Thank you for standing by, and welcome to the South32 Half-Year Financial Results and Outlook H1FY22 Investor and Analyst Call, Australia. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Graham Kerr, CEO. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us today for our Financial Results Conference Call for the half-year ended 31 December 2021. I'm joined today with our Chief Financial Officer, Katie Tovich, and our Chief Operating Officers, Jason Economidis, and Noel Pillay. I'll give a summary of our results before handing back to the operators' questions. The most important commitment we make at South32 is that everyone goes home safe and well, and during the half, we didn't achieve that. In November, we tragically lost one of our colleagues, Mr. Des Menes, a contractor with Laterite Mining who was fatally injured while working at our Wessels Mine at South Africa Manganese. My deepest sympathies are with Mr. Menes' family, friends, and colleagues, and we'll provide them with our support. We undertook a detailed investigation to understand what happened, and we are sharing these learnings across our business.
During the period, we initiated a Safety System of Work, a multi-year program designed to achieve a step change in our safety performance. We will never be truly successful until we eliminate fatalities and significant incidents. Our teams around the world have worked incredibly hard to deliver a strong set of production results during the half, and we have achieved some significant milestones with the reshaping of our portfolio for a low-carbon future. During the period, we achieved a record operating margin of 44% and a significant increase in our underlying earnings to $1 billion. Benefiting from a broad recovery in commodity prices and the divestment of lower-returning businesses, we maintained our focus on operating performance, holding the increase in controllable costs to less than 3% of our total cost base despite significant inflationary headwinds. We delivered record quarterly production of Brazil Alumina and South Africa Manganese.
While at Worsley Alumina, we continued to operate above nameplate capacity. At Cannington, we revised production guidance 5% higher as we prepared a transition to 100% truck haulage in the June 2022 quarter, bringing higher-grade material forward in the mine plan. We also achieved a 26% increase in payable nickel at Cerro Matoso following the completion of the furnace refurbishment and first ore from our high-grade Q&P project. Production guidance has been revised lower for Illawarra Metallurgical Coal and Australia Manganese, reflecting lower first-half volumes and the impact of COVID-19 at those operations. During the half, we generated a substantial improvement in free cash flow and distribution for our manganese business to $942 million despite the temporary build in working capital caused by logistics congestion.
We also delivered a very strong return on invested capital of 25%, and we finished December with net cash of $975 million, which increased to $1.1 billion by the end of January. Our strong financial performance has translated increased returns to shareholders with a record dividend of $0.87 per share and a further $110 million added to our capital management program, with $302 million now to be returned. We've made significant progress reshaping our portfolio with a divestment to South Africa Energy Coal, TEMCO, and Metalloys, which is expected to sustainably lift the group's operating margin into the future. We're adding copper to our portfolio by acquiring a 45% stake in Sierra Gorda, in Chile, and we completed a pre-feasibility study for the Taylor deposit at Hermosa in Arizona, demonstrating potential for a sustainable low-cost operation.
We're also increasing our exposure to green aluminum, increasing our shareholding in Mozal Aluminium, and participating in the restart of the Brazil Aluminium smelter using renewable energy. We are well placed to continue our strong performance, remaining focused on delivering safe, stable production, and realizing value from the improvements we have made to our portfolio. Thank you, and I'll 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 Rahul Anand with Morgan Stanley, Australia. Please go ahead.
Hi, Graham and team. Hope you're well. Look, a couple for me. Firstly, if we talk about the alumina side, Worsley, we're obviously seeing that cost inflation come through, and I guess that's partly driven by the fact that you're doing above-average caustic consumption this year. 112 kilograms per ton in the first half was 102. Could you remind us when that caustic consumption comes back down? Is it over the next 12 months? And then there's a follow-up in the alumina space, if I may.
Thanks, Rahul. If you talk about Worsley, I mean, it's first I'd note that Worsley continues to operate at its nameplate capacity. Whenever we think about where we sit in the alumina cost curve, it's all about relativity, and one of those big drivers is obviously the need for caustic soda, and then the cost of caustic soda. I think in terms of relative gain, as you think about going forward, I think Worsley's always positioned when it comes to that equation. If you think about the comparison of operating costs of the first half of FY 2022 versus the first half of FY 2021, you have seen about a $50/ton increase to $256/ton. The big drivers of that were really high caustic prices, which were $19/ton, and price linked freight, which is about $15/ton.
So the two together are about 65% of that. In terms of the higher caustic consumption, that was probably worth about $5 a ton. And comparatively, the two periods you looked at 112 kilograms per ton versus 97. We do expect that to decline in the second half of FY 2022 as you actually get more, if you like, into lower levels of reactive silica.
Okay. And just as a follow-up on the alumina side, there's a slide, slide 25, where you talk about the alumina market fundamentals and also the aluminium market fundamentals. I guess in the medium term, China doesn't really have a cap on the alumina production side. And then slide 25 also talks about how 89% of bauxite consumed in China is going to be imported. Barring the freight impact of that bauxite, how do you see the cost curve progressing on the back of that? I mean, do you think this is deflationary to the long-term price for alumina?
Yeah, look, what I'd say, and I think that the box in the top right-hand slide on slide 25 really talks about that. And it does say that, look, the long-term outlook for us is supported by that Chinese domestic bauxite depletion, and they will have to bring in alumina units. There's no doubt about that. And obviously, that's been in our forecast for a period of time. And we do see that domestic production, if you like, sort of depleting through environmental policies together with those higher raw material costs, in particular things like reactive silica that will push them out of being economic. From our perspective, that's always underpinned, if you like, our long-term price view when it comes to actually alumina, which hasn't really actually changed that much.
And if you think about when we talk about that, we've always positioned that, if you like, in two ways. One is if the Chinese continue to basically, if you like, import bauxite from Guinea and do, if you like, the refining on the coast in China. Or the flip side is if you actually talk about that they do, if you like, the refining in Indonesia. Either way, we actually find, if you like, strong support for alumina in the long term which we think will underpin the pricing. And again, I think relatively speaking, when you think about Worsley, it is important to note that it actually sits, if you like, it sits very well on the cost curve because of the levels of reactive silica versus some of our peers.
We've always spoken about a long-term price of somewhere around that $380-$390 a ton mark, and that really is underpinned, if you like, by either of those two scenarios, and it certainly positions Worsley in a great position on the cost curve. I do think it does open an interesting dynamic when you also talked about alloy because quite rightly, probably over the last five, 10 years, the industry has been very focused on iron ore and what does the iron ore equation look like, but I think as we move more into the world of decarbonisation and the need for some of these metals to green the world, people are starting to rethink about, well, what does alumina or aluminium look like? What is zinc like? and I guess part of the context of what we showed today in these slides was actually trying to tell that story.
And particularly on slide 24, you see that we're seeing more, if you like, long-term price support for alloy, if you like, by the higher inducement cost of projects in China because of what's actually going on in terms of growth. And we show that on slide 24. Does that help, Rahul?
Yes, yes, sure does. Okay. And then the next one was around the addition to the buyback today. You've obviously added to that, but I wanted to sort of reflect a bit on the share price. Obviously, a bit of a retracement higher, and that's pleasing to see. But how are you viewing current levels? And I mean, is this going to be I mean, are you expecting that you're still quite cheap in the market and you're going to you're expecting that the NPV should be higher, or is this more of now a signaling mechanism and you're perhaps going to start returning a bit more on the dividend side if you can't really complete the buyback as you're planning?
Look, Rahul, I think it's a great question for Katie. Is the CFO, Katie?
Yeah, great. Thanks, Rahul. Look, yeah, I think today we did announce that increase of $110 million to our capital management program. And certainly, we intend to execute that in the form of the on-market share buyback. At this stage, we still see good value in our share price. That said, as you've seen in the past, we continue to have a value-driven approach to the execution of our buyback, and you'll expect to see us buying at lower volumes as prices are higher. So you would expect to see us in the market at slightly lower volumes at these price levels. And then what we'll do is we'll continue to reassess our balance sheets at the end of the half and determine, again, our excess balance, excess cash balance, and the appropriate form of returns.
I think also it's probably worth noting if you think about our balance sheet at this stage with the addition of Sierra Gorda, the Mozal transaction, and Brazil Aluminium, our pro forma net debt balance approaches $1.3 billion with the inclusion of today's record dividend of $405 million and also the capital management program at $302. So we do expect to look to recover that balance sheet position consistent with the capital management framework of an investment-grade credit rating through the cycle. So I think it's the right number for today. The buyback still has value, and we'll continue to reassess our form of returns as we move forward.
I think, Rahul, the only thing I'd add, look, Katie alluded to, I mean, at the moment you still got Sierra Gorda to close. You've got Mozal Aluminium to close. And obviously, we talked about interim financing and how we place that all long term. They're all the pieces that come into thinking about the balance sheet. The fundamental belief in having a strong balance sheet remains unchanged. But I think it is important to note that what we have done with the portfolio changes with South Africa Energy Coal, Metalloys gone, TEMCO gone, it's increasing the strength and the quality of the earnings by taking away those, if you like, capital-intensive low-returning operations.
Perfect. Look, final question for me. Then Graham, the Hermosa mine, you're doing the updated mine plan for that, and you flagged submission for the EIS in the third quarter of FY 2022, which is basically now. I just wanted to understand where do you see the next steps on this after this? And then also, is it fair to assume that this reworked mine plan would perhaps come at a cost to the NPV given the concerns and the reworkings that will be required? That's all for me. Thanks.
Yeah, thanks, Rahul. Look, I mean, that's a good question to talk about with regard to Illawarra because obviously, this time last year, as we've spoken about in the past, the actual rejection of the DND project was really not what we sort of expected, but I think it is important to take a step back and think about how are we thinking about Illawarra. And certainly, the way we think about it at the moment, the DND is an unknown piece, and I'll come back to what I mean by an unknown piece at the moment. You are right that we actually do plan to obviously put the EIS in this quarter, and obviously, we'll look for feedback and commentary from them.
But if we start with Appin, because I think it's important to understand that, we've always spoken about moving towards Appin and thinking about it long term in terms of moving the single panels from FY 2025. We did return to a dual long wall operation in April 2020 using single crews, and that did deliver the higher volumes that we actually saw in FY 2021 of about 7.6 million tons and an average of FY 2019 to 2020 of about 6.8 million tons through the production efficiencies. We did in August 2021 talk about that move to the single long wall operation at Appin, and that really is about achieving single panels to bring further capital and operating efficiencies. But that is going to require, if you like, some investment that we've spoken about in terms of safe and reliable capital expenditure.
And there are really things around coal clearance and ventilation infrastructure, and that allows you to keep pace with the required underground development in the near term. And important to note that we have all the development approvals until 2040 with Appin. So we believe that that investment is really going to set the mine up to be sustainable through the cycle. And as you recall, that's one of the discussions we had at the time around is Appin by itself sustainable or not. We believe this actually is a good step in that direction. Now, obviously, at the same time, we have revised the guidance slightly down to FY 2022. That has predominantly been the impact of COVID-19 that we've seen at Illawarra, which were quite extensive over November, December, and January.
We do expect production to increase again in FY 2023, but then we do expect to see production volumes across the complex to actually come down in FY 2024 as then Appin moves into new mining areas. And in that space, we've spoken about production volumes expected to climb to around 5.5 million tons in FY 2024. And that's really driven by two issues. One, whenever you set up in a new area, it takes some time to set up that longwall, and we're moving into Area 3C in Dendrobium. And the other piece is Area 3C is gas. To note it's CO2, not methane, so it's not the same as the gas that we deal with at Appin. This will result in lower production efficiency at Dendrobium until we move to the next domain. So that's the DND gap case.
As you pointed out, that's now going, if you like, through the approval process. Now, obviously, we've put together an alternate mine plan. We're looking to submit that to the EIS in this quarter, as we've spoken about. It's useful that obviously we've had the declaration of the project being safe to give an infrastructure. We do believe that Dendrobium Next Domain mine plan does focus on extracting the higher value coal from the resource with the lowest gas content and reduces the overall footprint by about 62%. What it does do, we believe, is address, if you like, some of the issues that were actually raised by the Independent Planning Commission. Now, obviously, we're not in a position to make a final investment decision yet because it needs to go through that EIS process.
It needs to basically, if you like, have input from various different bodies, and then we need to see what the conditions look like. What we're focused on at the moment is ensuring that we preserve the optionality at Dendrobium for the future.
So it sounds like it might even be a bit lower on the CapEx side as well to offset even this.
Look, I think obviously, smaller infrastructure, smaller area, so that should translate to why you don't have the same tonnage. You should have some lower capital efficiencies. But again, until I think we go through that approval process, we've seen what it's been like over the last 18 months, not only in New South Wales, but across Australia and across the globe around met coal projects. I think we just need to work through that process before we give too much guidance.
Fair. Okay. That's very helpful. Thank you. I'll pass it on.
Your next question comes from Paul Young with Goldman Sachs. Please go ahead.
Good morning, Graham, Katie, and team. Graham, two questions from me. Just the first one on unit costs. First of all, guidance, it's pretty well flagged. So expected by the market, you've just been through cost exogenous pressures. Where else are you seeing? Where are the other big cost pressures you're seeing on the uncontrollable side? And how long do you think this lasts? Is it six months? Is it 12 months plus? And obviously, that's higher uncontrollable costs, fantastic for marginal cost push and commodities. That's the first question. Thanks.
Yep. No problem, Paul. And I'll probably get Katie to talk you through that. I mean, obviously, not all cost increases are a bad thing, particularly when you think about royalties, but Katie can unpack the numbers.
Yeah. No, look, I think, I mean, your observations are right, Paul. We are seeing price linked cost inflation, but predominantly in our aluminium value chain coming through cost and our aluminium raw materials, but also royalties at Illawarra and Cerro Matoso. But we are expecting to see that flow through, and you will have seen we have increased guidance at a number of operations, unit cost guidance at a number of operations, which really is reflecting the continuation of that theme in half two. And I think you'd also expect to see Mozal and Hillside heading into the second half similarly influenced by those raw material cost increases, energy cost impacts with PPI changes. And there's some tailwind for us probably coming with FX. But certainly, at the moment, we're probably not seeing cost pressures that others are seeing in relation to labor at this stage coming through.
But perhaps the exception there is at Cerro where we're seeing higher contractor costs, which is largely associated sort of with COVID impacts and accessing labor there.
Okay. Thanks, Katie. Second question might be another one for you, Katie, around the dividend. I understand it was the bottom end of your, I guess, your minimum threshold. It's prudent and conservative. You've got to bed down Sierra Gorda. Obviously, other cash outflows, as you call it. But obviously, commodity prices are very high, sort of 10-year highs at the moment. The outlook looks fantastic. Is it going to be a different conversation with the board come August regarding the payout ratio?
Look, I think, Paul, there's probably a couple of points I'd make there. One, look, it is a record dividend. It's consistent with our policy of 40%. And if you think about the increase to the capital management program of $110 million, if you reflect back through time, our cumulative returns to shareholders are 83% of our underlying earnings. So look, we think we've got a flexible structure to return cash to shareholders when we do have excess cash. And also, in terms of our dividend payout ratio, it's working as intended. It's intended to protect us in the downside and enhance returns to shareholders as our earnings improve. So I think, look, we're comfortable with that dividend payout ratio. We have the flexibility with the ongoing capital management program to increase returns, which is delivering, as I said, 83% through time in terms of cumulative returns to shareholders.
I think the effectiveness of our buyback program. We've bought back 13% of our shares on issue at $2.88 a share. That's really driving EPS and DPS accretion for our shareholder base with the reduced shares on issue. Look, I think we've got the right approach. We need to restore our balance sheet to where we can be comfortable that we can maintain that investment-grade credit rating through the cycle post the completion of these transactions, then we'll continue to assess excess cash as we always have done and return to shareholders in the most efficient manner.
I think, Paul, for me, slide 16 in the pack, because we've always talked about being exposed to commodity prices, but that's a good thing and a bad thing. And I think slide 16 really shows that we saw a huge increase in most of our commodity prices between the first half of FY 2022 versus FY 2021 first half. But I think on the far right-hand side, we also ran spot versus the first half of FY 2022. And in that case, you see another considerable step up in prices. Now, if that holds, obviously, we'll continue to generate very strong cash flows. And I think Katie's key point about thinking around a strong balance sheet remains unchanged. But I think our history of returning excess capital or cash back to shareholders remains in place as well. That hasn't changed.
So the board will think about it through the lens of our framework that we've always had, and the framework is really unchanged.
Great. Thanks, Katie. Thanks, Graham. That's it from me.
Yeah. So I'll probably just add one other thing. I mean, if I think about returns at this stage and Sierra Gorda and Mozal, if you think about the multiples that we're investing at there, Sierra Gorda at 3.3 times FY 2021 EBITDA, Mozal at 1.9 times half one FY 2022 annualized EBITDA. These are really strong investments, and this is our capital management framework at work in terms of creating that competition for capital. So that is competing with returns to shareholders at this stage.
Your next question comes from Lyndon Fagan with J.P. Morgan. Please go ahead.
Thanks. The first one's just on Illawarra. I just wanted to try and understand the CapEx in FY 2023 going up to $360 million that year. Can you maybe walk us through the scope of that and how much flows into future years? I just wanted to make sure that we're capturing the right amount in the model.
Yeah. So maybe if I take a step back and the major amount of that capital is tied to what we're doing about Appin going to that single long wall. And if you think about that single long wall in the conventional configuration, when we talked about it at the time, Lyndon, the benefits are around increasing long wall length, reducing the number of long wall moves, reduced delays, etc. But the other piece was, what does it actually mean for future capital requirements? It does result in 30 kilometers less underground development. It does require us going from basically four vent shafts to two and from seven continuous miners to four and obviously have less gas drainage rates to go from about 12 to four. So if you think about the capital we're talking about, I'd probably group it into a couple of areas.
One will be around two vent shafts. The second one would basically be around some coal clearance work. And probably the third piece is around some new long wall shields as we sort of get into this sort of new area. And the way I think about the capital is we have gone through our FY 2022, a safe and reliable capital expenditure of $300 million-$360 million, which really is the peak. And that'll come down, if you like, in FY 2025, where it goes back to more normalized levels.
Great. And then with regards to production going from seven and a half to five and a half out at that time, how quickly can it recover?
I think the big issue for us around production is not Appin. The big issue for us around production is going to be around Dendrobium Next Domain and the DND adapt project. And what does that look like in terms of the approval process? What does that look like in terms of the economics and then investing in it? Now, obviously, we're moving into Area 3C. So that does take a little bit of time to actually set up a longwall in a new area. As I mentioned earlier, it is an area that has high gas levels than what we've actually seen in Dendrobium before. But again, very important to understand when we talk about those gas levels of CO2, not methane, so managing it in a different way. There are potential that we could do a little bit more in 3C. We don't know that yet.
We need to do the work. But the big unknown, Lyndon, to me, is actually getting the approvals of the DND adapt project. And when I say the approvals, to be very clear, that'll be the state and the federal government approvals, but then it'll be our own board approval to be comfortable that the economics and investing make sense. Part of the work we're doing in the investment in Appin at the moment is to ensure that Appin itself can actually be standalone. And that just gives you the optionality around Dendrobium.
Okay. Thanks. And just a couple on aluminium. So just with the Mozal ownership, it can go up to 25%, a minimum of 16%. Can you maybe refresh on where we're at with that? Is the up to 25% still possible?
Look, I mean, obviously, there's ourselves and the IDC, so South African government-funded entity. Obviously, if it was available, we'd take the whole 25%. We've exercised our preemptive right. The IDC have indicated that they want to exercise their preemptive right. They will work through that process, which will obviously have their own internal improvements, both for the IDC but also the government. So we'll await that outcome. We can still complete the first part of the transaction. If they, for some reason, decide not to proceed or they don't get approval from the government, then we'd be interested in mopping up their share on the same terms.
Okay. Great. And just another quick one, if I may. There's a lot of promotion of green aluminium, which is great. Are you able to point to any green premiums in the market to try and capture the benefit of that?
Look, it's a good question. Lyndon, I think as time goes by, we're seeing more and more talk about, is it a premium or is it more and more talk about, are you excluded from certain markets? And I think that's probably more the longer-term game we're thinking about, particularly if you think about something like Mozal. Mozal, if you keep that hydro contract long-term, you already have in place a good agreement to EU around VAT exemption selling into the EU. So if you have green aluminium with a good supporting agreement, quality reliable supplier, I think that makes Mozal incredibly valuable, which is why we're targeting it. Whereas if I think about Hillside, the challenge for Hillside, which we're openly talking to the government and Eskom about, is we sell roughly 30%-40% of the product domestically that goes to Hulamin and the car makers.
They sell their product into Europe. If ultimately Hillside doesn't become green, will Europe want to buy those components? So I think that's more, to me, the dynamic in the medium to long term. Who's actually going to buy green aluminium versus who's going to buy it, for want of a better word, non-green aluminium?
Thanks a lot, Graham.
Your next question comes from Matt Green with Credit Suisse. Please go ahead.
Hey. Good morning, Graham, Katie, and Tim. Graham, my first question is just on the PFS study on the conversion of the boiler at Worsley. Are you able to provide some high-level economics on what that study's produced then?
Yeah. Look, I mean, I think what you sort of alluded to is actually something worth touching on because one of the things we talk about is the move of our portfolio to basically have more exposure to green commodities. But it doesn't mean we're not focused on what we do around our own Scope 1 and Scope 2 emissions. And when you start thinking about Worsley, really Worsley accounts for about, if you look at our FY 2021 emissions, it accounts for 38% of our Scope 1 and 1%, if you like, of our Scope 2. For me, the order of impact is Hillside accounts for 56% of our Scope 1 and Scope 2, and Worsley accounts for 17%. Then Illawarra's 11%. And then you're sort of really getting into the rounding. So the really big focus areas we've got at the moment are essentially Hillside, Worsley, and Illawarra.
Now, if you think about Worsley, we've talked a fair bit about the way we plan to approach that, and I think you're pointing out one of the aspects that we're actually working on to how we actually improve our footprint there. And certainly, one of them is how do we actually convert from coal to gas and ultimately how do you go from gas to something else? The other one we're also obviously talking about is what do we do, if you like, around mud washing, so that's the other big project that's sort of on the go at the moment, and that's certainly designed, if you like, not only around energy savings but also water savings. Look, the actual first coal to gas conversion is what's called Facility 110 at Worsley, so that's one of the first multiple ones. We're in the process of completing a pre-feasibility study.
It's an interesting one because we've got to balance the just transition of Collie. So Collie, if you like, is the coal-producing region, if you like, in the southwest. Not only does it support us, it also supports the government power station at the moment. So obviously, we've got to work very closely with the residents around employment and just transition, but also ensuring the government can manage their own power station needs as well. Now, in saying that, I think the positive is that we're actually seeing the gas, if you like, open up quite considerably in WA, particularly with the Perth Basin coming in. So at the economics, at the moment, the economics look attractive on doing that conversion. But we'll go through the PFS study, finalize that, and then go into feasibility study.
I'm not sure, Katie, as Chair of the investment committee, you want to add anything on that, Katie Tovich ?
No, that's right. We're in PFS phase this year, and we should expect to complete that this year and then assess how we take that project forward.
Okay. That's great. Thank you. I just noted on slide nine, it says you've completed a PFS. That's the question there. But look, just keeping on the green theme then. And look, you touched on it, Graham, there just on the green alloy premiums. But I guess at the moment, just given some of the low inventory levels we're seeing on the aluminum elsewhere, what are you observing in the market here? And what's your expectations of how this could pan out over the next sort of six-to-12 months?
Yeah. Look, I mean, I think there's no doubt at the moment. Obviously, aluminium, if you look at the short term, we're seeing it being driven by firm demand, tighter supply, and we actually see some upside price risk from low inventory levels. And if you look at what you're seeing in prices, obviously, even over the last month, you've seen the aluminium and the shift. You've seen price increases of 10% and 6%. And I think that really has been driven by the expectations of further Chinese and European smelter cuts and declining, if you like, Chinese social inventory. So I think that is sort of driving some of the short-term prices. If we sort of think aluminium, how long does it last around this? We'd probably see around that $3,000 a ton mark for the next plus M plus 3, if you like, timeframe.
Probably over 12 months, you'd probably see it hovering much more close to $2,800 a ton, but in saying that, I do think there is that overlay of what's going on, if you like, in Europe at the moment around energy security and what Russia's up to, and the other piece, obviously, is demand continues to strengthen. From our perspective, and I made the comments earlier, I do think the whole aluminum value chain is something that people need to rethink about, particularly as the world decarbonizes, the use of that, not only, if you like, into the energy mix, but also how does it fit into the replacements of plastics, and I think that's something that people probably haven't done a fair bit of work on for a while.
Certainly, part of the reasons why we're investing in green aluminium and we're going double what our current green aluminium capacity is through the additional stake in Mozal and also what we're doing in Alumar, I think that's in the belief that we see stronger support for aluminium in the long term.
That's great. Graham, thanks for the color there. And Katie, perhaps one for you. Just on the working capital build, $330 million, appreciate about $150 million of that in alumina inventory. May take some time to unwind that, which is paid. But of the circa $140 million increase in the cash at the end of January, how much of that was an unwind in that working cap?
We haven't seen, in January, an unwind in working cap. I mean, we put, and to your points, I mean, of the $333 million built in working cap to the half, roughly half of that was in inventory, and we are working actively to look at different freight strategies and warehousing strategies to manage that freight risk, which has predominantly been out of South Africa, and to ensure that we can get product to market efficiently, so we do expect those strategies, assuming freight markets also cooperate with us through the next half, to come back into our operating windows by the end of the year, the financial year, so we would expect to see a large portion of that inventory component unwind, but certainly, yes, in the January period, we've seen a further build in working cap.
That's great. Thanks, Graham. Thanks, Katie. That's all for me.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Paul McTaggart with Citi. Please go ahead.
Good morning, all. So you mentioned earlier some of the, I guess, the acquisitions you made, like Sierra Gorda, which, assuming we get completion in February, is pretty well timed. On that asset, obviously, you've talked about some kind of capital-efficient debottlenecking projects. Can you give us any more color on this yet? Are we at a point where we can add more, or we should need to wait till it's complete and spend some time there?
Yeah. Look, I think, Paul, there's probably not a lot to add from what we gave at the release at the time of the acquisition. We do expect it to basically, obviously, close in February as we alluded to. And we're very confident that's obviously occurring. We will give, if you like, some firmer guidance of what that looks like when we announce that closure of that deal. But fair to say, now, obviously, we're about to take up our seats, obviously, when we close the deal on things like the operating committee, the technical committee, and we'll drive a bit more of that program. But those early opportunities around debottlenecking, I think you see Sierra Gorda or the KGHM team continuing to actually deliver those. And we certainly see upside, if you like, on the oxide project and also upside on the expansion.
But as we sort of get into that, we'll disclose more about that. I think to your point, if you think back of timing, timing doesn't always work that way, so let's be honest. But I think the acquisition of Mozal, additional stake there, and I think the additional restart of the Alumar smelter, I think the timing of both of those and Sierra Gorda from a commodity price perspective has been very positive for us.
Just while I cut you, just on that Alumar CapEx, can you remind me what the kind of CapEx is for that restart for the smelter?
Katie?
We've said $70 million is the cumulative cost at this stage and roughly $10 million of that is capital cost.
Okay. Thank you.
To be clear, that is a 2022-2023 spend. It's not a 2022 spend.
Yep.
Your next question comes from Glyn Lawcock with Barrenjoey. Please go ahead.
Good morning, Graham. Just a couple of quick ones. Firstly, just Cannington. I mean, it seems like it just seems to be slipping on the closure date. Is there anything to be concerned about, just understanding where the process is? And then the second question's just interested in your high-level thoughts around, obviously, your focus is to move South32 into that low-carbon future with future-facing commodities. But you've exited energy coal in South Africa, but you're still dragging a coal asset. And when I look at how the market rewards you for the focus on future-facing, but you're still carrying a business that's maybe, call it circa 20% given prices where they are, what's the future for Illawarra? Do you think this business can get re-rated while you drag the coal business along with you?
Yeah. So let's maybe tackle those in parts. We talk about Sierra Gorda. If you remember, some of the conditions that we needed to basically complete were around competition clearances, and they were basically China, they were Turkey, they were Brazil, they were EU. You don't always necessarily control the timeline of that, and they did occur over the festive period. But we actually have all those competition clearances now that have actually been completed. I think now you've probably gone if you think about where the holidays are playing out, there's been some public holidays in Chile. There's also a public holiday Monday in the U.S., and there's also a public holiday coming in Japan. So I think it's just some of those timing issues around that. So there's nothing in that space that concerns me around risk to completion.
So it's just some of those factors coming into it. And I think in the end, if it all completes, looking at the moment, we'll probably be six or seven days over what we were hoping for. So in the scheme of things, not massive. I think your second question around Illawarra, on slide 42 of the pack, and I think you raised a really good point because we have made a fair bit of progress about growing our exposure to what we consider the metals that are critical to low-carbon future. And on slide 42, we sort of talked about, if you like, what our revenue mix was by commodity in the first half of FY 2022. And as you point out, at that stage, metallurgical coal's about 20%.
In the future, if you bring in Sierra Gorda and you rebase it all with the Alumar and the Mozal coming in, you're probably looking at that met coal piece being about 16%. So maybe we talk about a strategy internally about a bias to base metals. We still think metallurgical coal is different from energy coal. So if you think about, if you like, energy coal, there are ready-made replacements today, if you like, in terms of solar, wind, etc., battery technologies that are fastly moving in that space where it's more competitive. Met coal at the moment would still have the belief that real green steel is a fair bit away, 20-plus years, and there's substantial investment to be made in that space.
We do believe that, if you like, the hard coking coal that comes out of the east coast of Australia is obviously of a high quality, particularly Illawarra, and I think that's important when you think about, well, what does that mean for steelmaking going forward and its own carbon footprint, so there's no issues for me around holding metallurgical coal as a percentage of your portfolio. I don't think we'd want it to be the majority. I think about where it sits at $400 a tonne today. While I'd be happy if it stayed at $400 a tonne and made up about 16% of our revenue base, I don't expect it to sit at $400 a tonne, so I think it will naturally move down over time.
I think the bigger question for us is, how do the economics continue to stack up in metallurgical coal, particularly as we've got to look at what DND looks like, particularly as we actually make Appin standalone. I think the key word I spoke about before was ensuring that we have optionality around DND. What we're not going to be forced into is making a decision on an uneconomic project. Until we see what the approvals look like, does a revised mine plan get up under any particular conditions, we're not in a position to actually talk about that. If Illawarra stays positive, cash flow, delivers an acceptable return to our investors, I don't see a problem holding it, if you like, in the portfolio.
I would say on the flip side, there are a number of people looking to think about the metallurgical coal business at the moment, and obviously, for ourselves, we've been looking at alternate options for Illawarra. To your point, it's not like there's a long list of investors or public companies that want to actually invest in metallurgical coal because of the ESG shareholder issues.
I totally appreciate that, Graham. But the market can already see it's less than 20%, to your point, in that slide, yet you're still trading at four times EBITDA. It doesn't seem like it's half the multiple of a pure-play base metals company. It feels like you're not going to get rewarded while you hang on to it. And I understand the pros and cons you've gone through. But at $400 met coal, if you can't sell it at $400, it's going to be hard to sell it back at $150.
Yeah. And I think what we've said in this case is we want to build optionality. We want to get some sense of where DND goes. That's the most important thing for us at the moment. If it ends up being 8% of our portfolio, 6% of our portfolio, as the price adjusts, I think it's more our job to actually sell better this transition we've done to those green metals. And that's probably something that's really occurred over the last six or seven months. So we've got an opportunity to talk to the market more about that and obviously get that revaluation through that way. What I don't want to do is be in a position where you're forced to do something with met coal that doesn't actually generate an acceptable return for your shareholders. And that probably is two-fold.
It's one that you actually invest in a project that doesn't make economic sense, or two, you actually divest it for what you think it's less than what it's worth.
All right. Thanks very much.
There are no further questions at this time. I will now hand back for closing remarks.
Thank you. And thanks, everyone, for your time today. Really appreciate it. It's a busy reporting time. Maybe just a couple of key messages to wrap it up. One is, look, in the first half, we've recorded a very strong result, record operating margin of 40% and return on invested capital of 25%. And look, no doubt we benefit from broader, higher prices. But I think at the same time, we're really seeing the benefits of what we've been doing on the portfolio by divesting those low-return businesses. And in that mind, we have actually done a lot of, if you like, substantial steps over the last six- to- 12 months to actually reposition our portfolio for those green metals.
And that includes, obviously, the work we've done around increasing our stake in Mozal, the restart of Alumar smelter, the acquisition of Sierra Gorda, which will complete in February, as well as actually talking about the potential at Hermosa with Taylor, Clark, Flux, and Peake. And the important thing, I guess, for all investors to know is, while the quality and strength of our earnings are getting better, what hasn't changed is our approach to capital management and the whole fact that it hinges around having that strong balance sheet, but also equally important, continuing to reward shareholders as their financial performance improves. But thank you for your questions any time today and look forward to talking to you individually soon.
That does conclude our conference for today. Thank you for participating. You may now disconnect.