africa Aluminium

Raw material input costs, including LME linked power (70% of cost base in FY18) are expected to remain elevated


Mozal Aluminium

Raw material input costs (49% of cost base in FY18) are expected to remain elevated


Illawarra Metallurgical Coal

Largely fixed cost operation expected to benefit from a significant increase in production


Australia Manganese ore

  • Costs expected to decrease despite a further increase in strip ratio to 4.2:1
  • PC02 circuit expected to operate at 115% of nameplate capacity


South Africa Manganese ore

  • South African rand and in-land logistics will continue to have the biggest influence on the industry cost-curve
  • Lower costs expected, despite a reduction of lower quality, fine grained material sales


Cerro Matoso

  • Lower production as a further improvement in plant utilisation only partially offsets a decline in ore grade
  • Supportive market conditions are expected to result in higher price-linked royalties



  • Lower negotiated TCRC’s, the sale of excess logistics capacity and a reduction in power costs following the renegotiation of a supply contract expected to mitigate inflationary pressure
  • A greater proportion of hoisting versus trucking (from 35% to 80%) following completion of the replacement underground crusher


South Africa Energy Coal

Extended dragline outage at Klipspruit and an increase in material movement at the WMC expected to impact costs


Hermosa project

  • Expect to invest ~US$100M in FY19 to advance the project:
  1. Includes the development of a twin exploration decline and underground diamond drilling to increase our understanding of the resource and test for extensions
  • To provide a further update on progress during H2 FY19

4. Markets


The Company operates in markets including:[4]


Industry (Australia)

Industry Revenue

Growth Rate

Iron Ore Mining

$63 Billion (2018)

(1.1%) (Annual 13-18)

Alumina Production

$9 Billion (2018)

5.3% (Annual 14-19)

Silver, Lead and Zinc Ore Mining

$4 Billion (2017)

(2.0%) (Annual 13-18)

Aluminium Smelting

$5 Billion (2018)

(4.2%) (Annual 13-18)

Bauxite Mining

$2 Billion (2017)

6.2% (Annual 13-18)

5. Competition


Major competitors include:[5]


  •  Anglo American plc (LON:AAL)
  •  Rio Tinto Limited (ASX:RIO)
  •  Vale SA (BVMF: VALE3)

6. History



Charles Rasp and George McCulloch formed Broken Hill Proprietary Company (BHP)



BHP began extracting silver, lead, and zinc



BHP entered steel production



BHP acquired Australian Iron & Steel Company



BHP relaunched iron ore prospecting and mining operations



BHP commissioned the first oil well off the coast of Victoria



BHP opened the Gregory coal mine



BHP acquired 80 percent of Thiess Dampier Mitsui, operator of Moura and Kianga



The U.S. mining and construction group Utah Mines Ltd. was acquired from General Electric



Monsanto Oil was acquired



Hamilton Oil was acquired



Gulf Energy Development was acquired



Magma Copper Company was acquired



The White Pine refinery was acquired from Inmet Mining Corporation



New CEO Paul Anderson began a company wide restructuring, cutting 20,000 jobs



BHP merged with the United Kingdom's Billiton, creating BHP-Billiton, the world's largest diversified resources group



BHP began a $5 billion investment program to boost oil operations



BHP launched a $412 M expansion of the Hillside aluminum smelter in South Africa; the company announced interest in acquiring one of Australia's smaller oil producers



Treatment of BHP: Billiton Demerger in the S&P/ASX Ind

Samancor Manganese JV extends closure of South African mines



South32 announced major restructuring plans and non-cash charges



Metropolitan Colliery acquisition proposal withdrawn



South32 to acquire arizona mining in agreed all cash offer

7. Team


Board of Directors[7]


David Crawford AO – Chairman and Independent Non-Executive Director

Graham Kerr – Chief Executive Officer and Managing Director

Frank Cooper AO – Independent Non-Executive Director

Dr. Xolani Mkhwanazi – Non-Independent Non-Executive Director

Dr. Ntombifuthi (Futhi) Mtoba – Independent Non-Executive Director

Wayne Osborn – Independent Non-Executive Director

Keith Rumble – Independent Non-Executive Director


Senior Management Team


Graham Kerr – Chief Executive Officer and Executive Director

Brendan Harris – Chief Financial Officer

Mike Fraser – Chief Operating Ofcer

Nicole Duncan – Chief People and Legal Officer

Paul Harvey – Chief Operating Officer

Rowena Smith – Chief Sustainability Officer

Peter Finnimore – Chief Marketing Officer

Johan Coetzee – Chief Technology Officer

read more

8. Financials


2018 Full Year Results Presentation


Financial Year 2017/18 (ended 30 June)[8]



Revenue ($M)

% Change

Profit (before Int, Tax, Depn & Amort) ($M)

% Change

Worsley Alumina





South Africa Aluminium





Mozal Aluminium





Brazil Alumina





South Africa Energy Coal





illawarra Metallurgical Coal





Australia Manganese





South Africa Manganese





Cerro Matoso










Group and unallocated items/ elimination





Statutory adjustment










9. Risk


Major risks include:[9]


The Company has identified 15 strategic risks that have the potential to significantly impact the performance and sustainability of its business, as listed below. Elements of those risks may be relevant across the entire Group, whilst others may be specific to a commodity group or operation.


Fluctuations in commodity prices, exchange rates, interest rates, and global economy

Industry earnings, balance sheet and cash flows are affected by the volatility of commodity prices, currencies and interest rates. Financing costs, currency impacts, input costs and commodity prices are managed based on floating indices. Prices are determined by the balance of supply and derived demand for commodities. Costs are impacted by the local currencies of operations. Significant deterioration in commodity prices or unfavourable currency movements have the potential to adversely impact the value of its operations and its ability to declare dividends.


Actions by governments, political events or tax authorities

The value of its investments depends on long-term fiscal stability and may be affected by political, economic, tax and legal changes beyond its control. The resources sector can often be subject to unpredictable, higher direct and indirect taxes and royalties in its countries of operation that can negatively impact on cash flow. The decisions of regulators relating, for example, to nationalisation of mineral resources, renegotiation or nullification of contracts, leases, permits or agreements, may impact its business model.


Cost inflation and labour dispute impact on operating margins and expansion

Inflation of input and capital costs could adversely impact financial returns. Labour is a significant operating cost that may vary depending on industrial action and scheduling delays. Its need to reduce operating costs may impact negatively on previously communicated labour commitments.


Access to water and energy

Water and energy are critical to its operations, however, scarcity of supply, counterparties, change in government policy and increasing cost of natural resources can impact its operations and supply chain.


Failure to maintain, realise or enhance value due to inadequate knowledge of its resources and reserves

The Company aim to maximise shareholder value by continually optimising its operations. Failure to maintain a technical and economic understanding of its Mineral/Coal Resources undermines its ability to identify the right opportunities to optimise and enhance its operations. This will detrimentally impact on shareholder returns and, ultimately, the sustainability of the Company.


Deterioration in liquidity and cash flow

External factors may adversely impact cash flows. If the Company compromise its balance sheet, liquidity and cash reserves, interest rate costs on borrowed debt and future access to financial capital markets could be adversely affected.


Climate change impacts

Climate change may result in physical impacts and transition risks on its operational infrastructure, decreasing natural resource availability and increased occurrence of extreme weather events that can cause disruption to its operations, as well as increased operating and capital costs. Climate change driven by worsened greenhouse gas emissions may force a change in government policy about carbon taxes and/or trading which will impact on its operating costs.


Health and safety risks in respect of its operational activities

There are inherent health and safety risks across the mining operations value chain. Apart from physical harm to its people and contractors, failure to maintain a high standard of safety may impact negatively on employee morale, the achievement of production targets and its licence to operate.


Water, waste and environmental risks

The Company recognise that its operations have the potential to significantly impact biodiversity, air, land and water resources. Advances in scientific understanding of these impacts, regulatory requirements and stakeholder expectations may prevent or delay project approvals and result in increased mitigation costs, offset or compensatory actions, weakening the overall sustainability of operations.


Unexpected operational or natural catastrophes

Its operations and transport networks can be disrupted by events such as fire, explosion, flooding, geotechnical failures, loss of power supply, mechanical equipment failures and unexpected natural catastrophes. The frequency and severity may be exacerbated due to climate change.


Commercial counterparties that the Company transact with may not meet their obligations

The Company contract with commercial, government and financial counterparties, including customers, suppliers and financial institutions who may fail to perform against contracts and obligations, impacting cost or price performance. Non-supply or changes to the quality of key inputs may impact costs and production at operations.


Fraud and corruption

The Company are exposed to the risks of fraud and corruption, both within and external to its company. Fraud and corruption may lead to regulatory fines, financial loss, litigation, loss of operating licences or reputational damage.


Breaches of information technology security

Information technology systems may be subject to security breaches resulting in theft, disclosure or corruption of information. Security breaches might also result in misappropriation of funds or disruption to operations.


Failure to retain and attract key people

The loss of key personnel or the failure to attract, develop and retain talent could affect its operations, financial position and growth.


Support of its local communities

Its social licence to operate is dependent upon the engagement and support of the communities within which the Company operate or seek to operate. Community dissatisfaction can result in failure to attract people and business partners, operational delays and disruption and litigation, which can affect cost, production and, in extreme cases, the viability of its operations.


Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises interest rate risk, foreign currency risk and other price risk, such as equity price risk and commodity price risk. Financial instruments affected by market risk include loans and borrowings, deposits, available for sale investments and derivative financial instruments. Group activities expose it to market risks associated with movements in interest rates, foreign currencies and commodity prices. The Group manages financing costs, currency impacts, input costs and commodity prices on a floating or index basis. This strategy gives rise to a risk of variability in earnings which is measured under the CFaR framework. In executing the strategy, financial instruments may be employed for risk mitigation purposes on an exception basis, or to align the total Group exposure to the relevant index target in the case of commodity sales, operating costs or debt issuances.


Interest rate risk

The Group is exposed to interest rate risk on its outstanding borrowings, embedded derivatives and investments from the possibility that changes in interest rates will affect future cash flows or the fair value of financial instruments.


Foreign currency risk

Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The functional currency of the majority of operations of the Group is the US dollar. The Group’s potential currency exposures comprise:

  • Translational exposure in respect of non-functional currency monetary items and
  • Transactional exposure in respect of non-functional currency expenditure and revenues

Certain operating and capital expenditure is incurred by operations in currencies other than their functional currency. To a lesser extent, certain sales revenue is earned in currencies other than the functional currency of operations, and certain exchange control restrictions may require funds be maintained in currencies other than the functional currency of the operation. When required the Group may enter into forward exchange contracts.


Commodity price risk

Contracts for the sale and physical delivery of commodities are executed whenever possible on a pricing basis intended to achieve a relevant index target. Where pricing terms deviate from the index, the Group may choose to use derivative commodity contracts to realise the index price. Contracts for the physical delivery of commodities are not typically financial instruments and are carried in the Consolidated Balance Sheet at cost (typically at nil). The fair value of embedded derivatives with a commodity price link will change in response to changes in commodity prices.


Liquidity risk

The Group’s liquidity risk arises from the possibility that it may not be able to settle or meet its obligations as they fall due. Operational, capital and regulatory requirements are considered in the management of liquidity risk, in conjunction with short and long-term forecast information. The Group’s policy on counterparty credit exposure ensures that only counterparties of a high credit standing are used for the investment of any excess cash.


Credit risk

The Group has credit risk management policies in place covering the credit analysis, approvals and monitoring of counterparty exposures. As part of these processes the ongoing creditworthiness of counterparties is regularly assessed. Mitigation methods are defined and implemented for higher-risk counterparties to protect revenues, with approximately half of the Group’s sales of physical commodities occurring via secured payment terms including prepayments, letters of credit, guarantees and other risk mitigation instruments.


  1. ^ Annual Report 2018, P. 32-33
  2. ^ Annual Report 2018, P. 40-49
  3. ^ Annual Report 2018, P. 02-03
    Investor Presentation 2018, P. 22-32
  4. ^
  5. ^
  6. ^
  7. ^
  8. ^ Annual Report 2018, P. 32-33
  9. ^ Annual Report 2018, P. 20-23, 127-129