Thank you. Good morning, everyone, and thanks for joining us today for our financial results conference call for the year ended June 30, 2021. I'm joined on the call today by our Chief Financial Officer, Katie Tovich and our Chief Operating Officers, Jason Ekonidis and Mike Crozer. I'll give a brief summary before handing back to the operator for questions. And just as a reminder, there is a short video summary of FY 'twenty one financial results available on our website.
Look, this year has been a challenging year for everyone as the impacts of COVID-nineteen continue to be felt globally. At South 32, we have remained focused on keeping our people safe and well, maintaining safe and live operations and supporting our communities. Despite these challenges, our operations are performing very well. We set 3 production records at Worsley, Alumina and Brazil, Alumina and Australian Manganese, we also exceeded initial market guidance of South African Manganese, Ceramatosa and Cannington. And it's great to say that that strong operating performance has been combined with improved commodity prices has been translated into 153% increase in our underlying earnings.
I'd also like to note the substantial progress has been made in reshaping our portfolio with the divestment of South Africa, Enrico and PEMCO and a portfolio of non core precious metals royalties. This greatly simplifies that business. It reduces capital intensity and will improve our margins. In terms of our growth projects and the way forward at Amosa, we continue to progress studies of both Taylor and Clark. At Ambler Metals, we commenced a summer field season drilling program and continue to progress the study at Ardich.
In May, We announced our medium term target to half our operational carbon emissions by 2,035 from our 20 21 baseline, supporting our pathway to net 0 by 2,050. To achieve this, we will invest in efficiency projects, shift to lower carbon energy, apply low carbon design principles and adopt new technologies. At the same time, we continue to increase our exposure of the base metals required for a low carbon future. Looking ahead, we expect to see strong volumes at our base metal operations, Moselle aluminum, Cerro Metos and Cannington with improvement projects designed to increase production into favorable markets. At the same time, we continue to pursue cost and volume efficiencies to offset stronger producer currencies and cyclical inflation.
We believe we are well positioned to take advantage of improved commodity markets and continue to transition our business for the future. That's underpinned by our strong operating performance, our high quality growth options and our disciplined approach to capital management. Thank you. And I'll hand back to the operator for questions.
Thank The first question today comes from Khan Peaker from Royal Bank of Canada. Please go ahead.
Thanks, Graham, and good morning, team. Just great to see a step up in the dividend, but just wanted to focus on the buyback. So since restarting the buyback, South 32 has averaged around roughly around $250,000,000 a half. Given free cash flow is stepping up in FY 'twenty two, that's really relative to FY 'twenty one, Why only 250 committed? And also just wondering if that's more a half year number than a full year number, Noting that, talking about September 2022 for the program?
First question.
Yes. Thanks, Tom. Look, I'll get Cady to sort of drill in for some of the detail I am at being the CFO. I mean, the comment I've made is, look, What we are applying is a consistent approach to our capital management framework. We've always talked about looking at the cash when the cash is actually in the bank, not in terms of effective cash flows.
But maybe, Katy, you can unpack that a little bit more about how we think about the timing and the amounts. Yes.
So thanks, Graham. Maybe just to recap just in terms of our capital management framework. Once again, it's an unchanged framework And you do see our ordinary dividends starting to flex with increased earnings. So that's coming through in our returns this half that we have announced. Look, the announcement today brings total returns in respect of FY 2021 to $670,000,000 a final dividend payout ratio of 73% of underlying earnings and total returns in respect of FY 2021 to 80% 81% of free cash flow, including Equity accounted distributions.
I think really the point to say to reflect on is as we've said in the past, as Brian mentioned, that we won't give cash back prospectively, But we do continue to reassess our excess cash balance on an ongoing basis. And obviously, our goal is to create competition for capital, But should there not be alternatives to that capital allocation, we will continue to return excess Cash to our shareholders in the most efficient and timely manner. So I think to your point around the volume, we have increased the volume $520,000,000 to that $252,000,000 remaining balance and that is indicative of what we are able Get away in terms of the on market share buyback broadly in a half as you've mentioned. If you look back in the last half, I think we got away In the region of $230,000,000 So, it's about what we expect to get away in a half year period.
And I think sorry, I don't get out of Kansas. If you look at Slide 16, I think that's a really good slide in the pack that actually talks about Our net cash position, our adjusted net cash position, which takes into account commitments, which is pretty consistent. And the other thing about that is it's great to We see internally we're creating some competition for capital for brownfield opportunities as well. And you've seen that that Ceramatose with QMP, the furnace rebuild in our Delosnock project. We're seeing that IP3XLE at Moselle and we're actually looking at IP3XLE now for Hillside, particularly when you think about when those aluminum markets are and the other opportunity potentially in that space.
You would have heard Alcoa talk about potentially restarting smelter At Alunum, that's something else we're going to consider as we go forward as well.
Sure. Thank you. And just the second one, just on Worley costs. Just wondering if you could give a bit more of a breakdown on the cost increase And maybe some of the underlying assumptions around FX that are captured in that?
Cat, do you want to cover that one?
Yes. Look, I mean, worstly, yes, cost. If I look more broadly In terms of our cost outcomes as a group sort of in the FY 2021 year, I mean, I think we did a great job in terms of managing costs through the year coming in broadly in line with guidance. What you will see in our pack is we've shown the half one, half two comparisons of our cost breakdown. And we have seen cost inflation coming through into the second half, which we did talk to at the half year.
Worsley in particular, you'll see Worsley's cost $2.24 and a half and it's probably worth calling out if you actually look at the Brazil alumina second half cost Coming through at $201 But if you add back the benefits of the historical tax credits that they picked up there, Actually their costs are broadly in line with Wesley's at 225. So I think that's indicative of the fact that we're seeing broad based inflation across refineries globally. More specifically, that uptick from that half year number to the high guidance number in FY 'twenty two, About half of that relates to caustic price increases and freight. Freight for us is a net nil outcome. Other people don't necessarily capture the freight costs in their numbers, but so we are seeing a fairly big hike in caustic Prices, we're expecting to see that come through.
I think the other thing to note there is certainly in terms of Worthy itself, we are moving into a new mining area. And with that mining area, we are seeing a different ore type, which is resulting in higher caustic consumption into the second half and into calendar FY 'twenty two. So that is something and unfortunately it's combining with higher caustic prices and that is creating probably some more pressure for us into 2022. But probably at least half of that relates to caustic inflation and it's In line with what we're seeing across the sector.
And I think at this point, Karen, all the time is it's a relative gain in alumina as well. If you think about our consumption, the Chinese probably sit on average somewhere between 120 kilogram per ton, Whereas we're still floating around that 100 ish mark, slightly up if you like in 'twenty two around the 105 number compared to where we had been previously in those different areas. But it's worth just starting I think that's a relative game as well.
Question, just quickly to close out on your FX question. Look, it's not a significant impact coming through. It's probably a couple of dollars a ton.
Okay. Thank you.
And just before I pass it on, could you just remind us of the lag for your caustic rough lag for your caustic price Contracts?
Yes, it's roughly, yes, price on a quarterly basis.
Thank you very much. Thank you.
So, that is why I'd close-up on that one as well, Cam. Slide 30 through 33. While we focus specifically on Worsley, I think Slide 33 in the pack was a real good example of What we've been doing to the cost base, the simplification of the group in that, it's a nice slide that talks about FY 2021 to basically FY 2021 excluding SAIC and Temco and you really see almost $1,000,000,000 comes off the cost base. And if you look forward to FY 'twenty two, you see our D and A charges will reduce by about $90,000,000 Our underlying net finance costs will reduce by about $42,000,000 and you see returns normalized tax rates. At the same time, by taking SAIC, etcetera, out of the business, you increased the margins by about 6%.
So while some of the cost is driven by inflation, some of it's driven by high price royalties. I think the things that we can control, the teams continue to make big steps in that space.
Thank you. The next question comes from Paul Young from Goldman Sachs. Please go ahead.
Good morning, Graham and team. First point, great to see the dividend payout ratio above 70% and also great to see some pretty positive production guidance For FY 2022 and FY 2023. Graham, can I dig into some of the CapEx and incremental, I guess, Crayfall growth projects that You've outlined can I start with Illawarra and the step up in CapEx to $215,000,000 FY 'twenty two, that's a little bit above where it's quite a bit above, I should say, where it's been over the past sort of 5 years? Can you maybe just step through what's in that number?
Yes, Paul, thanks. And thanks for the question. Probably the 2 biggest items are sort of changing, if you like, in your Lewara, as we've always talked about going, if you like, to Obviously, we've got successfully back to that 3 longwall configuration at Appen. We've also talked about where we want to get towards the optimized mine plan at Appen, which would involve 2 longwall phases into FY 2024 and then we're transitioning FY 2025 to a simplified layout and longer panels. And I've just spoken about in the past that brings lots of benefits around productivity, cut time, etcetera, less continuous miners, less development meters.
What that does require though is some investment in coal clearance and ventilation infrastructure at Appen, in particular some work around the shields in terms of moving the new area and also for additional bench shafts to sort of open up the ability to do that if you like simplified mine plan. They're probably the 2 single biggest drivers in that space.
Yes. Okay. That's great, Graham. Then moving on to Hermosa, obviously pretty difficult getting people on the grounds Up in Arizona and just getting study work done and obviously with COVID on the ground there. I know that your CapEx guidance of $45,000,000 for the year, but that doesn't include a bunch of, I guess, additional expenditure assuming post The approval of the PFS or release of the PFS.
Can you step through again just where we're at with the study work And the PFS?
Yes, absolutely. And Paul, the first thing I would acknowledge is the challenge of the team. I mean, we only got the team back in the office for the first time probably about 6 weeks ago. So you can imagine trying to complete a pre feasibility study is being incredibly difficult in that space when you're all working remotely. And particularly if we go through our own internal review process, doing that remote is also not ideal as well.
I think on the positive as you continue to see the mineral resource sort of get greater confidence around that with the drilling we've actually put out there, particularly the updated mineral resource where we talked about zinc equivalent grade increasing from about 7.6 to about 8.6. While there is a reduction in tonnage and that will actually change as we continue to work through the model. And that will come back as we sort of do some more drilling, particularly as the deposit is still open at depth and laterally. I think the other thing we gave some clear guidance around is that we do see the opportunity to actually sort of go into this and actually look at a dual shaft system. And we certainly feel that allows us to actually prioritize nearly access to high grade mineralization.
I think the other thing we have flagged out here and that's probably the point that you're talking about because we've been very clear about the capital expenditure in the first half is about US45 $1,000,000 But it does exclude, if you like, our expectation around the full FY 'twenty two. And the big item there is we want to finish the pre feasibility study. And my expectation is we've talked about in the past that we'd have to build a water treatment plant number 2. So that's the thing we need to finalize during the PFS study. And the other piece that we probably look to finalize is there is some material amounts of water that we're doing at Deepwater from the ore body.
So, they're on the critical path around the development and the approvals process. So, certainly, they're the things that we'd like to iron out before the half year end and then come back to the marketplace of that when we finish the PFS study. On the positive side, Clark continues to develop well. Now what we've been very confident around is the technical viability of a flow sheet to produce battery grade manganese. 2 alternatives we can actually do that for, but both of those are tested well.
The next piece for us is working more on some of the marketing side and the end customer opportunities. And obviously, if that progress as well as we get into the feasibility stage at Taylor, we'd look to combine both the Taylor and Clark resource models to understand the opportunities around integration. So by the end of the calendar year, we'll have a greater sense on what Water Treatment Plant Number 2 looks like and that's the watering pool as we actually finish the PFS.
Okay. Thanks, Graham. We'll wait for that. Last question for me is around the incremental growth CapEx. I think you've outlined US100 million on incremental growth costs across Worsley, Cerro Matozo and Manganese, etcetera.
Great to see the additional detail by laying those projects in the presentation and we'll work through all of that. But just high level, can you maybe just get a sense give everyone a sense of what sort of IRR returns All these sorts of projects just on average sort of generate?
Yes. And I think, look, that's a really good question, Paul. And I'll Start by saying that look what is really good to see is when we started the journey a fair while ago now, we didn't have a lot of opportunities to actually grow internally within the business because the cover was pretty bare. It wasn't really a focus. I think now you've obviously seen things like IP3XLE at Moselle which allowed us to increase production by 5% by 2024.
You've actually seen AP3XLE also going through the same study phase now at Hillside. We expect to finish out in the last 6 months. But I think the standout story for us has really been around what the work has occurred at Saramatosa. And some of those projects, I think, really talk about the benefits of, if you like, of Brownfields opportunity versus Greenfields. And particularly on Slide 38, we spoke a little bit about Cuban P, which is a satellite deposit north of the current Cerro Matosa plant.
And obviously, that has a very low CapEx around $13,000,000 and has a very high IRR. And you see something similar as we actually move into the next phase of development there, is really around the concentration planner as we call it the OSMOQ or the ore sorting mechanical concentration project. And that really replaces account upgrades, so it allows us to deliver 50% increase in processing capacity. So, they're both really high IRR projects in excess of 100%. The other projects, we'll sort of weigh them up as they individually go through the toll gating process.
Maybe as the Chair of the IC, Cady, you can talk a little bit about how you think about those opportunities?
Yes. Thanks, Graeme. Yes, probably just a couple of comments to add to that. In terms of the dollars flowing through that Improvement in life extension bucket, we do expect that to sit around that $100,000,000 mark over the next Couple of years as we move forward. We do have decarb CapEx also in those numbers, albeit relatively low volumes for the next couple of years as we work through study phases on the various projects including the mud washing projects and some of the energy efficiency projects Across the group.
As Graeme mentioned, look, I think, I mean, in terms of our goal here, it's about competition for capital. We are allocating capital predominantly towards our base metals and alley value chain businesses and looking to ultimately drive production growth and production creep across that group of businesses. I think Kayton is probably one also to call out In terms of the transition to trucking and the longer term outlook there in the medium term targets there. But I think, look, ultimately, Paul, that's about generating that competition, allocating capital wisely in that space and really looking for those productivity improvements across the group. And life extension, there's probably some worth calling out Eastern leases and Wesley Hotham North also captured in the early phases of study and they will come through sort of over the next 3, 4 years in terms of you start to see some more information around what CapEx looks like for those projects over the medium term.
MRN is probably the other thing that's Still on the radar in that window and we will continue to work with our partners around options in terms of life extension for MRN as well.
I mean, I think, Katie, if you could bear calls around the Cannington Trucking Study, low CapEx, high return, QMP, Osmoq. They're the kind of things that we're really trying to eat out of the portfolio for. I mean, I think those ones such as the new mining areas of Worsley and D and P Adapt, Obviously, as we get more detail around the PFS, that's what we'll sort of outline in more detail.
Yes, understood. I'll work through it all. Thank you, Graham. Thanks, Katy.
Thank you. The next question comes from Lyndon Fagan from JPMorgan. Please go ahead.
Thanks very much. The first one is just to focus a bit on the rehab charges. Can you maybe walk through What's driving such a high charge at Wellesley? I did say the discount rates come down, but Can we maybe flesh that out a little bit?
Katie, do you want to take that one?
Yes, happy to do that. Look, we did at the half year in December, it's probably where the bulk of that movement came through. Certainly at the half year as part of our annual Right review process, we did make an amendment to our discount rates, which did flow through into Increased provisions, provisions were up $875,000,000 from June 20 to December 30. So That's where you see the large bulk of the movement. The other thing that came through at the half year was also a considerable uptick in terms of FX impact.
What we're seeing now from the half through to June 30 is an uptick ex SAIC of about $113,000,000 The bulk of that That's relate to Worsley and it really relates to mine life adjustments and cost adjustments at the back end as we've reviewed our rehab provision.
Okay. Thanks. And the next question is just on the Dendrobium extension project, can you maybe provide an update on the latest thinking for Illawarra and What degree of certainty there is now on any kind of project proceeding?
Yes, look Brendan, good question. We tried to put a slide in the pack to actually address that. If you focus on Slide 44, I'll probably use that as a reference point. As we have spoken about in the past, there have been a couple of developments over the last 6 months in particular since we had the reviews we bought the IPC. 1 of those is we're going through additional review of the IPC decision at the Land and Environment Court at New South Wales.
As that progresses, that's something we think we need to do because we didn't agree with some of filings of the IPC. But if that's successful, that's more than likely to kick you back into The second thing that obviously Despite the cash and requesting that any future developments of D and D would be created to space significant infrastructure. So that really gives the minister once we finish looking at dendron and the DAP project to actually look at the project and run it through its own kind of approval process. So what we sort of outlined on Slide 44 is there's 3 options that exist. One is to go with the original D and D mine plan And that would be based on the success of the judicial review and that would mean you have minimal changes potentially to that plan And we outlined the CapEx or timeframe on that.
The second one, which I think is probably more likely than anything because the D and D adapt process. And the D and D adapt is really taking the original dendrobiomex domain plan and saying, okay, if we listen while we don't agree with them with the IPC, how can we actually adjust the mine plan that sort of deals with lots of land issues and allows the municipal to be in a position to say that we've responded to some of the concerns. That results in a mine plan that is slightly different. It focuses much more on high quality coal. We have probably have less land disturbance.
It's further away from water tributaries, etcetera. We're doing that mine plan at the moment. We expect the PFS and feasibility study to be completed towards the back end of this calendar year. That then allows us to actually talk to the minister. Obviously, if the D and D adapts, Numbers don't stack up economically or the IPC, we get kicked into an IPC process after a successful judicial review.
The other option we've got is to actually have a look at it at Apanoni. And that's the other exercise that the team is working on. How do we change the cost base? How do we look at the productivity to make the Apanoni a potential option? Activity to make that only a potential option.
Part of the reason we took the impairment is the uncertainty around dendrobi in the next domain and what does it actually look like. But certainly, the team is working hard to finalize the feasibility study on the DND ADAPT and then we'd be looking to talk to the Minister.
Thanks, Graeme. And just a final one, just more broadly on the portfolio. Obviously, growth is a focus. I'm wondering whether you would ever consider a lithium asset in the portfolio?
Look, I think we've always talked about we've got to bias the base sales. We like the bias of base metals because we think of a low carbon future that makes sense. Lithium is obviously a commodity we've talked about over internally a lot over the journey. The view we'd have today is it's priced reasonably well. If you could get the right asset which sat in the right position the cost curve you might think about it, but I think it's probably hard to get that at the current price today.
So I'd never say never, but I'd also say it's not the commodity we're knocking down the door to get into.
Thanks very much.
Thank you. The next question comes from Rahul Anad from Morgan Stanley. Please go ahead.
Hi, Graeme and Katie. Thanks for the opportunity. Can I perhaps start with a capital allocation question, perhaps to ask the question a different way? SAUC is out of the group now and I was hoping that we'd be able to see a target net debt range being provided. How should we think about that going forward and I'll come back with a few after that?
Thanks.
Hi guys. Why don't you take that one first, Katie?
Yes, sure. Look, I think probably the best way to talk through that is what we've said is the right level of or the right balance sheet for us is one that enables us to maintain investment grade credit rating through the cycle. And that's based on our view of our portfolio, our forward earnings in a low profile and our capital profile going forward. So what the capital management decision today has done is brought us to a net debt Position around about $150,000,000 which right now, as I said, based on our current portfolio and our forward profile Of CapEx, we believe it's the right starting position for us at this stage to ensure we can maintain that investment grade credit rating through the cycle. I think sort of going back to, I guess, the points in terms of generating excess cash, we will continue to reassess our balance sheet for excess cash.
And as we have done in the past, we will continue to look to return that excess cash to shareholders in the most Yes, in a timely manner possible.
Okay. Thanks for that. And then perhaps a couple So, Graeme, then in terms of the Wolseley alumina costs, I just wanted to understand how long should we expect For you to stay in those low grade zones? That's the first one. And then perhaps the second one for you Graeme was around The caustic consumption that you talked about in terms of China being 120 to 130 kilos Per tonne versus Wasley at 100.
In terms of Shandong, which uses the Ghanaian bauxite, do you have any stats around what they might be using per tonne?
Yes. So maybe I'll let Katie answer the cost one first because she's an ex CFO down at Worsley as well. So knows that info, Lisa.
So why don't you do
that one first, Katie, and I'll do the second one?
Yes. So I think, I mean, in terms of How long we're in that zone? I think it's an area that we're going to be in for some time And we're going to need to look at opportunities to further optimize our cost outcomes to help mitigate some of those increased consumption rates over the next couple of years.
Hang on for one sec. Look, with regards to the book side coming out of Ginnie, I mean, I guess what I'd start with 1st and foremost is, That's certainly a trend that we have actually seen continue as you've seen China actually continue to basically import bulk site coming out of Guinea or other places in Dunedin if you do the processing in China. We don't expect that to actually change, but obviously there There's not only the cost of mining, there's the cost of transportation actually getting it there. And certainly when we think about our long term price around alumina is very much informed if you like about what we expect to see continue to happening and we expect probably 2 things to continue to happen is 1 that we do expect to actually see that China continues to basically for material out of Guinea in terms of bauxite and doing the refining on the coast in China. But we also expect to actually see Indonesia do the refining and potentially they'll do the refining Actually, they'll do the refining actually in Indonesia and maybe the smeltering, but more than likely said the smeltering back to China as well.
That's actually built into our numbers when we actually think about it. In terms of the reactive silica levels, I think they're more comparable to what we see in Worthly, but at that time, I'll probably chase it up a little bit with the team and circle back to you. I don't know, Alex, if you're on the line and you can recall by any chance?
No, Alex is not in the room.
Okay. No, I can get that I can get a follow-up on that. That would be great. Final question for me was just around the working Capital release, we saw about a $170,000,000 released this period. Just wanted to quickly follow-up and see are we at normalized levels now, Katy, or do we expect some of that to go back into the business going forward?
Yes. Look, I think probably the best way to answer that is that Price and FX at these levels are going to be the key drivers of working cap for us as we go forward. Certainly in terms of debtor days, they're broadly normalized. In terms of our inventory pipeline, that's also comfortably within our operating window now. So I think really price and FX are going to be Key variables, probably one thing to call out though, we will see an unwind of the Hillside Accrual for energy from FY 2021 that unwinds.
It's about it's almost $90,000,000 that unwinds over 2 years in monthly increments from August of this year. So you will see that unwind going forward.
Okay. Perfect. That's very helpful. I'll pass it on.
Thank you. The next question comes from Paul McTaggart from Citigroup. Please go ahead.
Good morning. So maybe could we just circle back to D and D Adapt for a moment because you said it might be the most likely outcome. In terms of tonnage, you've sort of got broadly the same tonnage as the original plant, but not marginally higher. So, how should we and You'd have to be steering clear some of the reserves that you're going to mine in the original plan. So, how should we think about mine life under the ADAPT Model compared to the original plan?
Yes. I think that's one of the opportunities that we continue to work through, Paul. I mean, As I mentioned before, that actually is in the feasibility study at the moment. It certainly does target higher grade material than what we at an original D and D mine plan. So, it concentrates on the high grade material and at least some of that lower grade material behind.
So, as a consequence, you get a better product coming out. I think the thing we're still working through at the moment is what is the unit cost look like in terms of panel sizes, length of long walls and productivity rates. So, that's the other piece we're working on at the moment because when you look at this polymer face here, that's part of the reason I said D and D that is probably more sensible case. The more we've actually worked through that, the more D and D that looks probably better than the original D and D project. But again, we have not finished the study around that piece yet.
But at the less tons you disturbed overall, the high quality tons, What we haven't quite worked out yet is Watson, the optimal size of long walls and mine have productivity that runs from that.
Okay. Thanks, Graham. Thank you.
The next question comes from Matthew Hope from Credit Suisse. Please go ahead.
Hi. Yes, thanks for taking the question. Just wanted to Just a little more on aluminum and just to start with some on Hillside. Just wondering what the cost would be to implement that AP3 LXE And what benefits would have that for efficiency? What would we see out of that?
Yes, I mean probably a little bit of a difference I guess between the AP3 XLE that would actually put in at Hillside versus Mizelle. The Hillside as we actually look at that project, It's probably far more around energy efficiencies rather than actually production increase. The project itself is subject to final investment decision towards the back end of this calendar year. We'll actually look to run a 20 pot trial which concluded in January 2022 with an execution started in FY 'twenty three. Again, probably similar to what we saw at Mizelle, we haven't given the exact number yet, but you're not talking about a magnitude of CapEx in that space.
There's obviously the money that you spend around relaying the pipes as a license fee around the technology, but you're not talking about vast amounts of capital.
Yes. And quickly to add to that. So if you look at MOSAL, MOSAL was around about $18,000,000 to roll out. So that will give you a bit of perspective. Hillside is just marginally more than that given size.
Okay. Thanks. And then you Talked about potlining at Hillside. Was that to be higher next year? Is that part of this project?
Look, certainly there's some red line going in our trial in the box, but there's actually a sequence of how we line the box as well where you do see some natural variation up and down depending on the life.
Right. And then secondly, I just wanted to look at the CO2 issue. Obviously, you want to By half through the 2,035 and that I guess that really is all about the aluminum dropping because that's so much of your portfolio. Now What confidence do you have that you can actually hit that target given you're really dependent on Eskom? And is there anything you could do or South32 could do yourselves to actually help in reduction of CO2 emissions from South Africa?
Yes, look, I mean, I think maybe I'll get Mike to answer the specific question. So we got a project called Gremchutes at Hillside in a second. But maybe if we take a step back and if we look at where we are in our portfolio and what our carbon emissions profile looks like, I think we had a pretty good slide that sort of talked about some of the projects we're working on Slide 8 of the pack. And obviously, it's not just around Hillside. There are some things that we'll do around Hillside with the energy efficiency.
Then there'll be some things we've got to work with partners outside I'll get Mike to talk about his side, but some of the things that we're driving across the rest of the business obviously is at worst, we're looking at mud washing. We're also looking at a change in energy supply there to go from naturally coal to gas and also to another green form such as hydrogen. We're also, if you like, doing some work around Elawarra, in particular, our efficiency around drainage. And also, if you like, working with CSIRO on some They make technology to basically take out the ventilation methane. So there's a number of fronts we're working on, but you are right.
The big one we have to make progress on its around Hillside. And maybe Mike, you can talk about some of the work Eskom and the government are doing and then some of the work we're doing on brain shoots.
Yes. Thanks, Graeme, and thanks for the question. Look, we one of the things that's really helped us with Hillside is during the 10 year extension of the power contract from Eskom, because what we do believe is it just gives us time to actually study and explore what that transition will look like. And as Graham has said, I think it's coming from multiple fronts. So first and foremost, Eskim is driving a renewable strategy of their own, which will see a reduction in the carbon intensity of the grid emissions, which will be helpful and we should see some of those benefits emerging over the next decade.
But if we truly want to deliver a 0 carbon product, we're going to have to move a lot faster than probably what Eskom can move. And we're addressing it in a number of fronts. Firstly, on the Scope 1 emissions, so looking at opportunities and as Technology advances, how can we improve the scope 1 emissions profile of the asset. But the biggest by far is the scope 2 emissions, which needs to be addressed. We have got initiated a project in pre feasibility on that project looking at a number of options that could be available.
We believe on a model basis that There is a technically feasible solution that can be achieved using a combination of solar PV, wind, as well as modulation technologies for the smelter. And that would give us the ability to moderate what is still not available. I think there's a couple of things that we have to work through there in particular given our significant Proportion of the grid that we make use of is how do we work with Eskimo on that transition because we do realize that we will both still need each other both on a backup power as well as from an Eskom point of view in terms of the load shedding that they utilize us for to stabilize the grid. Obviously, there's a significant deregulation that needs take place. There's already been a lift in the self generation to 100 megawatts for smelter that uses 1205 megawatts of continuous power.
This is a Significant transition that would be required. But at a conceptual level, we believe it can be delivered, but it's It's going to require a significant amount of work on the deregulation to enable that and then the partnership with the primary generator to make this work. But from a high level technical and Economic perspective, we believe over the next decade, this will be achievable. But it's going to yes, it is a big project to deliver.
And I think the key point is, it's not around the technical aspects, there are some challenges and technology continues to develop quickly over the next 10 years. It's our ability to influence government policy. We have seen some of those shifts already where the government sort of surprised on the upside about giving people the capability to do self generation which wasn't what we expected to say. They came back with a much higher limit than people expected. I think the other piece would be even this week, you've seen Andre de Vida, who is the CEO of Eskom talking about how they plan to green their network.
So we need to continue to help them actually do that. As Mike says, we're very joined at the hip around this. But to be very clear, 10 years of the power contract gives us time to do that. We need to have a green power contract going forward because Hillside is roughly 89% of our scope to emissions.
Right. Thanks. And just one follow-up on that. Of course, obviously, we've seen the proposed CO2 border tax equalization in Europe. And if that comes in around 2024, how would that impact Hillside do you believe?
To be perfectly honest, splendid teams have done work around that and had a look at it and sort of had not just across aluminum, but all our commodities. I guess the good attitude that's more symbolic than impactful in the short term, mainly driven by the fact that it's a gradual implementation which is phased in from calendar year 'twenty six to 'thirty five. And if you think about our 10 year power block, it with the time that we need to get things actually right. And certainly, if you think about the impact on aluminum price, it is limited due to global average direct emissions the 10th year is about 2 tons of CO2 per ton of aluminum. And we think that's something that we can manage over that timeframe.
So, we don't think it's going to be huge impact on us.
Probably one thing that I'd
just jump in and add there is if you think about Hillside, About 30% of purified volume is domestic as well in terms of market. And MOSAL having hydropower access and delivering into Europe is well placed.
Sure. Thanks very much. I'll pass it over.
Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Kerr.
Thank you. Look, thanks everyone for your So I'm today. Maybe just a couple of really quick messages to sort of wrap it up and obviously if you've got any follow-up reach out to the IR The key message is that our operations are performing strongly and I think we are positioned to take advantage of strong commodity markets. We've really seen that in the second half of this year. And if you look at stock compared to the second half of the year just gone, they're even stronger.
We do continue to reshape our portfolio A low carbon future by exiting those low returning operations and investing in base metals for the future. And the important thing, we've talked about it a said that our approach to capital management remains unchanged and it's working as we intended to work and that we're rewarding our shareholders as financial performance improves and we are consistently applying that. But look, thanks for your time today and stay safe and stay well.