Thank you. Good morning, everyone, and thanks for joining us today. I'm joined today by our Chief Financial Officer, Katie Tovich, and our Chief Operating Officer, Jason Economidis. I'll give you a summary of our results before handing back to the operator for questions. Just as a reminder, the presentation is available on our website. The most important commitment we make at South32 is that everyone goes home safe and well. This year, we did not achieve that. We are deeply saddened by the loss of our colleagues, Mr. Desmin Mienies, a contractor who was fatally injured while undertaking electrical work at our Wessels mine at South Africa Manganese in November. Our deepest sympathies are with Mr. Mienies' family, friends, and colleagues. We provide them with our support following this tragic incident and undertook a detailed investigation to understand what happened.
The learnings were shared across our business, and we held stop the safety conversations to discuss and learn from them to prevent a similar incident occurring at any of our operations again. Moving to our results. During the first half of FY 2022, we undertook a review of our safety performance and identified areas for improvement. This formed the foundation of our safety improvement program, a three-year global program of work designed to achieve a step change in our safety performance. When it comes to our operations this year, we delivered stable operating performance despite a challenging external environment, which included managing the ongoing impacts of COVID-19, labor availability, and extreme weather events. We achieved record production at Worsley Alumina and at Hillside Aluminium and Mozal Aluminium continue to test their maximum technical capacity. At Cerro Matoso, we achieved a 22% increase in nickel production.
At Cannington, we exceeded our already increased production guidance as we transitioned to a new operating configuration. We delivered record earnings and cash flow as our stable operating performance, the implementation of logistics solutions, and recent portfolio improvements enabled us to capitalize on significant price tailwinds. We generated a record underlying EBITDA of $4.8 billion and record underlying earnings of $2.6 billion. Free cash flow increased by more than 200% to $2.6 billion, and we finished the period with net cash of $538 million after funding $1.5 billion of investments to improve our portfolio during the year. As we continue to transform our portfolio, our capital management framework remains unchanged.
A strong balance sheet is at the core of our strategy, and our framework is designed to reward shareholders as our financial performance improves. Reflecting our strong financial position and disciplined approach to capital management, the board has resolved to pay a record $648 million fully franked ordinary dividend in respect of FY 2022, and a $139 million fully franked special dividend, taking total dividends to a record $0.257 per share for the year. Our total shareholder returns of $1.3 billion in respect of FY 2022, including our ongoing on-market share buyback, was also a record.
Today, we have further expanded our capital management program by $156 million to $2.3 billion, leaving $250 million to be returned by September 2023. During the year, we accelerated our portfolio transformation, increasing our exposures to the metals critical to a low carbon future. We acquired a 45% interest in the Sierra Gorda copper mine in Chile. We also acquired an additional 16.6% shareholding in Mozal Aluminium, which benefits from access to hydropower. We achieved first production from the restart of the Brazil aluminium smelter using 100% renewable energy. These investments in our aluminium value chain have increased our low carbon aluminium production capacity by 100%. Our attractive commodity mix also includes a growth pipeline across development assets and exploration properties in these metals.
Looking ahead, we are well positioned heading into FY 2023, given our growing production profile and strong balance sheet, and we are well placed to capitalize on the increasing demand for base metals as the world transitions to a low carbon future. Thank you, and I will now hand back to the operator for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Green from Credit Suisse. Please go ahead.
Hi, good morning, Graham and Katie. Can I just start off with asking a question on the cost base of the African smelters? I noticed on slide 46 that raw material inputs across both smelters are around 52% of your cost base. In the release, it's saying about 77% for Hillside and 74% for Mozal are power and raw materials. Do I interpret that as based on the FY 2022 costs at about 25% and 22% of your cost base is related to power at Hillside and Mozal respectively? Is that a fair observation?
If not, perhaps can you just provide some comments on how much of your absolute cost base is currently power related, and how often is this price reset to reflect what we're observing in the PPI space? Thanks.
Maybe I'll hand it over to Katie to give you some of the background on that. I would start off with one of the advantages we do have in our smelters compared to what's happening, particularly in Europe at the moment, is we do have longer-term contracts. While they do have inflationary increases tied to PPI indexes, they don't have the same exposure to spot prices. Maybe, Katie, you can talk about the breakdown of the actual aluminum smelter costs.
Yeah. Thanks, Matt. You're spot on the money in terms of your observation, in terms of the cost base, around about 25% being related to electricity. Those PPI adjustments are made on an annual basis, in relation to Hillside. They're reset every August.
Okay. That's great. That's very helpful. Thanks. If I could just move on to Worsley, just your comments about the performance of the third-party coal supplier. Can you just elaborate on what challenges are being faced there?
Yeah. Maybe if you take a step back, obviously, we have a combination of different energy sources that feed Worsley. Predominantly, we use the coal for steam generation. We have two coal suppliers at the moment, and both of those coal suppliers are obviously going through a period of change, with the government announcing, if you like, some closure of their power stations long term by 2030. I think the other piece at the moment, it's been traditionally a wet time of year in the southwest of Western Australia, which has probably had a bit of an impact on the mining and productivity rates. There is some ongoing, you know, discussions around the longevity of both of those suppliers with the changes in government requirements, if you like. That's something we continue to engage with.
I don't know, Katie, if you want to add anything to that? No, she's fine. Does that help, Matt?
Yeah. That's helpful. Thanks, Graham. Just lastly on the unit cost guidance, if I recall, I think controllable costs are up 3% in FY 2022. What are you assuming on the controllable cost front into FY 2023?
Yeah. What you're seeing is actually a 2% uplift in our controllable costs relative to our total cost base in terms of FY 2022. I think, I mean, probably, it may be worth just touching on cost guidance as we're looking into FY 2023, because I'm sure it's gonna be topical. Certainly what we have factored in is you know the relevant inflationary pressures that we're expecting to see within the business, particularly in the raw materials input price side. To call out probably in terms of, say, Worsley Alumina, that's probably where we're seeing the biggest sort of uplift in terms of FY 2022 to FY 2023 guidance. Of that, probably a couple of things to point out in terms of Worsley.
One is our unit costs, and it's across the board, capture freight. That's a pass-through for us, and you should expect to see that come out in revenue. If you look at Worsley cost guidance for 2023 at $296, it once you back out freight, we're looking at about $270. I think the other point on Worsley is we're seeing about 65% of the cost uplift from 2022 to 2023 directly related to our caustic price assumption. Again, what we're seeing in the market at the moment is caustic prices have certainly come off compared to the assumption that we had made there.
For every $40 a ton reduction in caustic, you would expect to see a $4 a ton impact on our unit costs coming through there. Probably the other ones to call out, Cerro. We have provided guidance at $497. That's pretty sensitive to currency and FX assumptions. If we run our spot FX through Cerro today, you come in at somewhere around $444-$466. That is pretty sensitive in terms of FX assumptions. The other one I wanted to probably call out is Australia Manganese, which is the other element of cost guidance that's moving up.
In terms of Australia Manganese, it's probably the key takeaway I think there is while we're seeing an increase in strip ratios year-on-year coming through, we are continuing to benefit from PCO2 price realizations. What you're seeing is that over FY 2022, in fact, we saw price realizations across all of our products coming in at index. You're seeing PCO2 prices really mitigating some of that erosion that we might see in margin associated with increasing strip ratios.
Maybe just worth adding to Katie's couple of points there. I mean, I think the broader industry is pricing strong inflationary pressures at the moment. If you look at the work we've done over the last 12 months and the work ahead, and you take some of those examples at Cannington, you've seen us actually change, if you like, the way we get the material out of the actual underground to actually give ourselves more flexibility, more access, if you like, to the high-grade material. At Cerro Matoso, you've seen a series of projects such as the QMP project, the OSMO project that allow us to lift productivity. Worsley, despite the cost increases we're seeing with caustic soda, which are large, we have seen the team continue to actually, you know, creep and push that production record that we saw this year.
If you sort of take a look at places like Mozal and Hillside, we've got the rollout of the AP3XLE. I think while there are some things outside of our control, I think the teams are taking some really positive steps to mitigate those impacts. That's obviously an ongoing push within our business around sustainability.
That's very helpful. Thanks. Thanks very much, Graham. Thanks, Katie.
Thank you. Your next question comes from Paul Young from Goldman Sachs. Please go ahead.
Thanks. Yeah. Morning, Graham and Katie. Hope you're both well. Graham, can I just focus on some of the projects. To start with Illawarra and the decision not to proceed with DND, which, you know, listen, I think it's the right call, and it's better to buy back stock and allocate capital in the base metal projects. Just wanted to understand the decision on this. Was it purely that other projects in the portfolio have a better IRR, or is it. Is this a combination of the, you know, difficulty of actually getting approvals and also, you know, you wanting to increase exposure to other base metals. Just wanna understand what actually, what was the number one thing that actually probably drove the decision.
Yeah, probably the number one thing is always picking one thing in isolation is not necessarily a challenge, but I think it's a bit of a narrow view. I think the way I look at it is, as an organization, we have a bias to the base metals because we do believe, you know, that the world is gonna need more of those metals as they decarbonize, which drives better supply-demand fundamentals and hence stronger pricing. If you have two kind of equal projects, we're always gonna push more of the base metals than we are perhaps the bulks. I think the other comment I would make is we also recognize that capital is scarce and putting, if you like, capital to work in the most efficient way is how we actually, if you like, get in a position to outperform our peers.
When we sort of look at Illawarra and take a step back, it's been a journey for us. If you recall, probably over the last 12 months, we've talked about the various pieces of work we have underway. One was to continue to look at a DND revised project and work that through our project system. The second one was to look at how we optimize Appin by going to that single longwall configuration from FY 25, and that's actually on track to sort of be completed. The third piece was, you know, looking at the alternatives for Dendrobium Next Domain, and in particular, we've talked about area three that exists, if you like, in the current mining area we have consent. We've always spoken about it has gas in there, so CO2, not methane.
One of the things we've been running in parallel is testing to understand how that would work in terms of extractions and how many long walls it'll have access to. I guess what it's come down to, Paul, is the trade-off of putting the capital into Dendrobium Next Domain versus actually continuing to mine in Area 3, but at a slower rate, because you've done enough work around the gas to understand how you extract it. In simple economics, staying in current Area 3 and extracting at a lower rate because of the gas, the material there made better sense. You know, we've definitely got plans up to 2028 that are a lock-in. The team now is working on how we extend that to at least get to 2032.
If you think about what we have, if you like, in Appin, we've got a life at least to FY39. I think if you look at the decision in isolation, first off, it was clear that it made better economic sense to stay in the area three and mine those existing panels. If you take a step back, where we have equal choices, we'll always deploy our capital to the base metals opportunities first because we do believe that they have longer, if you like, attractive supply-demand fundamentals and hence pricing.
Thanks, Graham. I like all that detail. Then moving on to Sierra Gorda. You had a tougher June quarter, and grades are falling in FY 2023. You were over there in June. I guess what I'd like to know is, you know, just your thoughts on the performance and, you know, what you saw over there in Chile and how it compares to, you know, what you expected during the DD process. Just the growth in this asset with the fourth milling line and, you know, the timing around that and the capital efficiency of that project, but just curious around just your observations really post that visit and touching on those points.
Yeah. Look, if you take a step back and we'll sort of break it into components, the visit was actually really good to spend time with the management team there and understand their capability and skills. It is important to note that it's a joint control, joint venture, and the management team, you know, has some really strong people that have come out of Escondida. They've come out of, you know, other, if you like, operating mines in Chile. You've got some really good strong, if you like, bench strength in that place. We've spent a couple of days with the management team there and then had about three or four days of technical meetings and planning going forward.
If you take a step back and look at the bigger view, if we could acquire the rest of that asset at what we paid for it, we would do that today, absolutely every single day of the week. We like the commodity, we like the exposure, we like the fact that we actually think this has got an opportunity to actually grow in time through the current debottlenecking work that's underway, through the fourth line, as you mentioned, but also some other opportunities around the oxide material sitting on the surface. Then if you like, largely unexplored rest of the land. We think there's lots of upside opportunity there. You are right.
If you look at the fourth quarter, you know, we had a lower copper grade than we actually expected as the mine plan basically moved into the next phase or phase six, if you like, of the Catabela pit. At the moment in FY 2023 and 2024, we're doing a bit of mining, if you like, on the shoulders of the ore body. By the time we get to FY 2025 and 2026, we return more to the central parts of the ore body, and in that, we'll get back to the high-grade material. The debottlenecking project that we've spoken about in the past, that essentially lifts the throughput by 6% to about 50 million tons per annum, is on track to be finished by December 2022.
The fourth line is currently in the feasibility study, which is expected to be finished around mid, you know, towards, let's say the calendar year 2023. For us, you know, installing that fourth grinding line makes a lot of sense because it allows you to actually increase the concentrate capacity to about 58.4 million tons per annum, which is about a 14% uplift. From that side, we think there's a lot of attractiveness in what the asset has to offer, been impressed by the management team, and certainly happy with what we've got today.
Excellent, Graham. Thanks very much.
Thank you. Your next question comes from Lyndon Fagan from J.P. Morgan. Please go ahead.
Thanks very much. The first one is just to try and understand the long-term outlook for Illawarra. Understand the production guidance is now around about 5.5 million tons to 2028. Can you maybe talk a bit about the cost outlook that's associated with that, given the lower output? And also just to confirm that beyond 2028, assuming you don't get that area three extension, we're at the 4.8 million tons that's associated with Appin. And again, how should we think about costs with that lower production base?
I think the point to sort of note out first is obviously when you talk about our guidance for next year in 2023, we do get back up to that 7.4 million tons, of which roughly 3.9 comes from Appin and 3.6 comes from Dendrobium. As you quite rightly point out, as we actually move into those gassy areas, you know, the mining rate coming out of Dendrobium will actually slow down. That's the balance, if you like, the extraction of the CO2 gas versus the productivity rate. I think the flip side that sort of works for you on the productivity side is that you are moving into that single longwall from about FY 2025, and that will actually bring further operating and capital efficiencies.
In particular, you know, that single longwall operation at Appin allows you to dramatically reduce the complexity, get rid of the delays on longwall changeovers, less, if you like, gas crews, less development crews, and that makes a real big difference. For example, you go from 7 to 4 continuous miners, and you have a development reduction, which is material. But it does require you spend a bit of money, if you like, on Ventilation Shaft 7 and 8, and that expenditure is about $260 million we've spoken about in the past. You spend the bulk of that money over FY 2023, 2024 and 2025, which is why we have elevated sustaining CapEx numbers.
Now, there's still further opportunities to obviously improve in both Dendrobium and Appin, but if you focus particularly on Appin, as you look at Ventilation Shaft 7 and 8, I think there is a real opportunity to have a look at how close we get to the actual operating development areas. 'Cause at the moment, because of the age and the layout of Appin, it probably takes our crews 45-60 minutes to actually get to the operating face in terms of travel time. You know, as we look at those vent shafts, we'll look at ways to get quicker access to where they need to be to actually reduce that traveling time. We believe that's one opportunity to actually improve, if you like, the productivity rate that we actually have.
I think, look, the second piece that I'll talk about is that sustaining CapEx does come down from that peak that you see in 2024/2025, to more normalized levels beyond 2025. I'd like to see that the team probably gets somewhere around an all-in operating costs, including sustaining CapEx, of somewhere around $130 a ton. You know, we have talked about a little bit of a range in that space, all-in costs of $135 to $150 a ton, but I believe they can get closer to that 130 with some of the work we're looking at, and that's certainly where we're pushing them towards.
Graham, just to confirm, once Dendrobium's out of the picture, with those efficiency gains at Appin, what is the nameplate of that beyond FY 2028?
If you think about Appin, you can probably run Appin around 4.1, 4.2, around that kind of mark. But again, I wouldn't say that Dendrobium 28, we think we're finished. You know, what we're talking about now in area 3 is we have very clear plans and extraction rates to actually take care of, you know, extracting material up to 2028. If you look on the picture that we actually had, if you like, in the slide pack on Illawarra, you'll see in Dendrobium, there is a large already approved area that we don't currently have in our mine planning process. And on top of that, there's remnant mining. That's the kind of material that the team will now start focusing on.
As you'd expect over the last, you know, 12 months, they've been very much concentrating on the work that we spoke about earlier when Paul asked the question, which is about the trade-off between Dendrobium Next Domain versus the current Area 3, and also optimizing what we have at Appin. I'm confident the teams, now they turn their attention to beyond 2028 at Dendrobium, they'll find enough material to at least get us to 2032, if not more.
Great. Thanks. Just switching tack to Hillside, I just wanted to revisit some of your previous comments around the power contract. I'm assuming it's up for renewal around 2030. You mentioned before that if Eskom doesn't have sufficient renewables on offer, you're not really interested in signing that. I guess I just wanted to try and explore that a bit further. If we run the scenario that for whatever reason, Eskom doesn't have the renewables available, what are your options at Hillside post 2030? You've kinda sort of mentioned it's not necessarily an asset that you want in the portfolio under that scenario. I just wanted to explore that a bit, please.
Yeah. The current contract we have in place runs to 2032, just to clarify the timing on that. From our position, we've always been strong that we believe over time you'll see a green premium in aluminum. You know, Mozal has the benefit today of having a hydro contract. You know, we'd like to be in a position where all of our aluminum production is green. Because we think premium or discount in the future, there's gonna be a differential in the marketplace, so it's important to capture that. You know, we have time to work through this in South Africa. What we have been very clear to the government is that, you know, Hillside today plays an important, if you like, role in the stabilizing of the Eskom grid in terms of we're the largest offtaker, we're the largest paying customer.
We've given the ability to actually load shedding by working with us. We're also the reserve battery if they need to restart up again. There is a lot of, if you like, connection between ourselves and Eskom, and the day-to-day working relationship is actually fantastic in terms of how we manage the load shedding. Despite the fact we're having record load shedding, you're really seeing Hillside operating close to the maximum technical capacity. That's a function of our team on the ground, but also the Eskom team. I think it's a really positive relationship. What we're working on, if you like, is two aspects. We're working closely with the government about how they can continue to actually change policy to open up their network to more than just coal. You've seen that recently with government announcements to actually encourage independent third-party power producers.
That's included removing some of the restrictive caps, putting out their tender work. You will actually see Eskom, particularly the André de Ruyter, who's the CEO, talking about their ten-year plan to decarbonize their network. We've also done a lot of work, which was shared with the Department of Trade, Industry, but also Eskom, which talks about you know, it's not a, it's not technically a challenge to actually have the smelter running on renewables, and also done a lot of work with them, if you like, about how that progression can actually happen. The reality is, while we don't wanna invest our capital, providing a long-term offtake agreement is something that many of, if you like, the producers will be looking to actually have when it comes to independent power. We're working closely with Eskom on the long term.
In the short term, we still think there's opportunities to actually look at some of the different power that goes into the Eskom system, because today you're already seeing the green stuff grow. There's then unallocated nuclear. We're working to try and actually work with the government and Eskom about how, instead of getting allocated coal power, we could work with them to increase that third party, if you like, renewable sources, have also access to nuclear, but to achieve, if you like, a totally green power source by 2032.
Thanks, Graham. I'll pass it on.
Thank you. Your next question comes from Kaan Peker from Royal Bank of Canada. Please go ahead.
Morning, Graham, Katie, and team. A few on Illawarra, if that's okay. Just wanted to get an understanding. The cost guidance you provided, I think $105-$120, without DND. Can you maybe provide the split of what comes from the operations and what comes from the increase in import costs? Thanks.
The increase in what cost? Sorry?
Port.
We actually ship out. If you think about where our product goes, it goes to two sources. One is PKCT, where we basically export it overseas, and being high quality coking coal, it's well sought after. The other piece of our product goes domestically to BlueScope Steelworks, and that's a combination of Appin and Dendrobium. When it comes to those logistics costs and port costs, we don't see those actually shifting materially. I think the biggest increase at the moment is probably twofold, one, the sustaining capital that we're putting into the business over the next couple of years to actually shift to that single long-wall configuration from FY 25 in Appin. Dendrobium, obviously, the unit cost is actually shifting as we actually produce less tonnages as we actually extract the CO2 gas.
You produce at a slightly lower rate. Now, the flip side to that, as I mentioned earlier, I still think there's some improvement opportunities that we haven't got baked into our numbers as we look at Ventilation Shaft 7 and 8 to get our people easier access to where they need to be from a productivity perspective. Certainly, the port costs aren't planned to increase. Katie, I don't know if you wanna add anything to any of that.
No, I think, I mean, probably the only thing I'd say is Illawarra as a complex has a pretty high fixed cost base. Really the driver for us over the next couple of years is to look at opportunities to push down and optimize that fixed cost structure as we reduce volumes.
Does that help?
Sure. Yeah, yeah, definitely. Thank you. Just on Illawarra as well. With the Illawarra blends, I mean, without Dendrobium, do you expect an impact on that?
There obviously
The quality.
Oh, the quality. No, we don't see there's a big change in that aspect. I mean, I think what you might have heard is BlueScope talked, if you like, about the quality of material that we produce, and for them, they're looking for a combination of what's called seam 1 and seam 3. Seam 3 comes from Dendrobium in Area 3. Seam 1 comes from Appin. They're probably more the one that'll talk about the blend that they want, which is configured, if you like, for their steelworks, and we achieve that in the current mine plan. I think when you actually look at the broader export material that we have, and a good reflection is if you look at the low-vol coking coal, you know, if you look at the index, you know, we're beating the index by about a 1% premium today.
I think that's reflective of the quality we have and the quality we expect going forward.
Just to confirm that you don't expect any impact to the Illawarra blend with that.
No, we're not. If you think about energy coal, we have a small fraction of energy coal that comes out of the Dendrobium area. If we stop producing at Dendrobium, ultimately, whatever that date would be, then that small fraction of energy coal actually vanishes.
Sure. Thank you. Just lastly on Sierra Gorda, just wanted to get an understanding on how long you think the low copper high grade part of that ore body is expected to be mined.
Yeah. We're working with obviously the team there to look at the mine planning and look at what it looks like longer term, as we actually obviously have our ownership interest and start to work through that. What we have seen, obviously in the fourth quarter of FY 2022, we saw the copper grade at 0.4 was lower than expected, and that really reflected the mine plan move into the new phase 6 of the Catabela pit. What we do expect in FY 2023, 2024, you know, we'll be mining some of the shoulders of the ore body as you sort of set it up for the future. And as a consequence, when you get into FY 2025 and 2026, you're back in the central part of the ore body. In that, you should expect to see the grades lift back up again.
Again, I wouldn't ignore the fact at the same time in the background, the de-bottlenecking project is on track to be completed by December 2022, and that will lift throughput by about 60% to 50 million tons per annum. We've got the fourth line, which is currently in feasibility study, and we believe that that will actually allow you to lift that concentrate capacity to 58.4 million tons per annum, which is about another 14% increase.
All right. I suppose following on with that, so we should expect above reserve grade in 2024 and 2025 and possibly 2026?
2025, 2026, you should be seeing it there, and you'll see a transition, if you like, towards the back end of 2024.
Thank you. Very helpful.
Thank you. Your next question comes from Lachlan Shaw from UBS. Please go ahead.
Morning, Graham and team. Thanks for the briefing. Just a couple of questions from me. Just quickly on costs at Worsley. Caustic prices have obviously come off. Are we right to think that it might be maybe a 6-month lag until you see that coming through the business?
Yeah. Look, I'll take that one. Look, we effectively buy on a market basis, and we don't have significant volumes of storage capacity in terms of caustics. So you'll probably see, you know, a 2-3-month lag in terms of that pricing coming through.
Okay. Got it. Thank you. Just going to returns, dividend, buyback. Can you just give us maybe a bit of insight around how the board is thinking about that at the moment? Obviously, share price has come up a little bit or it's valued recently, but you know, what's the thinking in terms of that split going forward?
Yeah, I'll get Katie to take that one, but I'll be honest, I think the IR team have a fantastic slide in the pack, slide 18, that sort of, if you like, overlays share price and our buyback activity versus our dividend, which I think talks about it. Maybe, Katie, you can sort of pull out some of the detail.
Yeah, look, I think, I mean, what you would expect to see is nothing different than what you've seen in the past. I think in terms of our ordinary dividend, you know, a record ordinary final dividend this time around, and it reflected our dividend policy of a minimum of 40% of our underlying earnings. What you have seen, of course, is the step up in terms of our capital management program by $156 million. That brings us to $250 million outstanding as we go forward from today on that program, which we are still looking to execute in the form of an on-market share buyback. We certainly see value in our shares today.
You will see us execute that program, which is reflected pretty well on slide 18, I think, in terms of, you know, our value accretive approach in terms of how we execute that program through the cycle. You'll see us buy smaller volumes at higher prices and increase volumes as the price moves down. Certainly, you know, we've bought back 13% of shares on issue to date, at an average price of $2.93 a share. I think, certainly, you know, a well-executed program to date. You wouldn't expect us to do anything different going forward, but you do see that shift between the on-market share buyback and dividends, as the, you know, as our share price moves through the cycle.
The critical point I think that Katie made a couple of times is consistency. Certainly, we've got no intent to build any kind of war chest or cash. We'll always look, as we have been, to return excess cash back to the shareholders in the most efficient mechanism.
Yeah. Probably the only other thing I'd add there as well is with that top-up to the buyback and also with the ordinary divi, that brings our adjusted net debt to $499 million, which we see is the right balance sheet position for us going forward from today, you know, reflecting our current portfolio and our forward capital profile.
Great. Thank you.
Thank you. Your next question comes from Hayden Bairstow from Macquarie. Please go ahead.
Yeah, morning, guys. Graham, just a question on Worsley and the broader alumina market. Just interested to get your thoughts on, you know, we haven't really seen a change in the ratio of alumina versus aluminum really. The power costs in aluminum have gone up a lot, so have your caustic soda prices. I know they've come off a bit, but they're no longer sort of $200-$300. Do we need to think about, you know, effectively there's just gonna be a lower margin in the alumina industry if you are unable to pass these costs through? Or do you think it's a shorter-term issue with power prices in aluminum that will enable you eventually to push alumina higher versus aluminum to offset some of these high caustic prices.
Yeah. Look, good question, Hayden. I think maybe let's start with the pieces that are within our control. Certainly from our perspective, you know, over time and having watched the industry for many decades, we do see the value sort of move up and down the chain. I think with the additional stake we've taken in Mozal, the restart of the Alumar smelter on renewable power in Brazil has allowed us to, you know, double, if you like, effectively our low carbon aluminum production. The additional acquisition, if you like, in MRN, has really actually, if you like, taken out some of the leakage we actually had in the chain. We've got a much more holistic covered chain now. Look, what you have seen obviously is some low levels of prices over the last couple of months.
You know, if you talk about some of the charts that we had in our pack, and if you talk about aluminum, you know, based on the CRU numbers, you'd probably say an aluminum space at about 30% of the value chain at the moment is loss-making. In the alumina side, it's probably about 35%. That is telling you we are seeing a squeeze, if you like, on pricing in the short term. We are starting to see, if you like, some capacity shutdowns come in both the alumina and the aluminum side. As a consequence, you know, there is some short-term pain that we're seeing. To be perfectly honest, our long-term view of where we see alumina and aluminum going hasn't dramatically shifted.
If you look at aluminum space and you have a look at the long-term signposts that are important, particularly around China, you know, not over-investing in capacity and actually scaling back capacity to that cap, nothing's changed in our view in that space. We still see all the right signals. If you talk about the alumina side, while you are seeing, if you like, an impact at the moment around caustic soda, even though it's come off a little bit, we're still well-positioned when you think about the shape of the cost curve with the levels of reactive silica we have. Long term, we're still confident in a price that's above today's spot price, and we've talked historically about a price around that $390 mark. That probably hasn't shifted from our position.
you know, while we don't have large scale, you know, we're creeping in both of our refineries, and we're creeping slowly in our smelters through efficiency projects. We think that's the right way to continue to invest in the business, but we will see the value shift up and down, but we've really closed, if you like, some of the leakage in that value chain.
Okay.
I think.
Sorry. Go ahead, Katie.
Just to reiterate the point I made before as well in terms of our cost guidance, you know, we do have that freight component in there. If you back that out, you're looking at around about $370 a ton.
Okay, great. Just on the manganese market, Graham, I mean, it's had a pretty extraordinary pricing period for the early part of the year. It sort of come right back now to where it sort of averaged last year for most of the year. Just keen to understand the dynamics of that and where you guys think the outlook for manganese might be. Is there sort of risks of a further price downside from here in the short term?
Yeah. Look, the one thing we've always talked about, you would've heard us talk about a lot in manganese, as it goes up, it comes down. That's really a function, if you like, very much of the swing production that you see come out of South Africa. If you're thinking at the moment, what drives that? Well, today it's the marginal cost of trucking, which on a 44% CIF equivalent base is probably somewhere between $5-$5.50. You know, obviously in the short term, you're right, we have seen, for example, the August prices decline quite significantly, about 27% below the peak that we're seeing earlier in the year. The three big drivers I guess of that have been, one, the reduced steel demand that you're actually seeing in China, but also ex-China at the moment.
The second piece is you've had strong exports coming out of South Africa and also Gabon. We think that's sort of what's putting some downward pressure obviously on the price. I think, look, for the balance of this year, there's a potential that you actually see a growth in the stockpiles or a surplus in the marketplace, particularly with the, if you like, not large uplift that you'd expect to see in steel production in China with some kind of stimulus, it's not sort of playing out at the moment. That's something we watch with interest. Long term, look, we still believe that you'll see a long-term price that really is driven by the marginal supply coming out of South Africa.
That'll probably be a move away from trucking, where we talk about the $5-$5.50, to more of a move towards an underground mine, which is lower grade, which will actually set, if you like, the price going forward. Still makes an attractive industry for us. Certainly seeing some of those steel dynamics at the moment having some pressure. When it comes to Gabon, we probably don't see them dramatically increasing their production. We think they're probably at that plateau point now, which will hold for a fair period of time. We'll continue to watch South Africa swing in and out based on price.
Yeah. Terrific. Thanks for that. I'll leave it there.
Thank you. Your next question comes from Rahul Anand from Morgan Stanley. Please go ahead.
Hi, Graham and Katie. Thanks for the opportunity. Look, perhaps if we start with Sierra Gorda, it's a two-part question. I wanted to perhaps understand, I saw the tax disputes with the seller of the asset that you had, but then I also wanted to touch upon how does that NPV adjustment mechanism look like in the case of royalty changes? If you could perhaps provide a bit of light to understand whether, you know, there's enough securities built into that agreement for you to be reimbursed in case that NPV does change materially. That's my first one. Let me come back with a second.
Yeah. I'll get Katie to talk through the royalty tax changes, but I would flag at the moment there's a lot of uncertainty what they look like, not only around the royalty changes, but also the constitutional referendum. If you look at it from two fronts at the moment, you're seeing probably not a strong level of support to support the constitutional referendum. The royalty stuff is an ongoing discussion between, if you like, the minerals association and council in Chile and also the government. We wouldn't expect that what the current numbers that are out there is where it actually ends up landing. If you talk about the dispute with Sumitomo, and Katie will come back to the royalty and how the exemptions work. You know, we are in a dispute with Sumitomo at the moment over $130 million of pre-closing tax liabilities.
We have recognized a contingent asset for this, but we're very clear in our mind that that's money that Sumitomo will owe us. We'll work through that process with them as we go through the dispute. Maybe Katie, talking about the indemnity and the royalty changes and how that would work.
Yeah. Look, I think, I mean, probably a couple of key points around what's happening at the moment in Chile. Certainly what we have seen is that the Chilean Ministry has confirmed that the stability agreements will be respected. I think that's a fairly key point for us, which means no impacts until January 1, 2029 in relation to Sierra Gorda there. In terms of the tax indemnity, look, the indemnity provides for payment to South32 at the time of any changes of law enacted prior to December 2025. It is a cash payment determined at the time on an NPV basis.
The intent of that indemnity is to protect us from the introduction of any new mining royalty tax changes or changes to existing mining taxes, and changes to corporate tax rates if they primarily relate to the mineral industry. We will, you know, make an assessment once the proposal becomes law and we have a better understanding of what that looks like.
On Sierra Gorda. The oxide circuit, Graham, when do you expect that project to come online and perhaps what sort of CapEx should we be looking at?
Yeah. You're talking about, from memory, about 130 million tons that are sitting on the surface. It's not a complicated process. You know, obviously in that part of Chile, you see a number of different operations are already doing that. To be perfectly honest, though, in the short term, our focus is more on completing the de-bottlenecking work that's due to be finished by the end of December 2022. Then the next piece that we think gives the best bang for the buck is actually around that fourth line expansion, and we're currently in the feasibility study of that. They're probably the two major focuses. The oxide work is being worked but a little bit slower in the background.
Perfect. Look, final question is around Hermosa. We've seen the inflationary environment and, you know, I just wanted to touch upon perhaps the CapEx estimates you last put out at the start of the year. I know production is some time away still, but how are you seeing the market in the U.S. and the general level of inflation and what type of risks, say, do you assess at Hermosa in terms of any sort of long lead items? Have they already been ordered?
Maybe there are different levels of impact if you think across our business. Maybe start off with where we are in FY 2023 and the activity underway. At the moment, we are currently in the feasibility study, and that's on track to be completed by mid-calendar year 2023. As part of that process towards the back end of this year, we would typically go out and revisit our numbers to understand what they look like in terms of inflationary impact. We'll come back to that. What we have also in 2023, and expecting, we've got our state permits received for dewatering. Water treatment plant number 2 is actually on track and to date is scheduled to be commissioned in the fourth quarter of FY 2023.
We're seeing some small inflationary impacts, but nothing that the team can't manage and nothing that isn't covered by the contingency we have in place. Six of the nine dewatering wells, they'll be needed before you actually get into the ore body and the shaft sinking. We expect to finish those in FY 2023. We're seeing the Clark PFS study progress well. We expect to finish that by the end of this calendar year. That's obviously something that's getting a large piece of support in the U.S. when you consider that manganese now is being declared a critical mineral and how that's being treated in the U.S.
At the same time, in FY 2023, you know, we're continuing to drill Peak, and also we'll start drilling in Flux in early, you know, probably January, February next year. I think there's lots of positive stuff that's going on at Hermosa. Probably the interesting piece is if you think about that capital estimate, and again, we'll update as part of the feasibility study, but I know one piece of work that the team's looking at the moment is around shaft sinking. While shaft sinking, you know, obviously there'll be some inflationary impacts in the broader marketplace, in many ways, we've got our timing right because there's very few shafts getting sunk in North America at the moment. There's actually an abundance of excess people and equipment. I think we're gonna have to look at it piece by piece about how we do the work.
Clearly, we'll be looking at the inflationary impacts as we consider the project. The most important thing for us in the short term is the dewatering, and that includes building water treatment plant number 2 and actually putting in, if you like, 6 out of those 9 dewatering wells. At the moment, they're not being impacted by inflationary pressures at all. The team are managing that well.
Perfect. That's very helpful. Thank you very much.
Thank you. Your next question comes from Peter O'Connor from Shaw and Partners. Please go ahead.
Good morning, Graham, Katie Tovich. Back to Dendrobium. The proportion of labor across Illawarra in general, but Dendrobium specifically, which is labor-based of your costs.
It's about... I mean, Katie will go look at the numbers, but it's about 500 people that work at Dendrobium. We had probably about 19 people who were working on the project, of which three were our people, and 16 were contractors. You know, some of that 19 people will be relocated to some of the vent shaft work. If you sort of think about a breakdown of the operating costs and what we look at, total workforce, like about the Dendrobium. Now, the total workforce is probably around 2,100 people, of which, again, 500 are probably at Dendrobium. What else did you want to understand, sorry, Rocky?
What proportion of the cost base is labor?
Katie, just look up.
Yeah. I'll have to come back to you, Rocky. Give me a second.
Okay. Stepping ahead then. When you step down Dendrobium to the 1.5 million tons, right? You talked about going beyond 28, maybe to 32 or beyond. I imagine that would step down again, because you're starting to talk about remnant mining. What step down does occur at that point? To what level?
Yeah. I would say at the moment, Rocky, what we're very clear about is what do the numbers look like for 2028. You know, what will give more clarity as the team does more work is what does it look like beyond 2028 as we do that work. There are a number of panels that will still be, if you like, similar to what we're mining up to 2020. They have higher levels of CO2, which means your extraction rate will be slower as you actually gas drain. It doesn't mean from 2028, for example, or 2032, you're straight into remnant mining.
There's some more panels that we look at that will be too conventional mining, but we just haven't done the work to firm that up yet because of the concentration on understanding the Dendrobium zone mine piece versus the existing area. Katie, the operating cost, please.
Yeah. Rocky, of our total operating cost in 2022, 44% related to labor, including our contractor workforce.
With that in mind, Katie, and you mentioned before earlier that your fixed costs are lower or high, it's not surprising. You step down production, was it to 25-ish or whenever. How many or what proportion of that labor needs to be retrenched to maintain a cost base which is within the guidelines you've talked about?
Yeah. Look, I mean, we're still working through the levers that we've got in terms of cost optimization, and that's a process we're gonna go through over the next sort of 12-24 months. It's probably too early to comment.
I think that's the right answer. I'd also say at the moment, probably cost our existing business. Our vacancy rates are really high, Rocky. You're probably looking at average of 100-ish, 100 plus in most of our operations. I think as we actually think about the timeframe between now and 2028 and 2032, I think if you look at the turnover rate that you're actually seeing in the industry and the aging of the workforce, I think there'll be a transition plan that will allow you to manage that movement of people.
Okay. It may be the case that there are retrenchments naturally occurring, which is a good thing for you.
Yeah, I think that's right. You know, that mine being in place for a period of time, same has happened. There's naturally turnover we're seeing from attrition, but we're also naturally seeing as age comes into play, people start retiring. We've got quite large vacancy rates at the moment, so I'm not worried about we're gonna put on a lot of people. I think that'll naturally work itself through.
Okay. That's great feedback. On alumina to Hayden's question. You gave a really detailed answer, thank you. Just back to the point about the link, the old, you know, aluminum versus alumina link. It does sound like it's the numbers we used to think about are not there anymore. As a large alumina producer, you're missing that potential that's gone to the aluminum side. Is that short-term, medium-term, long-term that link stays different to what we've been used to?
Yeah. Look, I think, again, the comment around vertical integration, I think is important because, you know, we have obviously increased our stake in the smelters with the Mozal acquisition. Even though we talk about our sales to Mozal, obviously we still actually sell to the other parties in Mozal as well. Yes, we are slightly long in the alumina position, not so much in the Americas part of the country now. You'll also see we've got the Alba deal, which actually was designed to actually protect ourselves or have a take or pay customer, which means you also don't have that large exposure in. It's not about price risk because it's tied to the index. It's more about performance risk, which you've taken away.
Okay. Thank you. Just lastly on Chile. Consultation sounds like it's been high with the government in Chile relating to the mining industry. What level of participation of South32 or Sierra Gorda as a company had with the government ahead of potential changes to the constitution, the mining code or royalties?
Yeah. I mean, clearly when it comes to industry shaping events, we work very closely with the National Mining Agency or Council, whatever you wanna call it. We're, you know, KGHM and Sierra Gorda are an active participant in that. You know, obviously we have strong connections to Rio and also BHP, but also, you know, Antofagasta that we work through on that side. Look, we're actively involved in those discussions. We're very keyed into, if you like, some of the challenges going on in the country. To Katie's point, we have probably one of the longer stabilization agreements in place that finishes in 2028. Clearly from our perspective from an industry, you know, Chile's been a good place to invest. I think it's important for their own economic growth. They continue to make it a good place to invest.
I think the flip side, if you wanna be pessimistic and say that it goes a certain way, I think it'll because they're such a large producer of copper, it'll probably gonna shape the price curve and the cost curve.
To be clear, you haven't had direct discussions, but through the mining council and your peer group, you're closely related to what's going on on the ground.
Correct. Look, the Sierra Gorda management team has had direct conversations, and they're the appropriate people to have it. We manage it through the committees behind the scenes and also some of our people, if you like, that have experience in Chile.
Thanks, Graham. Thanks, Katie.
Thank you. Your next question comes from Glyn Lawcock from Barrenjoey. Please go ahead.
Good morning, Graham. I joined a bit late, but I believe you touched a little bit about aluminum and the smelter cost, but more the breakdown of the historics. Could you maybe give a little bit of quantitative discussion around where the costs sit today? I think from memory, you reset the power contract every August. Maybe just in that quantitative commentary, talk a little bit about how high the power prices have just gone up if they have been reset. Thanks.
Yes. Katie can talk through that detail. I think just to your point, it is important to note that, you know, obviously we have seen the smelter margins move up and also the costs have moved up, particularly when you think of things like pitch, coke, et cetera. It is interesting, if you look at the percentage, if you like, if you look at the percentage of coke, pitch, AlF3, alumina as a percentage of LME aluminum, in FY 2022, we're probably looking at somewhere around 37%, whereas the average in the previous year was probably, you know, a couple of years was around 40%. The power itself generally makes up about percentage of the smelter cost.
25%.
25%. You know, we have two long-term contracts, which I think is important to note. We're not exposed to the spot price, but we do have inflationary impacts in Hillside as a PPI, which is done about every August, which is a 12-month renewal based on when we signed the contract. Katie, maybe talk about what that's looked like over the last period of time.
Yeah, look, I mean, probably the only other comment I'd add to that, we do have the PPI linkage in relation to that agreement, and it is a ZAR-based agreement, which is different from what we had in the past. We are exposed to movements in the South African rand as well there. I think probably just looking half on half, Glyn, too, in terms of H1 FY22 to H2 FY22, we have actually seen efficiency improvements at Hillside in terms of energy use, and therefore a cost reduction in our electricity costs, half on half. Again, you know, at Mozal, we have a similar construct in place in terms of what that pricing structure looks like.
If you think about an increase, it's probably been around the 8% mark when you look at the PPI for the country.
Sorry, Graham, what was that? That was 8%, did you say?
Around 8% is what the general PPI has sort of been flagged in South Africa at the moment.
My question was, quantitatively, though, if I looked at where we sit today, we're in August, you've had your 8% lift in the PPI, but you've got alumina price obviously flowing through now much lower.
Yep.
Are the quantitative costs somewhere between second half and first half than now for both smelters in Hillside and Mozal?
Yeah.
Yeah. You probably hit the nail on the head. That's roughly where it would be.
Okay, cool. Then second question, just, I believe Katie mentioned earlier in the Q&A about, I think the question was $499 million adjusted net debt is appropriate. When we were talking about getting rid of SA Energy Coal, there was talk about, you know, we get rid of the big provision on the balance sheet, we might be able to move to a net debt position. Has your thinking changed now? If so, why?
Yeah. I think, Glyn, that 499 that I'm referencing is our adjusted net debt position post the allocation of our ordinary and special divvies, and the capital management program. We do see that we've shifted, I guess, the positioning somewhat in terms of our balance sheet. We do, as I said, you know, as we assess the balance sheet, we do it on an ongoing basis, in light of the portfolio changes in our forward capital profile in a low scenario. At the moment, you know, our view is that that $499 million adjusted net debt position is the right starting position for us today.
What hasn't changed is, you know, we don't do projections on prospective returns. You know, we focus on very much the cash in the bank, which is what we're talking about, those obligations we have now around those special dividends and dividends.
Yeah. Apologies, I misunderstood what you said, Katie. Sorry. Just a final question, Graham. In light of everything that's happening, the cost inflation, some of it's sticky, some of it's not. You've talked a little bit about, you know, what it might mean for long run pricing, your comments. I mean, are you making changes to your long-term prices? Like, where do you think the biggest risks are to you needing to maybe revise up long-term pricing given what you're seeing in the marketplace?
Yeah. Look, I would start with the position, Glyn, that I don't think there's been a better time to be in the industry when you think about the medium to long term. You know, we talk about this bias to base metals, and whether you believe in a 1.5-degree world or a two-degree world, the one thing you do know is whether it's copper, nickel, zinc, manganese, as you decarbonize, you're gonna need more of it. What you do also know is for the probably past decade plus, there's been a lack of investment in new projects, a lack of investment in exploration, and we all know that taking a project from early stage exploration to commissioning. You talk about seven years, it's a much longer process now when you think about permitting.
Medium to long term, I think the supply-demand gap, and people talk about it in copper, but I think it's gonna be equally, if not worse, in zinc. You know, I think that is gonna create opportunities for people. We're gonna position ourselves for that. We probably haven't seen a major shift, if you like, in our long-term pricing for a period of time. It's relatively consistent, to be honest. I do think some of those inflationary impacts will come and go. I think probably more where the risk is, and the question was asked earlier, is when you're building a large capital project, is when do you choose to actually build that to avoid the inflationary impact? That's the thing that I think is probably the biggest challenge for the industry at the moment.
It wouldn't surprise me if across the board, you know, you'll continue to see projects be deferred until some of that inflation comes out of the market. There will be a little bit of stickiness in the market for a period of time, but I also think the market adjusts relatively quickly as well. Classic example for us, I mentioned earlier, is we think about shaft sinking in the US. While there are inflationary impacts on steel and cement and general labor, there's not many people sinking shafts at the moment, so there's probably no better time to start thinking about sinking a shaft.
All right. Thanks, Graham.
Thank you. That does conclude our time for questions. I now hand back to Mr. Kerr for closing remarks.
Thanks. Thanks everyone for your time today and your questions. Just a quick recap. Look, for us, FY22 was a really strong year in terms of record earnings, free cash flow from operations, return on invested capital. You know, we actually returned $1.3 billion in shareholder returns, about 10% of our market capitalization. You know, we've changed the portfolio over the last 12 months with the Sierra Gorda, the Mozal, the MRN, the Alumar restart, which I think has positioned us very strongly for the future and actually hasn't in any shape or form weakened our balance sheet. It's still a real strength for us. We've dramatically increased our exposure to those critical metals for the future, which I think is important. In the short term, we've got strong growth, 14% copper equivalent production growth in FY23.
Mid to long term, I'd argue we have one of the best suite of projects out there to actually deliver on, which will help, if you like, reap the benefits of some of that supply and demand gap I spoke about in copper and zinc, et cetera. I think we're really well-positioned for that. Wanted to thank you for supporting your questions. Thank you.