Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- South32 Ltd (SHTLF, Financial) reported a strong financial performance with an underlying EBITDA of USD 1.8 billion and underlying earnings of USD 380 million for FY '24.
- The company lowered its net debt by USD 320 million in H2 FY '24, reflecting a strengthened financial position.
- South32 Ltd (SHTLF) announced a USD 140 million fully franked ordinary dividend and a USD 200 million allocation to an ongoing capital management program through an on-market share buyback.
- Significant milestones were achieved, including the progression of construction at Hermosa's Taylor zinc-lead-silver deposit and the sale of Illawarra Metallurgical Coal for up to USD 1.65 billion.
- The company has a strong near-term production growth outlook, with expected increases in copper and low-carbon aluminum production in the coming years.
Negative Points
- The lost time injury frequency rate increased by 19%, indicating ongoing safety challenges despite improvements in other safety metrics.
- Operations at GEMCO were suspended due to significant damage from tropical cyclone Megan, with a phased return to normal production not expected until FY '26.
- The West Australian Environmental Protection Authority imposed conditions on Worsley that South32 Ltd (SHTLF) finds impractical and inconsistent with other regulations, leading to an appeal process.
- The Cerro Matoso operation faced higher unit costs due to lower grades and ongoing legal disputes with the government around royalty and tax changes.
- The Brazil Aluminum operation reported negative EBITDA and higher-than-expected operating costs, with challenges in ramping up production to nameplate capacity.
Q & A Highlights
Q: Graham, good to see the buyback being reinstated and also the completion of Illawarra. Few questions actually on Worsley. No doubt you'll have a few more. Just the first thing to point out some good cost guidance, I think, for FY '25, and I know you've given a target, I think, from FY '27 on production of 4.6, which is good to see, but I presume that assumes that you obviously will get your permits from the EPA. So just to ask the question, just the confidence around why you think you'll see a resolution on this by the end of this calendar year? And how do you actually find middle ground here with EPA?
A: Thanks, Paul. Look, really good question. I mean just to sort of cover some of the context for the people on the call, the current approval we are seeking will cover the next 15 years of bauxite mining from our perspective. It has been a process that began with the EPA in 2019. And it's fair to say it's been a long frustrating process where we've had multiple chairmen, multiple case officers. And it's the own WA government report outlined at the end of last calendar year, the EPA has some serious challenges and needs to be fixed. We got a hold of those conditions on the 8th of July. And those conditions from our perspective were a surprise, were not as expected and certainly go beyond what we believe is good scientific evidence. And also, if you like, some of the discussions that were held along the way. A great example of that would be around greenhouse gas emissions where the addition of Scope 1, Scope 2, and Scope 3 is quite alarming, particularly some of it's been measured, but also that it goes well beyond the federal safeguard mechanism in terms of changes we're looking for. And because of the nature of scope to electrification of the system that is ultimately required in the Southwest, we put a lot of the businesses in the Southwest of WA at risk. That's just one example of the things that we think, if you like, are very disappointing and really ignore scientific assessment. To date, the government has been quite clear that there is a process that is legislated that needs to follow. The process has been for the EPA, which is an independent body to make their assessment based on various public submissions in their own scientific work. What we have seen from the government now was a commitment around the appeals process and a commitment to come back with the final decision on the appeals just before the start of November. So they can then actually ensure that the minister can make a decision then. The appeals process, we based purely on scientific evidence. It won't take into account things like social impacts, job impacts, community. But the appeals process will make recommendations to the Environment Minister. The Environment Minister then, for the first time, has the ability to consider all those other issues. What we are confident by is there's been a really strong engagement at various levels by the WA government, which has been really good. I've had a lot of those meetings with the Premier as well as our other senior people. They have certainly committed on the schedule. They've provided enough resources to ensure that the appeal process runs smooth because that's one of the challenges for the API, and they've certainly been very forthright on their commitment that this will be resolved in early November, which then allows us 30 days for a Federal approval. We really need the approval by the end of the calendar year. That then allows us, if you like, to be in a position that we can start seriously getting into the new mining areas in the first half of the next calendar year towards the back end of that. We could always run the refinery under these conditions, but that very much puts it under, if you like, economic viability of threat, in particular, the greenhouse gas issues. But there are other issues well that we'd look to see to be resolved. There are broader implications if this is the path they go down the EPA in terms of offsets, but also greenhouse gas emissions that will impact every other resource and potentially infrastructure projects in WA, sorry, so it is very alarming for the WA government. And also in the background context when you look at a number of our competitors in lithium, even iron ore, nickel have been shedding a lot of jobs in WA, which is probably not something that the WA government has seen before. And particularly, if you think about a stable action coming up in the first half of next calendar year.
Q: Okay, good context. And then maybe moving up to GEMCO. Good to see that, I guess, you've got the confidence that you can get up and running again in the June quarter next year and also the insurance offset. It's probably the fastest agreement I've seen from insurance company post an event like this. So interested in your views there, but just on actually the rebuild of the berth, what actually can you tell us around the contractor mobilization and the confidence about actually getting this project, which is quite a specialized project actually completed by March next year and through the wet season.
A: Yes. Thanks, Paul. Maybe a little bit of context, I think, is also useful there because I think it sort of leads into your story, your question. I mean, when you think about that GEMCO, it's not like GEMCO is immune to cyclones. This is a regular event that occurs multiple times a year up there. What is very different in this situation was the size and the speed at which this cyclone actually came in. To put it in perspective, we had 681 mm of rain in a very short period of time. Second highest set of wind gusts, which were recorded at 87 kilometers an hour, and that resulted in mass flooding, storm surges and attenuated waves and wind conditions in the port. To put it in perspective around water volume, typically coming out of a wet season, we'd be moving about 10.5 gigaliters. We're actually, this year, having to deal with 36.3 gigaliters of water post Tropical cyclone Megan. If you think about the percentage terms, that's 346% above the norm. So the wharf is not the only piece of work that needs to be done here. There is a large piece of dewatering. There's a large piece of rebuilding bridges, et cetera, that connect to different mining areas to get equipment and people back and forth. The wharf itself, the contractor is engaged. Some of the long lead items have sort of been already ordered. Barges are set to sort of arrive, et cetera, et cetera. When we look at the dates, there's probably 3 things that are obviously on our mind. One, obviously, is we do expect more weather events and cyclones up in that part of the world. So we will have an allowance for the wet season and cyclone activity. Demolition to me will be the biggest issue. So demolition, there's a nice visual diagram that we have. There will be a series of existing pillars of the old wharf that will work off the back of. But then there will be a series of other pillars, if you like, are damaged beyond use and
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
