Results:
https://www.investegate.co.uk/announcem ... 23/8038826South32 announces investment in Hermosa and is well positioned for second half
"We delivered Underlying EBITDA of US$708M, as record Group aluminium production was offset by commodity price headwinds, and lower metallurgical coal volumes as we completed planned longwall moves at Illawarra Metallurgical Coal.
"We continued our rigorous focus on costs identifying further opportunities to drive efficiencies. This supported FY24 Operating unit cost guidance being lowered or held unchanged across the majority of our operations, along with lower FY24 capital expenditure guidance at our operations through capital efficiencies and the deferral of certain non-critical projects.
"Today we have taken the next step in our portfolio transformation by announcing a US$2.16 billion investment in the Taylor zinc-lead-silver deposit at our Hermosa project in Arizona, with first production expected in H2 FY27.
"This investment is a major milestone for our business, that further reshapes our portfolio towards commodities critical to a low-carbon future. Taylor is expected to deliver value for shareholders for decades to come and underpin further growth phases at our regional scale Hermosa project, establishing it as a globally significant producer of commodities critical for a low-carbon future.
"In addition, we continue to invest to unlock value across our business. We remain on track for a final investment decision for the fourth grinding line expansion at Sierra Gorda during the fourth quarter of FY24 and continue to progress more than 25 greenfield exploration options in base metals.
"Looking forward, we remain focused on driving operating performance and cost efficiencies across our business. This focus, combined with our expected 7 per cent production uplift in the second half, places us in a strong position to capture higher margins as market conditions improve."
PERFORMANCE SUMMARY
The Group's statutory profit after tax decreased by US$632M to US$53M in H1 FY24, as record Group aluminium production and lower raw material input prices, were more than offset by lower commodity prices and metallurgical coal volumes as we completed two planned longwall moves at Illawarra Metallurgical Coal. Underlying earnings decreased by US$520M to US$40M in H1 FY24. A reconciliation of statutory profit to Underlying earnings is set out on page 6.
Underlying EBITDA decreased by US$656M to US$708M, for a Group operating margin(6) of 19.0%, due to the aforementioned commodity price and volume impacts. We maintained our focus on cost management, holding increases in controllable costs to approximately 4% of the Group's cost base(13), despite broad inflationary pressures. We also realised the benefit of our portfolio improvements in copper and low-carbon aluminium(14), with Sierra Gorda contributing Underlying EBITDA of US$117M at an operating margin of 36%, and production from Brazil Aluminium more than doubled.
In H1 FY24, we completed a Group-wide review of expenditure that identified further efficiencies and options to defer non-critical projects. This has supported FY24 Operating unit cost guidance being lowered or maintained across the majority of our operations, and a 6% reduction in FY24 Group safe and reliable and improvement capital expenditure.
Looking forward, our expected production uplift of 7%(15) in H2 FY24 and continued focus on driving cost efficiencies, places us in a strong position to capture higher margins as market conditions improve.
Free cash flow from operations, including distributions from our manganese and Sierra Gorda equity accounted investments (EAIs), decreased by US$544M to an outflow of US$417M. This reflected our continued investment in productivity, improvement and growth projects, and a temporary build in our high value aluminium inventory as third-party port congestion impacted the timing of shipments. Looking forward, we expect to reduce our aluminium inventory position in H2 FY24, adding to the Group's cash generation.
We returned US$180M to shareholders during H1 FY24, paying a US$145M fully-franked ordinary dividend in respect of H2 FY23 and returning US$35M via our on-market share buy-back. We have today announced a fully-franked ordinary dividend of US$18M (US 0.4 cents per share) in respect of H1 FY24, consistent with our policy to distribute a minimum 40% of Underlying earnings as ordinary dividends in each six month period.
We continue to prioritise a strong balance sheet and investment grade credit rating through all cycles, finishing the period with net debt of US$1.1B. Our current investment grade credit ratings were re-affirmed in H1 FY24 and we retain access to significant liquidity, having successfully extended our undrawn sustainability-linked revolving credit facility.
To manage our financial position and ensure we retain the right balance of flexibility, efficiency and prudence, we have taken the decision to cancel our on-market share buy-back, which was due to expire on 1 March 2024(16). Consistent with our unchanged capital management framework and in the context of our financial position, we will continue to assess opportunities to return excess cash to shareholders in the most efficient and value accretive manner.
We have today announced(17) the next step in our portfolio transformation, approving a final investment decision to develop the Taylor zinc-lead-silver deposit at our Hermosa project in Arizona, USA. With first production expected in H2 FY27, Taylor has the potential to be one of the world's largest, lowest cost zinc producers and deliver value for our shareholders for decades to come.
Specific highlights for H1 FY24 included:
• Delivered record half-year Group aluminium production, and increased zinc and nickel production by 20% in Q2 FY24;
• Finalised new industrial agreements at Illawarra Metallurgical Coal and Cannington;
• Completed a Group-wide review of costs to deliver further efficiencies and reduce expenditure;
• FY24 production guidance is unchanged and we expect to deliver a 7%(15) increase in production volumes in H2 FY24;
• FY24 Operating unit cost guidance has been lowered or maintained across the majority of our operations;
• Invested US$188M at Hermosa as we installed critical path infrastructure and progressed study work and federal permitting for our Taylor and Clark deposits;
• Progressed the feasibility study for the fourth grinding line expansion at Sierra Gorda, ahead of a planned final investment decision in Q4 FY24;
• Continued our investment in greenfield exploration to discover our next generation of base metal mines, spending US$19M in targeted prospective regions; and
• Progressed decarbonisation programs to support our target(18) to reduce operational greenhouse gas (GHG) emissions by 50% by 2035, completing the conversion of Worsley Alumina's first coal-fired boiler to natural gas.
Subsequent to the end of the period:
• Announced final investment approval for the Taylor deposit at our Hermosa project, a major milestone aligned with our strategy to reshape our portfolio toward commodities that are critical for a low-carbon future; and
• Entered into a binding agreement to divest our 50% interest in the Eagle Downs metallurgical coal project to a subsidiary of Stanmore Resources Limited, for upfront consideration of US$15 million, a contingent payment of US$20 million, subject to the Eagle Downs project reaching metallurgical coal production of 100,000 tonnes, and a price-linked royalty of up to US$100 million. The transaction is expected to be completed in the 2024 calendar year subject to the satisfaction of conditions precedent including approval from Australia's Foreign Investment Review Board and certain joint venture consents.
EARNINGS RECONCILIATION
The Group's statutory profit after tax decreased by US$632M to US$53M in H1 FY24, while Underlying earnings decreased by US$520M to US$40M.
Consistent with our accounting policies, various items are excluded from the Group's statutory profit/(loss) to derive Underlying earnings. Total adjustments to derive Underlying EBIT (US$161M), shown in the table below, include:
• Sierra Gorda (+US$47M) and manganese (+US$71M) joint venture adjustments: adjustments to reconcile the statutory equity accounting position to a proportional consolidation basis; and
• Net impairment loss of financial assets (+US$48M): periodic revaluation of the shareholder loan receivable from Sierra Gorda reflecting copper prices and other macroeconomic assumptions. An offsetting amount is recorded in the Sierra Gorda joint venture adjustments noted above.
Further information on these earnings adjustments is included on page 42.
Group Underlying revenue declined by 14% (or US$643M) as lower realised prices (-US$396M), together with lower sales volumes at Illawarra Metallurgical Coal (-US$267M) due to planned longwall moves, more than offset higher volumes from Brazil Aluminium, Cannington, Australia Manganese and Worsley Alumina (+US$148M). Group Underlying EBITDA decreased by US$656M (or 48%) to US$708M for an operating margin(6) of 19%. The Group's costs remained well controlled, with controllable cost increases held to approximately 4% of the Group's cost base(13) (-US$131M) despite broad inflationary pressures, and we benefited from a reduction in raw material input prices and other price-linked costs (+US$231M).
The Group's Underlying EBIT decreased by US$686M (or 74%) to US$236M, as Underlying depreciation and amortisation increased by US$30M (or 7%) to US$472M, reflecting our continued investment in projects to improve productivity and grow future volumes.
A poor set of results:
BALANCE SHEET, DIVIDENDS AND CAPITAL MANAGEMENT
The Group finished the period with net debt of US$1,091M, due to lower profitability, higher investment in our business to improve productivity and grow future volumes, and a temporary build in working capital. We also returned US$180M to shareholders during H1 FY24, paying a US$145M fully-franked ordinary dividend in respect of H2 FY23, and a further US$35M via our on-market share buy-back.
We continue to prioritise a strong balance sheet and investment grade credit rating through all cycles. Our current BBB+/Baa1 credit ratings were re-affirmed by S&P Global Ratings and Moody's, respectively, during H1 FY24. We also retain access to significant liquidity, having successfully extended our undrawn sustainability-linked revolving credit facility of US$1.4B to December 2027 and US$1.3B to December 2028.
To manage our financial position and ensure we retain the right balance of flexibility, efficiency and prudence, we have taken the decision to cancel our on-market share buy-back, which was due to expire on 1 March 2024(16). Consistent with our unchanged capital management framework and in the context of our financial position, we will continue to assess opportunities to return excess cash to shareholders in the most efficient and value accretive manner.
Our unchanged capital management framework supports investment in our business and is designed to reward shareholders as our financial performance improves. Consistent with our policy to distribute a minimum 40% of Underlying earnings as ordinary dividends, the Board has resolved to pay a fully-franked interim ordinary dividend of US 0.4 cents per share (US$18M) in respect of H1 FY24, representing 45% of Underlying earnings.
Dividend timetable
Announce currency conversion into rand 1 March 2024
Last day to trade cum dividend on the Johannesburg Stock Exchange (JSE) 5 March 2024
Ex-dividend date on the JSE 6 March 2024
Ex-dividend date on the ASX and London Stock Exchange (LSE) 7 March 2024
Record date (including currency election date for ASX) 8 March 2024
Payment date 4 April 2024