South32 Annual Report 2019

Plain-text annual report

ANNUAL ANNUAL ANNUAL REPORT REPORT REPORT 2019 2019 2019 OUR PURPOSE OUR PURPOSE OUR PURPOSE WHO WE ARE WHO WE ARE WHO WE ARE Our purpose is to make a Our purpose is to make a Our purpose is to make a diff erence by developing natural diff erence by developing natural diff erence by developing natural resources, improving people’s resources, improving people’s resources, improving people’s lives now and for generations lives now and for generations lives now and for generations to come. We are trusted by our to come. We are trusted by our to come. We are trusted by our owners and partners to realise the owners and partners to realise the owners and partners to realise the potential of their resources. potential of their resources. potential of their resources. South32 is a globally diversiﬁ ed mining and metals company. We produce South32 is a globally diversiﬁ ed mining and metals company. We produce South32 is a globally diversiﬁ ed mining and metals company. We produce bauxite, alumina, aluminium, energy and metallurgical coal, manganese, bauxite, alumina, aluminium, energy and metallurgical coal, manganese, bauxite, alumina, aluminium, energy and metallurgical coal, manganese, nickel, silver, lead and zinc at our operations in Australia, Southern Africa and nickel, silver, lead and zinc at our operations in Australia, Southern Africa and nickel, silver, lead and zinc at our operations in Australia, Southern Africa and South America. We are also the owner of a high grade zinc, lead and silver South America. We are also the owner of a high grade zinc, lead and silver South America. We are also the owner of a high grade zinc, lead and silver development option in North America and have several partnerships with development option in North America and have several partnerships with development option in North America and have several partnerships with junior explorers with a bias to base metals. junior explorers with a bias to base metals. junior explorers with a bias to base metals. OUR VALUES OUR VALUES OUR VALUES Care Care Care We care about people, We care about people, We care about people, the communities we’re the communities we’re the communities we’re a part of and the world a part of and the world a part of and the world we depend on. we depend on. we depend on. Trust Trust Trust Togetherness Togetherness Togetherness Excellence Excellence Excellence We deliver on our We deliver on our We deliver on our commitments and rely commitments and rely commitments and rely on each other to do on each other to do on each other to do the right thing. the right thing. the right thing. We value diff erence and We value diff erence and We value diff erence and we openly listen and share, we openly listen and share, we openly listen and share, knowing that together knowing that together knowing that together we are better. we are better. we are better. We are courageous and We are courageous and We are courageous and challenge ourselves to be challenge ourselves to be challenge ourselves to be the best in what matters. the best in what matters. the best in what matters. This Annual Report is a summary of the operations, activities and This Annual Report is a summary of the operations, activities and This Annual Report is a summary of the operations, activities and performance of South32 Limited (ABN 84 093 732 597) and its controlled performance of South32 Limited (ABN 84 093 732 597) and its controlled performance of South32 Limited (ABN 84 093 732 597) and its controlled entities and joint arrangements for the year ended 30 June 2019 and its entities and joint arrangements for the year ended 30 June 2019 and its entities and joint arrangements for the year ended 30 June 2019 and its ﬁ nancial position as at 30 June 2019. ﬁ nancial position as at 30 June 2019. ﬁ nancial position as at 30 June 2019. South32 Limited is the parent company of the South32 Group of South32 Limited is the parent company of the South32 Group of South32 Limited is the parent company of the South32 Group of companies. In this report, unless otherwise stated, references to South32, companies. In this report, unless otherwise stated, references to South32, companies. In this report, unless otherwise stated, references to South32, the South32 Group, the Company, we, us and our, refer to South32 the South32 Group, the Company, we, us and our, refer to South32 the South32 Group, the Company, we, us and our, refer to South32 Limited and its controlled entities and joint arrangements, as a whole. Limited and its controlled entities and joint arrangements, as a whole. Limited and its controlled entities and joint arrangements, as a whole. South32 Limited shares trade on the ASX, JSE and LSE under the listing South32 Limited shares trade on the ASX, JSE and LSE under the listing South32 Limited shares trade on the ASX, JSE and LSE under the listing code of S32. code of S32. code of S32. Monetary amounts in this document are reported in US dollars, unless Metrics describing sustainability and HSEC performance apply to Monetary amounts in this document are reported in US dollars, unless otherwise stated. operated assets that have been wholly owned and operated by South32, otherwise stated. or that have been operated by South32 in a joint venture operation, from Metrics describing sustainability and HSEC performance apply to Metrics describing sustainability and HSEC performance apply to 1 July 2018 to 30 June 2019. South32’s GRI Navigator and Sustainability operated assets that have been wholly owned and operated by South32, operated assets that have been wholly owned and operated by South32, data tables are available at www.south32.net. or that have been operated by South32 in a joint venture operation, from or that have been operated by South32 in a joint venture operation, from 1 July 2018 to 30 June 2019. South32’s GRI Navigator and Sustainability 1 July 2018 to 30 June 2019. South32’s GRI Navigator and Sustainability Forward-looking statements data tables are available at www.south32.net. data tables are available at www.south32.net. This report contains forward-looking statements. Please refer to page 36, which contains a notice in respect of these statements. Forward-looking statements Forward-looking statements This report contains forward-looking statements. Please refer to page 36, This report contains forward-looking statements. Please refer to page 36, Non-IFRS which contains a notice in respect of these statements. which contains a notice in respect of these statements. This report includes certain non-IFRS ﬁ nancial measures, including underlying measures of earnings, eff ective tax rate, returns on invested Non-IFRS Non-IFRS capital, cash ﬂ ow and net debt. For an explanation of how South32 uses This report includes certain non-IFRS ﬁ nancial measures, including This report includes certain non-IFRS ﬁ nancial measures, including non-IFRS measures, see page 22. The meanings of individual non-IFRS underlying measures of earnings, eff ective tax rate, returns on invested underlying measures of earnings, eff ective tax rate, returns on invested measures used in this report are set out in the Glossary on page 137. capital, cash ﬂ ow and net debt. For an explanation of how South32 uses capital, cash ﬂ ow and net debt. For an explanation of how South32 uses Non-IFRS measures should not be considered as alternatives to an IFRS non-IFRS measures, see page 22. The meanings of individual non-IFRS non-IFRS measures, see page 22. The meanings of individual non-IFRS measure of proﬁ tability, ﬁ nancial performance or liquidity. measures used in this report are set out in the Glossary on page 137. measures used in this report are set out in the Glossary on page 137. For information or to contact South32, visit www.south32.net. Non-IFRS measures should not be considered as alternatives to an IFRS Non-IFRS measures should not be considered as alternatives to an IFRS measure of proﬁ tability, ﬁ nancial performance or liquidity. measure of proﬁ tability, ﬁ nancial performance or liquidity. For information or to contact South32, visit www.south32.net. For information or to contact South32, visit www.south32.net. CONTENTS CONTENTS CONTENTS Our company Our company Our company Board of Directors Board of Directors Board of Directors Lead Team Lead Team Lead Team Risk management Risk management Risk management Operating and ﬁ nancial review Operating and ﬁ nancial review Operating and ﬁ nancial review Resources and reserves Resources and reserves Resources and reserves Remuneration report Remuneration report Remuneration report Directors’ report Directors’ report Directors’ report Financial report Financial report Financial report Shareholder information Shareholder information Shareholder information Glossary of terms and abbreviations Glossary of terms and abbreviations Glossary of terms and abbreviations Corporate directory Corporate directory Corporate directory 1 1 1 11 11 11 15 15 15 18 18 18 22 22 22 40 40 40 50 50 50 72 72 72 77 77 77 132 132 132 135 135 135 141 141 141 See the rest of our 2019 annual reporting suite at www.south32.net. See the rest of our FY19 annual reporting suite at www.south32.net See the rest of our FY19 annual reporting suite at www.south32.net CORPORATE CORPORATE CORPORATE CORPORATE CORPORATE CORPORATE GOVERNANCE GOVERNANCE GOVERNANCE GOVERNANCE GOVERNANCE GOVERNANCE STATEMENT STATEMENT STATEMENT STATEMENT STATEMENT STATEMENT 2019 2019 2019 2019 2019 2019 OUR APPROACH OUR APPROACH OUR APPROACH TO CLIMATE CHANGE TO CLIMATE CHANGE TO CLIMATE CHANGE 2019 2019 2019 TAX TRANSPARENCY TAX TRANSPARENCY TAX TRANSPARENCY AND PAYMENTS TO AND PAYMENTS TO AND PAYMENTS TO GOVERNMENTS REPORT GOVERNMENTS REPORT GOVERNMENTS REPORT 2019 2019 2019 ■ Corporate Governance Statement ■ Corporate Governance Statement ■ Corporate Governance Statement Our corporate governance practices and a description of our approach Our corporate governance practices and a description of our approach Our corporate governance practices and a description of our approach to promoting responsible and ethical behaviour. to promoting responsible and ethical behaviour. to promoting responsible and ethical behaviour. ■ Our Approach to Climate Change ■ Our Approach to Climate Change ■ Our Approach to Climate Change Climate-related risk and opportunities reported in accordance Climate-related risk and opportunities reported in accordance Climate-related risk and opportunities reported in accordance with the recommendations of the Task Force on Climate-related with the recommendations of the Task Force on Climate-related with the recommendations of the Task Force on Climate-related Financial Disclosures. Financial Disclosures. Financial Disclosures. ■ ■ ■ Tax Transparency and Payments to Governments Report Tax Transparency and Payments to Governments Report Tax Transparency and Payments to Governments Report All payments to governments which meets the requirements All payments to governments which meets the requirements All payments to governments which meets the requirements of mandatory and voluntary disclosure initiatives. of mandatory and voluntary disclosure initiatives. of mandatory and voluntary disclosure initiatives. ■ ■ ■ FY19 Sustainability Performance Report FY19 Sustainability Performance Report FY19 Sustainability Performance Report ■ Our Approach to Water Stewardship ■ Our Approach to Water Stewardship ■ Our Approach to Water Stewardship ■ Modern Slavery Statement (November 2019) ■ Modern Slavery Statement (November 2019) ■ Modern Slavery Statement (November 2019) Printed copies of this Annual Report will only be posted to those Printed copies of this Annual Report will only be posted to those Printed copies of this Annual Report will only be posted to those shareholders who have requested a printed copy. Other shareholders are shareholders who have requested a printed copy. Other shareholders are shareholders who have requested a printed copy. Other shareholders are notiﬁ ed when the Annual Report becomes available and given details of notiﬁ ed when the Annual Report becomes available and given details of notiﬁ ed when the Annual Report becomes available and given details of where to access it electronically. where to access it electronically. where to access it electronically. YEAR AT A GLANCE 12% reduction 981 US$ million 17.3 US$ million Total recordable injury frequency Paid in taxes and royalties Community investment(1) 26% reduction 2,197 US$ million 504 US$ million Total recordable illness frequency Underlying EBITDA(2) Net cash balance(2) 481 US$ million 281 US$ million 9% below Dividends returned in respect of FY19 On-market share buy-back Our Scope 1 Greenhouse gas emissions FY15 baseline(3) (1) Community investment consists of cash, in-kind support and administrative costs and includes donations and investments of funds in the broader community. (2) This is a non-IFRS measure. For an explanation of how South32 uses non-IFRS measures, see page 22 of this Report. (3) Our short-term carbon emission reduction target is to stay below our FY15 Scope 1 carbon emission baseline in FY21. SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 1 OUR COMPANYFROM OUR CHAIR On behalf of the Board, I am pleased to present our 2019 Annual Report, my ﬁ rst as Chair. South32 was fortunate to have David Crawford as its inaugural Chair. David worked tirelessly to ensure South32 was well positioned for life as an independent global resources company. Working with the Board and Chief Executive Ofﬁ cer, Graham Kerr, he led the development of the Company’s purpose and strategy, underpinned by its values of care, trust, togetherness and excellence. His extensive experience in business, particularly in the resources sector, served the Company well in its formative years. David’s focus on shareholder value is evident, as is the role he played in protecting the interests of the communities where we operate. On behalf of our shareholders and our people, I thank him for his service. The 2019 ﬁ nancial year marked a turning point for South32. We completed the acquisition of Arizona Mining, acquired a 50 per cent interest in the Eagle Downs Metallurgical Coal project, and progressed the divestment of South Africa Energy Coal. These decisions play an important part in reshaping and improving our portfolio to promote long- term shareholder value, consistent with our purpose and strategy. Our strong operating performance delivered Underlying earnings before interest, tax and depreciation of US$2.2 billion and free cash ﬂ ow of US$1 billion. We ﬁ nished the year with a net cash balance of US$504 million, having returned US$938 million to shareholders during the period. This included US$366 million returned to shareholders as part of our ongoing capital management program, with US$281 million reports our progress towards emissions reduction and the resilience of our portfolio in a low-carbon world. Lately, there has been much commentary on corporate culture, particularly in the ﬁ nancial services sector in Australia. We believe this commentary contains lessons for all of us in how we approach our role as Directors. First and foremost is the appointment of the right Chief Executive and a competent and capable leadership team, whose work is underpinned by the right values that are clearly set, communicated and reinforced. In this, we’re well served, but equally, not complacent. From our purpose and our strategy, to our reward frameworks, we’re as committed to how we achieve our goals as we are to the goals themselves. Over the past four years, South32 has delivered a total shareholder return of 84 per cent, which has exceeded both the sector index and the world index (Morgan Stanley Capital International). We will continue to focus on improving return on invested capital and prioritising a strong balance sheet to ensure we remain in control through economic cycles. There will be no shortage of challenges for our company and our sector as we grapple with the economic and geopolitical realities of our time. The Board is conﬁ dent that our people, led by Graham and his team, are well equipped to respond and contribute to South32’s ongoing success. On behalf of the Board, I would like to thank our shareholders and every one of the South32 team for their ongoing support. Karen Wood Chair allocated to our on-market share buy-back program and US$85 million returned in the form of a special dividend. The increase in our capital management program by US$250 million to US$1.25 billion reﬂ ects our disciplined approach to capital management and positive outlook for the business. The Board declared a fully franked ﬁ nal dividend of US 2.8 cents per share, bringing the full year dividend to US 7.9 cents per share. We were saddened by the signiﬁ cant loss of life and the immense environmental damage caused by the failure of the tailings storage facility at Brumadinho in Brazil. We’ve supported the work of the International Council on Mining and Metals to develop an international standard for safe tailings management. In June, we released our Tailings Storage Facilities Management Report. We compiled this in line with the Investor Mining and Tailings Safety Initiative, and it details our approach to tailings management. The Board is committed to making regular visits to our operations and ofﬁ ces around the world to engage with our people. During the year, we visited operations and ofﬁ ces in South Africa, Singapore, the United States and Australia. In each of these places, we were pleased to see a strong commitment to the safety of our people. This commitment remains at the heart of everything we do. We’re also committed to creating value through social and environmental leadership. We continued to advance our work in response to climate change, in line with our commitment to achieve net zero emissions from our operations by 2050. We have again detailed our work in the 2019 report, Our Approach to Climate Change, which meets the recommendations of the Task Force on Climate-related Financial Disclosures, and Over the past four years, South32 has delivered a total shareholder return of 84 per cent 2 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANYFROM OUR CEO This year we continued to reshape and improve our portfolio, securing high potential development options for the future, while maintaining a leadership position in alumina and manganese. Overall, our operating performance was strong as we focused on growing value per share. Our commitment to improving safety at our operations to avoid, mitigate and manage safety risks was reﬂ ected in a 12 per cent year-on-year reduction in our total recordable injury frequency. We also took a signiﬁ cant step to improve risk management, with our new platform for real-time risk and control administration successfully deployed across the business. In the 2019 ﬁ nancial year, we delivered a three per cent increase in Group production. Australia Manganese achieved record ore sales, while Hillside Aluminium delivered record production as the smelter continued to test its maximum technical capacity. Worsley Alumina ﬁ nished the year well, with an increase in calciner availability, which contributed to a 12 per cent production increase in the June quarter. Illawarra Metallurgical Coal production increased by 57 per cent, following work to improve longwall and development performance. Our growth agenda has seen us create a pipeline of high-quality development opportunities in commodities we believe will have strong fundamentals into the future. Last August, we completed the acquisition of Arizona Mining, adding the high-grade zinc, lead and silver Hermosa development option to our portfolio. In June, we reached an important milestone for Hermosa, declaring a Mineral Resource for the Taylor Deposit in accordance with the JORC Code. We also completed the acquisition of a 50 per cent interest in the Eagle Downs Metallurgical Coal project, and maintained our option with Trilogy Metals for the third and ﬁ nal year. an international standard for safe tailings management. Our operations are just one part of a bigger picture. We support our communities by backing community programs and infrastructure, and promoting jobs and business opportunities. Our total community spend was US$17.3 million, with a commitment to invest up to US$125 million over Our operating performance was strong as we focused on growing value per share the next ﬁ ve years. To make a diff erence for those in need, we contributed US$800,000 in response to ﬂ oods in Townsville, Australia, as well as US$250,000 to support the recovery from Cyclone Idai in Mozambique. Our success is underpinned by our leadership capability and the diversity of our people. Our leaders play a critical role in creating an inclusive and diverse culture, and we’ve invested more than A$10 million in leadership development over the past two years. We closed FY19 well positioned for the future. We have a strong balance sheet and a solid pipeline of future opportunities. Our portfolio will include high returning options with a bias to base metals and the potential to deliver meaningful growth in shareholder value over the medium- term. Above all, the most important thing we must do is make sure everyone goes home safe and well at the end of every shift. I would like to thank our people for all their eff orts in making South32 a success. Graham Kerr Chief Executive Ofﬁ cer Part of improving our portfolio means assessing our current operations against our view of the future. Divesting South Africa Energy Coal (SAEC) is an important next step. Our intention is that the business becomes sustainable, black-owned and operated, consistent with the South African government’s transformation agenda. We received bids for SAEC during the June quarter and have entered into an exclusivity agreement with Seriti Resources as we work to ﬁ nalise the off er. A fundamental shift in the global market for manganese alloys over many years led to the decision to review our manganese alloys smelters, TEMCO and Metalloys. Our people, suppliers and the local communities will be top of mind as we consider which path to take. Eff ective environmental management is as important to our long-term success as our operational performance. We continued our progress towards our ﬁ ve-year emissions reduction target, advancing decarbonisation studies at Worsley Alumina and Illawarra Metallurgical Coal. This year, we continued our transparent approach to reporting critical environmental issues with the publication of our ﬁ rst Our Approach to Water Stewardship Report. The report details how we manage water consumption and the steps we’re taking to safeguard future water supply. This work will remain a key focus for us, working with the Board, through our Sustainability Committee. We also released our 2019 Tailings Storage Facilities Management Report. In FY17 and FY18, we conducted a detailed assessment of our highest potential consequence tailings dams. Through this, we concluded that our dam structures are well managed, and we’ve implemented the identiﬁ ed improvement actions. Through ICMM, we’re committed to playing our part in the development of SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 3 OUR COMPANYOUR PORTFOLIO Cu Au Freegold Ventures Shorty Creek Cu Pb Au Ag Zn Co Trilogy Metals Bornite & Arctic Vancouver London Hermosa Zn Pb Ag Cu Au Silver Bull Resources Sierra Mojada Zn Ag Pb Cu EMX Royalty Corp Jasper Canyon, Midnight Juniper, Sleeping Beauty, Dragons Tail & Lomitas Negras Cerro Matoso Ni Puerto Libertador Project Ag Cu Brazil Alumina Aa Inca Minerals Riqueza AusQuest Los Otros, Cerro de Fierro & Parcoy Cu Au Zn Cu Au Commodities OFFICES Aa Al Bauxite, Alumina, Aluminium Large alumina reﬁneries and high-quality bauxite resources integrated with our African aluminium smelters with a signiﬁ cant long alumina position. Head Ofﬁ ce EC Mn MC Ni Energy Coal One of the largest coal exporters and domestic suppliers in South Africa. Manganese World’s largest producer of manganese ore and a producer of alloy. Metallurgical Coal A major exporter of high-quality metallurgical coal. Nickel One of the world’s largest ferronickel producers. Ag Pb Zn Silver, Lead, Zinc One of the world’s largest producers of silver and lead. Cu Copper Au Gold Co Cobalt Corporate Ofﬁ ce Marketing Ofﬁ ce PROJECTS Exploration Project Development Option O U R C O M P A N Y Cu Co EMX Royalty Corp Riddarhyttan AusQuest Hamilton Cu Au Eagle Downs MC North Queensland Resources Gamboola, Lynd and Yappar Cu Zn Pb Ag Au Superior Resources Nicholson Pb Zn Ag Singapore Johannesburg South Africa Energy Coal Mozal Aluminium Hillside Aluminium Metalloys manganese smelter Hotazel Manganese Mines EC Al Al Mn Mn AusQuest Tangadee Perth Zn Worsley Alumina Aa AusQuest Balladonia GEMCO Mn Cu Pb Ag Cannington Ag Pb Zn TEMCO Mn Illawarra Metallurgical Coal MC 4 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 5 WHO WE ARE WHO WE ARE Around the world, we’re helping people improve their lives through the development of natural resources. We produce bauxite, alumina, aluminium, energy coal, metallurgical coal, manganese, nickel, silver, lead and zinc in Australia, Southern Africa and South America. We also own a high- grade zinc, lead and silver development option in North America and have partnered with several junior explorers with a bias to base metals. Whether it’s for use in infrastructure, energy generation, consumables or vehicles, we believe the extraction and processing of minerals and metals can be done in a responsible way. That’s why we continually challenge ourselves to be the best in what matters – the safety and wellbeing of our people and communities, our operational performance, and minimising our environmental impact. OUR PURPOSE IS TO MAKE A DIFFERENCE Our purpose is to make a diff erence by developing natural resources, improving people’s lives now and for generations to come. We’re trusted by our owners and partners to realise the potential of their resources. We do this by creating local jobs, empowering and investing in communities, and contributing to governments through paying taxes and royalties – while achieving sector-leading returns for our shareholders. OUR STRATEGY AND BREAKTHROUGHS Our purpose is underpinned by our strategy, which is focused on: ■ Optimising the performance of our existing operations; ■ Unlocking their potential by converting high-value resource into reserve; and Identifying new opportunities to compete for capital. ■ To deliver on our purpose and strategy, we’re guided by our ‘Breakthroughs’, which outline how we’ll make a diff erence through our safety performance, stakeholder engagement, operations, functions, technology, environmental and social leadership, and portfolio optimisation. Across the organisation, our Breakthroughs form the basis of our Business Plans to ensure we’re all aligned. While our strategy and Breakthroughs focus on the ‘what’, our values focus on ‘how’ we achieve our purpose. We hold ourselves and each other to account to act and make decisions aligned with our values of care, trust, togetherness and excellence. We all guarantee everyone goes home safe and well We are meaningfully connected and believe in our purpose Our operations run to their full potential and maximise return on investment Our functions are lean and enable our operations to deliver their full potential Technology and innovation is radically lifting our performance We create value through our environmental and social leadership We have optimised our portfolio and have multiple growth options with a bias to base metals 6 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANYOUR PEOPLE Our people are the foundation of our success. We’re constantly challenging ourselves to ensure the work we do is well designed and reliably delivers safe results, with a strong focus on continuous improvement and learning. Together, we create an inclusive workplace where we hold ourselves and each other to account to demonstrate our values, where we’re empowered to be the best we can be and contribute to exceptional business performance and sustainable outcomes. Representation of women Representation of Black People in our workforce in South Africa 18% 37% Women in our workforce Women in senior leadership 82% Total Employees 49% Management Roles FY18 17% FY18 31% FY18 81% FY18 45% OUR COMMITMENT TO SAFETY The most important commitment we make at South32 is to ensure everyone goes home safe and well. The core focus for safety at South32 has been the creation of an inclusive workplace. This helps our people to speak up and share any concerns or ideas regarding safety. Our openness contributes to a learning culture and helps us work towards continuous improvement in everything we do. Occupational exposures % change from FY18 Total recordable injury frequency per million work hours Total recordable illness frequency per million work hours 4.5 units FY18 5.1 1.3 units FY18 1.7 CREATING SHARED VALUE 12% Material(1) Occupational Exposures 16% Potential exposures to airborne contaminants 6% Potential exposures to noise In FY19 we continued to create long-term value for our stakeholders by maintaining ﬁ nancial discipline and adhering to our strategy. Leading through our strong environmental and social commitments From providing jobs and business opportunities, to empowering suppliers and supporting community programs, we know we can make a signiﬁ cant contribution to the way people live and work. We’re continually looking at ways to reduce our land requirements, biodiversity impacts, waste, carbon and water usage. Community investment(2) 17.3 US$ million Enterprise and Supplier Development Programs Scope 1 and 2 Greenhouse gas emissions Scope 1 Greenhouse gas emissions 9.5 US$ million 23.5 Million tonnes 9% below our FY15 baseline(4) FY18 US$20.4 million FY18 US$11.2 million FY18 22.8 million tonnes(3) (1) Material occupational exposures include potential exposure to carcinogens and coal dust. (2) Community investment consists of cash, in-kind support and administrative costs and includes donations and investments of funds in the broader community. (3) Scope 2 emissions have been restated to better reﬂ ect newly available assumption data. (4) Our short-term carbon emission reduction target is to stay below our FY15 Scope 1 carbon emission baseline in FY21. SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 7 OUR COMPANYRunning our operations to maximise return on investment We aspire to be a leading operator in our industry, where we safely deliver stable and predictable performance and maximise the potential of our operations. We’re doing this by ensuring our work is well designed and supported by easy-to-use systems that provide smart data. Underlying EBITDA(1) 2,197 US$ million FY18 US$2,516 million Dividends returned in respect of FY19 481 US$ million On-market share buy-back 281 US$ million FY18 US$691 million FY18 US$254 million Return on invested capital(1) 11.1% FY18 15.0% Managing today’s portfolio while developing opportunities for tomorrow We’re positioning ourselves for the next phase of growth in demand by creating a pipeline of opportunities to compete for capital, with a bias to base metals. In the ﬁ rst half of FY19, we expanded our global footprint with the acquisition of the high-grade zinc, lead and silver Hermosa project in Arizona. We also acquired a 50 per cent interest in the Eagle Downs Metallurgical Coal project in Queensland’s Bowen Basin. Exploration is an important part of how we create future opportunities. We assess numerous opportunities every year and have more than 20 active greenﬁ eld exploration projects in Australia, the Americas and Europe. Acquired the remaining 83 per cent of Arizona Mining, and declared the ﬁ rst Mineral Resource for the Taylor Deposit which forms part of the Hermosa project. Maintained our third and ﬁ nal year of the Option Agreement with Trilogy Metals targeting a high grade copper resource in Alaska. Acquired a 50% interest in the Eagle Downs Metallurgical Coal project. We invested US$34 million in greenﬁ eld exploration projects with our partners. (1) This is a non-IFRS measure. For an explanation of how South32 uses non-IFRS measures, see page 22 of this Report. 8 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANYOUR OPERATIONS WORSLEY ALUMINA South32 holds an 86 per cent interest in Worsley Alumina, while Japan Alumina Associates (Australia) Pty Ltd owns 10 per cent and Sojitz Alumina Pty Ltd owns four per cent. Bauxite is mined near the town of Boddington, 130 kilometres south-east of Perth. It is transported by overland conveyor to the alumina reﬁ nery near Collie and turned into alumina powder, before being transported by rail to Bunbury Port. It is then shipped to smelters around the world, including South32’s Hillside and Mozal aluminium smelters in Africa. BRAZIL ALUMINA South32’s interests consist of the non-operated Mineração Rio do Norte (MRN) mine (14.8 per cent), Brazil Alumina reﬁnery (36 per cent) and aluminium smelter (40 per cent), which is currently on care and maintenance. The MRN mine is an open-cut strip mining operation. Mined ore is hauled to primary crushers and then transported by conveyor belt to the beneﬁciation plant. The bauxite produced from the MRN mine is sold to its shareholders. South32’s share of bauxite produced from the MRN mine is supplied to the Brazil Alumina reﬁnery. The alumina produced from the reﬁ nery is exported through the Alumar Port. HILLSIDE ALUMINIUM The Hillside Aluminium smelter is located in Richards Bay in the South African province of KwaZulu-Natal and is 100 per cent owned and operated by South32. The smelter uses alumina predominantly imported from Worsley Alumina to produce high- quality, primary aluminium for the export and domestic markets. To support the development of the downstream aluminium industry in South Africa, a portion of liquid metal is supplied to Isizinda Aluminium which, in turn, supplies aluminium slab to Hulamin, a local company that produces products for the domestic and export markets. MOZAL ALUMINIUM South32 has a 47.1 per cent share of Mozal Aluminium, while Mitsubishi Corporation Metals Holding GmbH holds 25 per cent, Industrial Development Corporation of South Africa Limited holds 24 per cent and the State of Mozambique holds 3.9 per cent (through preference shares). Mozal Aluminium is located 20 kilometres west of Mozambique’s capital city Maputo. Mozal Aluminium is the only aluminium smelter in Mozambique and the second largest aluminium smelter in Africa. It produces standard aluminium ingots. ILLAWARRA METALLURGICAL COAL Located in the southern coalﬁ elds of New South Wales, Illawarra Metallurgical Coal is 100 per cent owned by South32 and operates two underground metallurgical coal mines, Appin mine and Dendrobium mine, and West Cliff and Dendrobium coal preparation plants. Illawarra Metallurgical Coal also manages the Port Kembla Coal Terminal on behalf of a consortium of partners. Illawarra Metallurgical Coal produces premium-quality, hard coking coal for steelmaking, with energy coal as a by-product. The product is processed at the coal preparation plants before being transported by road and rail to the processing facilities and to the Port Kembla Coal Terminal for distribution to domestic and international customers. SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 9 OUR COMPANYAUSTRALIA MANGANESE Australia Manganese consists of Groote Eylandt Mining Company (GEMCO) in the Northern Territory and Tasmanian Electro Metallurgical Company (TEMCO) in Tasmania. South32 owns 60 per cent of GEMCO and Anglo American Plc holds the remaining 40 per cent. TEMCO is wholly owned by GEMCO. GEMCO is an open-cut strip mining operation, producing high-grade ore and is located in close proximity to Asian export markets. Using mainly ore shipped from GEMCO, TEMCO produces high-carbon ferromanganese, silicomanganese and sinter, primarily using hydroelectric power. SOUTH AFRICA MANGANESE South Africa Manganese is made up of two manganese mines and an alloy smelter. Hotazel Manganese Mines (HMM) is located in the Kalahari Basin and the Metalloys manganese smelter site is in Meyerton. South32 holds a 60 per cent interest in Samancor Holdings (Pty) Ltd and Anglo American Plc holds the remaining 40 per cent. Samancor indirectly owns 74 per cent of HMM, which gives South32 its ownership interest of 44.4 per cent. The remaining 26 per cent of HMM is owned by B-BBEE entities. South32 holds an eff ective 60 per cent interest in Samancor Manganese (Pty) Ltd (Metalloys manganese smelter). CERRO MATOSO Cerro Matoso is an integrated nickel laterite mine and smelter located in the Cordoba area of northern Colombia, consisting of a truck and shovel open-cut mine and a processing plant. South32 owns 99.94 per cent of Cerro Matoso. Current and former employees own 0.02 per cent, with the balance of shares held in a reserve account following a buy-back. Cerro Matoso is a major producer of nickel contained in ferronickel which is used to make stainless steel. Ore mined is blended with ore from stockpiles, which is then dried in rotary kilns and smelted in two electric arc furnaces where ferronickel is produced. CANNINGTON Located in north-west Queensland, Cannington is 100 per cent owned by South32 and is one of the world’s largest producers of silver and lead. Cannington consists of an underground hard rock mine and surface processing facility, a road-to-rail transfer facility and a concentrate handling and ship loading facility at the Port of Townsville. Silver, lead and zinc are extracted from the ore using grinding, sequential ﬂotation and leaching techniques that produce high-grade, marketable lead and zinc concentrates with a high silver content. SOUTH AFRICA ENERGY COAL South32 owns 92 per cent of South Africa Energy Coal (SAEC), with the remaining eight per cent held by a B-BBEE consortium, led by Phembani Holdings. Energy coal operations consist of primary coal mining operations (Khutala colliery, Klipspruit colliery, Ifalethu colliery and Wolvekrans colliery), as well as three processing plants. SAEC operations are located in the coalﬁ elds of Mpumalanga. From 30 April 2018, we have managed SAEC as a stand-alone business separately from the rest of the South32 Group. 10 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANYBOARD OF DIRECTORS Mr Kerr holds a Business degree from Edith Cowan University and studied at Deakin University to become a Certiﬁ ed Practicing Accountant Other Directorships and Ofﬁ ces: ■ Chair, CEOs for Gender Equity. and the Australian Federal Government's Business Regulatory Advisory Group. Before joining BHP, she held the role of General Counsel and Company Secretary with Bonlac Foods Limited. Following her retirement from BHP, Ms Wood chaired the BHP Foundation, where she oversaw grant provisions for not-for-proﬁ t organisations to deliver large, long-term global programs in the areas of natural resource governance, human capability and social inclusion and conserving and sustainably managing natural environments. She is currently a Non- Executive Director of Djerriwarrh Investments Limited (and a member of the Audit Committee), a member of Chief Executive Women and a Fellow of Monash University. Current ASX listed directorships: ■ Djerriwarrh Investments Limited: Independent Non- Executive Director since July 2016. Other Directorships and Ofﬁ ces: ■ Director, State Library Board of Victoria and Member of the Foundation Council; ■ Director, Robert Salzer Foundation; and ■ Vice President, Melbourne Cricket Club. Mr Graham Kerr BBus, FCPA, 48 Chief Executive Ofﬁ cer since October 2014 Managing Director, appointed 21 January 2015 Location: Australia Mr Kerr has been our Chief Executive Ofﬁ cer since October 2014. He’s responsible for running all parts of our business. In May 2015, he led the charge on establishing South32 and its public listing in three countries. Mr Kerr is passionate about health, safety and sustainability, with a strong track record in global resource development. Before joining us, he worked in a range of roles at BHP, including Chief Financial Ofﬁ cer and President of Diamonds and Specialty Products. As President of Diamonds and Specialty Products, he was accountable for the Ekati Diamond Mine in Canada, the Richards Bay Minerals Joint Venture in South Africa, diamond exploration in Angola, the Corridor Sands Project in Mozambique and the development of BHP’s potash portfolio in Canada. In 2004, he left BHP for two years to become General Manager Commercial for Iluka Resources. Ms Karen Wood BEd, LLB (Hons), FCIS, 63 Chair and Independent Non-Executive Director, appointed 1 November 2017 (Chair from 12 April 2019) Location: Australia During her career, Ms Wood has attained a variety of executive and leadership skills which she brings to her role as Chair of South32. She has held various senior global leadership roles with BHP, including Group Company Secretary, Chief People Ofﬁ cer and President Corporate Aff airs and served as a member of BHP’s leadership team. Ms Wood gained extensive expertise as a key adviser to the Board and CEO on matters of governance, the composition of leadership teams, development and succession planning, organisational design and culture, remuneration structures and stakeholder relations. She served as Chair of The Global Ethics Advisory Panel, the Disclosure Committee and as Chief Governance Ofﬁ cer. Following the merger between BHP Limited and Billiton Plc in 2001, she established the multi-jurisdictional governance framework for the merged entity. She joined BHP as Group Company Secretary in 2001, and retired in 2014. Ms Wood’s governance experience is strengthened by her membership of the Takeovers Panel (Australia) from 2000 to 2012 and her roles with the ASIC (Business Consultative Panel) SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 11 OUR COMPANYBOARD OF DIRECTORS (CONTINUED) In 2014, Mr Cooper was awarded an Ofﬁ cer of the Order of Australia and was named West Australian of the Year in the Professions category in 2015. Mr Cooper is also a Fellow of the Australian Institute of Company Directors and Chartered Accountants Australia and New Zealand. Current ASX listed directorships: ■ Woodside Petroleum Limited: Independent Non- Executive Director since February 2013. Other Directorships and Ofﬁ ces: ■ Commissioner and Chairman, Insurance Commission of Western Australia; ■ Member, Senate of the University of Western Australia; Trustee, St John of God Health Care; ■ ■ Director, St John of God Australia Limited; ■ Advisor, Azure Capital; ■ President, WA Council of the Australian Institute of Company Directors; and ■ Member, ASIC Director Advisory Panel. Mr Frank Cooper AO BCom, FCA, FAICD, 63 Independent Non-Executive Director, appointed 7 May 2015 Chair of Risk and Audit Committee Location: Australia Mr Cooper’s combined experience gives him a uniquely rich understanding of the challenges and mechanisms of operating in diff erent cultural and political environments. He brings this to South32, alongside a strong focus on organisational philosophy, values and standards. Mr Cooper is a chartered accountant with over 35 years of experience in the ﬁ nance and accounting profession. He previously held the position of Partner at both Ernst & Young and PricewaterhouseCoopers, and was Managing Partner for Arthur Andersen in Perth. During his time in the profession he specialised in the mining, energy and utility sectors. Mr Cooper is currently a Non- Executive Director of Woodside Petroleum Limited (including Chair of the Audit and Risk Committee and member of the Human Resources and Compensation Committee and Nominations Committee). Until 2006, he was a Director of Alinta Infrastructure Limited and Alinta Funds Management Limited. Dr Xiaoling Liu BEng (Extractive Metallurgy), PhD (Extractive Metallurgy), FAusIMM, FTSE, GAICD, 62 Independent Non-Executive Director, appointed 1 November 2017 Location: Australia Dr Xiaoling Liu is a metallurgical engineer with a 26 year career at the Rio Tinto Group. Dr Liu’s technical experience is an essential contribution to the South32 Board. Dr Liu’s roles at Rio Tinto included General Manager and Managing Director positions in smelting operational management. She held other senior positions, including Managing Director Technical Services where she led Rio Tinto’s global technical services unit, and as President and Chief Executive Ofﬁ cer where she led the Borate business with integrated mining, processing, and supply chain operations in the United States, Europe and Asia. Gained from this experience, Dr Liu contributes strong technical, strategic, marketing and risk management skills to the South32 Board. She was a board member of the California Chamber of Commerce, Vice President of the Board of Australian Aluminium Council, and member of the University Council of the University of Tasmania. Before joining Rio Tinto, Dr Liu held an academic position as Research Fellow of City University, London. Since her retirement from Rio Tinto in 2014, Dr Liu has held the position of Non- Executive Director of Newcrest Mining Limited (including as a member of the Human Resources and Remuneration Committee; Audit and Risk Committee and Nominations Committee). She was also a Non-Executive Director of Iluka Resources Limited until April 2019 (including member of the Audit and Risk Committee and Nominations Committee). These roles have contributed to Dr Liu’s skills and experience in remuneration, acquisition and divestment. Dr Liu is a Fellow of the Australian Academy of Technological Science and Engineering, a Fellow of AusIMM and a member of Chief Executive Women. Current ASX listed directorships: ■ Newcrest Mining Limited: Independent Non- Executive Director since September 2015. Previous ASX listed directorships: ■ Iluka Resources Limited: Independent Non- Executive Director February 2016 until April 2019. Other Directorships and Ofﬁ ces: ■ Director, Melbourne Business School; and ■ Member, China Matters Advisory Council. 12 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANY The Board of Directors is committed to representing shareholders and protecting the interests of South32. Underpinned by strong corporate governance practices, the Board believes South32 has the right people and the right strategy to be positioned well for future growth. Dr Xolani Mkhwanazi BSc, MSc, PhD (Applied Physics), 64 Non-Independent Non-Executive Director, appointed 2 July 2015 Location: South Africa With vast experience across global and regional mining operations, combined with expertise in science, Dr Mkhwanazi has a deep understanding and appreciation for environmental and sustainability opportunities and risks as they relate to South32. He was previously Chairman of BHP Billiton in South Africa and President and Chief Operations Ofﬁ cer of South Africa Aluminium with BHP Billiton. During this time, he was responsible for the southern African aluminium smelters of Hillside, Bayside and Mozal with accountability for maximising their value and potential by providing appropriate strategic direction, while also facilitating future aluminium opportunities in the region. Dr Mkhwanazi also served as Chief Executive Ofﬁ cer of Bateman Africa Limited and at the National Electricity Regulator, where he was instrumental in the restructuring of the electricity supply industry in South Africa. Prior to this, he held senior positions at the Council for Scientiﬁ c and Industrial Research, where he played a signiﬁ cant role in the formulation of the South African National Science and Technology Policy. Earlier in his career, Dr Mkhwanazi was a Senior Scientist at the Atomic Energy Corporation and Head of the Physics Department at the University of Swaziland. Dr Mkhwanazi is also a Director of JSE-listed Murray and Roberts Holdings Limited, where he is a member of the Risk Management Committee, Health, Safety and Environment Committee and Social and Ethics Committee. He has also been appointed as Chairperson of EOH Holdings Limited. Current JSE listed directorships: ■ Murray and Roberts Holdings Limited: Independent Non- Executive Director since August 2015; and EOH Holdings Limited; Director and Chairperson since 5 June 2019. ■ Other Directorships and Ofﬁ ces: ■ Director, South32 South Africa Energy Coal Holdings (Pty) Ltd; and ■ Deputy Chairman, The Public Investment Corporation (SOC) Limited. Dr Ntombifuthi (Futhi) Mtoba DCom (Honoris Causa), BCompt (Hons), HDip Banking Law, BA (Econ)(Hons), BA (Arts), CA(SA), 64 Independent Non-Executive Director, appointed 7 May 2015 Location: South Africa Dr Mtoba is a chartered accountant with an extensive career in business and community engagement in South Africa. In addition, she brings valuable sustainability and environmental experience to our Board. Dr Mtoba joined Deloitte and Touche South Africa in 1988, specialising in ﬁ nancial services. Later, she become one of the ﬁ rst African black women to be appointed as a Partner by one of the Big Four accounting ﬁ rms; she then became the ﬁ rst African woman Deputy Chairman and then Chairman of Deloitte Southern Africa. Dr Mtoba has been a member of the International Monetary Fund Advisory Group of Sub-Saharan Africa, the World Economic Forum Global Advisory Council, the B20 Financing Growth and Infrastructure Task Force and the B20 Transparency Task Team. She was also the ﬁ rst woman president of the Association for the Advancement of Black Accountants of Southern Africa. She served as Chair of the Public Investment Corporation Limited, President of Business Unity South Africa, and board member of the Public Accountants and Auditors Board, the South African Institute of Chartered Accountants and the New Partnership for Africa’s Development Business Foundation. Dr Mtoba is engaged in the regional and global community. Previously, she was on the board of the United Nations Global Compact. For her contributions, Dr. Mtoba has received numerous awards, most recently Most Outstanding Leadership Women of the Year (Africa Economy Builders, 2018). She is also a Harvard Advanced Leadership Initiative Fellow (2017). Other Directorships and Ofﬁ ces: ■ Director, Discovery Bank Limited; ■ Director, Discovery Bank Holdings Limited; ■ Chairman and Trustee, WBD Trust; ■ Chair of Council, University ■ ■ ■ of Pretoria; Founding Trustee, ZM Foundation; Trustee, Allan Gray Orbis Foundation Endowment; and Trustee and Audit Committee Chairman, Nelson Mandela Foundation. SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 13 OUR COMPANY BOARD OF DIRECTORS (CONTINUED) Mr Rumble has been a Non- Executive Director of a variety of private companies, including Platinum Mining Corporation of India PLC, Barplats Holdings Limited, Western Platinum (Pty) Limited, Eastern Platinum (Pty) Limited and Sarplat Investments Limited. He was also an independent Non- Executive Director at BHP Billiton plc and BHP Limited and at JSE-listed Aveng Limited. Mr Rumble completed the Stanford (US) Executive Program in 1990. Other Directorships and Ofﬁ ces: ■ Director, Acetologix Pty Limited; ■ Director, Enzyme Technologies (Pty) Limited; ■ Director, Elite Wealth (Pty) Limited; ■ Member of Board of Governors, Rhodes University; and Trustee, World Wildlife Fund, South Africa. ■ Mr Keith Rumble BSc, MSc (Geology), 65 Independent Non-Executive Director, appointed 27 February 2015 Chair of Sustainability Committee Location: South Africa Mr Rumble has more than 40 years of experience in the resources industry, speciﬁ cally in titanium and platinum mining. He also has experience as a principal investor and private equity fund manager in Russia, India and other emerging markets. Mr Rumble contributes to the Board of South32 this valuable combination of skills and knowledge. He has held various leadership roles including CEO of SUN Mining (a wholly-owned entity of the SUN Group), CEO of Impala Platinum (Pty) Ltd and CEO of Rio Tinto Iron and Titanium Inc in Canada. Mr Rumble also worked for Verref, a division of the Anglo American Corporation, prior to joining Richards Bay Minerals in 1980, working in smelting and metallurgy, progressing to General Manager and later CEO in 1996. Mr Wayne Osborn Dip Elect Eng, MBA, FAICD, FTSE, 67 Independent Non-Executive Director, appointed 7 May 2015 Chair of Remuneration Committee, Chair of Nomination and Governance Committee Location: Australia Mr Osborn brings over 40 years of experience from the mining, resources and manufacturing sectors to our Board. Mr Osborn was Managing Director of Alcoa in Australia from 2001 until 2008, leading an integrated business comprised of bauxite mining, alumina reﬁ ning, coal mining, power generation and aluminium smelting. This included operations in Victoria and Western Australia. His prior role at Alcoa included accountability for its Asia Paciﬁ c manufacturing operations in China, Japan, Korea and Australia. He joined Alcoa in 1979 after working as an engineer in the iron ore and telecommunications sector. Since 2008, Mr Osborn has worked as a Non-Executive Director in the mining, construction and energy industries. He was also Chairman of the Australian Institute of Marine Science, Chairman of the Western Australia Branch of the Australia Business Arts Foundation and Vice President of the Chamber of Commerce and Industry, Western Australia. Mr Osborn is currently a Non-Executive Director of Wesfarmers Limited, where he is a member of the Remuneration Committee and the Nomination Committee. He has been awarded a WA Business Leader Award from the Australian Business Arts Foundation in 2007 and an Australian Institute of Company Directors excellence award in 2018. Current ASX listed directorships: ■ Wesfarmers Limited: Independent Non- Executive Director since March 2010. Previous ASX listed directorships: ■ Alinta Energy Limited March 2011 until April 2017. Other Directorships and Ofﬁ ces: ■ ■ Fellow, Australian Academy of Technological Sciences and Engineering; and International Fellow, Explorers Club (New York). 14 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANYLEAD TEAM Graham Kerr BBUS, FCPA, 48 Chief Executive Ofﬁ cer and Managing Director See page 11 for Graham Kerr’s qualiﬁ cations and experience. Nicole Duncan BA (Hons), LLB, MAICD, FGIA, FCIS, 47 Chief People and Legal Ofﬁ cer, Company Secretary Nicole Duncan became our Chief People Ofﬁ cer in July 2017, having been our Chief Legal Ofﬁ cer and Company Secretary. She’s responsible for our Human Resources functions, as well as our Company Secretariat, Legal and Business Integrity teams. Before joining us, Nicole was Vice President, Company Secretariat for BHP. She was also Vice President Supply, Group Information Management from 2011 to 2013. During her legal career, she’s worked in various BHP roles in Australia, the United States and the Netherlands. Nicole graduated from the Australian National University with a Bachelor of Laws and a Bachelor of History (Hons). Simon Collins BE (Mining), MBA, 46 Chief Development Ofﬁ cer Simon Collins became our Chief Development Ofﬁ cer in October 2018. He’s responsible for Business Development, Greenﬁ elds Exploration, Brazil Alumina and the Hermosa project. Before this, he was our Head of Corporate Development and led the acquisitions of Arizona Mining and a 50 per cent interest in the Eagle Downs metallurgical coal project in Australia. Simon brings 25 years’ experience in the resources industry, working in senior leadership and business development roles. Before joining us, he worked for BHP for more than a decade, leading business development teams in Belgium, the United Kingdom, Singapore and Australia. Simon holds a Master of Business Administration from London Business School and a Bachelor of Engineering (Mining) from the University of New South Wales. Peter Finnimore BCom, LLB, 54 Chief Marketing Ofﬁ cer Peter Finnimore has been our Chief Marketing Ofﬁ cer since August 2017, having been our Head of Marketing following our Demerger in May 2015. He’s responsible for our Commodity Marketing and Supply functions. Peter has more than 25 years of global commodity marketing experience. Before joining us, he worked in various roles in BHP, starting in The Hague in 2008 as Vice President Marketing Aluminium. He then led the consolidation of the Aluminium and Stainless Steel Materials Marketing teams in August 2012. In 2013, he was appointed Vice President Marketing Aluminium, Manganese & Nickel, where he was based out of Singapore. In his career, Peter has worked in various marketing roles in Japan, Australia, Russia, Cyprus and Switzerland, including for Rio Tinto and Rusal. Peter completed degrees in Commerce and Law at the University of Queensland. He’ll be succeeded by Brendan Harris in the role of Chief Marketing Ofﬁ cer on 1 January 2020. SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 15 OUR COMPANYLEAD TEAM (CONTINUED) Mike Fraser BCom, MBL, 54 Chief Operating Ofﬁ cer Mike Fraser became our Chief Operating Ofﬁ cer on 30 April 2018, having been our President and Chief Operating Ofﬁ cer for the Africa region from January 2015. He’s responsible for the Group’s alumina operations in Australia, aluminum operations in Southern Africa and the Cerro Matoso operation in Colombia. He’s also responsible for South Africa Energy Coal. Before joining us, Mike was President, Human Resources with BHP. Before this, he was Asset President of Mozal Aluminium in Mozambique. He’s also worked in various roles in BHP’s coal, manganese and aluminium businesses. During his career, Mike held leadership roles in a large internationally diversiﬁ ed industrial business, and has worked in the United Kingdom, South Africa, Mozambique and Australia. Mike holds a Master of Business Leadership and a Bachelor of Commerce from the University of South Africa. Brendan Harris BSc, CPA, 47 Paul Harvey BEng, 55 Rowena Smith BCom, 52 Chief Operating Ofﬁ cer Chief Sustainability Ofﬁ cer Rowena Smith became our Chief Sustainability Ofﬁ cer in August 2017, having been our Vice President Supply in the Australia region. She’s responsible for Health, Safety, Environment, Sustainability, Risk and Compliance. Before joining us, Rowena worked with BHP Nickel West as Head of Resource Planning and Development. In her 14 years with BHP, she also held senior roles in marketing and operations, including General Manager, Kwinana Nickel Reﬁ nery. Before this, she worked in operational leadership roles within Rio Tinto’s aluminium smelting business. Rowena holds a Bachelor of Commerce from the University of Western Australia. In April 2018, Paul Harvey became our Chief Operating Ofﬁ cer for the Group’s manganese operations in South Africa and Australia, and the Illawarra Metallurgical Coal and Cannington operations in Australia. Prior to this, Paul was our President and Chief Operating Ofﬁ cer for the Australia region, and Chief Transformation Ofﬁ cer. Before joining us, Paul was the Asset President of BHP’s Nickel West operation in Australia and Asset President at its Ekati diamond mine in Canada. He also held leadership roles in operations management, major capital projects, business planning, strategy and growth across uranium, base metals, diamonds and specialty products in Africa, Australia and Canada. Paul holds a Bachelor of Engineering (Mining) from the Western Australian School of Mines. Chief Financial Ofﬁ cer (up to 1 May 2019) Chief Marketing Ofﬁ cer (elect) Brendan Harris will become our Chief Marketing Ofﬁ cer from 1 January 2020 and be responsible for our Commodity Marketing and Supply operations. Brendan will move to Singapore in the second half of 2019 to enable a handover of our global customer relationships from Peter Finnimore. Previously, he was our inaugural Chief Financial Ofﬁ cer, looking after Financial Reporting, Management Reporting, Treasury, Business Evaluation, Tax, Corporate Aff airs, Investor Relations, Risk and Assurance, and Brazil Alumina – and played a key role in our establishment, Demerger and listing. Before joining us, Brendan was Head of Investor Relations at BHP, based in the United Kingdom and then Australia, having been Vice President Investor Relations Australasia. During his career, he also held roles in investment banking, including Executive Director Metals and Mining Research at Macquarie Equities. Brendan holds a Bachelor of Science in Geology and Geophysics from Flinders University. 16 SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY OUR COMPANYVanessa Torres BSc (Chemical), MEng, DEng, 49 Chief Technology Ofﬁ cer Vanessa Torres became our Chief Technology Ofﬁ cer in August 2018. She is responsible for Technology Strategy, Digital Operations, Innovation and Improvement, Enterprise Resource Planning Transformation, Greenﬁ eld Technology and Global Business Services. Before this, Vanessa was Vice President Operational Infrastructure for BHP Western Australia Iron Ore. She has over 27 years of global mining experience across Australia, Canada, Brazil, Peru and New Caledonia, and has held various senior roles at BHP and Vale in strategy, projects, business development, and operations. Vanessa holds Doctorate and Master degrees in Minerals Engineering from the University of Sao Paulo, and a Bachelor of Science from the Federal University of Minas Gerais, Brazil. She was also a Visiting Scholar at the University of British Columbia, Canada, where her research focused on the application of Artiﬁ cial Intelligence to the mining industry. Katie Tovich BCom, CA, GAICD, 49 Chief Financial Ofﬁcer Katie Tovich became our Chief Financial Ofﬁ cer in May 2019, having been our Vice President Corporate Aff airs and Investor Relations, as well as our Head of Treasury. She’s responsible for Financial Reporting, Management Reporting, Treasury, Business Evaluation, Tax, Investor Relations, Risk and Assurance, and Corporate Aff airs including Community. Katie brings more than 25 years of global experience in the resources sector. Before joining us, she held senior ﬁ nance and marketing roles at BHP in Australia and Asia, including Vice President Corporate Finance, Head of Finance Worsley Alumina and Vice President Finance Marketing – Carbon Steel Materials. Earlier in her career, she held ﬁ nance and marketing leadership positions at WMC Resources Limited in Australia and North America. Katie holds a Bachelor of Commerce from the University of Tasmania and is a member of Chartered Accountants Australia and New Zealand. SOUTH32 > ANNUAL REPORT 2019 > OUR COMPANY 17 OUR COMPANYRISK MANAGEMENT RISK MANAGEMENT RISK MANAGEMENT At South32, risk management underpins almost everything we do, enabling us to identify and manage At South32, risk management underpins almost everything we do, enabling us to identify and manage At South32, risk management underpins almost everything we do, enabling us to identify and manage threats and opportunities, to support the delivery of our business goals and company strategy. threats and opportunities, to support the delivery of our business goals and company strategy. threats and opportunities, to support the delivery of our business goals and company strategy. Our risk management framework is well established, with strong governance and risk management processes in place. In FY19, as part Our risk management framework is well established, with strong governance and risk management processes in place. In FY19, as part Our risk management framework is well established, with strong governance and risk management processes in place. In FY19, as part of our continuous improvement process, we have simpliﬁ ed the approach, provided more eff ective tools and focused our eff orts on of our continuous improvement process, we have simpliﬁ ed the approach, provided more eff ective tools and focused our eff orts on of our continuous improvement process, we have simpliﬁ ed the approach, provided more eff ective tools and focused our eff orts on lifting the risk capability and practices across our business. lifting the risk capability and practices across our business. lifting the risk capability and practices across our business. Through ongoing engagement, management keeps the board informed on the strategic risks facing the Company globally. The Through ongoing engagement, management keeps the board informed on the strategic risks facing the Company globally. The Through ongoing engagement, management keeps the board informed on the strategic risks facing the Company globally. The identiﬁ cation and assessment of these risks is informed, among other things, by an understanding of our business, signiﬁ cant trends in identiﬁ cation and assessment of these risks is informed, among other things, by an understanding of our business, signiﬁ cant trends in identiﬁ cation and assessment of these risks is informed, among other things, by an understanding of our business, signiﬁ cant trends in our operating environment and the relevant interests, expectations and concerns of key stakeholders that are most likely to inﬂ uence our operating environment and the relevant interests, expectations and concerns of key stakeholders that are most likely to inﬂ uence our operating environment and the relevant interests, expectations and concerns of key stakeholders that are most likely to inﬂ uence our success. Our annual evaluation with senior leaders and the Board considers emerging trends, new impacts from internal and external our success. Our annual evaluation with senior leaders and the Board considers emerging trends, new impacts from internal and external our success. Our annual evaluation with senior leaders and the Board considers emerging trends, new impacts from internal and external factors, while ensuring continued alignment with our purpose. factors, while ensuring continued alignment with our purpose. factors, while ensuring continued alignment with our purpose. We have identiﬁ ed 13 strategic exposures that have the potential to signiﬁ cantly impact the performance and sustainability of our We have identiﬁ ed 13 strategic exposures that have the potential to signiﬁ cantly impact the performance and sustainability of our We have identiﬁ ed 13 strategic exposures that have the potential to signiﬁ cantly impact the performance and sustainability of our business. Some elements of these risks may be relevant across the entire Group, while others may be speciﬁ c to a single commodity business. Some elements of these risks may be relevant across the entire Group, while others may be speciﬁ c to a single commodity business. Some elements of these risks may be relevant across the entire Group, while others may be speciﬁ c to a single commodity or operation. or operation. or operation. Strategic Risk Strategic Risk Strategic Risk Our Response Our Response Our Response Ensuring that our people go home safe and well Ensuring that our people go home safe and well Ensuring that our people go home safe and well A safe and healthy working environment A safe and healthy working environment A safe and healthy working environment is fundamental to living our values. This is fundamental to living our values. This is fundamental to living our values. This goal promotes the culture we aspire to and goal promotes the culture we aspire to and goal promotes the culture we aspire to and meets societal expectations, as well as our meets societal expectations, as well as our meets societal expectations, as well as our expectations of each other. expectations of each other. expectations of each other. ■ ■ ■ In everything we do, we focus on the health and safety of our people, contractors In everything we do, we focus on the health and safety of our people, contractors In everything we do, we focus on the health and safety of our people, contractors and communities; and communities; and communities; ■ We engage, develop and train our people to ensure our work is well designed; ■ We engage, develop and train our people to ensure our work is well designed; ■ We engage, develop and train our people to ensure our work is well designed; ■ We continuously improve our work environment to make it safer and more ■ We continuously improve our work environment to make it safer and more ■ We continuously improve our work environment to make it safer and more productive for our people; productive for our people; productive for our people; If we don’t provide a safe working If we don’t provide a safe working If we don’t provide a safe working environment, it may result in physical environment, it may result in physical environment, it may result in physical harm to our employees, contractors and harm to our employees, contractors and harm to our employees, contractors and communities. This could negatively impact communities. This could negatively impact communities. This could negatively impact team morale, Total Shareholder Returns (TSR) team morale, Total Shareholder Returns (TSR) team morale, Total Shareholder Returns (TSR) and stakeholder conﬁ dence. and stakeholder conﬁ dence. and stakeholder conﬁ dence. ■ We have comprehensive health and safety policies, systems and standards with ■ We have comprehensive health and safety policies, systems and standards with ■ We have comprehensive health and safety policies, systems and standards with associated performance requirements designed to prevent and mitigate exposure associated performance requirements designed to prevent and mitigate exposure associated performance requirements designed to prevent and mitigate exposure to health and safety risks; to health and safety risks; to health and safety risks; ■ We investigate signiﬁ cant events, put preventive and corrective controls in place, ■ We investigate signiﬁ cant events, put preventive and corrective controls in place, ■ We investigate signiﬁ cant events, put preventive and corrective controls in place, and share our learnings across the organisation – so that everyone can beneﬁ t; and and share our learnings across the organisation – so that everyone can beneﬁ t; and and share our learnings across the organisation – so that everyone can beneﬁ t; and ■ We have an independent assurance function that reviews our risk register and the ■ We have an independent assurance function that reviews our risk register and the ■ We have an independent assurance function that reviews our risk register and the associated controls, to test how eff ective they are. associated controls, to test how eff ective they are. associated controls, to test how eff ective they are. Actions by governments, political events or tax authorities Actions by governments, political events or tax authorities Actions by governments, political events or tax authorities When changes in legislation, regulation, and/ When changes in legislation, regulation, and/ When changes in legislation, regulation, and/ or policy impact our strategic goals and the or policy impact our strategic goals and the or policy impact our strategic goals and the way we work, we aim to eff ectively manage way we work, we aim to eff ectively manage way we work, we aim to eff ectively manage this uncertainty. this uncertainty. this uncertainty. This includes uncertainty surrounding This includes uncertainty surrounding This includes uncertainty surrounding direct and indirect taxes and royalties in direct and indirect taxes and royalties in direct and indirect taxes and royalties in the countries where we operate, as well the countries where we operate, as well the countries where we operate, as well as around broader policy decisions and as around broader policy decisions and as around broader policy decisions and regulatory changes, relating to: regulatory changes, relating to: regulatory changes, relating to: ■ Nationalisation of mineral resources; ■ Nationalisation of mineral resources; ■ Nationalisation of mineral resources; ■ Renegotiation or nulliﬁ cation of ■ Renegotiation or nulliﬁ cation of ■ Renegotiation or nulliﬁ cation of contracts; contracts; contracts; Leases, permits or agreements; and Leases, permits or agreements; and Leases, permits or agreements; and Environmental performance. Environmental performance. Environmental performance. ■ ■ ■ ■ ■ ■ ■ We have the specialised knowledge we need in our functions and through ■ We have the specialised knowledge we need in our function and through ■ We have the specialised knowledge we need in our function and through consultants, including tax management capability, tax advice, and external relations consultants, including tax management capability, tax advice, and external relations consultants, including tax management capability, tax advice, and external relations advice; advice; advice; ■ We monitor political activity in all jurisdictions we operate in; ■ We monitor political activity in all jurisdictions we operate in; ■ We monitor political activity in all jurisdictions we operate in; ■ We engage with our key stakeholders, identifying them through active mapping and ■ We engage with our key stakeholders, identifying them through active mapping and ■ We engage with our key stakeholders, identifying them through active mapping and developing comprehensive engagement plans; developing comprehensive engagement plans; developing comprehensive engagement plans; ■ We work through selected industry associations to inﬂ uence how the industry is ■ We work through selected industry associations to inﬂ uence how the industry is ■ We work through selected industry associations to inﬂ uence how the industry is positioned; positioned; positioned; ■ While we monitor policy, legislative and regulatory changes, we also engage with ■ While we monitor policy, legislative and regulatory changes, we also engage with ■ While we monitor policy, legislative and regulatory changes, we also engage with relevant authorities; and relevant authorities; and relevant authorities; and ■ We produce an annual Tax Transparency and Payments to Governments Report, ■ We produce an annual Tax Transparency and Payments to Governments Report, ■ We produce an annual Tax Transparency and Payments to Governments Report, which shows how we meet our regulatory tax obligations. which shows how we meet our regulatory tax obligations. which shows how we meet our regulatory tax obligations. 18 18 18 SOUTH32 > ANNUAL REPORT 2019 > RISK MANAGEMENT SOUTH32 > ANNUAL REPORT 2019 > RISK MANAGEMENT SOUTH32 > ANNUAL REPORT 2019 > RISK MANAGEMENT RISK MANAGEMENT Strategic Risk Our Response Portfolio composition Our aim is to outperform our peers by reshaping our portfolio. This will create exposure to high-quality operations in commodities with a strong and sustainable outlook, as well as in jurisdictions where we believe we can operate into the future – in line with our values. We invest for value in our preferred commodity and jurisdictional exposures. We do this by progressing our internal development options and by acquiring exploration opportunities, development projects or existing operations. If we don’t invest in a disciplined way, or divest non-preferred exposures, we could reduce TSR. ■ We keep our strategy front of mind – it informs our portfolio composition, including an annual review with Board and Lead Team together; ■ We have a dedicated greenﬁ elds exploration team focused on delivering a ﬂ ow of low-cost, high-quality resource development options; ■ We apply a rigorously developed and independently veriﬁ ed Commodity Price Protocol (CPP) process, to develop long-term prices for our portfolio commodities; ■ We maintain a strong life of operations planning process. By evaluating the embedded options in our operations, we can progress with organic options at the right time; ■ We follow strong due diligence processes for acquisitions and new business ventures; ■ We apply a standardised valuation methodology with consistent key macro- economic assumptions; ■ We have a mature and independent peer review process, which we rigorously follow to make key investment decisions; and ■ We actively manage portfolio change with dedicated specialists, to deliver integration and separation beneﬁ ts. Global economic uncertainty and liquidity Our aim is to manage risks related to uncertain and changing macroeconomic conditions. We’ll do the same when it comes to the volatility in commodity, currency and debt capital markets – given how much they can impact our earnings, balance sheet and growth goals. ■ Our diverse portfolio strengthens our resilience to the disruption of any one commodity, geography or operation – compared with single mine or commodity companies; ■ We prioritise a strong balance sheet and an investment grade credit rating, so that we remain in control through economic cycles; ■ We test our ﬁ nancial strength across a range of scenarios, including a depressed demand and pricing environment. We also maintain a minimum liquidity buff er; ■ Our commercial strategy is designed to ensure we stay resilient and take advantage of new opportunities; ■ We carry out qualitative global economic scenario assessments, monitor meaningful leading indicators, and adjust our commercial approach accordingly; ■ We maintain strong relationships with high-quality customers and suppliers from all around the world; ■ We mostly sell our products with reference to ﬂ oating, market-based prices, which are broadly correlated with ﬂ oating global currency markets and the input costs we’re exposed to; and ■ We carry out an annual review of our CPP, which we use to inform our ﬁ nancial planning and how we operate. Unexpected operational or natural catastrophes Our operations and transport networks can be disrupted by events such as: ■ When facing potential catastrophes, we put safety and wellbeing at the heart of everything we do; ■ ■ ■ Fire; Explosion; Flooding; ■ Geotechnical failures; Tailings dam failures; Loss of power supply; ■ ■ ■ Mechanical/electrical equipment failures; and ■ We use a strong system of risk management in design, construction and operation phases, to analyse risks and design plans that prevent or limit business impacts; ■ We have business continuity and disaster recovery plans in place. We’ve tested these to make sure we can respond rapidly to major events and safely restore our operations; ■ We have governance functions independent of the operations. These give us assurance against our own comprehensive internal standards for equipment integrity, tailings dams management and technical stewardship; ■ We maintain insurance against many, but not all, potential losses or liabilities arising ■ Unexpected natural catastrophes. from operating risks. This may not fully cover all ﬁ nancial losses; and ■ We work with external experts, relevant industry bodies and technology suppliers, to provide additional assurance and input. SOUTH32 > ANNUAL REPORT 2019 > RISK MANAGEMENT 19 RISK MANAGEMENT Strategic Risk Our Response Key talent identiﬁ cation, attraction and retention Our ability to identify, attract and retain key talent and develop capabilities is fundamental to delivering our strategic priorities. Failure to ensure the right capabilities and talent within our business erodes shareholder value. ■ We focus on enhancing our off ering to employees and potential employees to distinguish ourselves in the market; ■ We continually seek ways to better engage and empower our workforce, including leading ﬂ exibility policies and a focus on ensuring we maintain an inclusive workplace; ■ Our dedication to “making a diff erence” inspires our people; ■ We identify key talent and provide them with experience and growth through time in critical roles; ■ We have eff ective approaches to talent and recruitment management, remuneration, skills development and succession planning; ■ Our strategic planning process identiﬁ es capability requirements for the future; ■ We work to strengthen our reputation and status in the community as an employer of choice through community engagement programs; and ■ We have developed and are implementing a long-term workforce planning and talent management program across the organisation. Changing societal expectations and acceptance There are growing expectations of shared value outcomes from mining and metals companies by government, investors, employees, host communities and broader society. By understanding and maintaining stakeholder acceptance, we can manage the eff ect of business impacts to achieve shared value. ■ We embrace the concept of shared value – it’s at the heart of our purpose; ■ We maintain connection and understanding of stakeholder acceptance and needs through routine mapping and engagement on a wide range of environmental, social and governance issues; ■ We work with appropriate industry associations and organisations who are shaping the dialogue between society and mining. This helps us enhance our understanding of social expectations across our portfolio; ■ We have internal subject matter expertise, policies and governance processes to help us identify shared value opportunities, as well as integrate social expectations into our planning and decision-making – at all levels; ■ Our organisational investment proposition and purpose is clear, to minimise any misalignment with our owners’ expectations of us; and ■ We manage and transparently report on regulatory obligations, commitments, and areas where we’re working. This means we can optimise our value proposition to society and the communities we operate in. Evolving culture of the organisation We recognise the value of a strong culture. It’s at the core of how we deliver our purpose and strategy. ■ We’re working to better understand the gap between what our culture is and what we want it to be – and to have a clear approach to help us close it; ■ We make sure our ways of working (systems, symbols and behaviours) are aligned As our organisation grows and matures, our culture must evolve with it. This will help us keep delivering on our strategy, achieve our purpose and live our values. Predictable operational performance Predictable operational performance improves our ability to keep our people safe, meet our regulatory and social obligations, provide quality products to our customers and deliver TSR. If we can’t safely achieve our production targets and mitigate rising unit costs, it will impact directly on our proﬁ ts and cash ﬂ ow, as well as our ability meet our commitments to our stakeholders. to our aspired culture; and ■ We identify eff ective levers to move our culture and use them deliberately to address any misalignment. ■ We carry out rigorous quality assurance programs over our operations and marketing; ■ We review our asset health and integrity on a regular basis; ■ We reconcile the performance of our mineral resource and ore reserve quality against production on an annual basis; ■ We carry out rigorous modelling and reviews of our geotechnical drilling data; ■ We operate within target operating windows and regularly review our internal scheduling and operational planning; ■ We monitor raw material supply contracts and implement early detection procedures at load port; ■ We’ve developed and implemented long-term and short-term planning, scheduling and veriﬁ cation of developments; ■ We carry out operational resource planning and regularly review our productivity metrics; ■ We apply structured work design processes for critical or high value tasks; and ■ We apply veriﬁ cation systems to ensure we’re compliant with work standards. 20 SOUTH32 > ANNUAL REPORT 2019 > RISK MANAGEMENT RISK MANAGEMENT Strategic Risk Our Response Maintain competitiveness through innovation and technology It’s clear that technology and innovation are advancing at a rapid pace. And companies who don’t keep up ﬁ nd themselves falling behind in TSR. To stay competitive, we’ll organise our business in a way that means we can identify, adopt and maintain innovation and technology that delivers shareholder return. ■ We’ve implemented a clear approach to innovation, improvement and technology; ■ We’ve organised the coordination and delivery of programs focused on adoption of critical technology across the business; ■ We’ve planned to identify opportunities to test and scale emerging innovation and technology; ■ We’ve developed and implemented rigorous internal standards and processes (technology ‘ways of working’); ■ We benchmark our digital operations performance to industry best practice, and we implement strategies to close any gaps; ■ We actively manage cyber security and data centre risks through our system of risk management; ■ We monitor customer satisfaction and manage customer support; and ■ We follow a rigorous assurance process for our approach to innovation, improvement and technology. Security of supply of logistics chain and critical services Our logistics chain includes road, rail and ports. Our critical services include gas, power (sourcing and generating) and water. By securing our supply at commercially acceptable terms, we can capitalise on market opportunities, run safe and predictable operations, and deliver life of operations plans. If we fail to do this, it could result in a disruption to our operations, increased operational costs and ﬁ nancial penalties. ■ We build strong strategic partnerships with Tier 1 suppliers of road, rail, port facilities, water, gas and power, on a long-term, mutually beneﬁ cial basis; ■ We have a clearly deﬁ ned B-BBEE (Broad-Based Black Economic Empowerment) strategy in South Africa to support the secure supply of electricity to the smelters; ■ We actively work to secure resources within our control to strengthen the resilience of our operations' logistics and critical services against supply disruption; and ■ We explore opportunities to optimise existing sources, and identify alternate sources, for critical services. Maintain, realise or enhance the value of our resources and reserves We exist to realise the potential of the resources and reserves we are entrusted to develop. ■ We report Mineral Resources and Ore Reserves (including Coal Resources and Coal Reserves) in accordance with the JORC Code as required by Chapter 5 of the ASX Listing Rules; We work to continually optimise our operations through our sound technical and economic understanding of our resources and reserves. If we fail to do this, it will have a signiﬁ cant impact on TSR and ultimately, the sustainability of the Company. Climate change resilience By using climate change scenarios, we can identify opportunities and threats to our portfolio and operations. We assess these risks through a framework that includes policy, market and physical factors. ■ We apply an annual business planning standard and process, structured to get maximum value across the life of our operations; ■ Our capital prioritisation, capital allocation & short-term planning processes prioritise the highest value options across our portfolio; ■ We apply a rigorous project development process that includes independent peer review of project risks and approval tollgates; and ■ Our closure standard ensures that our full life of operations value incorporates closure and rehabilitation liabilities. ■ We seek to understand our portfolio performance in a range of future climate scenarios, considering both opportunities and threats; ■ We use the latest climate modelling data to inform us of the level of risk to our operational plans; ■ We identify potential controls in the short, medium and long-term to improve the climate change resilience of our portfolio; ■ We prioritise our land management eff orts to improve resilience, including minimising land disturbance and maximising rehabilitation eff orts; ■ We support the Paris Agreement objectives and are committed to achieving net zero carbon emissions by 2050; ■ We identify and implement greenhouse gas reduction and energy efﬁ ciency projects, with our emission reduction targets linked to our remuneration; and ■ We’re transparent with our disclosure of climate change-related opportunities and threats in our annual Our Approach to Climate Change report, which is prepared with regard to the Recommendations of the Task Force on Climate-related Financial Disclosures. SOUTH32 > ANNUAL REPORT 2019 > RISK MANAGEMENT 21 RISK MANAGEMENT OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW INTRODUCTION INTRODUCTION INTRODUCTION The following operating and ﬁnancial review is The following operating and ﬁnancial review is The following operating and ﬁnancial review is intended to convey the Directors’ perspective of the intended to convey the Directors’ perspective of the intended to convey the Directors’ perspective of the Group’s operating performance and ﬁnancial position, Group’s operating performance and ﬁnancial position, Group’s operating performance and ﬁnancial position, development potential and future prospects. development potential and future prospects. development potential and future prospects. In addition, South32 management retains the discretion to adjust In addition, South32 management retains the discretion to adjust In addition, South32 management retains the discretion to adjust for other signiﬁ cant non-recurring items that are not considered for other signiﬁ cant non-recurring items that are not considered for other signiﬁ cant non-recurring items that are not considered reﬂ ective of the underlying performance of the Group's reﬂ ective of the underlying performance of the Group's reﬂ ective of the underlying performance of the Group's operations. Signiﬁcant items are detailed on page 89 in note 4(b)(ii) operations. Signiﬁcant items are detailed on page 89 in note 4(b)(ii) operations. Signiﬁcant items are detailed on page 89 in note 4(b)(ii) to the ﬁnancial statements. to the ﬁnancial statements. to the ﬁnancial statements. FINANCIAL KEY PERFORMANCE INDICATORS FINANCIAL KEY PERFORMANCE INDICATORS FINANCIAL KEY PERFORMANCE INDICATORS FOR FY19 FOR FY19 FOR FY19 Financial highlights Financial highlights Financial highlights US$M US$M US$M Revenue(1) Revenue(1) Revenue(1) Proﬁt/(loss) before tax and ﬁ nance Proﬁt/(loss) before tax and ﬁ nance Proﬁt/(loss) before tax and ﬁ nance cost cost cost Proﬁt/(loss) after tax and ﬁ nance Proﬁt/(loss) after tax and ﬁ nance Proﬁt/(loss) after tax and ﬁ nance cost cost cost Basic earnings per share (US cents)(2) Basic earnings per share (US cents)(2) Basic earnings per share (US cents)(2) Ordinary dividends per share Ordinary dividends per share Ordinary dividends per share (US cents)(3) (US cents)(3) (US cents)(3) Special dividends per share Special dividends per share Special dividends per share (US cents)(4) (US cents)(4) (US cents)(4) Other ﬁ nancial measures Other ﬁ nancial measures Other ﬁ nancial measures FY19 FY19 FY19 FY18 Change FY18 Change FY18 Change 7,274 7,274 7,274 7,549 7,549 7,549 (4%) (4%) (4%) 887 887 887 1,719 1,719 1,719 (48%) (48%) (48%) 389 389 389 7.7 7.7 7.7 1,332 1,332 1,332 25.8 25.8 25.8 (71%) (71%) (71%) (70%) (70%) (70%) 7.9 7.9 7.9 10.5 10.5 10.5 (25%) (25%) (25%) 1.7 1.7 1.7 3.0 3.0 3.0 (43%) (43%) (43%) Underlying EBITDA Underlying EBITDA Underlying EBITDA 2,197 2,197 2,197 2,516 2,516 2,516 (13%) (13%) (13%) Underlying EBITDA margin Underlying EBITDA margin Underlying EBITDA margin 33.9% 33.9% 33.9% 37.3% 37.3% 37.3% (3.4%) (3.4%) (3.4%) Underlying EBIT Underlying EBIT Underlying EBIT 1,440 1,440 1,440 1,774 1,774 1,774 (19%) (19%) (19%) Underlying EBIT margin Underlying EBIT margin Underlying EBIT margin 22.2% 22.2% 22.2% 26.2% 26.2% 26.2% (4.0%) (4.0%) (4.0%) Underlying earnings Underlying earnings Underlying earnings 992 992 992 1,327 1,327 1,327 (25%) (25%) (25%) Basic Underlying earnings per share Basic Underlying earnings per share Basic Underlying earnings per share (US cents)(2) (US cents)(2) (US cents)(2) ROIC ROIC ROIC 19.7 19.7 19.7 25.7 25.7 25.7 11.1% 11.1% 11.1% 15.0% 15.0% 15.0% Ordinary shares on issue (million) Ordinary shares on issue (million) Ordinary shares on issue (million) 5,006 5,006 5,006 5,120 5,120 5,120 (23%) (23%) (23%) (3.9%) (3.9%) (3.9%) (2.2%) (2.2%) (2.2%) (1) Revenue includes revenue from third party products and services. (1) Revenue includes revenue from third party products and services. (1) Revenue includes revenue from third party products and services. (2) FY19 basic earnings per share is calculated as Proﬁ t/(loss) after tax divided by the (2) FY19 basic earnings per share is calculated as Proﬁ t/(loss) after tax divided by the (2) FY19 basic earnings per share is calculated as Proﬁ t/(loss) after tax divided by the weighted average number of shares for FY19 (5,048 million). FY19 basic Underlying weighted average number of shares for FY19 (5,048 million). FY19 basic Underlying weighted average number of shares for FY19 (5,048 million). FY19 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted earnings per share is calculated as Underlying earnings divided by the weighted earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for FY19. FY18 basic earnings per share is calculated average number of shares for FY19. FY18 basic earnings per share is calculated average number of shares for FY19. FY18 basic earnings per share is calculated as Proﬁ t/(loss) after tax divided by the weighted average number of shares for as Proﬁ t/(loss) after tax divided by the weighted average number of shares for as Proﬁ t/(loss) after tax divided by the weighted average number of shares for FY18 (5,159 million). FY18 basic Underlying earnings per share is calculated as FY18 (5,159 million). FY18 basic Underlying earnings per share is calculated as FY18 (5,159 million). FY18 basic Underlying earnings per share is calculated as Underlying earnings divided by the weighted average number of shares for FY18. Underlying earnings divided by the weighted average number of shares for FY18. Underlying earnings divided by the weighted average number of shares for FY18. (3) FY19 ordinary dividends per share is calculated as H1 FY19 ordinary dividend (3) FY19 ordinary dividends per share is calculated as H1 FY19 ordinary dividend (3) FY19 ordinary dividends per share is calculated as H1 FY19 ordinary dividend announced (US$258 million) divided by the number of shares on issue at 31 announced (US$258 million) divided by the number of shares on issue at 31 announced (US$258 million) divided by the number of shares on issue at 31 December 2018 (5,051 million) plus H2 FY19 ordinary dividend announced December 2018 (5,051 million) plus H2 FY19 ordinary dividend announced December 2018 (5,051 million) plus H2 FY19 ordinary dividend announced (US$140 million) divided by the number of shares on issue at 30 June 2019 (US$140 million) divided by the number of shares on issue at 30 June 2019 (US$140 million) divided by the number of shares on issue at 30 June 2019 (5,006 million). FY18 ordinary dividend per share is calculated as H1 FY18 ordinary (5,006 million). FY18 ordinary dividend per share is calculated as H1 FY18 ordinary (5,006 million). FY18 ordinary dividend per share is calculated as H1 FY18 ordinary dividend announced (US$223 million) divided by the number of shares on issue dividend announced (US$223 million) divided by the number of shares on issue dividend announced (US$223 million) divided by the number of shares on issue at 31 December 2017 (5,181 million) plus H2 FY18 ordinary dividend announced at 31 December 2017 (5,181 million) plus H2 FY18 ordinary dividend announced at 31 December 2017 (5,181 million) plus H2 FY18 ordinary dividend announced (US$317 million) divided by the number of shares on issue at 30 June 2018 (US$317 million) divided by the number of shares on issue at 30 June 2018 (US$317 million) divided by the number of shares on issue at 30 June 2018 (5,120 million). (5,120 million). (5,120 million). (4) FY19 special dividends per share is calculated as FY19 special dividend announced (4) FY19 special dividends per share is calculated as FY19 special dividend announced (4) FY19 special dividends per share is calculated as FY19 special dividend announced (US$86 million) divided by the number of shares on issue at 31 December 2018 (US$86 million) divided by the number of shares on issue at 31 December 2018 (US$86 million) divided by the number of shares on issue at 31 December 2018 (5,051 million). H1 FY18 special dividend per share is calculated as H1 FY18 special (5,051 million). H1 FY18 special dividend per share is calculated as H1 FY18 special (5,051 million). H1 FY18 special dividend per share is calculated as H1 FY18 special dividend announced (US$155 million) divided by the number of shares on issue at dividend announced (US$155 million) divided by the number of shares on issue at dividend announced (US$155 million) divided by the number of shares on issue at 31 December 2017 (5,181 million). 31 December 2017 (5,181 million). 31 December 2017 (5,181 million). The following information forms part of this operating and The following information forms part of this operating and The following information forms part of this operating and ﬁnancial review and the information cross-referenced therein: ﬁnancial review and the information cross-referenced therein: ﬁnancial review and the information cross-referenced therein: ■ ■ ■ ■ ■ ■ Year at a glance on page 1 of the Annual Report; Year at a glance on page 1 of the Annual Report; Year at a glance on page 1 of the Annual Report; From our Chair and From our CEO on pages 2 to 3 of the From our Chair and From our CEO on pages 2 to 3 of the From our Chair and From our CEO on pages 2 to 3 of the Annual Report; Annual Report; Annual Report; ■ Our portfolio on pages 4 to 5 of the Annual Report; ■ Our portfolio on pages 4 to 5 of the Annual Report; ■ Our portfolio on pages 4 to 5 of the Annual Report; ■ Who we are on pages 6 to 8 of the Annual Report, which sets ■ Who we are on pages 6 to 8 of the Annual Report, which sets ■ Who we are on pages 6 to 8 of the Annual Report, which sets out our strategy and Breakthroughs; out our strategy and Breakthroughs; out our strategy and Breakthroughs; ■ Our operations on pages 9 to 10 of the Annual Report; and ■ Our operations on pages 9 to 10 of the Annual Report; and ■ Our operations on pages 9 to 10 of the Annual Report; and ■ Risk management on pages 18 to 21 of the Annual Report. ■ Risk management on pages 18 to 21 of the Annual Report. ■ Risk management on pages 18 to 21 of the Annual Report. The Group uses a number of non-International Financial Reporting The Group uses a number of non-International Financial Reporting The Group uses a number of non-International Financial Reporting Standards ﬁnancial measures in addition to those reported in Standards ﬁnancial measures in addition to those reported in Standards ﬁnancial measures in addition to those reported in accordance with International Financial Reporting Standards accordance with International Financial Reporting Standards accordance with International Financial Reporting Standards (IFRS), including underlying measures of earnings, eff ective tax (IFRS), including underlying measures of earnings, eff ective tax (IFRS), including underlying measures of earnings, eff ective tax rate (ETR), returns on invested capital (ROIC), cash ﬂ ow and net rate (ETR), returns on invested capital (ROIC), cash ﬂ ow and net rate (ETR), returns on invested capital (ROIC), cash ﬂ ow and net debt. The Directors believe that these non-IFRS measures are debt. The Directors believe that these non-IFRS measures are debt. The Directors believe that these non-IFRS measures are important when assessing the underlying ﬁnancial and operating important when assessing the underlying ﬁnancial and operating important when assessing the underlying ﬁnancial and operating performance of the Group and its operations as set out below. performance of the Group and its operations as set out below. performance of the Group and its operations as set out below. The meanings of individual non-IFRS measures used in this report The meanings of individual non-IFRS measures used in this report The meanings of individual non-IFRS measures used in this report are set out in the Glossary on page 137. are set out in the Glossary on page 137. are set out in the Glossary on page 137. Underlying earnings, Underlying EBIT and Underlying EBITDA are Underlying earnings, Underlying EBIT and Underlying EBITDA are Underlying earnings, Underlying EBIT and Underlying EBITDA are included on page 86 in note 4 to the ﬁnancial statements. We included on page 86 in note 4 to the ﬁnancial statements. We included on page 86 in note 4 to the ﬁnancial statements. We believe that Underlying earnings, Underlying EBIT and Underlying believe that Underlying earnings, Underlying EBIT and Underlying believe that Underlying earnings, Underlying EBIT and Underlying EBITDA provide useful information, but should not be considered EBITDA provide useful information, but should not be considered EBITDA provide useful information, but should not be considered as an indication of, or an alternative to, proﬁt/(loss) after tax as an as an indication of, or an alternative to, proﬁt/(loss) after tax as an as an indication of, or an alternative to, proﬁt/(loss) after tax as an indicator of actual operating performance or as an alternative to indicator of actual operating performance or as an alternative to indicator of actual operating performance or as an alternative to cash ﬂow as a measure of liquidity. cash ﬂow as a measure of liquidity. cash ﬂow as a measure of liquidity. In discussing the operating results of the Group, the focus is on In discussing the operating results of the Group, the focus is on In discussing the operating results of the Group, the focus is on Underlying earnings and ROIC. Underlying earnings is the key Underlying earnings and ROIC. Underlying earnings is the key Underlying earnings and ROIC. Underlying earnings is the key measure that is used to assess the performance of the Group, measure that is used to assess the performance of the Group, measure that is used to assess the performance of the Group, make decisions on the allocation of resources and assess senior make decisions on the allocation of resources and assess senior make decisions on the allocation of resources and assess senior management’s performance. management’s performance. management’s performance. In addition, the performance of each of the Group's operations In addition, the performance of each of the Group's operations In addition, the performance of each of the Group's operations and operational management is assessed based on Underlying and operational management is assessed based on Underlying and operational management is assessed based on Underlying EBIT. Management uses this measure because ﬁnancing EBIT. Management uses this measure because ﬁnancing EBIT. Management uses this measure because ﬁnancing structures and tax regimes diff er across the Group’s operations structures and tax regimes diff er across the Group’s operations structures and tax regimes diff er across the Group’s operations and substantial components of tax and interest charges are levied and substantial components of tax and interest charges are levied and substantial components of tax and interest charges are levied at a group level rather than an operation level. at a group level rather than an operation level. at a group level rather than an operation level. In order to calculate Underlying earnings, Underlying EBIT and In order to calculate Underlying earnings, Underlying EBIT and In order to calculate Underlying earnings, Underlying EBIT and Underlying EBITDA, the following items are adjusted as applicable Underlying EBITDA, the following items are adjusted as applicable Underlying EBITDA, the following items are adjusted as applicable each period, irrespective of materiality: each period, irrespective of materiality: each period, irrespective of materiality: ■ ■ ■ ■ ■ ■ Exchange rate (gains)/losses on restatement of monetary items; Exchange rate (gains)/losses on restatement of monetary items; Exchange rate (gains)/losses on restatement of monetary items; Impairment losses/(reversals); Impairment losses/(reversals); Impairment losses/(reversals); ■ Net (gains)/losses on disposal and consolidation of interests in ■ Net (gains)/losses on disposal and consolidation of interests in ■ Net (gains)/losses on disposal and consolidation of interests in ■ ■ ■ businesses; businesses; businesses; Fair value (gains)/losses on non-trading derivative instruments Fair value (gains)/losses on non-trading derivative instruments Fair value (gains)/losses on non-trading derivative instruments and other investments; and other investments; and other investments; ■ Major corporate restructures; and ■ Major corporate restructures; and ■ Major corporate restructures; and ■ ■ ■ Earnings adjustments included in proﬁ t/(loss) of equity Earnings adjustments included in proﬁ t/(loss) of equity Earnings adjustments included in proﬁ t/(loss) of equity accounted investments. accounted investments. accounted investments. 22 22 22 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW EXTERNAL FACTORS AND TRENDS AFFECTING THE GROUP’S RESULT Estimated impact on Underlying EBIT of a +/- 10% change in commodity price The following describes the main external factors and trends that have had a material impact on the Group’s ﬁnancial position and results of operations. Details of the Group’s most signiﬁcant risk factors and how they are mitigated can be found in Risk management on pages 18 to 21 of the Annual Report. Management monitors particular trends arising from external factors with a view to managing the potential impact on the Group’s future ﬁnancial position and results of operations. COMMODITY PRICES AND CHANGES IN PRODUCT DEMAND AND SUPPLY South32 produces metals and ores, prices of which are largely driven by global demand and supply for each of these commodities. Commodity prices were generally lower in FY19 compared to FY18 as most physical markets weakened on the back of slower demand and heightened macroeconomic uncertainty. The prices that the Group obtains for its products are a key driver of its business, and ﬂuctuations in these commodity prices aff ect its results, including cash ﬂows and asset values. US$M Alumina Aluminium(1) Manganese ore(2) Metallurgical coal Energy coal Nickel Manganese alloy(2) Silver Lead Zinc FY19 217 198 125 99 67 43 25 18 17 10 (1) Aluminium sensitivity shown without any associated increase in alumina pricing. (2) The sensitivity impacts for manganese ore and manganese alloy are on a pre-tax basis. The Group’s manganese operations are reported as an equity accounted investment. As a result, the proﬁt after tax for manganese is included in the Underlying EBIT of South32. The following table shows prices of the Group’s most signiﬁcant commodities for FY19 and FY18. These prices represent quoted prices from the relevant sources as indicated. These prices diff er from the realised prices on the sale of production due to contracts to which the Group is a party, diff erences in quotational periods, quality of products, delivery terms and the range of quoted prices that are used for contracting sales in diff erent markets. Quoted commodity prices Year ended 30 June Alumina(1) (US$/t) Aluminium (LME Cash)(2) (US$/t) Energy coal(3) (US$/t) Metallurgical coal(4) (US$/t) Manganese ore(5) (US$/dmtu) Manganese alloy(6) (US$/t) Nickel (LME Cash)(2) (US$/t) Silver(7) (US$/toz) Lead (LME Cash)(2) (US$/t) Zinc (LME Cash)(2) (US$/t) Average price Closing price FY19 435 1,921 86.3 204.9 6.68 1,150 FY18 421 2,132 93.6 203.0 6.88 1,342 12,353 12,450 15.0 1,998 2,657 16.7 2,434 3,182 Change 3% (10%) (8%) 1% (3%) (14%) (1%) (10%) (18%) (16%) FY19 321 1,774 64.3 193.5 5.74 1,150 FY18 445 2,183 103.8 199.0 6.83 1,143 12,665 14,910 15.2 1,914 2,581 16.0 2,432 2,948 Change (28%) (19%) (38%) (3%) (16%) 1% (15%) (5%) (21%) (12%) (1) Platts Alumina Index (PAX) Free on Board (FOB) Australia – market price assessment of calcined metallurgical/smelter grade alumina. (2) LME Cash represents the Ofﬁcial Seller price for nickel, zinc and lead and the A.M. Ofﬁcial price for aluminium. (3) Richards Bay Coal Terminal (RBCT) FOB (API4). (4) Platts Low Vol Hard Coking Coal Index FOB Australia – representative of high-quality hard coking coals. (5) Metal Bulletin manganese ore 44 per cent Mn CIF Tianjin China. (6) Bulk Ferro Alloy high-carbon ferromanganese (HCFeMn) Western Europe DDP. (7) Daily London Bullion Market Association (LBMA) Silver Fix. SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 23 OPERATING AND FINANCIAL REVIEW The following summarises the pricing trends of our most signiﬁcant commodities for FY19. The price change reﬂects the average of FY19 over FY18. Alumina: The average FOB Australia price for the year was three per cent higher than FY18. The price increase was largely driven by supply disruptions. Aluminium: The average LME cash settlement price for the year was 10 per cent lower than FY18, driven by weaker demand. Energy coal: The FY19 average API4 FOB Richards Bay price was eight per cent lower than FY18. Higher Chinese domestic coal output, delays in Chinese port clearance of imported coal and higher exports from seaborne suppliers such as Australia and Indonesia weighed on price. Metallurgical coal: The FY19 average Platts Premium Low Vol Hard Coking Coal price was one per cent higher than FY18. Prices were supported by higher Chinese pig iron output and supply disruptions in Australia. Manganese: The average Manganese Ore Metal Bulletin 44 per cent CIF China price was three per cent lower than FY18. While strong Chinese demand provided support, an increase in ore supply weighed on prices. The Western Europe spot high carbon ferromanganese average price weakened 14 per cent during FY19 due to persisting oversupply of ferroalloy in the seaborne market. Nickel: The FY19 average LME cash settlement price was one per cent lower than FY18. Despite a decline in exchange stocks, prices remained stable as strong stainless steel demand was met by rising Chinese and Indonesian nickel pig iron production. Silver: The FY19 average LBMA silver price was 10 per cent lower than FY18. Macroeconomic drivers, including escalating trade tensions, pushed the silver market from a deﬁ cit into a more balanced position resulting in the price retreat. Lead: The FY19 average LME cash settlement price was 18 per cent lower than FY18. In the ﬁ rst half of the ﬁ nancial year, prices were supported by Chinese environmental clampdowns which impacted supply amid historical low exchange inventories. However, a weak global automotive sector and heightened macroeconomic uncertainty weighed on prices in the second half of FY19. Zinc: The FY19 average LME cash settlement price was 16 per cent lower than FY18. Increasing concentrate supply and the return of Chinese smelters following the environmental clampdown weighed on prices. EXCHANGE RATES The Group is exposed to exchange rate risk on foreign currency sales, purchases and expenses, as no active currency hedging is undertaken. As the majority of sales are denominated in US dollars, and the US dollar plays a dominant role in the Group’s business, funds borrowed and held in US dollars provide a natural hedge to currency ﬂuctuations. Operating costs and costs of locally sourced equipment are inﬂuenced by ﬂuctuations in local currencies, primarily the Australian dollar, Brazilian real, Colombian peso, Euro and South African rand. The Group is also exposed to exchange rate translation risk in relation to net monetary liabilities, being foreign currency denominated monetary assets and liabilities, including debt, tax and other long-term liabilities. Details of the exposure to foreign currency ﬂuctuations are set out in note 19 to the ﬁnancial statements on pages 103 to 111. The following table indicates the estimated impact on FY19 Underlying EBIT of a change in the principal currencies to which the Group is exposed against the US dollar. The sensitivities give the estimated impact on Underlying EBIT based on the exchange rate movement in isolation. The sensitivities assume all variables except for exchange rates remain constant. There is an inter-relationship between currencies and commodity prices where movements in exchange rates can cause movements in commodity prices and vice versa. This is not reﬂected in the sensitivities below. These sensitivities should therefore be used with care. Estimated impact on Underlying EBIT of a +/-10% change in producer currencies relative to the US dollar US$M Australian dollar(1) South African rand(1) Colombian peso Brazilian real FY19 155 119 23 15 (1) The sensitivity impacts for manganese ore and manganese alloy are on a pre-tax basis. The Group’s manganese operations are reported as an equity accounted investment. As a result, the proﬁt after tax for manganese is included in the Underlying EBIT of South32. The following table shows the average and period end closing exchange rates of the most signiﬁcant currencies that aff ect the Group’s results: Exchange rates(1) Year ended 30 June Australian dollar(2) Brazilian real(3) Colombian peso(3) Euro(4) South African rand(3) Average Value Closing Value FY19 0.72 3.86 3,125 1.14 14.19 FY18 Change 0.78 3.31 2,917 1.19 12.86 (8%) (17%) (7%) (4%) (10%) FY19 0.70 3.83 3,197 1.14 14.17 FY18 Change 0.74 3.85 2,945 1.16 13.73 (5%) 1% (9%) (2%) (3%) (1) Positive per cent change in FX indicates strengthening currency relative to US$. (2) Displayed as US$ to A$ based on common convention. (3) Displayed as local currency to US$. (4) Displayed as US$ to € based on common convention. Local economic conditions, commodity prices and US policies remain key drivers of our producer currencies. In FY19, producer currencies broadly weakened against the US dollar on the back of stronger US economic growth relative to local economies and widening interest rate diff erentials as the US Federal Reserve raised interest rates twice in FY19. Heightened macroeconomic uncertainty and escalating trade tensions also bolstered US dollar strength given its safe haven status. 24 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW We ﬁ nished the year with a net cash balance of US$504 million having generated free cash ﬂ ow from operations, including distributions from our manganese equity accounted investments of US$1.0 billion. Our strong ﬁ nancial position allowed us to return US$762 million to shareholders in respect of the period. This included payment of a US$256 million fully franked interim dividend and declaration of a US$140 million fully franked ﬁ nal dividend in accordance with our dividend policy, which seeks to return a minimum 40 per cent of Underlying earnings in each six month period. A further US$366 million was returned to shareholders as part of our ongoing capital management program, with US$281 million allocated to our on-market share buy-back program and US$85 million returned in the form of a special dividend. Demonstrating the disciplined approach we are taking to our capital management program, our conﬁ dence in the outlook for our business and an anticipated unwind in working capital during H1 FY20, the Board has expanded our program by US$250 million to US$1.25 billion, leaving US$264 million expected to be returned by 4 September 2020. EARNINGS The Group’s statutory proﬁ t after tax declined by US$943 million (or 71 per cent) to US$389 million in FY19. Consistent with our accounting policies, various items are excluded from the Group’s statutory proﬁ t to derive Underlying earnings including: exchange rate loss on restatement of monetary items (US$3 million pre-tax); South Africa Energy Coal impairment charges (US$504 million pre-tax); loss on fair value movements of non-trading derivative instruments and other investments (US$35 million pre-tax); major corporate restructures (US$28 million pre-tax); proﬁ t associated with earnings adjustments included in our equity accounted investments (US$17 million); exchange rate gains associated with the Group’s non US dollar denominated net debt (US$34 million pre-tax), and the tax expense for all pre-tax earnings adjustments and exchange rate variations on tax balances (US$84 million). Further information on these earnings adjustments is included on page 89. The Group’s Underlying EBITDA declined by US$319 million (or 13 per cent) to US$2.2 billion, for an operating margin of 34 per cent. Lower aluminium and thermal coal prices more than off set stronger prices for alumina, contributing to a US$275 million reduction in Revenue, despite higher volumes. While the Group beneﬁ tted from weaker producer currencies and cost reduction initiatives across labour, energy and materials usage, total costs rose with higher production and the commencement of several improvement initiatives at Worsley Alumina to support a sustainable increase in production to nameplate capacity. Underlying EBIT decreased by US$334 million (or 19 per cent) to US$1.4 billion as depreciation and amortisation increased by a modest US$15 million with the higher production volumes. Underlying earnings declined by US$335 million (or 25 per cent) to US$992 million as a change in our geographic earnings mix and permanent diff erences led to an increase in our Underlying ETR. 2019 FINANCIAL YEAR SUMMARY PERFORMANCE SUMMARY The Group’s statutory proﬁ t after tax decreased by 71 per cent to US$389 million in FY19 following the recognition of impairment charges totalling US$504 million (US$578 million after tax, including de-recognition of deferred tax assets) in relation to our South Africa Energy Coal operation. Underlying earnings decreased by 25 per cent (or US$335 million) to US$992 million as our strong operating performance that delivered a three per cent increase in Group production volumes, and cost reduction initiatives across labour, energy and materials usage were more than off set by lower aluminium and thermal coal prices. Basic Underlying earnings per share decreased by a lesser 23 per cent to US 19.7 cents per share as we beneﬁ tted from the continuation of our on-market share buy-back program which has reduced our shares on issue by six per cent since its commencement. Speciﬁ c highlights for the year included: ■ Record production at Hillside Aluminium and strong performance at Mozal Aluminium, despite an increase in load- shedding events; ■ A 57 per cent increase in production at Illawarra Metallurgical Coal as the Appin colliery continued to ramp up towards historical rates; ■ Manganese ore production of 5.5Mt, with South Africa ■ Manganese exceeding guidance and Australia Manganese operating the Premium Concentrate Ore (PC02) circuit at approximately 120 per cent of its design capacity; The acquisition of the remaining 83 per cent interest in Arizona Mining for US$1.4 billion (including transaction costs), which adds the Hermosa project and a prospective land package to our portfolio; ■ A ﬁ rst time Mineral Resource estimate in accordance with the JORC Code (2012) guidelines for the Taylor deposit, which forms part of the Hermosa project, de-risking our investment and increasing our conﬁ dence in the project as we advance its pre-feasibility study; The commencement of a feasibility study at Eagle Downs Metallurgical Coal, following our acquisition of a 50 per cent interest in the project and assumption of operating control for US$106 million; and ■ ■ Payment of the third and ﬁ nal instalment (US$10 million) to maintain our option with Trilogy Metals Inc. (TSX:TMQ) to earn a 50 per cent interest in the Upper Kobuk Mineral projects in Alaska by committing approximately US$150 million to a 50:50 joint venture by 31 January 2020. Subsequent to the end of the ﬁnancial year following a comprehensive and competitive process we entered into exclusive negotiations with Seriti Resources Holdings Proprietary Limited (Seriti) as we work towards ﬁnalisation of their indicative off er to acquire our South Africa Energy Coal business. In November 2017 we announced our intention to broaden the ownership of South Africa Energy Coal, with a vision that it become a sustainable, black-owned and operated business, consistent with South Africa’s transformation agenda. At that time we also approved a 4.3 billion South African Rand investment to extend the life of the Klipspruit Colliery by at least 20 years and improve the competitiveness of the business. The recognition of an impairment charge at 30 June 2019 considers Seriti’s current off er, which includes a modest up- front cash payment with a mechanism whereby both parties will share commodity price upside for an agreed period, and assumes that transaction approvals are fulﬁ lled by June 2020. SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 25 OPERATING AND FINANCIAL REVIEW OPERATING COSTS NET FINANCE COST FY19 and FY18 comparative operating costs are set out below, excluding earnings adjustment items impacting operating costs. Earnings adjustment items are detailed on page 89 in note 4(b)(i) to the ﬁnancial statements. US$M Operating cash costs Third party commodity purchases Depreciation and amortisation expense Total operating costs included in Underlying EBIT CAPITAL EXPENDITURE FY19 4,964 801 757 FY18 4,877 842 742 6,522 6,461 Capital expenditure continues to be scrutinised in every location as we seek to optimise the performance of our business and sustainably grow ROIC, without compromising the safety or reliability of our operations. US$M FY19 FY18 Stay in business, Minor discretionary and Deferred stripping (including underground development) Major project capital expenditure Intangibles and capitalisation of exploration expenditure Total capital expenditure (excluding equity accounted investments) Equity accounted investment capital expenditure (including intangibles and capitalised exploration) Total capital expenditure (including equity accounted investments) 433 219 58 710 96 806 368 62 6 436 65 501 Total capital expenditure, excluding equity accounted investments, increased by US$274 million to US$710 million as major project activity ramped up at the Klipspruit Life Extension (KPSX) project (US$123 million) and work progressed at the Hermosa project (US$85 million) following the acquisition of Arizona Mining in August 2018. Sustaining capital expenditure increased by US$65 million to US$433 million with expenditure at Illawarra Metallurgical Coal rising by US$44 million. Increased spend on intangibles and the capitalisation of exploration expenditure reﬂ ects a greater rate of investment in technology to support our operations and US$28 million of expenditure on exploration. This included US$18 million at Hermosa to improve our knowledge of the Taylor deposit where we released a ﬁ rst time Mineral Resource estimate in accordance with the JORC Code (2012) guidelines and commenced work on the broader, prospective land package. Total capital expenditure associated with our equity accounted investments increased by US$31 million to US$96 million during FY19 as we invested in additional tailings storage capacity at Australia Manganese. The Group’s Underlying net ﬁnance cost, excluding equity accounted investments, was US$118 million in FY19 and largely reﬂects the unwinding of the discount applied to our closure and rehabilitation provisions (US$103 million) and ﬁnance lease interest (US$47 million), primarily at Worsley Alumina. TAX EXPENSE The Group’s Underlying income tax expense, which excludes tax associated with equity accounted investments, was US$330 million for an Underlying ETR of 37.8 per cent in FY19. The Group’s Underlying ETR reﬂects the geographic distribution of the Group’s proﬁt. The primary corporate tax rates applicable to the Group for FY19 include: Australia 30 per cent, South Africa 28 per cent, Colombia 33 per cent (37 per cent to 31 December 2018), Mozambique zero per cent (the Mozambique operations are subject to a royalty on revenues instead of income tax) and Brazil 34 per cent. It should also be noted that permanent diff erences have a disproportionate eff ect on the Group’s Underlying ETR when commodity prices are lower and proﬁt margins are compressed or losses are incurred in speciﬁ c jurisdictions. Permanent diff erences are items which are treated diff erently for tax and accounting purposes. The Underlying income tax expense for manganese equity accounted investments was US$338 million, including royalty- related taxation of US$92 million at GEMCO (Australia Manganese), for an Underlying ETR of 42.2 per cent. CASH FLOW The Group’s free cash ﬂ ow from operations, excluding equity accounted investments, declined by US$302 million (or 35 per cent) to US$571 million as we increased our investment in our development projects and underground development at Illawarra Metallurgical Coal, with rates increasing ahead of a planned return to a three longwall conﬁ guration in the June 2020 quarter. Free cash ﬂ ow from operations, excluding equity accounted investments US$M Proﬁ t/(loss) Non-cash items (Proﬁ t)/loss from equity accounted investments Change in working capital Cash generated Total capital expenditure, excluding equity accounted investments, including intangibles and capitalised exploration Operating cash ﬂ ows before ﬁ nancing activities and tax, and after capital expenditure Interest (paid)/received Income tax (paid)/received Free cash ﬂ ow from operations FY19 887 1,335 (467) (129) FY18 1,719 815 (521) (392) 1,626 1,621 (710) (436) 916 1 (346) 571 1,185 (6) (306) 873 26 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW We also received (net) distributions totalling US$458 million from our manganese equity accounted investments, comprising dividends and capital returns of US$542 million and a net drawdown in shareholder loans (-US$84 million). Working capital increased by US$129 million as we re-established inventories at Illawarra Metallurgical Coal and Cannington following improved performance at both operations during the year. Further, provisions and other liabilities declined following the payment of previously recognised redundancy and restructuring charges as we simpliﬁ ed the Group’s functional structures and continued to invest in concurrent rehabilitation at South Africa Energy Coal. Working capital movement reconciliation US$M Trade and other receivables Inventories Trade and other payables Provisions and other liabilities Working capital movement FY19 6 (58) (13) (64) (129) FY18 (153) (99) (22) (118) (392) With no change to our payment terms, we expect a portion of working capital to unwind in H1 FY20 as trade and other receivables reduce following receipt of the initial insurance progress payment for the Klipspruit dragline incident at South Africa Energy Coal and the collection of receipts from June 2019 sales. EARNINGS ANALYSIS The following key factors inﬂ uenced Underlying EBIT in FY19, relative to FY18. Reconciliation of movements in Underlying EBIT (US$M)(1)(2)(3) 2,000 (333) Uncontrollable (44) 44 (94) 327 (129) 234 (354) 40 (25) Net ﬁnance cost and tax (118) (330) 1,000 1,774 0 I T B E 8 1 Y F i g n y l r e d n U e c i r p s e a S l & t n e m t a e r T ) 4 ( ) t s o c & e c i r p ( s e g r a h c g n n ﬁ e r i 1,440 992 s t s o c d e k n i l - e c i r P i n g e r o F e g n a h c x e n o i t a ﬂ n I l s e a S e m u o v l s t s o c l e b a l l o r t n o C r e h t O & t s e r e t n I y t i u q e ( x a t d e t n u o c c a ) t n e m t s e v n i I T B E 9 1 Y F i g n y l r e d n U t s o c i g n y l r e d n U e c n a n ﬁ t e n e s n e p x e i g n y l r e d n U x a t e m o c n i 9 1 Y F i s g n n r a e i g n y l r e d n U (1) Sales price variance reﬂ ects the revenue impact of changes in commodity prices, based on the current period’s sales volume. Price-linked costs variance reﬂ ects the change in royalties together with the change in input costs driven by changes in commodity prices or market-traded consumables. Foreign exchange reﬂ ects the impact of exchange rate movements on local currency denominated costs and sales. Volume variance reﬂ ects the revenue impact of sales volume changes, based on the comparative period’s sales prices. Controllable costs variance represents the impact from changes in the Group’s controllable local currency cost base, including the variable cost impact of production volume changes on expenditure, and period-on-period movements in inventories. The controllable cost variance excludes earnings adjustments including signiﬁ cant items. (2) Underlying net ﬁ nance cost and Underlying income tax expense are actual FY19 results, not year-on-year variances. (3) South32’s ownership share of operations is as follows: Worsley Alumina (86 per cent share), Hillside Aluminium (100 per cent), Mozal Aluminium (47.1 per cent share), Brazil Alumina (Alumina 36 per cent share, Aluminium 40 per cent share), South Africa Energy Coal (100 per cent until B-BBEE vendor loans are repaid), Illawarra Metallurgical Coal (100 per cent), Australia Manganese (60 per cent share), South Africa Manganese (60 per cent share), Cerro Matoso (99.9 per cent share), Cannington (100 per cent), Hermosa (100 per cent), and Eagle Downs Metallurgical Coal (50 per cent share). (4) The FY19 results reﬂ ect the Group’s adoption of AASB 15 Revenue from Contracts with Customers (AASB 15), with revenue recognised net of treatment and reﬁ ning charges. These changes result in lower realised prices (US$44 million) and operating unit costs (US$44 million), with no net impact to earnings. SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 27 OPERATING AND FINANCIAL REVIEW Earnings analysis US$M Commentary FY18 Underlying EBIT 1,774 Change in sales price (333) Lower average realised prices for our commodities, including: Aluminium (-US$194 million). Energy coal (-US$88 million). Nickel (-US$45 million). Lead (-US$44 million). Zinc (-US$41 million). Off set by higher average realised prices for: Alumina (+US$105 million). Treatment and reﬁ ning charges - Net impact from reclassifying Cannington’s treatment and reﬁ ning charges (AASB 15). Net impact of price-linked costs (94) Higher royalties (-US$40 million), primarily Illawarra Metallurgical Coal volumes. Higher smelter raw material costs (-US$35 million), including pitch and coke. Higher freight costs and diesel prices (-US$34 million). Higher Brazil Alumina bauxite costs (-US$17 million). Lower LME-linked electricity costs at Hillside Aluminium (+US$19 million). Lower caustic soda prices at Worsley Alumina (+US$34 million). Change in exchange rates 327 Australian dollar (+US$160 million). South African rand (+US$127 million). Brazilian real (+US$21 million). Change in inﬂation (129) Southern Africa (-US$80 million). Australia (-US$33 million). Change in sales volume 234 Illawarra Metallurgical Coal (+US$449 million). Australia and South Africa Manganese (+US$48 million). Brazil Alumina (-US$60 million). South Africa Energy Coal (-US$215 million). Controllable costs (354) Worsley Alumina (-US$111 million; initiatives to sustainably return production to nameplate capacity and inventory drawdown). South Africa Energy Coal (-US$66 million; higher contractor mining, rehabilitation costs and inventory). Illawarra Metallurgical Coal (-US$46 million; higher volumes with improvement in longwall performance). South Africa Manganese (-US$33 million; increased activity to take advantage of market conditions). Other 40 Klipspruit dragline initial insurance progress payment at South Africa Energy Coal. Proceeds from Mining Lease relinquishment at Illawarra Metallurgical Coal. Interest & tax (equity accounted investments) (25) Higher eff ective tax rate in our jointly controlled manganese operations. Lower EBIT on third party product. Higher depreciation and amortisation. FY19 Underlying EBIT 1,440 Further analysis of operations performance is outlined on pages 30 to 35. BALANCE SHEET AND CAPITAL MANAGEMENT While the Group generated US$1 billion in free cash ﬂ ow from operations, including net distributions from our manganese equity accounted investments, our net cash balance decreased by US$1.5 billion to ﬁ nish the period at US$504 million. Our strong balance sheet and disciplined approach to capital allocation allowed us to return US$938 million to shareholders during the period by way of dividends (US$657 million) and the continuation of our on-market share buy-back program (US$281 million). We also funded the Arizona Mining and Eagle Downs Metallurgical Coal transactions for a combined investment of US$1.5 billion out of our cash reserves. Demonstrating our conﬁ dence in our ﬁ nancial position and consistent with our dividend policy, our Board resolved to pay a fully franked ﬁ nal dividend of US$140 million, representing 40 per cent of Underlying earnings in respect of H2 FY19. The Board has also exercised its discretion to increase and extend our approved capital management program by US$250 million to US$1.25 billion, leaving US$264 million to be returned by 4 September 2020, further demonstrating the disciplined and ﬂ exible approach we are taking. With the declaration of our ﬁ nal dividend, we will return US$2.5 billion to shareholders in respect of the last four-year period, equivalent to 27 per cent of our market capitalisation as at 16 August 2019 (calculated as the number of shares on issue (5,006 million) and the South32 closing share price A$2.76). Having established this strong track record, we will continue to return any excess capital to shareholders in a timely and efﬁ cient manner by monitoring our optimal ﬁ nancial position within the context of the prevailing macroeconomic environment and our capital management framework. From 1 July 2019, the Group’s adoption of AASB 16 Leases (AASB 16), which aff ects the accounting classiﬁ cation of leases, will result in an increase to our gross debt balance of approximately US$140 million following the recognition of additional liabilities. The majority of 28 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW the increase relates to the reclassiﬁ cation of existing operating leases which will continue to be captured in the aforementioned monitoring of our optimal ﬁ nancial position. Our capital management framework remains unchanged and we continue to believe that a combination of high operating leverage and undue ﬁnancial leverage delivers a sub-optimal outcome for shareholders. NET DEBT AND SOURCES OF LIQUIDITY Our policies on debt and treasury management are as follows: ■ Commitment to maintain an investment grade credit rating; ■ Diversiﬁ cation of funding sources; and ■ Generally maintain borrowings and cash in US dollars. GEARING AND NET DEBT The table below presents net cash/(debt) and net assets of the Group, based on the balance sheet as at 30 June 2019: FUNDING SOURCES In addition to cash ﬂow from operations as a primary source of funding, the Group has a US$1.5 billion revolving credit facility, which is a standby arrangement to the Group’s US$1.5 billion US commercial paper program. This borrowing facility is not subject to ﬁnancial covenants at the Group’s current credit rating. Standard and Poor’s and Moody’s reafﬁrmed their respective BBB+ and Baa1 credit ratings for the Group. Certain ﬁnancing facilities in relation to speciﬁc operations are the subject of ﬁnancial covenants that vary from facility to facility; however, these are considered normal for such facilities. As at 30 June 2019, the Group’s cash and cash equivalents on hand were US$1.4 billion. Details of major standby and support arrangements are as follows: US$M Commercial paper program(1) Available FY19 1,500 Used FY19 - US$M Cash and cash equivalents Current external debt Non-current external debt Net cash Net assets FY19 1,408 (313) (591) 504 10,168 FY18 2,970 (333) (596) 2,041 10,709 (1) The Group has an undrawn US$1.5 billion revolving credit facility which is a standby arrangement to the US$1.5 billion US commercial paper program. The size of the multi-currency revolving credit facility is US$1.5 billion until February 2021, and then US$1.4 billion from February 2021 until the facility expires in February 2022. Additional information regarding the maturity proﬁle of the Group’s debt obligations and details of the standby and support agreements are included in note 19 to the ﬁnancial statements on pages 103 to 111. Given the net cash position of the Group, a gearing ratio is not presented. OPERATIONS ANALYSIS A summary of the underlying performance of the Group’s operations is presented below and more detailed analysis is presented on pages 30 to 35. Operations table (South32 share)(1) US$M Worsley Alumina Brazil Alumina Hillside Aluminium Mozal Aluminium South Africa Energy Coal Illawarra Metallurgical Coal Australia Manganese South Africa Manganese Cerro Matoso Cannington Third party products and services(2) Inter-segment / Group and unallocated Total Equity accounting adjustment(3) South32 Group Revenue Underlying EBIT FY19 1,619 566 1,439 556 1,037 1,135 1,095 553 489 467 815 (857) 8,914 (1,640) 7,274 FY18 1,473 551 1,583 629 1,366 686 1,111 503 559 584 870 (749) 9,166 (1,617) 7,549 FY19 541 160 (75) (21) (46) 359 638 188 40 104 5 (78) 1,815 (375) 1,440 FY18 422 136 213 99 276 (62) 651 186 120 183 25 (125) 2,124 (350) 1,774 (1) South32’s ownership share of operations is as follows: Worsley Alumina (86 per cent share), Hillside Aluminium (100 per cent), Mozal Aluminium (47.1 per cent share), Brazil Alumina (Alumina 36 per cent share, Aluminium 40 per cent share), South Africa Energy Coal (100 per cent until B-BBEE vendor loans are repaid), Illawarra Metallurgical Coal (100 per cent), Australia Manganese (60 per cent share), South Africa Manganese (60 per cent share), Cerro Matoso (99.9 per cent share), Cannington (100 per cent), Hermosa (100 per cent), and Eagle Downs Metallurgical Coal (50 per cent share). (2) FY19 third party products and services sold comprise US$57 million for aluminium, US$2 million for alumina, US$392 million for coal, US$239 million for freight services, US$116 million for aluminium raw materials and US$9 million for manganese. Underlying EBIT on third party products and services comprise nil for aluminium, US$2 million for alumina, US$9 million for coal, (US$5 million) for freight services, (US$1 million) for aluminium raw materials and nil for manganese. FY18 third party products and services sold comprise US$206 million for aluminium, US$49 million for alumina, US$290 million for coal, US$198 million for freight services, US$124 million for aluminium raw materials and US$3 million for manganese. Underlying EBIT on third party products and services comprise US$11 million for aluminium, US$2 million for alumina, US$12 million for coal, (US$1 million) for freight services and US$1 million for aluminium raw materials. (3) The equity accounting adjustment reconciles the proportional consolidation of the South32 manganese operations to the treatment of the manganese operations on an equity accounted basis (including third party product). SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 29 OPERATING AND FINANCIAL REVIEW ALUMINA BUSINESS WORSLEY ALUMINA (86% SHARE) BRAZIL ALUMINA (ALUMINA 36% SHARE, ALUMINIUM 40% SHARE) Worsley Alumina is one of the largest and lowest cost bauxite mining and alumina reﬁ ning operations in the world. Brazil Alumina operations include the MRN mine in the Trombetas Region, Para, and reﬁ nery and smelter, which is currently on care and maintenance, located at Sao Luis, Maranhao. 2,831 3,028 Underlying EBITDA South32 share Alumina production (kt) Alumina sales (kt) Realised alumina sales price (US$/t) Operating unit cost (US$/t)(1) FY19 3,795 3,857 420 238 FY18 3,764 3,763 391 235 (1) Operating unit cost is Revenue less Underlying EBITDA divided by sales volume. Volumes Worsley Alumina saleable production increased by one per cent (or 31kt) to 3.8Mt in FY19 as we opportunistically sold stockpiled hydrate at alumina equivalent prices during the year, off setting the impact of additional calciner maintenance. South32 share (US$M) Revenue Underlying EBITDA Underlying EBIT Net operating assets Capital expenditure All other capital expenditure Exploration expenditure Exploration expensed FY19 1,619 702 541 FY18 1,473 588 422 57 57 1 1 52 52 1 1 Operating costs Operating unit costs increased by one per cent in FY19 to US$238/t as lower caustic soda prices (FY19: US$489/t, FY18: US$582/t) and consumption rates (FY19: 98kg/t, FY18: 103kg/t) were off set by additional calciner maintenance and the opportunistic drawdown of hydrate stocks. Financial performance Underlying EBIT increased by 28 per cent (or US$119 million) in FY19 to US$541 million as a seven per cent rise in the average realised price of alumina (+US$109 million), a weaker Australian dollar (+US$51 million) and lower caustic soda costs (price and consumption, +US$46 million) were partially off set by initiatives to increase calciner availability (-US$42 million) and a drawdown in inventory as a result of higher sales (-US$34 million). The average realised price for alumina sales in FY19 was a discount of approximately ﬁ ve per cent to the Platts Alumina Index (PAX) on a volume-weighted M-1 basis. This discount narrowed to one per cent in the June 2019 half year and reﬂ ects the structure of speciﬁ c legacy supply contracts with our Mozal Aluminium smelter that are linked to the LME aluminium price and the elevated alumina to aluminium price ratio in the spot market during FY19. All alumina sales to other customers were at market- based prices. Capital expenditure Sustaining capital expenditure increased by US$5 million in FY19 to US$57 million as we invested in additional bauxite residue disposal and water catchment capacity. South32 share Alumina production (kt) Alumina sales (kt) Realised alumina sales price (US$/t) Alumina operating unit cost (US$/t)(1) FY19 1,255 1,240 456 270 FY18 1,304 1,341 411 252 (1) Operating unit cost is Revenue less Underlying EBITDA divided by sales volume. Volumes Brazil Alumina saleable production decreased by four per cent (or 49kt) to 1,255kt in FY19 as poor boiler performance and power outages impacted production. South32 share (US$M) FY19 FY18 Revenue Alumina Other income Alumina Aluminium Underlying EBIT Alumina Aluminium Net operating assets/(liabilities) Alumina Aluminium Capital expenditure All other capital expenditure 566 566 3 219 231 (12) 160 172 (12) 687 696 (9) 26 26 551 551 46 192 213 (21) 136 157 (21) 644 656 (12) 12 12 Operating costs Operating unit costs increased by seven per cent in FY19 to US$270/t as poor boiler performance resulted in lower volumes and additional maintenance activity, while bauxite costs increased as we sourced additional third party material in the period and the cost of supply from MRN was reset in accordance with its linkage to alumina and aluminium. Financial performance Alumina Underlying EBIT increased by 10 per cent (or US$15 million) in FY19 to US$172 million as an 11 per cent increase in the average realised price of alumina (+US$56 million) and a weaker Brazilian real (+US$21 million) were partially off set by lower sales volumes (-US$42 million), higher bauxite (-US$17 million) and boiler maintenance (-US$9 million) costs. Aluminium Underlying EBIT increased by US$9 million in FY19 to a loss of US$12 million as an indirect legacy tax obligation was settled and our commitment to purchase electricity from Eletronorte was fulﬁ lled during the prior period following termination of the contract in December 2015. Capital expenditure Sustaining capital expenditure increased by US$14 million in FY19 to US$26 million as we invest in additional bauxite residue disposal capacity and undertake further de-bottlenecking work at the reﬁ nery. 30 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW ALUMINIUM BUSINESS HILLSIDE ALUMINIUM (100%) MOZAL ALUMINIUM (47.1% SHARE) Hillside Aluminium is an aluminium smelter in South Africa and has a solid metal production capacity of 720ktpa. Mozal Aluminium is an aluminium smelter located in Mozambique and has a solid metal production capacity of 572ktpa (100 per cent basis). South32 share FY19 FY18 Aluminium production (kt) Aluminium sales (kt) Realised sales price (US$/t) Operating unit cost (US$/t)(1) 715 707 2,035 2,045 712 711 2,226 1,826 (1) Operating unit cost is Revenue less Underlying EBITDA divided by sales volume. Volumes Hillside Aluminium saleable production increased by 3kt to a record 715kt in FY19 as the smelter continued to test its maximum technical capacity, despite an increase in the frequency of load-shedding events. South32 share (US$M) Revenue Underlying EBITDA Underlying EBIT Net operating assets Capital expenditure All other capital expenditure FY19 1,439 (7) (75) FY18 1,583 285 213 1,027 1,202 19 19 28 28 Operating costs Operating unit costs increased by 12 per cent in FY19 to US$2,045/t as a rise in raw material input costs for alumina, coke, pitch and aluminium tri-ﬂ uoride, accounting for 58 per cent of the smelter’s cost base (FY18: 56 per cent), more than off set lower aluminium price-linked electricity costs. The smelter sources alumina from our Worsley Alumina reﬁ nery with prices linked to the Platts Alumina Index on an M-1 basis, while its power is sourced from Eskom under long-term contracts. The price of electricity supplied to potlines one and two is linked to the LME aluminium price and the South African rand/US dollar exchange rate. The price of electricity supplied to potline three is South African rand-based. We are advancing discussions with Eskom to agree a path forward to extend and consolidate our power contracts. Financial performance Underlying EBIT decreased by 135 per cent (or US$288 million) in FY19 to a loss of US$75 million as a nine per cent decrease in the average realised price of aluminium (-US$134 million), higher raw material and cathode prices (-US$129 million), an unfavourable movement in inventory (-US$35 million) and additional pot relining costs (-US$11 million) more than off set the beneﬁ ts of a weaker South African rand (+US$34 million) and lower aluminium price- linked power costs (+US$19 million). During FY19, 171 pots were relined at a cost of US$249 thousand per pot (FY18: 122 pots at US$220 thousand per pot). Capital expenditure Sustaining capital expenditure decreased by US$9 million in FY19 to US$19 million. South32 share FY19 FY18 Aluminium production (kt) Aluminium sales (kt) Realised sales price (US$/t) Operating unit cost (US$/t)(1) 267 268 2,075 2,026 271 274 2,296 1,810 (1) Operating unit cost is Revenue less Underlying EBITDA divided by sales volume. Volumes Mozal Aluminium saleable production decreased by one per cent (or 4kt) to 267kt in FY19 as the smelter’s strong operating performance was impacted by an increase in the frequency of load-shedding events. South32 share (US$M) FY19 FY18 Revenue Underlying EBITDA Underlying EBIT Net operating assets Capital expenditure All other capital expenditure 556 13 (21) 534 19 19 629 133 99 553 10 10 Operating costs Operating unit costs increased by 12 per cent in FY19 to US$2,026/t as raw material input costs increased for alumina, coke, pitch and aluminium tri-ﬂ uoride, which combined account for 49 per cent of the smelter’s cost base (FY18: 49 per cent). The smelter sources alumina from our Worsley Alumina reﬁ nery with approximately 50 per cent priced as a percentage of the LME aluminium index under a legacy contract and the remainder linked to the Platts Alumina Index on an M-1 basis, with caps and ﬂ oors embedded within speciﬁ c contracts. Electricity requirements are largely met by hydroelectric power that is generated by Hidroeléctrica de Cahora Bassa (HCB). HCB delivers power into Eskom’s South African grid and Mozal Aluminium sources electricity via the Mozambique Transmission Company (Motraco) under a long-term contract. The price of electricity is South African rand-based with the rate of escalation linked to a South Africa domestic producer price index plus a margin. Financial performance Underlying EBIT decreased by US$120 million in FY19 to a loss of US$21 million following lower average realised aluminium prices (-US$60 million) and sales volumes (-US$13 million), higher raw material and cathode prices (-US$27 million), higher power costs (-US$5 million) and additional pot relining costs (-US$4 million). Across FY19, 103 pots were relined at a cost of US$234 thousand per pot (FY18: 60 pots at US$211 thousand per pot). Capital expenditure Sustaining capital expenditure increased by US$9 million in FY19 to US$19 million as the smelter commenced the roll out of the AP3XLE energy efﬁ ciency technology in its pot relining program ahead of schedule. SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 31 OPERATING AND FINANCIAL REVIEW COAL BUSINESS SOUTH AFRICA ENERGY COAL ILLAWARRA METALLURGICAL COAL (92% SHARE) (100%) South Africa Energy Coal operations are located near Emalahleni and Middelburg in the coalﬁ elds of Mpumalanga. Illawarra Metallurgical Coal operations are located in the southern coal ﬁ elds of New South Wales, Australia. FY19 FY18 South32 share 100 per cent terms(1) Energy coal production (kt) Domestic sales (kt)(2) Export sales (kt)(2) Realised domestic sales price (US$/t) Realised export sales price (US$/t) Operating unit cost (US$/t)(3) 24,979 15,035 9,875 24 69 40 27,271 15,396 12,518 25 79 36 (1) South32’s interest in South Africa Energy Coal is accounted at 100 per cent until B-BBEE vendor loans are repaid. (2) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Metallurgical coal production (kt) Energy coal production (kt) Metallurgical coal sales (kt)(1) Energy coal sales (kt)(1) Realised metallurgical coal sales price (US$/t) Realised energy coal sales price (US$/t) Operating unit cost (US$/t)(2) FY19 5,350 1,297 5,044 1,262 209 66 94 FY18 3,165 1,079 2,937 1,179 203 76 142 (3) Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, (1) Volumes and prices do not include any third party trading that may be undertaken divided by sales volume. independently of equity production. Volumes South Africa Energy Coal saleable production decreased by eight per cent (or 2,292kt) to 25.0Mt in FY19, despite a 10 per cent improvement in the June 2019 quarter, as export sales volumes were impacted by an extended outage of the Klipspruit dragline following an incident in August 2018. (2) Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by sales volume. Volumes Illawarra Metallurgical Coal saleable production increased by 57 per cent (or 2,403kt) to 6.6Mt in FY19 as the Dendrobium and Appin longwalls continued to perform strongly and we successfully concluded the renegotiation of all major labour agreements. 100 per cent terms (US$M) (1) Revenue(2) Underlying EBITDA Underlying EBIT Net operating assets/(liabilities) Capital expenditure Major projects (>US$100M) All other capital expenditure FY19 1,037 42 (46) (373) 213 123 90 FY18 1,366 353 276 (23) 164 62 102 (1) South32’s interest in South Africa Energy Coal is accounted at 100 per cent until B-BBEE vendor loans are repaid. Includes domestic and export sales Revenue. (2) Operating costs Operating unit costs increased by 11 per cent in FY19 to US$40/t as we completed concurrent rehabilitation work and added extra contractor capacity to recover lost dragline availability at Klipspruit. This impact was partially off set by an initial insurance progress payment awarded in June 2019 for the volume and cost impact of the dragline outage, and a weaker South African rand. Financial performance Underlying EBIT decreased by 117 per cent (or US$322 million) in FY19 to a loss of US$46 million as lower sales volumes (-US$215 million), average realised prices (-US$75 million), and higher contractor mining (-US$75 million) and concurrent rehabilitation (-US$37 million) costs more than off set a favourable movement in inventory (+US$70 million) and a weaker South African rand (+US$48 million). Capital expenditure Sustaining capital expenditure decreased by US$12 million in FY19 to US$90 million despite incurring additional costs to recover from and mitigate the impact of the Klipspruit dragline incident, and our investment in new mining areas at the Wolverkrans Middelburg Complex (WMC) returning to typical levels. We also invested US$123 million in Major project capital expenditure in FY19 to progress the KPSX project, which was approved by the Board in November 2017. The 8Mtpa brownﬁ eld project extends the life of the colliery by more than 20 years. The project is approximately 72 per cent complete and remains on schedule and budget. South32 share (US$M) Revenue(1) Underlying EBITDA Underlying EBIT Net operating assets Capital expenditure Major projects (>US$100M) All other capital expenditure Exploration expenditure Exploration expensed FY19 1,135 542 359 1,410 138 5 133 9 3 FY18 686 103 (62) 1,408 89 - 89 7 7 (1) Includes metallurgical coal and energy coal sales Revenue. Operating costs Operating unit costs decreased by 34 per cent in FY19 to US$94/t as the operation beneﬁ tted from a substantial increase in sales volumes and a commercial agreement to relinquish a portion of its Mining Lease in the Appin area. Financial performance Underlying EBIT increased by US$421 million in FY19 to US$359 million as stronger sales volumes (+US$449 million), a weaker Australian dollar (+US$47 million), and lower labour (+US$16 million) and electricity (+US$15 million) costs were partially off set by higher price-linked royalties (-US$31 million). The volume-related impact on costs (-US$80 million) was tempered by the high ﬁ xed-cost base of the operation. Capital expenditure Sustaining capital expenditure increased by US$44 million in FY19 to US$133 million as we increased underground development rates at Appin. We also invested US$5 million in FY19 to progress studies for the Dendrobium Next Domain project, submitting our Environmental Impact Statement to the NSW Department of Planning and Environment during the June 2019 quarter. While still subject to necessary regulatory approvals, the project has the potential to extend the mine life of Dendrobium to approximately FY36, with a ﬁ nancial investment decision anticipated in H2 FY21. 32 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW MANGANESE BUSINESS AUSTRALIA MANGANESE (60% SHARE) GEMCO mines manganese ore in the Northern Territory, while TEMCO is a manganese alloy plant in Tasmania. South32 share Manganese ore production (kwmt) Manganese alloy production (kt) Manganese ore sales (kwmt) External customers TEMCO Manganese alloy sales (kt) Realised external manganese ore sales price (US$/dmtu, FOB)(1)(2) Realised manganese alloy sales price (US$/t)(1) Ore operating unit cost (US$/dmtu)(2)(3) Alloy operating unit cost (US$/t)(3) South32 share (US$M) Revenue(1) Manganese ore Manganese alloy Intra-segment elimination Underlying EBITDA Manganese ore Manganese alloy Underlying EBIT Manganese ore Manganese alloy Net operating assets/(liabilities) FY19 3,349 154 3,438 3,094 344 151 FY18 3,396 165 3,290 2,917 373 170 6.35 6.38 Manganese ore Manganese alloy 1,311 1.59 947 1,518 Capital expenditure 1.63 906 All other capital expenditure Exploration expenditure Exploration expensed FY19 1,095 FY18 1,111 930 198 (33) 698 643 55 638 588 50 316 303 13 65 65 2 1 884 258 (31) 710 606 104 651 552 99 289 284 5 48 48 1 1 (1) Realised ore prices are calculated as external sales Revenue less freight and marketing costs, divided by external sales volume. Realised alloy prices are calculated as sales Revenue, including sinter revenue, divided by alloy sales volume. Ore converted to sinter and alloy, and sold externally, is eliminated as an intracompany transaction. (2) Manganese Australia FY19 average manganese content of ore sales was 45.9 per cent on a dry basis (FY18: 45.7 per cent). 95 per cent of FY19 external manganese ore sales (FY18: 94 per cent) were completed on a CIF basis. FY19 realised FOB ore prices and operating unit costs have been adjusted for freight and marketing costs of US$47 million (FY18: US$43 million), consistent with our FOB cost guidance. (3) FOB ore operating unit cost is Revenue less Underlying EBITDA, freight and marketing costs, divided by ore sales volume. Alloy operating unit cost is Revenue less Underlying EBITDA divided by alloy sales volume and includes costs associated with sinter sold externally. Volumes Australia Manganese saleable ore production decreased by one per cent (or 47kwmt) to 3,349kwmt in FY19 as we maintained elevated production levels, operating our PC02 circuit at approximately 120 per cent of its design capacity. We also set an ore sales record of 3,438kwmt in FY19 as we continued to take advantage of strong market conditions. Manganese alloy saleable production decreased by seven per cent (or 11kt) to 154kt in FY19. (1) Revenues of sales from GEMCO to TEMCO are eliminated as part of the consolidation. Operating costs FOB manganese ore operating unit costs decreased by two per cent in FY19 to US$1.59/dmtu as record sales volumes and the optimisation of contractor usage mitigated an increase in strip ratio (FY19: 4.5, FY18: 4.0) and a temporary decline in product yield. Manganese alloy operating unit costs increased by ﬁ ve per cent to US$947/t as raw material input costs rose and our TEMCO smelter produced lower volumes. We continue to review options for our manganese alloy smelters as changes in market dynamics have reduced the attractiveness of our exposure and we will update the market in due course. Financial performance Underlying EBIT decreased by two per cent (or US$13 million) in FY19 to US$638 million as lower realised alloy prices (-US$18 million) and a rise in diesel, coke and freight costs (-US$13 million) were only partially off set by a weaker Australian dollar (+US$20 million) and lower maintenance contractor costs at GEMCO (+US$6 million). Our average realised price for external sales of Australian ore was in line with the high-grade 44 per cent manganese lump ore index in FY19, despite the 40 per cent grade PC02 product contributing 10 per cent to the sales mix (FY18: nine per cent). Capital expenditure Sustaining capital expenditure increased by US$17 million in FY19 to US$65 million (including US$6 million for alloys). SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 33 OPERATING AND FINANCIAL REVIEW SOUTH AFRICA MANGANESE (ORE 44.4% SHARE, ALLOY 60% SHARE) South Africa Manganese comprises Hotazel Manganese Mines in the Kalahari Basin and Metalloys Manganese Smelter in Meyerton. South32 share Manganese ore production (kwmt) Manganese alloy production (kt) Manganese ore sales (kwmt) External customers Metalloys Manganese alloy sales (kt) Realised external manganese ore sales price (US$/dmtu, FOB)(1)(2) Realised manganese alloy sales price (US$/t) Ore operating unit cost (US$/dmtu)(2)(3) Alloy operating unit cost (US$/t)(3) FY19 2,187 69 2,113 1,990 123 73 FY18 2,145 79 2,082 1,919 163 67 5.57 5.21 1,068 2.69 1,178 2.53 970 (1) Volumes and prices do not include any third party trading that may be undertaken independently of equity production. Realised ore prices are calculated as external sales Revenue less freight and marketing costs, divided by external sales volume. Ore converted to alloy, and sold externally, is eliminated as an intracompany transaction. Manganese ore sales are grossed up to reﬂ ect a 60 per cent accounting eff ective interest. (2) Manganese South Africa FY19 average manganese content of external ore sales was 40.5 per cent on a dry basis (FY18: 39.9 per cent). 74 per cent of FY19 external manganese ore sales (FY18: 70 per cent) were completed on a CIF basis. FY19 realised FOB ore prices and operating costs have been adjusted for freight and marketing costs of US$40 million (FY18: US$33 million), consistent with our FOB cost guidance. (3) FOB ore operating unit cost is Revenue less Underlying EBITDA, freight and marketing costs, divided by ore sales volume. Alloy operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by alloy sales volume. Volumes South Africa Manganese saleable ore production increased by two per cent (or 42kwmt) to 2,187kwmt in FY19 as productivity improvements at our high-grade Wessels mine delivered an increase in premium material. Manganese alloy saleable production decreased by 13 per cent (or 10kt) to 69kt in FY19. South32 share (US$M) FY19 FY18 Revenue(1) Manganese ore(2) Manganese alloy Intra-segment elimination Underlying EBITDA Manganese ore(2) Manganese alloy Underlying EBIT Manganese ore(2) Manganese alloy Net operating assets Manganese ore(2) Manganese alloy 1,269 Capital expenditure All other capital expenditure 553 488 78 (13) 215 223 (8) 188 205 (17) 312 253 59 30 30 503 436 85 (18) 215 195 20 186 175 11 297 234 63 17 17 (1) Revenues associated with sales from Hotazel Manganese Mines (HMM) to Metalloys are eliminated as part of the consolidation. (2) Consistent with the presentation of South32’s segment information, South Africa Manganese ore production and sales have been reported at 60 per cent. South32 has a 44.4 per cent ownership interest in HMM. 26 per cent of HMM is owned by a B-BBEE consortium comprising Ntsimbintle Mining (nine per cent), NCAB Resources (seven per cent), Iziko Mining (ﬁ ve per cent) and HMM Education Trust (ﬁ ve per cent). The interests owned by NCAB Resources, Iziko Mining and HMM Education Trust were acquired using vendor ﬁ nance with the loans repayable via distributions attributable to these parties, pro rata to their share in HMM. Until these loans are repaid, South32’s interest in HMM is accounted at 54.6 per cent. Operating costs FOB manganese ore operating unit costs increased by six per cent in FY19 to US$2.69/dmtu. Higher price-linked royalties combined with an increase in workforce activity and the use of higher cost trucking to take advantage of strong market conditions, more than off set the eff ect of a weaker South African rand. Manganese alloy operating unit costs increased by 21 per cent to US$1,178/t as an unfavourable movement in inventory and higher labour costs more than off set higher sales volumes from our Metalloys smelter. We continue to review options for our manganese alloy smelters as changes in market dynamics have reduced the attractiveness of our exposure and we will update the market in due course. Financial performance Underlying EBIT increased by US$2 million in FY19 to US$188 million as higher ore sales volumes (+US$35 million) and a weaker South African rand (+US$24 million) were largely off set by lower realised alloy prices (-US$14 million), an increase in costs associated with opportunistic trucking of ore (-US$10 million), an unfavourable movement in alloy inventory (-US$10 million), lower other income (-US$10 million) and higher labour costs (-US$9 million). Our average realised price for external sales of South African ore reﬂ ects the medium grade 37 per cent manganese lump ore index (FOB Port Elizabeth, South Africa) in FY19 as we increased production of premium material, reducing the contribution of our lower quality ﬁ nes product (FY19: six per cent, FY18: 13 per cent). Capital expenditure Sustaining capital expenditure increased by US$13 million in FY19 to US$30 million (including US$6 million for alloys). 34 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW OTHER METALS BUSINESS CERRO MATOSO (99.9% SHARE) CANNINGTON (100% SHARE) Cerro Matoso is a producer of ferronickel and has been operating for more than 30 years in Colombia. Cannington is a silver, lead and zinc mining and processing operation in North-West Queensland. South32 share Ore mined (kwmt) Ore processed (kdmt) Ore grade processed (%, Ni) Payable nickel production (kt) Payable nickel sales (kt) Realised nickel sales price (US$/lb) Operating unit cost (US$/lb)(1) Operating unit cost (US$/t)(2) FY19 2,278 2,738 1.66 41.1 41.2 5.38 3.99 132 FY18 3,741 2,722 1.79 43.8 43.3 5.86 3.67 129 (1) Operating unit cost is Revenue less Underlying EBITDA divided by sales volume. (2) Operating unit cost per tonne is Revenue less Underlying EBITDA divided by ore processed. Periodic movements in ﬁ nished product inventory may impact operating unit costs as related marketing costs may change. Volumes Cerro Matoso payable nickel production decreased by six per cent (or 2.7kt) to 41.1kt in FY19 following a planned increase in the contribution of lower grade stockpiled ore feed. South32 share (US$M) FY19 FY18 Revenue Underlying EBITDA Underlying EBIT Net operating assets Capital expenditure All other capital expenditure Exploration expenditure Exploration expensed 489 127 40 479 32 32 10 8 559 209 120 551 22 22 9 8 Operating costs Operating unit costs increased by nine per cent in FY19 to US$3.99/lb. The impact of lower production, increased contractor and maintenance spend and costs arising from the Constitutional Court of Colombia ruling more than off set a weaker Colombian peso and energy procurement and usage optimisations intended to partially mitigate inﬂ ationary cost pressure. Financial performance Underlying EBIT decreased by US$80 million in FY19 to US$40 million as the lower average realised nickel price (-US$45 million), sales volumes (-US$25 million) and higher maintenance expenditure (-US$10 million), were partially off set by a weaker Colombian peso (+US$18 million). Capital expenditure Sustaining capital expenditure increased by US$10 million in FY19 to US$32 million. South32 share Ore mined (kwmt) Ore processed (kdmt) Ore grade processed (g/t, Ag) Ore grade processed (%, Pb) Ore grade processed (%, Zn) Zinc equivalent production (kt)(1) Payable silver production (koz) Payable lead production (kt) Payable zinc production (kt) Payable silver sales (koz) Payable lead sales (kt) Payable zinc sales (kt) Realised silver sales price (US$/oz) Realised lead sales price (US$/t) Realised zinc sales price (US$/t) Operating unit cost (US$/t ore processed)(2) FY19 2,725 2,495 184 5.0 3.0 193.6 12,201 101.4 51.6 13,034 101.5 47.6 14.4 1,754(3) 2,122(3) 123(3) FY18 2,463 2,355 194 5.3 2.6 187.2 12,491 104.4 41.3 11,985 97.9 45.0 16.6 2,463 3,185 150 (1) Payable zinc equivalent (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total Revenue by the price of zinc. FY18 realised prices for zinc (US$3,185/t), lead (US$2,463/t) and silver (US$16.6/oz) have been used for FY18 and FY19. (2) Operating unit cost is Revenue less Underlying EBITDA divided by ore processed. Periodic movements in ﬁ nished product inventory may impact operating unit costs. (3) The FY19 results reﬂ ect the Group’s adoption of AASB 15, with revenue recognised net of treatment and reﬁ ning charges (previously recognised on a gross basis with treatment and reﬁ ning charges included as a separate expense). Volumes Cannington payable zinc equivalent production increased by three per cent (or 6.4kt) to 193.6kt in FY19 as improved productivity underground supported higher mill throughput and zinc grades improved in accordance with our expectations. South32 share (US$M) FY19 FY18 Revenue Underlying EBITDA Underlying EBIT Net operating assets Capital expenditure All other capital expenditure Exploration expenditure Exploration expensed 467 161 104 243 55 55 4 3 584 230 183 210 51 51 3 2 Operating costs Operating unit costs decreased by 18 per cent to US$123/t in FY19 as the adoption of AASB 15, which aff ects the accounting classiﬁ cation of treatment and reﬁ ning charges, reduced costs by US$19/t. A weaker Australian dollar and lower power costs following the renegotiation of a supply contract provided a further beneﬁ t, off setting additional haulage costs incurred as a result of signiﬁ cant ﬂ oods in North Queensland during the March 2019 quarter. Financial performance Underlying EBIT decreased by 43 per cent (or US$79 million) in FY19 to US$104 million as lower average realised prices (-US$107 million) and higher labour (-US$11 million) and freight (-US$6 million) costs were partially off set by an increase in sales volumes (+US$34 million) and a weaker Australian dollar (+US$23 million). Capital expenditure Sustaining capital expenditure increased by US$4 million in FY19 to US$55 million. SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 35 OPERATING AND FINANCIAL REVIEW THIRD PARTY PRODUCT SALES OUTLOOK The Group diff erentiates the sale of its production from the sale of third party products due to a signiﬁcant diff erence in proﬁt margin earned on these sales. The table below shows the breakdown between the Group’s production and third party products: US$M Group production Revenue Related operating costs (net of other income) Group production Underlying EBIT Margin on Group production Third party products Revenue Related operating costs (net of other income) Third party Underlying EBIT Margin on third party products FY19 FY18 6,468 6,682 (5,483) (5,424) 985 15.2% 1,258 18.8% 806 867 (801) 5 0.6% (842) 25 2.9% The Group engages in third party trading for the following reasons: ■ To ensure a consistent supply of materials to its customers; ■ As a result of production variability and occasional shortfalls ■ from the Group’s operations; and To enhance value through product blending and supply chain optimisation. This report contains forward-looking statements. While these forward-looking statements reﬂ ect South32’s expectations at the date of this report, they are not guarantees or predictions of future performance or statements of fact. They involve known and unknown risks and uncertainties, which may cause actual results to diff er materially from those expressed in the statements contained in this Annual Report. For further information regarding South32’s approach to risk, please see page 18 of this Annual Report. South32 makes no representation, assurance or guarantee as to the accuracy or likelihood or fulﬁ lment of any forward-looking statement or any outcomes expressed or implied in any forward- looking statement. Except as required by applicable laws or regulations, the South32 Group does not undertake to publicly update or review any forward-looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance. Information on likely developments in the Group’s business strategies, prospects and operations for future ﬁnancial years and the expected results that could result in unreasonable prejudice to the Group (for example, information that is commercially sensitive, conﬁdential or could give a third party a commercial advantage) has not been included below. The categories of information omitted include forward-looking estimates and projections prepared for internal management purposes, information regarding the Group’s operations and projects, which are developing and susceptible to change, and information relating to commercial contracts. PRODUCTION The Group’s production volumes are expected to rise by three per cent in FY20 (based on revenue-equivalent production which assumes average realised prices remain unchanged from FY19). Key guidance assumptions include: ■ ■ Illawarra Metallurgical Coal returning to a three longwall conﬁ guration from H2 FY20; South Africa Energy Coal recovering from the dragline incident and commencing production from the Klipspruit Extension Project; ■ An improvement in calciner availability at Worsley Alumina; and ■ Brazil Alumina realising the full beneﬁ ts of the De- bottlenecking Phase One project following the introduction of package boilers to improve the reliability in steam generation. 36 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW Production guidance (South32’s share)(1) FY19 FY20e(2) FY21e(2) Key guidance assumptions Worsley Alumina FY20 guidance unchanged Alumina production (kt) 3,795 3,965 3,965 Improvement in calciner availability and a drawdown of excess hydrate. Brazil Alumina (non-operated) FY20 guidance decreased by three per cent Alumina production (kt) 1,255 1,330 1,370 Ramp-up of package boilers installed in the June 2019 Hillside Aluminium quarter expected to delay the realisation of beneﬁ ts from the De-bottlenecking Phase One project. FY20 guidance unchanged (subject to load-shedding) Aluminium production (kt) 715 720 720 Smelter to test its technical capacity following record FY19 production. Mozal Aluminium FY20 guidance unchanged (subject to load-shedding) Aluminium production (kt) 267 273 273 AP3XLE energy efﬁ ciency project to add incremental Illawarra Metallurgical Coal Total coal production (kt) Metallurgical coal production (kt) Energy coal production (kt) Australia Manganese 6,647 5,350 1,297 7,000 5,800 1,200 production between FY20 and FY24. FY20 guidance unchanged 8,000 Expected return to a three longwall conﬁ guration during the June 2020 quarter. 6,800 1,200 FY20 guidance provided for the ﬁ rst time (subject to market demand) Manganese ore production (kwmt) 3,349 3,560 Subject to demand PC02 circuit to continue to operate above nameplate capacity. South Africa Manganese FY20 guidance provided for the ﬁ rst time (subject to market demand) Manganese ore production (kwmt) 2,187 2,100 Subject to demand Sales of lower quality ﬁ nes product remain subject to market demand. Cerro Matoso Ore to kiln (kt) Payable nickel production (kt) Cannington Ore processed (kdmt) Payable zinc equivalent production (kt)(3) Payable silver production (koz) Payable lead production (kt) Payable zinc production (kt) South Africa Energy Coal Total coal production (kt) Domestic coal production (kt) Export coal production (kt) 2,738 41.1 2,500 35.6 FY20 guidance unchanged 2,750 Planned furnace outage in the June 2020 quarter. 37.4 FY20 guidance increased by six per cent in payable zinc equivalent production(3) 2,495 2,700 2,600 Silver, lead and zinc production revised higher to reﬂ ect an increase in mill throughput as we draw down inventory. 218.2 12,201 101.4 51.6 FY19 24,979 14,978 10,001 221.0 11,200 104.0 59.0 213.7 10,550 103.0 57.0 FY20e(2) Key guidance assumptions FY20 guidance decreased (previously 30.3Mt) 15,300 - 16,100 26,000 - 28,000 Recovery from the Klipspruit dragline incident and a planned reduction in contractor activity at the WMC, as we respond to the lower thermal coal price environment and adjust volumes to maximise margins. 10,700 - 11,900 (1) South32’s ownership share of operations is as follows: Worsley Alumina (86 per cent share), Hillside Aluminium (100 per cent), Mozal Aluminium (47.1 per cent share), Brazil Alumina (Alumina 36 per cent share, Aluminium 40 per cent share), South Africa Energy Coal (100 per cent until B-BBEE vendor loans are repaid), Illawarra Metallurgical Coal (100 per cent), Australia Manganese (60 per cent share), South Africa Manganese (60 per cent share), Cerro Matoso (99.9 per cent share), Cannington (100 per cent), Hermosa (100 per cent), and Eagle Downs Metallurgical Coal (50 per cent share). (2) The denotation (e) refers to an estimate or forecast year. (3) Payable zinc equivalent (kt) was calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total revenue by the price of zinc. FY19 realised prices for zinc (US$2,122/t), lead (US$1,754/t) and silver (US$14.4/oz) were used for FY19, FY20e and FY21e. FY21 not provided subject to divestment SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 37 OPERATING AND FINANCIAL REVIEW COSTS AND CAPITAL EXPENDITURE Stronger production volumes, lower support costs following simpliﬁ cation of the Group’s functional structures that are on track to deliver US$50 million in annual savings, and the realisation of beneﬁ ts from our labour, energy and materials usage are expected to combine with a stronger US dollar to lower operating unit costs across the majority of our operations in FY20. While we do not provide unit cost guidance for our downstream processing operations, the lagged eff ect of a reduction in raw material prices during H2 FY19 is expected to provide some relief to the cost base of our aluminium smelters in FY20. Group and unallocated costs of US$90 million are expected in FY20 as we increase functional support for our development projects and invest in technology to support our operations. We also expect to capitalise US$30 million of expenditure on information technology systems. Operating unit cost guidance(1)(2) FY18 FY19 FY20e(3)(4) Key guidance assumptions Worsley Alumina (US$/t) 235 238 230 Brazil Alumina (non-operated) (US$/t) 252 270 Hillside Aluminium (US$/t) Mozal Aluminium (US$/t) 1,826 2,045 1,810 2,026 Not provided Not provided Not provided Illawarra Metallurgical Coal (US$/t) 142 94 97 Australia Manganese Ore (FOB) (US$/dmtu) 1.63 1.59 1.60 Increased production, lower energy costs following the renegotiation of legacy gas contracts and lower caustic soda price assumptions. Not provided but expected to beneﬁ t from lower caustic soda prices and a six per cent increase in production volumes. Not provided but expected to beneﬁ t from the lagged eff ect of lower raw material input costs and the workforce restructure completed in the June 2019 quarter. Not provided but expected to beneﬁ t from the lagged eff ect of lower raw material input costs. Increased production volumes and lower maintenance spend, more than off set by the prior year beneﬁ t from an agreement to relinquish a portion of a Mining Lease on commercial terms. Equipment productivity gains and the PC02 circuit operating above design capacity to off set a further planned increase in strip ratio. South Africa Manganese Ore (FOB) Weaker South African rand and lower price-linked royalties. (US$/dmtu) Cerro Matoso (US$/t)(5) (US$/lb) Cannington (US$/t)(6) 2.53 2.69 2.44 129 3.67 132 3.99 128 4.00 150 123 119 Lower price-linked royalties and the continued beneﬁ t of our energy optimisation strategy to off set the impact of lower production. Higher mill throughput and lower haulage costs. South Africa Energy Coal (US$/t) 36 40 37-40 Weaker South African rand and a planned reduction in contractor activity at the WMC. (1) South32’s ownership share of operations is as follows: Worsley Alumina (86 per cent share), Hillside Aluminium (100 per cent), Mozal Aluminium (47.1 per cent share), Brazil Alumina (Alumina 36 per cent share, Aluminium 40 per cent share), South Africa Energy Coal (100 per cent until B-BBEE vendor loans are repaid), Illawarra Metallurgical Coal (100 per cent), Australia Manganese (60 per cent share), South Africa Manganese (60 per cent share), Cerro Matoso (99.9 per cent share), Cannington (100 per cent), Hermosa (100 per cent), and Eagle Downs Metallurgical Coal (50 per cent share). (2) Operating unit cost is Revenue less Underlying EBITDA, excluding third party sales, divided by sales volume. Operating cost is Revenue less Underlying EBITDA excluding third party sales. (3) FY20 operating unit cost guidance includes royalties (where appropriate), the inﬂ uence of exchange rates and includes various assumptions for FY20, including: an alumina price of US$348/t; an average blended coal price of US$158/t for Illawarra Metallurgical Coal; a manganese ore price of US$5.64/dmtu for 44 per cent manganese product; a nickel price of US$5.54/lb; a thermal coal price of US$69/t (API4) for South Africa Energy Coal; a silver price of US$15.82/troy oz; a lead price of US$1,921/t (gross of treatment and reﬁ ning charges); a zinc price of US$2,483/t (gross of treatment and reﬁ ning charges); an AUD:USD exchange rate of 0.70; a USD:ZAR exchange rate of 15.06; a USD:COP exchange rate of 3,112; and a reference price for caustic soda; all of which reﬂ ected forward markets as at June 2019 or our internal expectations. (4) The denotation (e) refers to an estimate or forecast year. (5) US dollar per tonne of ore to kiln. Periodic movements in ﬁ nished product inventory may impact operating unit costs. (6) US dollar per tonne of ore processed. Periodic movements in ﬁ nished product inventory may impact operating unit costs. 38 SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW OPERATING AND FINANCIAL REVIEW CAPITAL EXPENDITURE Sustaining capital expenditure, excluding equity accounted investments, is expected to rise by US$82 million to US$515 million as we further increase underground development rates and expenditure on infrastructure improvements at Illawarra Metallurgical Coal in support of a return to a three longwall conﬁ guration, continue to invest in tailings storage capacity across our portfolio and commence a major refurbishment of a furnace at Cerro Matoso. Sustaining capital expenditure associated with our equity accounted investments is expected to be largely unchanged at US$90 million as we also continue to invest in additional tailings storage capacity at Australia Manganese. Major project capital expenditure is expected to increase by US$37 million to US$256 million in FY20 as we increase activity at the Hermosa project and progress study work for the Eagle Downs Metallurgical Coal and Dendrobium Next Domain projects. South Africa Energy Coal’s KPSX project is approximately 72 per cent complete and remains on schedule and budget for completion in FY21. Capital expenditure guidance (South32’s share)(1)(2) US$M Worsley Alumina Brazil Alumina Hillside Aluminium Mozal Aluminium Illawarra Metallurgical Coal Australia Manganese South Africa Manganese Cerro Matoso Cannington South Africa Energy Coal Group and unallocated Sustaining capital expenditure (including equity accounted investments) Equity accounting adjustment(4) Sustaining capital expenditure (excluding equity accounted investments) Hermosa Illawarra Metallurgical Coal – Dendrobium Next Domain Eagle Downs Metallurgical Coal South Africa Energy Coal Major capital expenditure Total capital expenditure (including equity accounted investments) FY18 FY19 FY20e(3) 52 12 28 10 89 48 17 22 51 102 2 433 (65) 368 - - - 62 62 495 57 26 19 19 133 65 30 32 55 90 2 528 (95) 433 85 5 6 123 219 747 60 35 23 12 185 64 26 55 55 90 - 605 (90) 515 109 21 11 115 256 861 (1) South32’s ownership share of operations is as follows: Worsley Alumina (86 per cent share), Hillside Aluminium (100 per cent), Mozal Aluminium (47.1 per cent share), Brazil Alumina (Alumina 36 per cent share, Aluminium 40 per cent share), South Africa Energy Coal (100 per cent until B-BBEE vendor loans are repaid), Illawarra Metallurgical Coal (100 per cent), Australia Manganese (60 per cent share), South Africa Manganese (60 per cent share), Cerro Matoso (99.9 per cent share), Cannington (100 per cent), Hermosa (100 per cent), and Eagle Downs Metallurgical Coal (50 per cent share). (2) Total capital expenditure comprises capital expenditure, the purchase of intangibles and capitalised exploration expenditure. Capital expenditure comprises Sustaining capital expenditure and Major projects capital expenditure. Sustaining capital expenditure comprises Stay-in-business (SIB), Minor discretionary and Deferred stripping (including underground development) capital expenditure. (3) The denotation (e) refers to an estimate or forecast year. (4) The equity accounting adjustment reconciles the proportional consolidation of the South32 manganese operations to the treatment of the manganese operations on an equity accounted basis. EXPLORATION EXPENDITURE Guidance for greenﬁ eld exploration expenditure to progress our early stage projects is US$30 million (FY19: US$34 million). We also expect to capitalise US$25 million (FY19: US$18 million) of exploration expenditure at Hermosa to further increase our knowledge of the Taylor deposit and the greater Hermosa land package. DEPRECIATION AND AMORTISATION, AND TAX EXPENSE Depreciation and amortisation (excluding equity accounted investments) is expected to reduce to approximately US$735 million (FY19: US$757 million) following the recognition of impairment charges for South Africa Energy Coal during the period. Depreciation and amortisation of US$95 million (FY19: US$87 million) is expected for our equity accounted investments. Guidance includes the impact from adopting the new AASB 16 accounting standard from 1 July 2019. Our geographical earnings mix continues to have a signiﬁ cant bearing on our ETR given diff ering country tax rates, while the impact of permanent diff erences is magniﬁ ed when margins are compressed. Although it is difﬁ cult to predict our ETR (excluding equity accounted investments), we do expect it to remain at elevated levels in FY20 (FY19: 37.8 per cent) should the compressed margins within our African aluminium operations persist. In addition, the de-recognition of tax assets in South Africa Energy Coal will further increase the Group’s ETR should the operation make losses in FY20. SOUTH32 > ANNUAL REPORT 2019 > OPERATING AND FINANCIAL REVIEW 39 OPERATING AND FINANCIAL REVIEW RESOURCES AND RESERVES RESOURCES AND RESERVES OUR GOVERNANCE ARRANGEMENTS OUR GOVERNANCE ARRANGEMENTS AND INTERNAL CONTROLS AND INTERNAL CONTROLS We have internal standards and governance arrangements We have internal standards and governance arrangements that cover regulatory requirements for public reporting. Our that cover regulatory requirements for public reporting. Our governance processes are managed by the Mining Governance governance processes are managed by the Mining Governance function in coordination with the Company Secretariat function. function in coordination with the Company Secretariat function. By doing this, we’re making sure our public reporting is correct By doing this, we’re making sure our public reporting is correct and accurate. and accurate. Our comprehensive review and audit program is aimed at Our comprehensive review and audit program is aimed at assuring our Mineral Resources and Ore Reserves estimates. This assuring our Mineral Resources and Ore Reserves estimates. This includes: includes: ■ Annual review of Mineral Resources and Ore Reserves ■ Annual review of Mineral Resources and Ore Reserves declarations and reports; declarations and reports; ■ Annual review of reconciliation performance metrics for ■ Annual review of reconciliation performance metrics for operating mines; operating mines; ■ Periodic internal mine planning and Ore Reserve audits; and ■ Periodic internal mine planning and Ore Reserve audits; and ■ ■ Independent audit of Mineral Resources or Ore Reserves that Independent audit of Mineral Resources or Ore Reserves that are new or have materially changed. are new or have materially changed. In FY19, we undertook one independent assurance audit of In FY19, we undertook one independent assurance audit of Mineral Resources and three internal mine planning and Ore Mineral Resources and three internal mine planning and Ore Reserve assurance audits. The frequency and scope of the audits Reserve assurance audits. The frequency and scope of the audits are a function of the perceived risks and uncertainties associated are a function of the perceived risks and uncertainties associated with a particular Mineral Resource and Ore Reserve. with a particular Mineral Resource and Ore Reserve. The accompanying tables outline our Mineral/Coal Resources and The accompanying tables outline our Mineral/Coal Resources and Ore/Coal Reserves holdings. Ore/Coal Reserves holdings. As required by Chapter 5 of the ASX Listing Rules, As required by Chapter 5 of the ASX Listing Rules, we report Mineral Resources and Ore Reserves we report Mineral Resources and Ore Reserves (including Coal Resources and Coal Reserves) in (including Coal Resources and Coal Reserves) in accordance with the 2012 Edition of the Australasian accordance with the 2012 Edition of the Australasian Code for Reporting of Exploration Results, Mineral Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code). Resources and Ore Reserves (the JORC Code). In this report, information relating to Mineral Resources and Ore In this report, information relating to Mineral Resources and Ore Reserves is based on, and fairly represents, information and Reserves is based on, and fairly represents, information and supporting documentation prepared by our Competent Persons. supporting documentation prepared by our Competent Persons. A Competent Person is deﬁ ned in the JORC Code, they have A Competent Person is deﬁ ned in the JORC Code, they have sufﬁ cient experience relevant to the style of mineralisation, sufﬁ cient experience relevant to the style of mineralisation, the type of deposit under consideration and the activity being the type of deposit under consideration and the activity being undertaken. undertaken. Each of our Competent Persons has given consent to the inclusion Each of our Competent Persons has given consent to the inclusion of the information in this report in the form and context in which of the information in this report in the form and context in which it appears. You can ﬁ nd more details on each of their professional it appears. You can ﬁ nd more details on each of their professional afﬁ liations, employer and areas of accountability on page 42. afﬁ liations, employer and areas of accountability on page 42. Unless we state otherwise, all Competent Persons listed are full- Unless we state otherwise, all Competent Persons listed are full- time employees at South32, or at one of our related entities. time employees at South32, or at one of our related entities. We report Mineral Resources and Ore Reserves in 100 per cent We report Mineral Resources and Ore Reserves in 100 per cent terms and represent estimates as at 30 June 2019. Our Mineral terms and represent estimates as at 30 June 2019. Our Mineral Resource estimations include Measured and Indicated Mineral Resource estimations include Measured and Indicated Mineral Resources which, after the application of all Modifying Factors, Resources which, after the application of all Modifying Factors, and development of a mine plan, have been classiﬁ ed as Ore and development of a mine plan, have been classiﬁ ed as Ore Reserves. Reserves. We report all quantities as dry metric tonnes (unless we state We report all quantities as dry metric tonnes (unless we state otherwise). otherwise). It’s important to note that Mineral Resources and Ore Reserves It’s important to note that Mineral Resources and Ore Reserves are estimations, not precise calculations. We’ve rounded tonnes are estimations, not precise calculations. We’ve rounded tonnes and grade information to reﬂ ect the relative uncertainty of the and grade information to reﬂ ect the relative uncertainty of the estimate, which is why computational diff erences may be present estimate, which is why computational diff erences may be present in the totals. in the totals. Our long-range forecasts are the basis for the commodity prices Our long-range forecasts are the basis for the commodity prices and exchange rates used to estimate the economic viability of Ore and exchange rates used to estimate the economic viability of Ore Reserves. Reserves. Our Ore Reserves are within existing, permitted mining tenements. Our Ore Reserves are within existing, permitted mining tenements. Our mineral leases are of sufﬁ cient duration, or, convey a legal Our mineral leases are of sufﬁ cient duration, or, convey a legal right to renew the tenure, to enable all Ore Reserves on the right to renew the tenure, to enable all Ore Reserves on the leased properties to be mined in accordance with the current leased properties to be mined in accordance with the current production schedules. These Ore Reserves may include areas production schedules. These Ore Reserves may include areas where additional approvals are required, and it’s expected that where additional approvals are required, and it’s expected that such approvals will be obtained within the timeframe needed for such approvals will be obtained within the timeframe needed for the current production schedule. the current production schedule. 40 40 40 SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES RESOURCES AND RESERVES AT A GLANCE - RESOURCES AND RESERVES (AS AT 30 JUNE 2019) Operations and development options Worsley Alumina Brazil Alumina South Africa Energy Coal(2)(3) Eagle Downs(4) Illawarra Metallurgical Coal(2)(3) Cerro Matoso Australia Manganese South Africa Manganese(3) Cannington Taylor Total Ore/ Coal Reserve (Mt) Reserve Life Years(1) Total Mineral/ Coal Resource (Mt) 270 44 510 107 32 65 130 21 15 2.7 26 19 10 6.4 58 12 1,190 494 4,970 1,080 1,240 312 162 235 85 155 (1) Scheduled extraction period in years for the Total Ore Reserves in the approved Life of Operation Plan. (2) Coal Reserves in this table are presented as Marketable Coal Reserves. Process recoveries are reported in the following detailed disclosures for each Coal operation. (3) Reserve Life for Illawarra Coal, South Africa Manganese and South Africa Energy Coal is reported as the life of scheduled Ore/Coal Reserves for Bulli seam, Wessels and Klipspruit respectively. The Reserve Life for the remaining operations are stated in the following detailed disclosures. (4) Metallurgical coal development option reported for the ﬁ rst time. OUR EXPLORATION, RESEARCH AND DEVELOPMENT In our operations, we carry out the necessary exploration, research and development to support our activities. Our brownﬁ eld exploration activities target the delineation and categorisation of mineral deposits connected or adjacent to our existing operations. Our greenﬁ eld exploration activities focus on the discovery and delineation of opportunities outside of our operational footprint, with a bias to base metals. During FY19, we expanded our global exploration footprint; we funded greenﬁ eld exploration in Australia, Peru, Colombia, Sweden, Mexico and the United States. Our exploration expenditure for FY19 was US$76 million (FY18: US$41.3 million) of which US$42 million related to brownﬁ eld and US$34 million related to greenﬁ eld (FY18: US$20.0 million and US$23.1 million respectively). FOREIGN ESTIMATE The information that relates to estimates of Mineral Resources for the Clark Deposit (formerly the Central Deposit) of the Hermosa project is a foreign estimate under ASX Listing Rules and is not reported in accordance with the JORC Code. We are not in possession of any new information or data relating to that foreign estimate that materially impacts the reliability of the estimate, nor do we have the ability to verify the foreign estimate as a Mineral Resource in accordance with the JORC Code. The supporting information contained in the clarifying statement in the market announcement 'South32 to acquire Arizona Mining in agreed all cash off er' dated 18 June 2018 continues to apply and has not materially changed. Our Competent Persons have not done sufﬁ cient work to classify the foreign estimate as a Mineral Resource or Ore Reserve in accordance with the JORC Code. It is uncertain that following evaluation and further exploration we will be able to report the foreign estimate as a Mineral Resource or Ore Reserve in accordance with the JORC Code. During FY20 we will commence a work program to increase conﬁ dence in the resource to ensure that resources are reported in accordance with the JORC Code. SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES 41 RESOURCES AND RESERVES COMPETENT PERSONS MINERAL RESOURCES WORSLEY: P Soodi Shoar, MAusIMM; J Binoir, MAusIMM; R Brown, MAusIMM, employed by SRK Consulting (Australasia) Pty Ltd MINERAÇÃO RIO DO NORTE: M A H Monteiro, MAusIMM, employed by Mineração Rio do Norte S.A. GEMCO: J Harvey, MAusIMM; D Hope, MAusIMM WESSELS & MAMATWAN: E P Ferreira, Pri. Sci. Nat., SACNASP; F T Rambuda, Pri. Sci. Nat., SACNASP CERRO MATOSO: I Espitia, MAusIMM CANNINGTON: P Boamah, MAusIMM TAYLOR: M Readford, MAusIMM (CP) ORE RESERVES WORSLEY: G Burnham, MAusIMM MINERAÇÃO RIO DO NORTE: C J da Silva, MAusIMM, employed by Mineração Rio do Norte S.A. GEMCO: U Sandilands, MAusIMM WESSELS & MAMATWAN: J Lamprecht, Pri. Sci. Nat., SACNASP, employed by Deswik Mining Consultants (Pty) Ltd CERRO MATOSO: N Monterroza, MAusIMM CANNINGTON: T Curypko, MAusIMM (CP) COAL RESOURCES LEANDRA & NAUDESBANK: S Nzama, Pri. Sci. Nat., SACNASP KHUTALA: S Ramluggan, Pri. Sci. Nat., SACNASP WOLVEKRANS MIDDELBURG COMPLEX: S Kara, Pri. Sci. Nat., SACNASP; L Visser, Pri. Sci. Nat., SACNASP KLIPSPRUIT: J Conradie, Pri. Sci. Nat., SACNASP, MGSSA PEGASUS & DAVEL: P Maseko, Pri. Sci. Nat., SACNASP BULLI & WONGAWILLI: J Gale, MAusIMM EAGLE DOWNS: M Blaik, MAusIMM, employed by JB Mining Services Pty Ltd COAL RESERVES KHUTALA & KLIPSPRUIT: P Mulder, MSAIMM WOLVEKRANS MIDDELBURG COMPLEX: P Mulder, MSAIMM; Z Smith, MSAIMM BULLI & WONGAWILLI: M Rose, MAusIMM 42 SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES RESOURCES AND RESERVES s e c r u o s e R l a r e n M i l a t o T 2 3 h t u o S t s e r e t n I s e c r u o s e R l a r e n M i l a t o T s e c r u o s e R l i a r e n M d e r r e f n I s e c r u o s e R l i a r e n M d e t a c d n i I s e c r u o s e R l i a r e n M d e r u s a e M 8 1 0 2 e n u J 0 3 t a s A S E C R U O S E R L A R E N M I 9 1 0 2 e n u J 0 3 t a s A I I M U N M U L A ₂ O S i . R % ₃ O ₂ l A . A % t M 9 1 . 2 4 . . 7 8 2 . 7 9 4 0 7 1 1 , 3 0 5 % 6 8 . 8 4 1 ₂ O S i . R % ₃ O ₂ l A . A % t M ₂ O S i . R % ₃ O ₂ l A . A % t M ₂ O S i . R % ₃ O ₂ l A . A % t M ₂ O S i . R % ₃ O ₂ l A . A % t M e p y T l a i r e t a M ) 1 ( t i s o p e D 9 1 . 2 4 . . 8 8 2 . 7 9 4 0 9 1 1 , 4 9 4 1 2 . 7 3 . . 7 8 2 . 9 9 4 8 0 4 4 3 1 0 2 . 8 4 . . 3 9 2 . 2 9 4 6 1 4 8 4 4 1 . 4 4 . . 3 8 2 . 7 9 4 4 6 3 1 1 3 d e h s a W N R M e t i r e t a L ) ( l 2 y e s r o W ) 3 ( N R M 8 1 0 2 e n u J 0 3 t a s A e v r e s e R e f i L s e v r e s e R e r O l a t o T 2 3 h t u o S t s e r e t n I e v r e s e R e f i L s e v r e s e R e r O l a t o T s e v r e s e R e r O e b a b o r P l s e v r e s e R e r O d e v o r P S E V R E S E R E R O 9 1 0 2 e n u J 0 3 t a s A s r a e Y ₂ O S i . R % ₃ O ₂ l A . A % t M 7 1 7 2 . 7 1 . 3 5 . . 8 7 2 . 8 8 4 8 9 2 3 4 % 6 8 . 8 4 1 s r a e Y ₂ O S i . R % ₃ O ₂ l A . A % t M ₂ O S i . R % ₃ O ₂ l A . A % 5 1 7 2 . 7 1 . 5 5 . . 7 7 2 . 5 8 4 0 7 2 4 4 4 1 . 0 5 . . 8 8 2 . 4 9 4 t M 6 1 2 9 . ₂ O S i . R % ₃ O ₂ l A . A % t M e p y T e r O ) 7 ( ) 6 ( ) 1 ( t i s o p e D 7 1 . 6 5 . . 7 7 2 . 2 8 4 4 5 2 5 3 d e h s a W N R M e t i r e t a L ) ( l 4 y e s r o W ) 5 ( ) 3 ( N R M . ) s s e n k c h t i m 2 ≥ t s e W g n o d a r r a M t p e c x e ( s s e n k c h t i m 1 ≥ d n a ₂ i . O S R % 5 3 ≤ . . . , ₃ O ₂ l A A % 5 2 - 5 2 2 m o r f g n g n a r e b a i r a V l i . s s e n k c h t i m 1 ≥ d n a i . ₂ O S R % 5 3 ≤ . . , ₃ O ₂ l A A % 5 2 - 2 2 m o r f g n g n a r e b a i r a V l i s e v r e s e R e r O s e c r u o s e R l a r e n M i e d a r g ff o - t u C l y e s r o W . i s s a b t n e c i r e p t h g e w n o y r e v o c e r % 0 3 ≥ d n a s s e n k c h t i m 1 ≥ i . , ₂ O S R % 7 ≤ . , ₃ O ₂ l A A % 6 4 ≥ . i s s a b t n e c i r e p t h g e w n o y r e v o c e r % 0 3 ≥ d n a s s e n k c h t i m 1 ≥ i . , ₂ O S R % 7 ≤ . , ₃ O ₂ l A A % 6 4 ≥ N R M . i i l d e y n o i t a c ﬁ e n e b t s a c e r o f n o d e s a b t c u d o r p d e t c e p x e e h t t n e s e r p e r s e d a r g d n a s e n n o t d e h s a w N R M . l e d o m e c r u o s e r d e t a d p u d n a g n i l l i r d l a n o i t i d d a o t e u d e s a e r c n i e c r u o s e R l a r e n M i . g n i l l i r d n o i t a z i l i r e t s d n a l e d o m e v r e s e r f o e t a d p u g n w o i l l o f e s a e r c e d s e v r e s e R e r O . s e s n e c L i l a n o i t a r e p O f o g n i t n a r g g n w o i l l o f e s a e r c n i s e v r e s e R e r O : s n o i t a r e p o e h t r o f y r e v o c e r l i a c g r u l l a t e M l . t n a p s s e c o r p o t d e r e v i l e d e r O % 1 4 9 . l y e s r o W % 0 9 N R M ) 1 ( ) 2 ( ) 3 ( ) 4 ( ) 5 ( ) 6 ( ) 7 ( SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES 43 RESOURCES AND RESERVES g k / l a C K V C S % M V % h s A % t M s e c r u o s e R l a o C l a t o T 8 1 0 2 e n u J 0 3 t a s A 2 3 h t u o S t s e r e t n I % 2 9 g k / l a C K g k / l a C K g k / l a C K g k / l a C K V C S % M V % h s A % t M V C S % M V % h s A % t M V C S % M V % h s A % t M V C S % M V % h s A % t M s e c r u o s e R l a o C l a t o T s e c r u o s e R l a o C d e r r e f n I s e c r u o s e R l a o C d e t a c d n i I s e c r u o s e R l a o C d e r u s a e M l a o C y g r e n E a c i r f A h t u o S L A O C Y G R E N E 44 S E C R U O S E R L A O C 9 1 0 2 e n u J 0 3 t a s A 0 9 8 4 , 0 2 1 . . 6 2 2 . 4 0 3 9 9 0 1 , 0 9 8 4 , 0 2 1 . . 6 2 2 . 4 0 3 8 9 0 1 , 0 9 3 4 , 7 7 0 . . 3 0 2 . 7 4 3 0 3 1 0 9 3 4 , 7 7 0 . . 3 0 2 . 7 4 3 3 2 1 0 9 8 4 , 0 2 1 . . 6 2 2 . 4 0 3 8 9 0 1 , 0 9 3 4 , 7 7 0 . . 3 0 2 . 7 4 3 3 2 1 0 9 0 5 , 2 2 1 . . 2 2 2 . 7 9 2 1 4 6 0 9 0 5 , 3 2 1 . . 2 2 2 . 7 9 2 3 3 6 0 5 9 4 , 5 1 1 . . 7 1 2 . 2 1 3 1 7 1 0 0 0 5 , 2 2 1 . . 0 2 2 . 8 0 3 1 5 1 0 1 2 5 , 8 2 1 . . 6 2 2 . 3 8 2 1 1 3 0 1 5 5 , 6 1 1 . . 8 2 2 . 4 6 2 3 4 8 0 1 5 5 , 3 1 1 . . 8 2 2 . 5 6 2 5 2 8 0 1 7 5 , 4 2 1 . . 6 3 2 . 5 4 2 8 7 1 0 1 1 5 , 9 9 0 . . 8 2 2 . 9 9 2 0 0 9 4 , 4 8 0 . . 6 0 2 . 1 1 3 8 6 . 0 1 2 5 , 7 8 0 . . 2 0 2 . 1 1 3 1 7 . 0 1 2 5 , 7 8 0 . . 2 0 2 . 1 1 3 8 1 1 7 . 0 7 4 5 , 1 1 1 . . 6 2 2 . 9 6 2 9 2 6 2 9 0 9 7 5 , 9 4 1 . . 2 7 2 . 8 2 2 2 2 2 0 9 7 5 , 9 4 1 . . 2 7 2 . 8 2 2 2 2 2 0 9 7 5 , 9 4 1 . . 2 7 2 . 8 2 2 2 2 2 0 8 2 5 , 1 0 1 . . 1 2 2 . 0 9 2 2 9 7 1 , 0 8 7 4 , 2 0 1 . . 1 2 2 . 0 9 2 9 9 7 1 , 0 7 7 4 , 8 9 0 . . 8 1 2 . 8 8 2 2 9 7 0 8 7 4 , 0 9 0 . . 5 1 2 . 0 9 2 1 7 3 0 0 8 4 , 2 1 1 . . 9 2 2 . 4 9 2 6 3 6 0 3 6 5 , 6 0 1 . . 5 5 2 . 6 4 2 3 4 2 0 3 6 5 , 6 0 1 . . 5 5 2 . 6 4 2 4 4 2 0 0 7 5 , 4 0 1 . . 8 5 2 . 0 4 2 8 2 0 0 6 5 , 4 0 1 . . 3 5 2 . 9 4 2 6 5 1 0 7 6 5 , 2 1 1 . . 1 6 2 . 2 4 2 0 8 3 5 , 5 3 1 . . 3 1 2 . 9 6 2 3 1 0 9 3 5 , 5 3 1 . . 3 1 2 . 0 7 2 4 1 0 3 7 5 , 2 3 1 . . 3 2 2 . 5 3 2 7 1 . 0 4 3 5 , 5 3 1 . . 1 1 2 . 4 7 2 0 6 2 1 h T G U & C O k n a b s e d u a N h T C O s u s a g e P SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES l a o C e p y T h T h T h T h T h T h T h T i g n n M i d o h t e M ) 2 ( ) 1 ( t i s o p e D C O G U C O C O P S G U G U i s e n m g n i t a r e p O l a a t u h K s n a r k e v o W l l g r u b e d d M i t i u r p s p i l K ) C M W l ( x e p m o C s t c e o r P j a r d n a e L l e v a D RESOURCES AND RESERVES 8 1 0 2 e n u J 0 3 t a s A e v r e s e R e f i L l e b a t e k r a M l a t o T s e v r e s e R l a o C 2 3 h t u o S t s e r e t n I e v r e s e R e f i L l e b a t e k r a M l a t o T s e v r e s e R l a o C l e b a t e k r a M e b a b o r P l s e v r e s e R l a o C l e b a t e k r a M d e v o r P s e v r e s e R l a o C l a t o T l a o C l e b a b o r P d e v o r P l a o C l a o C s e v r e s e R s e v r e s e R s e v r e s e R ) d e u n i t n o c ( l a o C y g r e n E a c i r f A h t u o S S E V R E S E R L A O C 9 1 0 2 e n u J 0 3 t a s A ) D E U N T N O C I ( L A O C Y G R E N E s r a e Y V C g k / l a C K % S % M V % h s A t M % 2 9 s r a e Y V C g k / l a C K % S % M V % h s A t M V C g k / l a C K % S % M V h s A t M V C % g k / l a C K % S % M V % h s A t M t M t M t M e p y T d o h t e M ) 7 ( ) 6 ( ) 3 ( ) 1 ( t i s o p e D l a o C i g n n M i 2 2 3 2 0 8 . 0 4 2 4 , 0 1 1 . . 1 8 1 . 4 7 3 3 1 . 5 9 . 0 2 4 4 , 7 0 1 . . 0 2 2 . 6 5 3 2 1 . 0 5 4 4 , 0 1 1 . . 3 2 2 . 3 5 3 9 0 . 0 6 3 4 , 0 0 1 . . 4 1 2 . 4 6 3 3 0 . 0 3 0 0 9 5 , 6 6 0 . . 4 2 2 . 4 4 1 0 0 3 4 , 5 7 0 . . 3 0 2 . 0 6 3 0 9 5 4 , 5 8 0 . . 2 1 2 . 2 8 2 0 0 1 4 , 9 0 1 . . 3 1 2 . 8 5 3 6 3 5 6 9 8 8 4 6 2 0 6 9 5 , 8 6 0 . . 5 2 2 . 1 5 1 0 2 3 4 , 0 9 0 . . 4 0 2 . 2 6 3 0 6 6 4 , 3 0 1 . . 9 1 2 . 6 9 2 0 8 0 4 , 5 7 0 . . 6 0 2 . 3 6 3 6 4 4 5 8 7 4 6 0 0 4 4 , 5 2 1 . . 9 0 2 . 3 6 3 0 8 9 5 , 6 6 0 . . 2 2 2 . 0 5 1 0 7 6 4 , 6 8 0 . . 4 1 2 . 4 9 2 0 6 1 4 , 8 7 0 . . 0 0 2 . 1 6 3 5 1 5 1 4 1 1 2 0 8 2 4 , 4 7 0 . . 2 0 2 . 2 6 3 0 5 9 5 , 8 6 0 . . 6 2 2 . 1 5 1 0 6 6 4 , 6 0 1 . . 0 2 2 . 6 9 2 0 5 0 4 , 3 7 0 . . 8 0 2 . 3 6 3 1 3 0 4 5 6 3 4 0 8 1 6 , 1 6 0 . . 8 4 2 . 2 9 1 9 0 2 0 4 2 6 , 0 7 0 . . 3 4 2 . 4 9 1 4 1 2 0 0 9 5 , 4 3 0 . . 2 4 2 . 3 1 2 9 9 . 0 6 2 6 , 3 7 0 . . 3 4 2 . 3 9 1 5 0 2 0 2 3 5 , 1 9 0 . . 1 2 2 . 4 5 2 1 6 0 6 5 5 , 5 9 0 . . 2 2 2 . 6 5 2 3 5 0 7 4 5 , 6 8 0 . . 1 3 2 . 7 4 2 3 1 0 0 6 5 , 8 9 0 . . 9 1 2 . 8 5 2 0 4 2 1 . 6 4 9 0 . 5 1 3 0 . 1 3 t r o p x E h T h T h T 7 4 2 1 6 6 8 1 h T 5 1 4 1 7 . 2 3 1 7 . 3 8 3 h T h T m o k s E h T c i t s e m o D h T t r o p x E h T ) 4 ( G U i s e n m g n i t a r e p O C O l a a t u h K C O C O C O C O P S C O C O ) ( 5 t i u r p s p i l K s n a r k e v o W l l g r u b e d d M i l x e p m o C ) C M W ( . r e t t a m e l l i t a o v % 9 7 1 ≥ . , h s a % 5 4 ≤ , V C g k / l a C K 0 7 8 2 ≥ , . h s a % 5 4 ≤ , , g k / l a C K 0 8 5 3 ≥ V C g n y r a v i , s s e n k c h t i , s s e n k c h t i m a e s m 8 0 ≥ . m a e s m 0 1 ≥ . . r e t t a m e l l i t a o v e e r f - h s a y r d % 4 2 ≥ , h s a % 5 4 ≤ . r e t t a m e l l i t a o v e e r f - h s a y r d % 4 2 ≥ . r e t t a m e l l i t a o v e e r f - h s A y r D % 2 2 ≥ , h s A % 5 4 ≤ . r e t t a m e l l i t a o v e e r f - h s a y r d % 4 2 ≥ , h s A % 5 4 ≤ . r e t t a m e l l i t a o v % 9 7 1 ≥ . , h s a % 5 4 ≤ , s s e n k c h t i , s s e n k c h t i , s s e n k c h t i , s s e n k c h t i , s s e n k c h t i m a e s m 0 1 ≥ . m a e s m 2 1 ≥ . m a e s m 8 1 ≥ . a r d n a e L C M W l e v a D m a e s m 8 0 ≥ . k n a b s e d u a N m a e s m 0 1 ≥ . s u s a g e P . r e t t a m e l l i t a o v e e r f - h s a y r d % 4 2 ≥ , h s A % 5 4 ≤ , m 8 0 ≥ . t i u r p s p i l K . G U r o f s s e n k c h t i m a e s m 5 2 ≥ . , C O r o f s s e n k c h t i m a e s m 0 1 ≥ . , G U r o f s s e n k c h t i m a e s m 5 2 ≥ . , C O r o f s s e n k c h t i m a e s m 0 1 ≥ . l a a t u h K s e v r e s e R l a o C s e c r u o s e R l a o C e d a r g ff o - t u C . r e t t a m e l l i t a o v e e r f - h s a y r d % 4 2 ≥ ) 1 ( . i s s a b d e i r d - r i a n a n o w a r s a d e t r o p e r e r a s e i t i l a u q d n a i s s a b e r u t s o m u t i s n i i n a n o d e t r o p e r e r a s e n n o t e c r u o s e R l a o C ) 2 ( . s e i t i l a u q t c u d o r p s a d e t r o p e r V C d n a S , M V , h s A . i s s a b d e i r d - r i a n a n o d e t r o p e r e r a y t i l a u q d n a s e n n o t e v r e s e R l a o C ) 3 ( . t n e m s s e s s a t e k r a m d n a n g s e d t i p n i i e t a d p u o t e u d s e v r e s e R l l a o C e b a t e k r a M r o f n o i t a c ﬁ c e p s i t c u d o r p n i s e g n a h C ) 5 ( . n o i t a t s r e w o p e h t o t d e r e v i l e d s i l a o c e r e h w a a t u h K r o f l t p e c x e l , t n a p h s a w o t d e r e v i l e d l a o C ) 6 ( : s n o i t a r e p o e h t r o f y r e v o c e r s s e c o r P ) 7 ( % 0 0 1 % 8 7 % 4 6 t i u r p s p i l K l a a t u h K C M W . l a v o r p p a l t n e m p o e v e d t c e o r p g n w o j i l l o f e s a e r c n i s e v r e s e R l a o C ) 4 ( SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES 45 RESOURCES AND RESERVES S % M V % h s A % – – – 6 3 0 . 7 5 0 . . 5 3 2 . 4 2 2 . 7 2 1 . 5 9 2 t M – 8 2 8 6 4 4 s e c r u o s e R l a o C l a t o T 8 1 0 2 e n u J 0 3 t a s A 2 3 h t u o S t s e r e t n I % 0 5 0 0 1 6 3 0 . 7 5 0 . . 4 3 2 . 5 2 2 . 7 2 1 . 5 9 2 6 9 7 9 3 4 6 3 0 . 7 5 0 . . 0 3 2 . 5 2 2 . 6 3 1 . 6 9 2 2 4 3 1 5 1 6 3 0 . 7 5 0 . . 7 3 2 . 2 2 2 . 4 2 1 . 5 9 2 3 1 3 0 4 2 7 3 0 . 9 5 0 . . 9 3 2 . 6 3 2 . 2 1 1 . 7 8 2 0 4 1 h T / t e M 8 4 h T / t e M G U G U S % M V % h s A % t M S % M V % h s A % t M S % M V % h s A % t M S % M V % h s A % t M 8 4 0 . . 9 4 1 . 7 9 2 0 8 0 1 , 1 5 0 . . 2 5 1 . 8 9 2 0 1 2 8 4 0 . . 4 4 1 . 6 9 2 3 3 1 7 4 0 . . 0 5 1 . 6 9 2 0 4 7 l a o C e p y T t e M i g n n M i d o h t e M ) 2 ( t i s o p e D ) 5 ( l a o C l i a c g r u l l a t e M a r r a w a l l I G U ) 4 ( ) 3 ( ) ( 1 s n w o D e g a E l s e c r u o s e R l a o C l a t o T s e c r u o s e R l a o C d e r r e f n I s e c r u o s e R l a o C d e t a c d n i I s e c r u o s e R l a o C d e r u s a e M S E C R U O S E R L A O C 9 1 0 2 e n u J 0 3 t a s A l a o C l i a c g r u l l a t e M a i l a r t s u A I L A O C L A C G R U L L A T E M 46 S E V R E S E R L A O C 9 1 0 2 e n u J 0 3 t a s A i l l i w a g n o W ) 6 ( i l l u B 8 1 0 2 e n u J 0 3 t a s A e v r e s e R e f i L l e b a t e k r a M l a t o T s e v r e s e R l a o C 2 3 h t u o S t s e r e t n I e v r e s e R e f i L l e b a t e k r a M l a t o T s e v r e s e R l a o C l e b a t e k r a M e b a b o r P l s e v r e s e R l a o C l e b a t e k r a M d e v o r P s e v r e s e R l a o C l a t o T l a o C l e b a b o r P d e v o r P l a o C l a o C s e v r e s e R s e v r e s e R s e v r e s e R s r a e Y S % M V % h s A % t M % s r a e Y S % M V % h s A % t M S % M V % h s A % t M S % M V % h s A % t M t M t M t M l a o C e p y T i g n n M i d o h t e M ) 9 ( ) 8 ( ) 7 ( ) 2 ( t i s o p e D 0 2 1 4 . 6 3 0 . . 8 4 2 9 8 . 7 1 1 9 5 0 . . 9 3 2 . 7 0 1 . 0 7 2 0 1 1 5 . 0 0 1 9 1 7 3 . 0 6 0 . . 1 4 2 . 7 0 1 . 0 7 2 8 8 . 6 3 . 0 6 0 . . 1 4 2 . 7 0 1 . 0 7 2 9 5 . 1 2 . 0 6 0 . . 2 4 2 . 7 0 1 . 0 7 2 9 2 . 5 1 . t e M h T 6 3 0 . . 6 4 2 9 8 . 5 9 6 3 0 . . 7 4 2 9 8 . 8 7 7 3 0 . . 1 4 2 9 8 . 8 1 4 1 1 6 1 3 9 0 1 1 2 7 5 . h T / t e M t e M l a o C l i a c g r u l l a t e M a r r a w a l l I G U G U G U G U i l l i w a g n o W ) 6 ( i l l u B . i c m o n o c e s i t u o y a l i e n m e h t n h t i i w s s e n k c h t i m u m n m i i , d e i l p p a ff o - t u c s s e n k c h t i m a e s o N s e v r e s e R l a o C . y d u t S y t i l i i b s a e f e r P e h t e h t r e t f a s e i t i l a u q d e i r d - r i a d n a ) h T i l l i w a g n o W % 7 , t e M i l l i w a g n o W % 5 5 1 . , i l l u B % 9 ( t n e t n o c e r u t s o m i t a e b a l l i a v a l a o c f o s e n n o t e h t e r a s e v r e s e R l l a o C e b a t e k r a M l a t o T . ) i l l i w a g n o W % 7 , i l l u B % 6 ( . i n o s v e r i t u o y a l i e n m d n a t n e m h s u q n i i l e r e s a e l . i s s a b d e i r d - r i a n a n o t c u d o r p l a i t n e t o p s a d e t r o p e r e r a S d n a M V , w a r s a d e t r o p e r s i h s A . i s s a b e r u t s o m u t i s n i i n a n o d e t r o p e r e r a s e n n o t e c r u o s e R l a o C l f o n o i t e p m o c e h t g n w o i l l i o f d e s v e r e b y a m s h t i , m 0 1 < s i i m a e s U C H o t e c n a t s d e r e h w d e d u c x e m a e s l L C H . w a r s a d e t r o p e r S d n a M V , h s A . i s s a b e r u t s o m u t i s n i i n a n o d e t r o p e r e r a s e n n o t e c r u o s e R l a o C ) 3 ( ) 4 ( ) 5 ( ) 6 ( . i c m o n o c e s i s s e n k c h t i m u m n m i i , d e i l p p a ff o - t u c . e m i t s s e n k c h t i m a e s o N t s r ﬁ e h t r o f d e t r o p e r e r a s e c r u o s e R l a o C s e c r u o s e R l a o C e d a r g ff o - t u C ) 1 ( ) 2 ( l a i t r a p g n w o i l l o f e s a e r c e d s e v r e s e R l a o C d n a s e c r u o s e R l a o C i d e n m n e h w t n e t n o c e r u t s o m e h t i t a e r a s e v r e s e R l a o C l a t o T . s e v r e s e R l a o C l a t o T e h t f o n o i t a c ﬁ e n e b i l . t n a p h s a w o t d e r e v i l e d l a o C ) 7 ( ) 8 ( : s n o i t a r e p o e h t r o f y r e v o c e r s s e c o r P % 4 8 % 7 7 i l l i w a g n o W i l l u B ) 9 ( SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES RESOURCES AND RESERVES i N % 9 0 . 9 0 . 2 0 . s e c r u o s e R e v r e s e R e f i L s r a e Y 1 1 i N % 2 1 . 2 1 . t M 8 1 9 1 s e v r e s e R e r O l a t o T 8 1 0 2 e n u J 0 3 t a s A 2 3 h t u o S t s e r e t n I % 4 9 9 9 . e v r e s e R e f i L s r a e Y 0 1 8 1 0 2 e n u J 0 3 t a s A S E C R U O S E R L A R E N M I 9 1 0 2 e n u J 0 3 t a s A o s o t a M o r r e C L E K C N I l a r e n M i l a t o T t M 0 5 2 7 4 7 1 2 3 h t u o S t s e r e t n I % 4 9 9 9 . i N % 9 0 . 9 0 . 2 0 . s e c r u o s e R l a r e n M i l a t o T s e c r u o s e R l i a r e n M d e r r e f n I t M 8 4 2 7 4 7 1 i N % 8 0 . t M 1 5 s e c r u o s e R i N % 9 0 . 9 0 . l i a r e n M d e t a c d n i I t M 0 6 1 7 3 s e c r u o s e R i N % 2 1 . 1 1 . 2 0 . l i a r e n M d e r u s a e M t M 7 3 7 9 . 7 1 e r O - R N M P S e p y T l a i r e t a M ) 1 ( t i s o p e D e t i r e t a L o s o t a M o r r e C S E V R E S E R E R O 9 1 0 2 e n u J 0 3 t a s A s e v r e s e R e r O l a t o T s e v r e s e R e r O e b a b o r P l s e v r e s e R e r O d e v o r P i N % 2 1 . 2 1 . t M 5 1 7 1 i N % 1 1 . 1 1 . t M 6 3 . 7 9 . i N % 2 1 . 2 1 . t M 2 1 4 7 . P S e p y T e r O ) 3 ( ) 2 ( ) 1 ( t i s o p e D e t i r e t a L o s o t a M o r r e C s e v r e s e R e r O s e c r u o s e R l a r e n M i i N % 6 0 . i N % 6 0 . i N % 6 0 . i N % 6 0 . i N % 2 1 0 . e d a r g ff o - t u C e t i r e t a L P S e r O - R N M l . t n a p s s e c o r p o t d e r e v i l e d e r O ) 1 ( ) 2 ( . % 0 8 : y r e v o c e R l i a c g r u l l a t e M ) 3 ( SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES 47 RESOURCES AND RESERVES i l d e Y % n M % t M 8 4 e F % . 6 1 1 . 3 8 1 5 4 . 7 4 . 2 6 . . 8 3 4 . 6 0 2 n M % . 1 6 4 . 4 1 4 . 1 7 3 . 2 7 3 . 5 9 2 1 6 1 2 1 t M 8 4 4 9 6 5 4 3 . 5 2 % 0 6 . 4 4 4 8 4 e F % . 6 2 1 . 3 8 1 5 4 . 6 4 . 2 6 . . 5 3 4 . 6 0 2 n M % . 8 4 4 . 4 1 4 . 0 7 3 . 5 6 3 . 5 9 2 1 5 1 1 1 t M 0 5 4 9 9 5 6 5 . 6 2 8 4 e F % . 9 9 3 . 0 0 2 n M % . 8 5 1 . 1 4 4 2 5 . . 4 7 3 2 2 3 2 . t M 7 7 . 5 0 . 8 4 e F % . 0 2 1 . 3 8 1 6 4 . 6 4 . 2 6 . . 8 1 4 . 8 0 2 n M % . 9 4 4 . 4 1 4 . 8 6 3 . 8 5 3 . 2 9 2 4 5 8 8 . t M 2 4 4 9 7 3 8 2 . 5 1 9 4 . 8 5 4 e F % n M % 4 4 . 7 4 . 1 6 . . 3 7 3 . 3 7 3 . 9 9 2 5 7 t M 1 2 8 2 . 1 1 s e c r u o s e R l a r e n M i l a t o T 2 3 h t u o S t s e r e t n I s e c r u o s e R l a r e n M i l a t o T s e c r u o s e R l i a r e n M d e r r e f n I s e c r u o s e R l i a r e n M d e t a c d n i I s e c r u o s e R l i a r e n M d e r u s a e M 8 1 0 2 e n u J 0 3 t a s A S E C R U O S E R L A R E N M I 9 1 0 2 e n u J 0 3 t a s A E S E N A G N A M 48 i l d e Y % n M % t M i l d e Y % n M % t M i l d e Y % n M % t M i l d e Y % n M % t M e p y T l a i r e t a M ) 1 ( t i s o p e D e s e n a g n a M a i l a r t s u A ) O & I ) ( 3 s d n a S y d o B r e w o L y d o B r e p p U l s e s s e W e s e n a g n a M a c i r f A h t u o S s e n o Z N , C , M n a w t a m a M e c n a a b l ( e n o Z X t u C p o T S E V R E S E R E R O 9 1 0 2 e n u J 0 3 t a s A ) 2 ( M O R O C M E G s e v r e s e R e r O l a t o T s e v r e s e R e r O e b a b o r P l s e v r e s e R e r O d e v o r P e v r e s e R e f i L s r a e Y 4 7 . 8 5 6 1 i l d e Y % n M % t M s e v r e s e R e r O l a t o T 8 1 0 2 e n u J 0 3 t a s A 9 5 3 2 e F % . 5 1 1 . 9 7 1 5 4 . 9 4 . . 2 4 4 . 0 0 4 n M % . 4 5 4 . 8 1 4 . 9 6 3 . 9 6 3 5 6 3 7 . t M 4 1 4 6 9 4 0 3 . 2 3 h t u o S t s e r e t n I % 0 6 . 4 4 4 d n a l s e p m a s e r o d e h s a w r e p s a d e t r o p e r e r a s e d a r g e s e n a g n a m e v r e s e R e f i L s r a e Y 4 6 . i l d e Y % 0 6 2 2 s r a e Y e F % 8 5 6 1 . 8 1 1 . 9 7 1 5 4 . 8 4 . n M % t M . 3 3 4 . 0 0 4 n M % . 6 5 4 . 7 1 4 . 6 6 3 . 3 7 3 8 5 2 7 . t M 4 1 4 6 0 5 2 2 . d n a t c u d o r p d e t c e p x e s a d e t r o p e r e r a s e d a r g e s e n a g n a m l , t n a p s s e c o r p o t d e r e v i l e d s a d e t a t s e r a s e n n o t e v r e s e R e r O . l s d e y i s s a m e v i t c e p s e r r i e h t h t i w r e h t e g o t d a e r e b d u o h s l l . t n a p s s e c o r p o t d e r e v i l e d e r O ) 4 ( ) 5 ( . u t i s n i s a d e t a t s e r a s e d a r g e s e n a g n a m d n a s e n n o t e c r u o s e R l i a r e n M s d n a S . l s d e y i s s a m e v i t c e p s e r r i e h t h t i w r e h t e g o t d a e r e b d u o h s l ) 3 ( , u t i s n i s a d e t a t s e r a s e n n o t e c r u o s e R l i a r e n M M O R ) 2 ( i l d e Y % n M % t M i l d e Y % n M % t M e p y T e r O ) 6 ( ) 1 ( t i s o p e D e s e n a g n a M a i l a r t s u A 1 6 2 2 e F % . 8 1 1 . 9 7 1 5 4 . 8 4 . . 5 2 4 . 0 0 4 n M % . 6 5 4 . 7 1 4 . 4 6 3 . 3 7 3 4 1 2 7 . t M 4 1 4 6 2 3 2 2 . 0 6 . 6 3 4 e F % n M % 4 4 t M s d n a S M O R ) 4 ( O C M E G 5 4 . . 0 7 3 8 1 s e n o Z N , C , M n a w t a m a M y d o B r e w o L y d o B r e p p U l s e s s e W ) 5 ( e s e n a g n a M a c i r f A h t u o S e n o Z X e d a r g ff o - t u C ) 1 ( s e v r e s e R e r O s e c r u o s e R l a r e n M i . t c u d o r p d e h s a w n M % 0 4 ≥ . t c u d o r p d e h s a w n M % 5 3 ≥ M O R O C M E G . l e b a t s e v r e s e R e r O n i i l d e y e e S : s n o i t a r e p o e h t r o f y r e v o c e r % 8 8 % 6 9 l t n a P / l a c g r u i l l a t e M ) 6 ( n a w t a m a M O C M E G l s e s s e W . n M % 5 3 ≥ . n M % 5 3 ≥ . d e i l p p a e d a r g ff o - t u c o N . n M % 5 3 ≥ . n M % 8 2 ≥ ) O & I . d e i l p p a e d a r g ff o - t u c o N . d e i l p p a e d a r g ff o - t u c o N . n M % 5 7 3 ≥ . . n M % 5 7 3 ≥ . . n M % 5 7 3 ≥ . . n M % 5 7 3 ≥ . e c a n a a b l ( e n o Z X t u C p o T s d n a S y d o B r e p p U y d o B r e w o L l s e s s e W s e n o Z N , C , M n a w t a m a M SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES RESOURCES AND RESERVES n Z % b P % g A t / g 3 3 3 . 0 3 2 . – – 1 3 5 . 0 2 3 . – – 8 8 1 0 0 1 – – t M 5 5 1 3 – – % 0 0 1 0 0 1 n Z % b P % g A t / g 9 2 3 . 4 3 2 . 2 3 3 . 2 2 5 . 8 2 5 . 4 1 3 . 6 6 3 . 2 8 3 . 4 8 1 8 9 0 7 7 5 t M 5 5 0 3 9 4 1 2 6 . 8 2 2 . 0 7 1 . 0 3 3 . 5 2 4 . 4 3 4 . 9 4 2 . 6 5 3 . 5 6 3 . 6 8 0 7 7 6 1 7 n Z % b P % g A t / g t M 1 1 . 3 1 . 2 4 0 1 . n Z % b P % g A t / g 9 8 2 . 5 0 2 . 4 1 3 . 1 4 5 . 6 9 3 . 7 6 2 . 3 7 3 . 5 8 3 . 3 2 1 8 6 5 7 5 5 t M 3 4 . 4 3 . 6 8 2 5 . n Z % b P % g A t / g 5 3 3 . 2 4 2 . 7 0 4 . 2 4 5 . 4 2 3 . 1 6 3 . 1 9 1 3 0 1 1 5 t M 0 5 5 2 1 2 e v r e s e R e f i L s e v r e s e R e r O l a t o T 2 3 h t u o S t s e r e t n I e v r e s e R e f i L 8 1 0 2 e n u J 0 3 t a s A s e v r e s e R e r O l a t o T s e v r e s e R e r O e b a b o r P l s e v r e s e R e r O d e v o r P s r a e Y n Z % b P % g A t / g 3 1 0 4 3 . 6 4 5 . 3 8 1 t M 3 2 % 0 0 1 s r a e Y n Z % b P % g A t / g 2 1 9 2 3 . 8 2 5 . 3 7 1 t M 1 2 n Z % b P % g A t / g 0 6 3 . 8 1 5 . 4 6 1 t M 6 0 . n Z % b P % g A t / g 8 2 3 . 8 2 5 . 3 7 1 t M 1 2 8 1 0 2 e n u J 0 3 t a s A s e c r u o s e R l a r e n M i l a t o T 2 3 h t u o S t s e r e t n I s e c r u o s e R l a r e n M i l a t o T s e c r u o s e R l i a r e n M d e r r e f n I s e c r u o s e R l i a r e n M d e t a c d n i I s e c r u o s e R l i a r e n M d e r u s a e M C N Z I , D A E L , R E V L I S S E C R U O S E R L A R E N M I 9 1 0 2 e n u J 0 3 t a s A e p y T l a i r e t a M ) 1 ( t i s o p e D i l e d h p u S G U i l e d h p u S C O i l e d h p u S G U n o i t i s n a r T G U S E V R E S E R E R O 9 1 0 2 e n u J 0 3 t a s A n o t g n n n a C i l r o y a T i l e d h p u S G U n o t g n n n a C i e p y T e r O ) 3 ( ) 2 ( ) 1 ( t i s o p e D s e v r e s e R e r O s e c r u o s e R l a r e n M i t / $ A n i n r u t e r r e t l e m s t e N t / $ A n i n r u t e r r e t l e m s t e N n o t g n n n a C i 0 3 1 0 3 1 8 5 i l e d h p u S G U i l e d h p u S C O t / $ S U n i n r u t e r r e t l e m s t e N l r o y a T 0 9 0 9 i l e d h p u S G U n o i t i s n a r T G U e d a r g ff o - t u C . n Z % 6 8 d n a b P % 8 8 , g A % 7 8 : y r e v o c e r l i a c g r u l l a t e M l . t n a p s s e c o r p o t d e r e v i l e d e r O ) 1 ( ) 2 ( ) 3 ( SOUTH32 > ANNUAL REPORT 2019 > RESOURCES AND RESERVES 49 RESOURCES AND RESERVES REMUNERATION REPORT REMUNERATION REPORT LETTER FROM OUR REMUNERATION LETTER FROM OUR REMUNERATION COMMITTEE CHAIR COMMITTEE CHAIR Dear Shareholders Dear Shareholders On behalf of the Board, I’m pleased to present the Remuneration On behalf of the Board, I’m pleased to present the Remuneration Report for the year ended 30 June 2019. Report for the year ended 30 June 2019. Our aim in preparing this report is to ensure that our shareholders Our aim in preparing this report is to ensure that our shareholders and stakeholders better understand our approach to and stakeholders better understand our approach to remunerating Executives. This includes the key principles we use remunerating Executives. This includes the key principles we use to determine our Reward Framework and ensure our Executives to determine our Reward Framework and ensure our Executives are focused on delivering long-term shareholder value consistent are focused on delivering long-term shareholder value consistent with our purpose and strategy. with our purpose and strategy. The Board endeavours to ﬁ nd the right balance between The Board endeavours to ﬁ nd the right balance between remuneration that attracts and incentivises management, while remuneration that attracts and incentivises management, while reﬂ ecting business performance and shareholder returns. This can reﬂ ecting business performance and shareholder returns. This can be challenging, particularly in relation to Long-Term Incentive (LTI) be challenging, particularly in relation to Long-Term Incentive (LTI) plans where there is greater variability of outcomes. plans where there is greater variability of outcomes. During FY19, we initiated a review of our Executive Reward During FY19, we initiated a review of our Executive Reward Framework, which will continue into FY20 and will include Framework, which will continue into FY20 and will include consultation with our shareholders. As this work is ongoing, we consultation with our shareholders. As this work is ongoing, we have not made any material changes to our approach to Executive have not made any material changes to our approach to Executive reward in FY19. reward in FY19. Short-Term Incentives Short-Term Incentives The intent of the Short-Term Incentive (STI) is to focus our The intent of the Short-Term Incentive (STI) is to focus our Executives on what they can inﬂ uence in the performance year. Executives on what they can inﬂ uence in the performance year. In FY19, our Total Recordable Injury Frequency (TRIF) improved In FY19, our Total Recordable Injury Frequency (TRIF) improved by 12 per cent. We also saw a 12 per cent reduction in material by 12 per cent. We also saw a 12 per cent reduction in material occupational exposures year-on-year. In line with our aim to occupational exposures year-on-year. In line with our aim to create value through our environmental and social leadership, create value through our environmental and social leadership, we continued to implement our approach to climate change and we continued to implement our approach to climate change and focus on improving our social performance. focus on improving our social performance. While we had strong overall operating performance, including While we had strong overall operating performance, including record production at Hillside Aluminium and a 57 per cent record production at Hillside Aluminium and a 57 per cent increase in volumes at Illawarra Metallurgical Coal, controllable increase in volumes at Illawarra Metallurgical Coal, controllable costs were short of target and the impact of lower production costs were short of target and the impact of lower production volumes at South Africa Energy Coal and Worsley Alumina volumes at South Africa Energy Coal and Worsley Alumina resulted in the Adjusted ROIC metric falling short of target. resulted in the Adjusted ROIC metric falling short of target. Good progress was made reshaping and improving our portfolio, Good progress was made reshaping and improving our portfolio, including completing the acquisition of Arizona Mining and a including completing the acquisition of Arizona Mining and a 50 per cent interest in the Eagle Downs Metallurgical Coal project, 50 per cent interest in the Eagle Downs Metallurgical Coal project, advancing the divestment of South Africa Energy Coal and advancing the divestment of South Africa Energy Coal and announcing the review of our manganese alloys businesses. announcing the review of our manganese alloys businesses. On balance, our Board resolved that Executives would receive STI On balance, our Board resolved that Executives would receive STI outcomes for FY19 ranging from 53 per cent to 64 per cent of outcomes for FY19 ranging from 53 per cent to 64 per cent of maximum. maximum. Long-Term Incentives Long-Term Incentives Our LTI aligns our Executives to the experience of our Our LTI aligns our Executives to the experience of our shareholders and encourages the building of long-term value. shareholders and encourages the building of long-term value. The ﬁ rst South32 LTI award granted to our Executives, the FY16 The ﬁ rst South32 LTI award granted to our Executives, the FY16 LTI, was tested for performance to 30 June 2019. Our strong Total LTI, was tested for performance to 30 June 2019. Our strong Total Shareholder Return (TSR) performance of 84 per cent over the Shareholder Return (TSR) performance of 84 per cent over the four year vesting period has meant that all equity from this ﬁ rst four year vesting period has meant that all equity from this ﬁ rst grant vested in August 2019. The 66 per cent growth in our share grant vested in August 2019. The 66 per cent growth in our share price over the same period has also contributed to a substantial price over the same period has also contributed to a substantial increase in the value of this award at vesting, resulting in a increase in the value of this award at vesting, resulting in a material uplift to year-on-year Actual Pay. material uplift to year-on-year Actual Pay. This year also sees the vesting of the last awards granted to This year also sees the vesting of the last awards granted to replace unvested BHP awards at the time of the Demerger in replace unvested BHP awards at the time of the Demerger in 2015. The Replacement BHP Awards for Graham Kerr and Mike 2015. The Replacement BHP Awards for Graham Kerr and Mike Fraser, which have a ﬁ ve year vesting period, were eligible to Fraser, which have a ﬁ ve year vesting period, were eligible to partially vest, based on the strong performance of our TSR. partially vest, based on the strong performance of our TSR. Following discussions between the Board and Graham, Graham Following discussions between the Board and Graham, Graham has volunteered to waive 100 per cent of his Replacement Award. has volunteered to waive 100 per cent of his Replacement Award. Mike also agreed to waive 50 per cent of his Replacement Award. Mike also agreed to waive 50 per cent of his Replacement Award. Our Board approved these outcomes and is satisﬁ ed that these Our Board approved these outcomes and is satisﬁ ed that these adjustments result in remuneration at levels aligned to the adjustments result in remuneration at levels aligned to the South32 Reward Framework and philosophy. South32 Reward Framework and philosophy. Looking Forward Looking Forward There are no material changes to the Reward Framework for There are no material changes to the Reward Framework for Executives for FY20. Executives for FY20. Executives will receive an increase to Fixed Remuneration for Executives will receive an increase to Fixed Remuneration for FY20 of 1.2 to 2.5 per cent, which is in line with increases for our FY20 of 1.2 to 2.5 per cent, which is in line with increases for our Australia-based employees. Graham will receive an increase of Australia-based employees. Graham will receive an increase of 2.5 per cent, which is the ﬁ rst increase for him since FY15. 2.5 per cent, which is the ﬁ rst increase for him since FY15. The base fees for the Non-Executive Directors will increase by The base fees for the Non-Executive Directors will increase by 2.3 per cent. 2.3 per cent. There has been, and will continue to be, an evolution in the world There has been, and will continue to be, an evolution in the world of executive pay due to changing community and shareholder of executive pay due to changing community and shareholder expectations, corporate learnings, regulatory reviews and expectations, corporate learnings, regulatory reviews and academic research. As such, we will continue the review of our academic research. As such, we will continue the review of our Reward Framework in FY20 and will outline any changes in Reward Framework in FY20 and will outline any changes in approach in next year’s report. approach in next year’s report. To our shareholders, thank you for your ongoing support. To our shareholders, thank you for your ongoing support. Wayne Osborn Wayne Osborn Chair, Remuneration Committee Chair, Remuneration Committee 50 50 50 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT FY19 AT A GLANCE Four-Year Total Shareholder Return(1) 84% Underlying EBIT 1,440 US$ million Total Recordable Injury Frequency 12% reduction TOTAL SHAREHOLDER RETURN (TSR) Diagram 1.1 South32 TSR relative to comparator groups Diagram 1.2 South32 TSR relative to major indices 150% 100% 50% 0% -50% 150% 100% 50% 0% -50% FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 World Index Sector Index South32 S&P500 FTSE100 ASX100 South32 (1) One-month average TSR June to June. OVERVIEW OF BUSINESS PERFORMANCE The following table outlines historic business performance outcomes. Table 1.1 Business performance Jul-15 Jul-16 Jul-17 Jul-18 Jul-15 Jul-16 Jul-17 Jul-18 Performance measures Underlying EBIT (US$M)(2) Underlying earnings (US$M)(2) Closing net cash/(debt) (US$M) Movement in adjusted ROIC (percentage point)(3) Closing share price on 30 June (A$)(4) Dividends/special dividends (US cents per share) TRIF (per million hours worked) FY19 1,440 992 504 (1.4) 3.18 13.0 4.5 FY18 1,774 1,327 2,041 (6.8) 3.61 13.7 5.1 FY17 1,648 1,146 1,640 (1.1) 2.68 4.6 6.0 FY16 356 138 312 1.8 1.54 - 7.7 FY15 (pro forma)(1) 1,001 575 (402) n/a 1.79 - 5.8 (1) South32’s pro-forma FY15 result. To assist shareholders in their understanding of the South32 Group, pro forma ﬁnancial information for FY15 was prepared to reﬂect the business as it was structured and as though it was in eff ect for the period 1 July 2014 to 30 June 2015. The pro forma ﬁnancial information was not prepared in accordance with IFRS consistent with previous periods. (2) The Underlying EBIT and Underlying earnings are not prepared in accordance with IFRS. Refer to page 89 of the Annual Report for a reconciliation to statutory earnings. (3) The movement in adjusted ROIC is by reference to the previous performance period and removes the eff ect of changes in commodity prices, commodity price linked costs, market traded consumables, foreign exchange rates and movements in the Group’s Eff ective Tax Rate (ETR), divided by the sum of ﬁ xed assets (excluding any rehabilitation asset, the impairment of South Africa Energy Coal and unproductive capital associated with Major projects). (4) South32’s share price on 25 May 2015 (date of Demerger) was A$2.32. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 51 REMUNERATION REPORT EXECUTIVE REMUNERATION FOR FY19 ALIGNED TO PERFORMANCE KEY MANAGEMENT PERSONNEL (KMP) CHANGES FIXED REMUNERATION STI In May 2019, Katie Tovich was appointed as Chief Financial Ofﬁ cer, succeeding Brendan Harris who served in this role since Demerger. See page 15 for details on our Lead Team Brendan is moving into the role of Chief Marketing Ofﬁ cer. As this is a non-KMP role, he ceased to be KMP from 1 May 2019. There was no increase to the CEO's Fixed Remuneration in FY19. Fixed Remuneration for other Executive KMP increased modestly in FY19. The focus of our STI is to reﬂ ect how management performed during the ﬁ nancial year. This means we exclude the impact of commodity price and foreign exchange. STI outcomes for FY19 have been assessed as below target. While safety performance has improved and key strategic measures delivered, we did not meet production and cost guidance at key operations, which impacted the ﬁ nancial metrics of our Scorecard. For FY19 Executive KMP STI outcomes varied from 53 per cent to 64 per cent of maximum. See page 57 for details on our FY19 Fixed Remuneration See page 58 for details on our STI outcomes SOUTH32 LTI The ﬁ rst awards we granted under our four-year LTI Plan reached the end of the performance period in June 2019 and vested at 100 per cent due to our strong TSR over the performance period. See page 60 for our LTI outcomes Management Share Plan awards also vested for Paul Harvey and Katie Tovich and a Transitional Award vested for Paul Harvey. REPLACEMENT BHP LTIP AWARDS The last of the Replacement BHP Awards were due to partially vest for Graham Kerr and Mike Fraser, based on BHP TSR performance to the date of Demerger and the strong performance of our TSR since Demerger for the ﬁ ve years to 30 June 2019. See page 63 for details on the Replacement Award outcomes TARGET REMUNERATION FOR FY19 Target Remuneration for each Executive KMP is determined by the South32 Reward Framework (see page 55). This Framework outlines the key factors the Board takes into consideration in setting executive reward and the strategic drivers of pay at South32. It is important to ensure remuneration levels fairly reﬂ ect the responsibilities and contribution of the Executives while ensuring that outcomes are aligned to performance and to the creation of shareholder value. As a result, a signiﬁ cant portion of our executive reward is at risk and based on demanding performance measures. Target Remuneration, as outlined below, assumes on-target performance and, for the LTI, takes into account the difﬁculty of achieving performance hurdles and anticipated share price volatility. The ﬁ gures reﬂ ected in the graph below are therefore based on STI paid at 100 per cent of target and LTI that is 40 per cent of the Face Value. (see page 56 for details on Face Value). Based on these principles, the total Target Remuneration for the Executive KMP for a full year is summarised below. Diagram 1.3 FY19 Target Pay (A$’000) Mr Graham Kerr Chief Executive Ofﬁ cer Mr Brendan Harris(1) Chief Financial Ofﬁ cer Mrs Katie Tovich(2) Chief Financial Ofﬁ cer Mr Mike Fraser Chief Operating Ofﬁ cer Mr Paul Harvey Chief Operating Ofﬁ cer 1,770 1,062 1,062 2,124 6,018 (71% at risk) 850 510 510 680 830 498 498 664 2,550 (67% at risk) 2,490 (67% at risk) 988 593 593 988 3,162 (69% at risk) 790 474 474 790 2,528 (69% at risk) Guaranteed ■ Fixed remuneration At risk: ■ STI (Cash) ■ STI (Deferred rights) ■ LTI (1) Brendan Harris ceased as a member of KMP eff ective 30 April 2019 and was appointed to the role of Chief Marketing Ofﬁ cer (Elect), a non-KMP role from 1 May 2019. Details above are for the full year in the KMP role and are not pro-rated for his time as a member of KMP. (2) Katie Tovich was appointed as a member of KMP on 1 May 2019. Previously, Katie was appointed to the role of Vice President Corporate Aff airs, a non-KMP role. Details above are for the full year in the KMP role and are not pro-rated for her time as a member of KMP. 2,000 4,000 6,000 52 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT RANGE OF POSSIBLE REMUNERATION OUTCOMES As actual business and individual achievement over the performance period determines reward outcomes, the amount of remuneration received by an executive each year will vary. The diagram below illustrates the range of possible remuneration outcomes for the CEO, based on a number of performance outcome scenarios. Diagram 1.4 Range of Remuneration Outcomes (A$’000) Minimum 100% 1,770 (all reward at risk forfeited) Target 29% 35% 36% 6,018 (71% at risk) Outstanding 17% 31% 52% Components ■ Fixed remuneration At risk: 10,266 (83% at risk) ■ STI (Cash & Deferred rights) ■ LTI 2,000 4,000 6,000 8,000 10,000 In the Minimum scenario, all STI and LTI is forfeited. The CEO would receive Fixed Remuneration, inclusive of superannuation, of A$1.77 million. Target outcomes would be achieved where the business meets the challenging STI performance hurdles, resulting in STI being paid at Target levels (i.e. 67 per cent of maximum opportunity, or 120 per cent of Fixed Remuneration, with half deferred into shares) and the LTI meeting the TSR performance threshold resulting in 40 per cent of shares vesting. Future share price movements are not included in the value of the Deferred STI or the LTI. To deliver an Outstanding outcome for the STI (i.e. at maximum STI, or 180 per cent of Fixed Remuneration, with half deferred into shares) South32 will need to meet the robust stretch targets across all metrics in the Scorecard. For the LTI to vest in full, the South32 TSR will need to outperform both the sector index and the world index, each by more than 23.9 per cent over the four-year performance period. Future share price movements are not included in the value of the Deferred STI or the LTI. ACTUAL PAY FOR EXECUTIVE KMP IN FY19 We disclose Actual Pay to provide our shareholders with a better understanding of cash and other beneﬁ ts our Executive KMP receive in the performance year. The amount of Actual Pay is likely to vary substantially, either up or down, from Target Remuneration (see page 52) as a signiﬁ cant portion of our pay is “at risk” and based on demanding performance measures. The Actual Pay for Executive KMP in FY19 includes: ■ South32 Reward: - Fixed Remuneration earned in FY19 (salary and pension/superannuation); - Total FY19 STI earned (including cash and deferred rights) based on performance during this ﬁ nancial year (details on page 59); - South32 LTI awards that vested based on performance and/or service conditions to 30 June 2019 (details on page 60); and - Other cash and non-monetary beneﬁ ts earned in FY19. ■ Replacement BHP Awards (details on page 54). These include: - Replacement BHP FY15 LTIP; and - Dividend Equivalent Payments relating to the partial vesting of the Replacement BHP FY15 LTIP. While Fixed Remuneration has remained unchanged for our CEO and only increased modestly for other Executive KMP, and STI outcomes are below target, there is a material increase in Actual Pay year on year as a result of increased value in equity awards compared to previous years. This is due to: ■ The vesting of our ﬁ rst four-year LTI; ■ Our TSR outperforming the sector and world indices, which has resulted in 100 per cent of the performance rights vesting; and ■ The strong growth in our share price over the performance period, with the value of our LTI based on an increase in share price from A$1.91 at grant to A$3.18 at 30 June 2019 – an increase of 66 per cent. Diagram 1.5 South32 four-year share price performance (A$) $4.50 $3.50 $2.50 $1.50 $0.50 A$3.18 as at 30 June 2019 Share price growth A$1.27 Grant price A$1.91 FY16 FY17 FY18 FY19 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 53 REMUNERATION REPORT REPLACEMENT BHP FY15 LTIP AWARDS At the time of the Demerger, Replacement Awards were granted to Executive KMP to replace forfeited BHP awards, and to ensure that these Executives weren’t negatively impacted by accepting roles with South32. The last of these awards, the Replacement BHP FY15 LTIP, which has a ﬁ ve-year vesting period, was due to vest to Graham Kerr and Mike Fraser, based on performance to 30 June 2019. Based on the performance outcomes, these awards would have been eligible to vest, resulting in 1,261,124 shares vesting for Graham and 974,505 for Mike, with a value, including dividend equivalent payments, of A$4,733,000 and A$3,657,000 for Graham and Mike respectively (based on a closing share price on 30 June 2019 of A$3.18). Over the past four years, South32 has delivered strong ﬁ nancial performance with a TSR of 84 per cent, which resulted in 100 per cent vesting of the FY16 South32 LTI. Coupled with share price growth of 66 per cent over the same period, this resulted in the South32 LTI delivering signiﬁ cant value. This outperformance is testament to the work of Graham and his Lead Team. Given this, and following discussions between the Board and Graham, Graham has volunteered to waive 100 per cent of his Replacement Award. Graham also recommended, and Mike agreed, that Mike waive 50 per cent of his Replacement Award. Our Board approved these outcomes and is satisﬁ ed that these adjustments result in remuneration at levels appropriate for our organisation. The waived awards lapsed. Additional information can be found on page 63. Information in the table below has not been prepared in accordance with Australian Accounting Standards. You can ﬁ nd our Executive KMP Statutory Remuneration on page 68. SUMMARY OF ACTUAL PAY FOR EXECUTIVE KMP IN FY19 Table 1.2 Actual pay in respect of FY19 (A$’000) Remuneration Component Mr G Kerr Mr M Fraser Mr B Harris(4) Mrs K Tovich(5) Mr P Harvey(6) Fixed Remuneration Other Beneﬁ ts(1) STI (Cash) STI (Deferred) LTI (Grant value) FY17 Transitional LTI (Grant value) South32 Actual (LTI at Grant Value) South32 LTI - Value of share price growth(2) South32 Actual Pay (inclusive of share price growth) Replacement FY15 BHP LTIP (Grant value) Replacement LTIP - Value of share price growth(2) Dividend Equivalent Payment(3) Sub-Total - Replacement BHP LTIP 1,770 29 924 924 5,735 - 9,382 3,813 13,195 2,838 1,173 722 4,733 988 31 474 474 2,619 - 4,586 1,741 6,327 2,193 906 558 3,657 Value waived by agreement (4,733) (1,829) 850 22 490 490 1,793 - 3,645 1,192 601 8 292 72 675 - 1,648 507 790 38 446 446 719 387 2,826 851 4,837 2,155 3,677 FY19 Total Actual Pay FY18 13,195 7,839 8,155 6,865 4,837 3,494 2,155 n/a 3,677 3,245 (1) Other Beneﬁ ts include insurances and tax advice provided during FY19. (2) Value of share price growth is based on a closing share price on 30 June 2019 of A$3.18. (3) A Dividend Equivalent Payment (DEP) of A$721,690 for Graham Kerr and A$557,670 for Mike Fraser based on the eligible vesting outcome of the Replacement BHP FY15 LTIP. It is calculated based on BHP dividends of US$1.24 multiplied by the proportion of BHP shares that would have vested (being 89,626 for Graham and 69,257 for Mike), and South32 dividends of US$0.313 multiplied by the proportion of South32 shares that would have vested (being 1,261,124 for Graham and 974,505 for Mike), using a conversion rate of AUD 1 : USD 0.701. Fifty per cent of this amount will be paid in September 2019 for Mike and 100 per cent has been waived by agreement for Graham. (4) Brendan Harris ceased as a member of KMP eff ective 30 April 2019. Details above are for the full year and are not pro-rated for his time as a member of KMP. (5) Katie Tovich was appointed as a member of KMP on 1 May 2019. Details above are for the full year and are not pro-rated for her time as a member of KMP. (6) As Paul Harvey is a member of the South32 Deﬁ ned Beneﬁ t Plan (as set out on page 68), his Fixed Remuneration presented above includes a notional company contribution to the Plan of 9.5 per cent. 54 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT OUR REWARD FRAMEWORK The pages of the Remuneration report that follow have been prepared in accordance with section 300A of the Corporations Act 2001 (Cth) (Act) and audited as required by section 308(3C) of the Act. These sections relate to those persons who were Key Management Personnel (KMP) of South32 during FY19, as named on page 52 and the Non-Executive Directors of South32. REMUNERATION GOVERNANCE The roles and responsibilities of our Board, Remuneration Committee, Management and external advisors in relation to remuneration for Executive KMP and employees at South32 are outlined below. BOARD Our Board maintains overall responsibility for overseeing the remuneration policy, and the principles and processes that underpin it. They approve the remuneration arrangements for our CEO and Non-Executive Directors. Changes to the Director fee pool are approved by shareholders. REMUNERATION COMMITTEE The Remuneration Committee approves reward arrangements for our Lead Team and oversees the remuneration and beneﬁ ts framework for all employees in South32. By taking advice from other Board Committees (such as Sustainability and Risk and Audit Committee), the Committee helps our Board to oversee remuneration policy, its speciﬁ c application to the CEO, Executives and Non-Executive Directors and, in general, our employees. They make sure our remuneration arrangements are equitable and aligned to the long-term interests of shareholders, while operating within our risk framework and supporting our purpose and values. CEO & MANAGEMENT Our CEO makes recommendations to the Remuneration Committee regarding our Lead Team, and how the remuneration policy and framework applies to all our employees. Our management provides information and recommendations for the Remuneration Committee, to help them consider and implement the approved arrangements. EXTERNAL ADVISORS We may engage external advisors either directly by the Remuneration Committee, or through management. They provide information on remuneration related issues, including benchmarking information and market data. There were no remuneration recommendations received by the Remuneration Committee from external advisors in relation to KMP in FY19. We seek information and analysis from a range of data sources. This means our decisions are informed, objective, weighted and aligned to the requirements of the Company and consistent with our guiding principles. HOW DO WE DETERMINE REWARD PRACTICES AND OUTCOMES? OUR GUIDING PRINCIPLES Purpose & Strategy The way we work Shareholders Performance Market We align short-term and long-term performance measures to our strategy and purpose. This includes our commitment to: ■ making sure everyone goes home safe and well at the end of every shift; ■ delivering operational excellence; ■ meeting key ■ strategic priorities; and achieving sector- leading total shareholder returns. Our culture is at the core of how we deliver our strategy and purpose. You’ll see it reﬂ ected in our values, the way we work, the decisions we take, the courage we show in challenging situations and the legacy we leave. Supporting this is a strong belief that culture can be actively shaped through a focus on what we prioritise, what we measure, what we reward and who we appoint. Our Reward Framework ensures Executives and management are focused on delivering superior total shareholder returns. We do this through share ownership and LTI performance measures aligned to the shareholder experience. We value our stakeholder's feedback, so we regularly check-in with investors and proxy advisors. We ensure our reward outcomes are aligned to performance by delivering a large part of Executive pay “at risk” based on challenging ﬁ nancial and non-ﬁ nancial measures. STI outcomes reﬂ ect performance over the ﬁ nancial year, while LTI outcomes reﬂ ect performance over a four-year period. We ensure our reward is competitive and allows us to attract and retain talented Executives. In balance with these principles, we benchmark our reward levels with consideration given to similar-sized companies in the ASX, as well as our global mining peer group. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 55 REMUNERATION REPORT COMPONENTS OF OUR REWARD OUR INTENTION Attract & retain talented Executives to lead South32 COMPONENT THE WHY ↓ Fixed Remuneration Fixed Remuneration is set with reference to the median of our peer groups, reﬂ ecting each Executive KMP’s responsibilities, location, skills and experience. The majority of pay at risk reﬂ ects our commitment to pay for performance and deliver value to shareholders Reward business and individual performance in the ﬁ nancial year ↓ Short-Term Incentive (STI) Drive long-term performance and ownership behaviours ↓ Long-Term Incentive (LTI) To focus eff orts on outcomes that are a priority for us in the ﬁ nancial year and motivate Executive KMP to achieve challenging performance objectives. Our STI reﬂ ects performance during the year and measures outcomes within management’s control. LTI is aligned to the shareholder experience and delivery of lasting, industry-leading total shareholder returns. THE HOW Base salary and pension/ superannuation. 50 per cent paid in cash annually 50 per cent in rights to South32 shares, deferred for two years Rights to South32 shares, subject to TSR performance measured over a four-year period, relative to two comparator groups OUR APPROACH IN FY19 Our peer groups are: Quantum (% of Fixed Remuneration): ■ ■ An ASX peer group based on companies (excluding foreign domiciled and REITs) with half to double our market capitalisation; and A global mining peer group of 15 companies with a similar market capitalisation, commodity mix and geographic spread (see below). The level of Fixed Remuneration for the CEO is below the median of our peer groups. See FY19 Target Remuneration on page 52. All Executive KMP Target Value 120% Max. Value 180% Business Scorecard: The Business Scorecard reﬂ ects a balance of ﬁ nancial and non-ﬁ nancial measures that are a priority for us in the ﬁ nancial year. ■ Sustainability (25%) ■ Financial: Adjusted ROIC (25%) ■ Financial: Production, cost and capital expenditure (25%) ■ Strategic Goals (25%) Business Modiﬁ er: As Scorecard measures do not always reﬂ ect overall performance over the year, and to mitigate any unintended reward outcomes, the Board has the discretion to apply a Modiﬁ er to the Business Scorecard outcome. The Modiﬁ er may be applied to Executive KMP on an individual or group basis, having regard to the perspectives of stakeholders including employees, shareholders and communities. Individual Performance & Behaviours: The Board also considers an Executive KMP’s individual performance, taking into account speciﬁ c key performance indicators and how these have been achieved (including alignment with our values). The Quantum is determined on Face Value as a percentage of Fixed Remuneration: Face Value Target Value CEO 300% 120% Other KMP 200% to 250% 80% to 100% Comparator groups: ■ ■ Two-thirds relative to a mining sector index (IHS Markit Global Mining Index with constrained weighting by company and sector); and One-third relative to a world index (Morgan Stanley Capital International (MSCI) World Index). Vesting: 100% vesting 40% vesting 0% vesting TSR = index TSR > index by 5.5% pa There is no retesting if the performance condition is not met at the end of the performance period. MINIMUM SHAREHOLDING REQUIREMENT OUR SERVICE CONTRACTS A Minimum Shareholding Requirement (MSR), equal to 100 per cent of Fixed Remuneration for Executive KMP, drives a long-term focus and alignment with our shareholders. The MSR applies to all Executive KMP and must be obtained within ﬁ ve years of appointment as a KMP. See page 71 for current shareholding of our Executives. The key terms are consistent for all Executive KMP, and include: ■ No ﬁ xed term; ■ ■ ■ Six months’ notice by either party or payment by the Company in lieu of notice; or Termination without notice for serious misconduct; or Two months’ notice by the Executive where a fundamental change occurs that materially diminishes their status, duties, authority or terms and conditions (receiving payment in lieu of six months’ notice). The maximum payment in lieu of notice won’t exceed six months’ Fixed Remuneration. Executive KMP will be subject to several post-employment restraints for a period of up to six months after their employment with the Group ends. Shareholder approval was granted at the 2018 Annual General Meeting (AGM) in relation to termination beneﬁts for Executive KMP for a further three years. OUR GLOBAL PEER GROUP Our global mining companies peer group includes: Agnico Eagle Mines; Alcoa; Anglo American; Antofogasta; Barrick Gold; Boliden AB; Eramet SA; First Quantum Minerals; Fortescue Metals Group; Freeport McMoRan; GoldCorp; Newcrest Mining; Newmont Mining; Teck Resources; Vedanta. 56 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT FIXED REMUNERATION FOR FY19 In FY19, there was no increase to Graham Kerr’s Fixed Remuneration, which hasn’t changed since our Demerger in May 2015. Our other Executive KMP received modest increases in FY19, which were outlined in the FY18 Remuneration report and were eff ective from 1 September 2018. Table 1.3 Fixed Remuneration for Executive KMP in FY19 Executive KMP Mr G Kerr Mr B Harris(1) Mrs K Tovich(1) Mr M Fraser Mr P Harvey FY18 Fixed Remuneration (A$) 1,770,000 830,000 n/a 970,000 775,000 FY19 Fixed Remuneration (A$) 1,770,000 850,000 830,000 988,000 790,000 Increase % 0.0 2.4 n/a 1.9 1.9 (1) Brendan Harris ceased as a member of KMP eff ective 30 April 2019 and Katie Tovich was appointed as a member of KMP on 1 May 2019. Fixed Remuneration above for Katie is eff ective from 1 May 2019. SHORT-TERM INCENTIVE FOR FY19 Diagram 1.6 Determination of STI awards SOUTH32 BUSINESS OUTCOME INDIVIDUAL OUTCOME OVERALL STI OUTCOME x x = 1A 1B 2 3 BUSINESS SCORECARD 0%-150% Target 100% BUSINESS MODIFIER Discretion +/- INDIVIDUAL PERFORMANCE & BEHAVIOURS (0%-150%) OVERALL STI OUTCOME Max 180% Target 120% (of Fixed Remuneration) The determination of the STI outcome at South32 follows a structured process. At the start of each year, the Board approves the Business Scorecard. The individual performance process that applies to our CEO and Executive KMP, and is cascaded through the organisation, includes: ■ ■ Setting of individual performance goals at the start of each performance year, which are aligned to the Business Scorecard, our Breakthroughs and our Business Plans; Ensuring regular “check ins” during the year; and ■ A review of performance relative to eff ectiveness in role, based on what is delivered and how it is delivered. For the CEO and Executive KMP, the performance in role is measured based on delivery against the Business Plans of the Operations or Functions for which they are responsible. In recognition that the strongest cultures are set from the top, our CEO and Executive KMP are also assessed based on demonstrated behaviour aligned with our values and the way we work. Following the individual performance review, the CEO recommends to the Board the individual outcomes for each Executive KMP. The Board assesses and approves the Business Outcome, Individual Outcomes and the overall STI Outcomes for the CEO and for the Executive KMP. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 57 REMUNERATION REPORT 1A FY19 BUSINESS SCORECARD The Business Scorecard, which is approved by our Board before the ﬁ nancial year begins, helps our Executive KMP focus on outcomes that are within their control and are a priority in that year. It also includes a balanced range of measures that take into account both our ﬁ nancial and non-ﬁ nancial performance. Our non-ﬁ nancial measures are in line with our Breakthroughs and our values including safety and health, environment, community, risk management and leadership. Our performance is assessed relative to the Business Scorecard (with guidance from Board Committees, such as the Remuneration, Risk & Audit and Sustainability Committees) and individual performance outcomes. Table 1.4 FY19 Business Scorecard outcomes SCORECARD MEASURE WEIGHT PERFORMANCE SUSTAINABILITY 25% 27.0% Safety: Aggregated 17 per cent reduction on previous year, equating to a TRIF of 4.3. Health: 5 per cent reduction on previous year plus plans in place to reduce the number of workers exposed above the OEL by a further 5 per cent in FY20. Environment: Achieve emissions forecast of 24,253 kt CO2 -e.On track for FY21 GHG reduction targets plus decarbonisation plans for Worsley and Illawarra. Community: Implement Community Investment Framework and Community Investment Plans for each operation. 12 per cent reduction in TRIF in FY19, to 4.5. Delivered a 12 per cent reduction in material exposures > 100 per cent (coal dust and carcinogens). An exposure reduction plan has been developed that will facilitate at least a further 10 per cent reduction in FY20. Actual emissions (Scope 1 and 2) were 23,482 kt CO2e. We remain on track to achieve our FY21 public target (Scope 1). Conceptual level decarbonisation plans for Illawarra Metallurgical Coal and Worsley Alumina operations completed. Community Investment Plans for each operation were developed and measures to assess the impact of investment were deﬁ ned. Community Action Plan implemented improving performance outcomes. FINANCIAL: PRODUCTION, COST AND CAPITAL EXPENDITURE Production: 95 per cent –105 per cent of budget Cost: Within US$50m of FY19 budget (adjusted for FX and price-linked costs). 25% 23.0% Overall, production (excluding non-operated operations) was 96 per cent of budget with record aluminium production at Hillside Aluminium and a run-of-mine production record at Dendrobium Coal Mine. However, volumes fell short at South Africa Energy Coal and Worsley Alumina. Cash operating costs were within range across most of the business. However, controllable costs are assessed as short of target when the cost beneﬁ ts of lower production are considered. OUTCOME (Target = 25% Max = 37.5%) Target not met Outstanding Better than target Target met Target met Target not met Target not met Capital Expenditure: within 5 per cent of FY19 Sustaining capital expenditure budget (adjusted for FX) and Major Projects tracking within 5 per cent of budget (adjusted for FX) Sustaining capital expenditure was 98 per cent of budget, but missed target due to underspend at Illawarra Metallurgical Coal, South Africa Manganese, Cerro Matoso and Australia Manganese. FINANCIAL: ADJUSTED ROIC 25% 12.5% Achieve budget FY19 Adjusted ROIC, consistent with our cost, production and capital expenditure targets. Despite positive results at many other operations, the impact of lower production volumes at South Africa Energy Coal and Worsley Alumina resulted in an Adjusted ROIC outcome that was 2.9 per cent behind budget. Target not met STRATEGIC PRIORITIES 25% 24.5% Implement the revised Risk Management System, including the three lines of defence and integrated platform with a common set of metrics. Although slightly behind schedule, we successfully implemented our integrated risk and event platform, Global 360, and piloted our enhanced second line assurance routines and tools. Lock in savings and further transform the ownership of South Africa Energy Coal. The ring-fenced management of South Africa Energy Coal has delivered savings slightly lower than forecast. Divestment activities are progressing. Unlock the value in our portfolio. Delivered on key projects across the Operations. Identify new opportunities and Introduce one base metals development project into the portfolio. Continue to build leadership capability across the group. Initial JORC resources estimate for Hermosa released. Pre- feasibility study proceeding to plan. Trilogy option remains on track. Progressing with new base metal options. Leadership Development initiatives implemented globally including capability reviews for over 1,000 leaders. Improvement in broad-based engagement levels as measured through pulse surveys. SUB-TOTAL 100% 87% Target not met Target not met Better than target Target met Better than target 58 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT 1B FY19 BUSINESS MODIFIER The Scorecard reﬂ ects the key focus areas of the business in the ﬁ nancial year, with metrics that are aligned to our purpose and Breakthroughs and that measure elements in management’s control. As the metrics and measures are set at the start of the performance year, the Business Modiﬁ er allows the Board to consider the impact of any event or action during the year that is not fully factored into the Scorecard. The Board has absolute discretion in applying the modiﬁ er, to adjust the Scorecard outcome either up or down, or to apply to the Executive KMP on an individual or a group basis. As it is not formulaic, the Board has discretion to ensure that the STI outcomes reﬂ ect overall business performance, including what has been delivered and how it has been achieved. Factors that would be considered in the modiﬁ er include, but are not limited to, the impact of fatalities and signiﬁ cant safety issues as well as the management of risk, governance, culture and reputational issues. Table 1.5 summarises the application of the modiﬁ er since Demerger. For FY19, our Board considered a number of factors. We had no fatalities in the year and improved overall safety indicators. We completed the acquisition of Arizona Mining and a 50 per cent interest in Eagle Downs and made good progress with negotiations to divest South Africa Energy Coal. While we had an impairment for South Africa Energy Coal, this was impacted by the market outlook for thermal coal demand and prices, that are outside the control of management. On balance, the Board determined that no modiﬁ er would be applied for FY19. Table 1.5 Application of the Business Modiﬁ er by the Board (multiplier applied to the Business Scorecard outcome) CEO: COO Africa: Other Executive KMP: FY16 -24% -40% -10% FY17 -2.5% -5% None FY18 -15% -15% -5% FY19 No modiﬁ er applied Application of the Modiﬁ er Four fatalities in Africa Region One fatality in Africa Region One fatality in Africa Region and impact of the temporary closure of Appin mine in FY17. 2 FY19 INDIVIDUAL PERFORMANCE & BEHAVIOURS Our Board determines the Individual Scorecard measures for the CEO and other Executive KMP in relation to what was delivered, as demonstrated in the performance of the Executive’s portfolio, and how it was delivered, which considers demonstrated leadership and behaviour aligned to our values, risk framework and governance processes. Individual outcomes were applied to Executive KMP, reﬂ ecting the performance of their areas of accountability. These outcomes ranged from 92 per cent to 110 per cent, as indicated in Table 1.6 below. 3 OVERALL FY19 STI OUTCOMES Overall STI outcomes for FY19 are determined through our Board’s assessment of the Business and Individual Outcomes, as outlined in the table below. Table 1.6 STI earned by Executive KMP in respect of FY19 performance Business Scorecard outcome % (1A) Modiﬁ er +/- % (1B) Individual outcome % (2) Overall STI outcome % of Target (1A x 1B x 2) 87 87 87 87 87 - - - - - 100 110 100 92 108 87 96 87 80 94 Total STI awarded (A$’000) 1,848 816 144 948 891 Percentage of maximum STI Cash(1) (A$’000) Rights (A$’000) Awarded % Forfeited % 924 408 72 474 446 924 408 72 474 446 58 64 58 53 63 42 36 42 47 37 Executive KMP(1) Mr G Kerr Mr B Harris(2) Mrs K Tovich(2) Mr M Fraser Mr P Harvey (1) Half of the STI will be paid in cash in September 2019, with the remaining half deferred into rights to South32 shares that will be granted in or around December 2019 and will be due to vest in August 2021. The rights remain subject to continued service with the South32 Group. The minimum possible total value of the rights for future ﬁnancial years is therefore nil (see page 62 for terms and conditions relating to South32’s equity plans). (2) Brendan Harris ceased as a member of KMP eff ective 30 April 2019 and Katie Tovich was appointed as a member of KMP on 1 May 2019. Details above for each are pro-rated for their time as a member of KMP. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 59 REMUNERATION REPORT LONG-TERM INCENTIVES OUR LTI AWARDS THAT VESTED IN RESPECT OF FY19 FY16 South32 LTI Award and MSP (Performance) Award Our ﬁ rst LTI Award granted since Demerger, the FY16 LTI, was tested for vesting subject to service and performance conditions to 30 June 2019. This award is subject to TSR performance conditions over four years, with two thirds relative to a mining sector index (the IHS Markit Global Mining Index) and one third relative to a world index (the MSCI World Index). The four-year period for this award was from 1 July 2015 to 30 June 2019. We granted Paul Harvey and Katie Tovich FY16 Management Share Plan (MSP) Awards before becoming members of KMP. These performance awards have the same performance and vesting conditions as our LTI Awards. For the LTI and MSP Awards to vest in full, they would need to outperform both indices by at least 23.9 per cent over the performance period (5.5 per cent per annum cumulative). Our Board noted that our TSR outperformed both peer indices by more than 23.9 per cent (see Diagram 1.8 and Table 1.7), and approved these awards to vest in full in August 2019. Diagram 1.7 Indicative TSR performance: South32 vs comparators Diagram 1.8 Vesting outcome 100% 50% 0% -50% FY16 FY17 FY18 FY19 World Index Sector Index South32 Table 1.7 South32 LTI Award vesting outcome A$3.18 as at 30 June 2019 Share price growth A$1.27 Grant price A$1.91 100% vesting 40% vesting 0% vesting TSR = index TSR > index by 5.5% pa ● Sector Index ● World Index ● Sector Index ● World Index TSR Performance(1) Outperformance for 100% vesting Vesting outcome Index weighting Index (A) 47.6% 48.3% South32 (B) 83.8% Required +23.9% +23.9% Achieved (B-A) +36.2% +35.5% (C) 100% 100% (D) 2/3 1/3 Weighted vesting outcome (C x D) 66.7% 33.3% 100.0% (1) TSR Performance reﬂ ects the one-month average return from 30 June 2015 at the start of the performance period, to the one-month average return to 30 June 2019 at the end of the performance period. Table 1.8 South32 LTI Awards vested Executive KMP Award Number of rights granted Number of rights vested Number of rights forfeited Value at grant(1) (A$’000) Value forfeited(2) (A$’000) Value of share price growth(3) (A$’000) Growth Value at vesting(4) (A$’000) Vest value - - - - - 3,813 9,548 1,192 2,985 319 799 1,741 4,360 478 1,197 Mr G Kerr South32 LTI 3,002,513 3,002,513 Mr B Harris(5) South32 LTI 938,638 938,638 Mrs K Tovich(6) FY16 MSP (Performance) 251,308 251,308 Mr M Fraser South32 LTI 1,371,204 1,371,204 Mr P Harvey FY16 MSP (Performance) 376,291 376,291 Grant value 5,735 1,793 480 2,619 719 - - - - - (1) (2) (3) 'Value at grant' is the number of shares granted multiplied by the grant determination price in June 2015 (A$1.91), based on the Volume Weighted Average Price (VWAP) of South32 shares over the last 10 trading days in June. ‘Value forfeited’ is the value lapsed/forfeited based on performance relative to the performance measures, multiplied by the grant determination price in June 2015 of A$1.91. ‘Share price growth’ is the number of shares that vested, multiplied by the diff erence between the grant determination price (A$1.91) and the share price at 30 June 2019 of A$3.18 This reﬂ ects the value added due to the change in share price since the start of the performance period. ‘Value at Vesting’ is the estimated number of shares that vested, multiplied by the closing share price of South32 shares on 30 June 2019 of A$3.18. (4) (5) Brendan Harris ceased as a member of KMP on 30 April 2019. Details above are for the full year and are not pro-rated for his time as a member of KMP. (6) Katie Tovich commenced as a member of KMP on 1 May 2019. Details above are for the full year and are not pro-rated for her time as a member of KMP. 60 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT FY17 Management Share Plan (Retention) Award We granted the FY17 Management Share Plan (Retention) Award to Katie Tovich before she became a member of KMP. Given the retention-focused objective of this award, the vesting conditions are service-based (with a service condition to 30 June 2019) and with no performance conditions. As the service condition was met, our Board approved this award to vest in full in August 2019. The structure of the MSP is detailed on page 70. FY17 Transitional Performance Award We granted a one-off FY17 Transitional Performance Award to Paul Harvey to cover the gap in vesting in 2019 due to his transition from the Management Share Plan (three-year retention rights and four-year performance rights) to the Executive LTI Plan (four-year performance rights). This award is subject to the same TSR performance conditions as our LTI (see Components of our Reward on page 56), namely two thirds relative to a mining sector index (IHS Markit Global Mining Index) and one third relative to a world index (MSCI Word Index), except this award has a three-year performance period, from 1 July 2016 to 30 June 2019. For the award to vest in full, it would need to outperform both indices by 17.4 per cent (5.5 per cent per annum cumulative). Our Board noted that our TSR outperformed both peer indices by more than 17.4 per cent (see Table 1.9), and approved this award to vest in full in August 2019. Table 1.9 Transitional Performance Award vesting outcome ● Sector Index ● World Index TSR Performance(1) Outperformance for 100% vesting Vesting outcome Index weighting Index (A) 75.4% 48.5% South32 (B) 134.4% Required +17.4% +17.4% Achieved (B-A) +59.0% +85.9% (C) 100% 100% (D) 2/3 1/3 Weighted vesting outcome (C x D) 66.7% 33.3% 100.0% (1) TSR Performance reﬂ ects the one-month average return to 30 June 2016 at the start of the performance period, to the one-moth average return to 30 June 2019 at the end of the performance period. Table 1.10 Other South32 Awards vested Executive KMP Award Number of rights granted Number of rights vested Number of rights forfeited Value at grant(1) (A$’000) Value forfeited(2) (A$’000) Value of share price growth(3) (A$’000) Growth Value at vesting(4) (A$’000) Vest value - - 373 188 761 383 Mr P Harvey FY17 Transitional Award Mrs K Tovich FY17 Management Share Plan (Retention) 239,197 239,197 120,296 120,296 - - Grant value 387 195 (1) (2) (3) 'Value at grant' is the number of shares granted multiplied by the grant determination price in June 2016 (A$1.62). ‘Value forfeited’ is the value lapsed/forfeited based on performance relative to the performance measures, multiplied by the grant determination price in June 2016 of A$1.62. ‘Share price growth’ is the number of shares that vested, multiplied by the diff erence between the grant determination price (A$1.62) and the share price at 30 June 2019 of A$3.18 This reﬂ ects the value added due to the change in share price since the start of the performance period. (4) ‘Value at Vesting’ is the number of shares that vested, multiplied by the closing share price of South32 shares on 30 June 2019 of A$3.18. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 61 REMUNERATION REPORT LTI GRANTED IN FY19 As part of our FY19 LTI Plan, we granted performance rights to Executive KMP in December 2018. These have a four-year performance period, and are subject to performance hurdles (outlined on page 56). Shareholders approved the grant of rights for the CEO at the AGM on 25 October 2018. Table 1.11 FY19 LTI grants Executive KMP Mr G Kerr Mr B Harris(4) Mr M Fraser Mr P Harvey Reward Determination(1) (calculated at the start of the performance period - July 2018) Grant (December 2018) Face value (% of Fixed Remuneration) Face Value (A$’000) Target Value(2) (% of Fixed Remuneration) Target Value(2) (A$’000) Number of Rights granted(3) 300 200 250 250 5,310 1,700 2,470 1,975 120 80 100 100 2,124 1,450,819 680 988 790 464,480 674,863 539,617 (1) The grant of awards is based on the Face Value as outlined in the Components of our Reward (see page 56). (2) The Target Value considers the difﬁculty of achieving performance hurdles and anticipated share price volatility. (3) The number of rights granted to the Executive KMP in December 2018 is calculated by dividing the Face Value by the VWAP of South32 shares traded on the ASX over the last 10 trading days of June 2018, being A$3.66. The Fair Value at grant for accounting purposes, as calculated by external consultants, was A$1.51 per right for the South32 LTI/ MSP Performance Award and A$2.79 per right for the Management Share Plan (Retention) Award. (4) Brendan Harris ceased as a member of KMP on 30 April 2019. Grant details above are for the full year and are not pro-rated for his time as a member of KMP. TERMS AND CONDITIONS OF RIGHTS AWARDED UNDER EQUITY PLANS TYPE OF EQUITY DIVIDEND AND VOTING RIGHTS CESSATION OF EMPLOYMENT We deliver deferred STI and LTI awards in the form of share rights. These are rights to receive fully paid ordinary shares in South32 Limited,(1) subject to meeting speciﬁ c performance and vesting conditions (Rights). If the Rights vest, no consideration or exercise price is payable for the allocation of shares. As Rights are automatically exercised, they don’t have an expiry date. Rights carry no entitlement to voting, dividends or dividend equivalent payments. Unless our Board determines otherwise: ■ Resignation or termination for cause: all unvested Rights lapse; ■ Death, serious injury, disability or illness that prevents continued employment or total permanent disability: all unvested Rights vest immediately; and ■ Other circumstances: a pro-rata portion of Rights to remain on foot subject to the Remuneration Committee’s discretion to lapse. CHANGE OF CONTROL MALUS & CLAWBACK Our Board can determine the level of vesting (if any) having regard to the portion of the vesting period elapsed, performance to date against any applicable performance conditions and other factors they deem appropriate. Our Board can reduce or clawback all vested and unvested STI and LTI awards in certain circumstances to ensure Executives don’t obtain an inappropriate beneﬁ t. These circumstances are broad, and can include: ■ An Executive engaging in misconduct; ■ A material misstatement of our accounts results in vesting; ■ Behaviours of Executives that bring us into disrepute; and ■ Any other factor our Board deems justiﬁ able. RIGHTS TO PARTICIPATE IN NEW ISSUES A participant can’t take part in new issues of securities in relation to their unvested Rights. However, the relevant plan rules include speciﬁ c provisions dealing with rights issues, bonus issues and corporate actions and other capital reconstructions. These provisions are intended to ensure that Rights holders aren’t unfairly disadvantaged by corporate actions. (1) References in this Remuneration report to ‘South32 shares’ are references to fully paid ordinary shares in South32 Limited. 62 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT REPLACEMENT BHP AWARDS BHP outlined the arrangements regarding the Replacement Awards in the Listing Document (March 2015). The unvested BHP awards that had been granted to the Executive KMP, including LTIP, Transition Awards and Deferred STI, were to be forfeited and replaced on similar value and terms to the BHP awards, including service and performance conditions (see Table 1.12 for key terms and conditions). These Replacement Awards were then granted to Executive KMP at the time of the Demerger, to ensure that Executives weren’t negatively impacted by accepting roles with us. This enabled us to acquire the appropriate talent into South32. The Replacement BHP FY15 LTIP is the ﬁ nal Replacement Award. It’s important that the remuneration arrangements for Executive KMP are aligned to our strategy, performance and service conditions. That’s why the Replacement Awards are linked to our performance, instead of BHP's, from the Demerger on 25 May 2015. TERMS AND CONDITIONS OF REPLACEMENT BHP AWARDS Table 1.12 Key terms and performance conditions for the Replacement Awards Award Key Terms and Performance Conditions Replacement BHP LTIP Awards LTIP Performance Measure: These are subject to relative TSR over a ﬁ ve-year vesting period with reference to the Sector index determining vesting of 67 per cent of the rights and the MSCI World index determining vesting of 33 per cent of the rights. For the period up to 24 May 2015, BHP TSR relative to the BHP comparator groups apply. From 25 May 2015, our TSR relative to our comparator groups apply (see page 56 for information relating to our comparator groups). Vesting: Vesting requires the TSR to equal or exceed the TSR of the relevant index over the performance period: ■ ■ ■ ■ If combined TSR over the vesting period is below the index, zero per cent of the rights vest If combined TSR is equal to the TSR of the index, 25 per cent of the rights vest If combined TSR exceeds the index by 5.5 per cent per annum cumulative (Outperformance), 100 per cent of rights vest If combined TSR is between the TSR of the index and Outperformance, vesting will be on a straight line between 25 – 100 per cent Dividends: Dividend equivalent payments will be made for any rights that vest at the end of the vesting period. REPLACEMENT BHP FY15 LTIP AWARDS THAT VESTED IN RESPECT OF FY19 In assessing the performance of the Replacement BHP FY15 LTIP Award, we considered BHP’s TSR relative to BHP’s comparator groups for the period up to Demerger (i.e. from 1 July 2014 to 24 May 2015) and our TSR performance relative to our comparator groups from Demerger to 30 June 2019. Diagram 1.9 graphs the indicative TSR performance for the full ﬁ ve-year performance period. The time up to Demerger is shaded grey. Our positive performance from July 2016 has meant that, for the full ﬁ ve-year performance period, the combined company TSR (BHP and South32) has exceeded both the sector index and the world index (the MSCI World). For the awards to vest in full, they would need to outperform both indices by 30.7 per cent over ﬁ ve years (5.5 per cent per annum cumulative). For the performance period ending 30 June 2019, the Replacement BHP FY15 LTIP Award was eligible to partially vest in August 2019 for Graham Kerr and Mike Fraser (as outlined in the diagrams and table below). Diagram 1.9 Indicative TSR performance: BHP/South32 vs comparators Diagram 1.10 Vesting outcome 5 1 0 2 y a M 5 2 50% 0% -50% FY15 FY16 FY17 FY18 FY19 BHP Sector Index World Index South32 A$3.18 as at 30 June 2019 100% vesting Share price growth A$0.93 Grant price A$2.25 25% vesting 0% vesting TSR = index TSR > index by 5.5% pa ● Sector Index ● World Index SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 63 REMUNERATION REPORT Table 1.13 Replacement BHP FY15 LTIP vesting outcome ● Sector Index ● World Index TSR Performance(1) vs Index Outperformance for 100% vesting Vesting outcome Index weighting BHP (A) (8.6%) (33.1%) South32 (B) 39.4% 34.1% Required +30.7% +30.7% Achieved (A+B) +30.8% +1.0% (C) 100% 27.4% (D) 2/3 1/3 Weighted vesting outcome (C x D) 66.7% 9.1% 75.8% (1) TSR Performance reﬂ ects the six-month average to 30 June 2014 at the start of the performance period, to the six-month average to 30 June 2019 at the end of the performance period, based on the rules of the BHP FY15 LTIP. REPLACEMENT BHP FY15 LTIP AWARDS WAIVED BY AGREEMENT The Replacement BHP FY15 LTIP, which was granted to Graham and Mike, met the performance thresholds resulting in 75.8 per cent of the rights being eligible to vest. As outlined previously, over the past four years, South32 has delivered strong ﬁ nancial performance with a TSR of 84 per cent, which has resulted in 100 per cent vesting of the FY16 South32 LTI (see page 60). This coupled with share price growth of 66 per cent over the same period, has resulted in the South32 LTI delivering signiﬁ cant value. Given this, and following discussions between the Board and Graham, Graham has volunteered to waive 100 per cent of his Replacement Award. Graham also recommended, and Mike agreed, that Mike waive 50 per cent of his Replacement Award. Our Board approved these outcomes and is satisﬁ ed that these adjustments result in remuneration at levels that is aligned to the South32 Reward Framework and philosophy. Graham will therefore waive 1,261,124 rights, with a value of A$4,733,000 (including a dividend equivalent payment of A$721,690). Mike will waive 487,253 rights, with a value of A$1,829,000 (including a dividend equivalent payment of A$278,835). The waived rights will lapse. Dividend equivalent payments will only be paid for shares that vest. The value waived is based on a closing share price on 30 June 2019 of A$3.18. The number and value of shares that have vested are outlined below: Table 1.14 Replacement BHP FY15 LTIP Award vested Executive KMP Mr G Kerr Eligible to vest based on performance outcome Rights lapsed based on performance outcome Number of rights granted Rights waived by agreement Number of rights vested Value at vesting(1) (A$’000) 1,664,067 1,261,124 402,943 1,261,124 - - Mr M Fraser 1,285,870 974,505 311,365 487,253 487,252 1,550 Dividend equivalent payment(2) (A$’000) Total value at vesting(3) (A$’000) - 279 - 1,829 (1) (2) ‘Value at vesting’ is the number of shares that vested, multiplied by the share price at 30 June 2019 of A$3.18. ‘Dividend equivalent payment’ for Mike Fraser is based on the number of shares that vested. It is calculated by multiplying BHP dividends of US$1.24 by the proportion of BHP shares that would have vested (34,628), and South32 dividends of US$0.313 multiplied by the number of South32 shares that vested (487,252), using a conversion rate of AUD 1 : USD 0.701. This amount will be paid in September 2019 for Mike. (3) ‘Total value at vesting’ is the number of shares that vested, multiplied by the share price at 30 June 2019 of A$3.18, plus the dividend equivalent payment. 64 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT NON-EXECUTIVE DIRECTOR REMUNERATION REMUNERATION POLICY As a global organisation, it’s important that we off er competitive Director fees – to help us bring on the appropriate level of experience from a diverse global pool. These fees reﬂ ect the size, complexity and global nature of our company, and acknowledge the responsibilities of serving on our Board. To ensure the independence of our Non-Executive Directors, their remuneration does not have an ‘at risk’ element. We pay committee fees to recognise the additional responsibilities associated with participating on a Board Committee. We pay a ﬁ xed fee to our Board Chair for all responsibilities, including participation on any Board Committees. FY19 NON-EXECUTIVE DIRECTOR FEES AND FEE POOL We review fees every year and may get outside advice to help us do so. In FY19, we based our review on data provided by external consultants, which resulted in the Chair, Non-Executive Directors and Committee fees increasing by up to 2.8 per cent (eff ective 1 September 2018). The maximum aggregate amount we can pay our Non-Executive Directors is A$3.9 million per annum (Fee Pool). Before making any changes to the Fee Pool, we would seek shareholder approval. The table below outlines the fee levels for FY19. Table 1.15 FY19 Board fees (eff ective 1 September 2018) Fee Description Board Fees Board of Directors Chair of the Board Other Non-Executive Directors Committee Fees Risk and Audit, Remuneration, Sustainability Committees Committee Chair Members MINIMUM SHAREHOLDING REQUIREMENTS FY19 Fees (A$ per annum) 565,000 185,000 46,000 23,000 Our Board is committed to each Non-Executive Director achieving a minimum shareholding level of one year’s base fees to be accumulated over a reasonable period. You can ﬁ nd more details of their current shareholdings in Table 1.22. TRAVEL ALLOWANCE As a global organisation, our Board meetings are held in Australia, South Africa and other locations (see page 72 for more details on this). For our Directors, site visits are an important part of our Board program, giving them: ■ A better understanding of workplace culture through interactions with site-based employees; ■ An improved understanding of local risks; ■ A chance to participate in continuous education; and ■ On-the-ground experience. Required meetings, site visits and other engagements take signiﬁ cant time and commitment – particularly if they’re in remote locations. In these cases, we give our Directors an allowance to compensate for this additional commitment. In FY19, where air travel to a Board commitment was greater than three hours, but less than 10 hours, a one-off allowance of A$7,840 per trip applied. Where air travel was greater than 10 hours, the allowance per trip was A$16,800. See page 67 for details of changes to the Travel Allowance for FY20. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 65 REMUNERATION REPORT Diagram 1.11 - Director site visits in FY19 June 2019 Board meeting Tucson, site visit to Hermosa project and a visit to Caterpillar Global Mining April 2019 Board meeting Singapore, visits to Nanyang Technological University and TollCity August 2018 Board meeting Perth October 2018 Board meeting Perth and AGM February 2019 Board meeting Perth December 2018 Board meeting Johannesburg and site visit to Metalloys, Meyerton FY19 NON-EXECUTIVE DIRECTOR REMUNERATION In Table 1.16, we’ve set out the statutory disclosures required under the Corporations Act and in accordance with Australian Accounting Standards, in respect of FY19 remuneration paid to Non-Executive Directors. Table 1.16 Non-Executive Director remuneration (A$’000) Non-Executive Director FY19 term Mr David Crawford AO(3) to 12 April 2019 Ms Karen Wood(3,4) Mr Frank Cooper AO Dr Xiaoling Liu(4) Dr Xolani Mkhwanazi(5) Full year Full year Full year Full year Dr Ntombifuthi Mtoba Full year Full year Full year Mr Wayne Osborn Mr Keith Rumble TOTAL FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 (1) (2) Includes assistance for tax return preparation in FY19. Includes travel allowance paid in FY19. Short-term beneﬁts Post- employment beneﬁts Board & Committee fees Non-monetary beneﬁts(1) Other cash allowances & beneﬁts(2) Superannuation beneﬁts 426 530 282 137 232 228 209 137 259 198 204 198 232 227 250 243 2,094 1,898 - - - - - - - - 2 2 2 2 - - 2 2 6 6 48 115 73 57 49 66 56 40 84 84 84 84 65 74 84 84 543 604 17 20 21 13 21 20 21 13 4 5 4 5 21 20 3 5 Total 491 665 376 207 302 314 286 190 349 289 294 289 318 321 339 334 112 101 2,755 2,609 (3) David Crawford retired as Director eff ective 12 April 2019. Karen Wood was elected as Chair, eff ective 12 April 2019. (4) Xiaoling Liu and Karen Wood were appointed to the Board on 1 November 2017, FY18 details reﬂ ect this appointment date. (5) Xolani Mkhwanazi received remuneration of ZAR549,858.67 for his role as a Non-Executive Director of South32 SA Coal Holdings (Pty) Ltd during FY19. This ﬁ gure is included in Board and Committee fees above based on a FX rate of AUD1:ZAR9.93. 66 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT LOOKING FORWARD TO FY20 During FY19, our Board commenced a review of our Executive Remuneration strategy and framework. This review will continue into FY20 and any changes will be communicated in our FY20 Remuneration report. As such, we’re not making any changes to remuneration arrangements in FY20, except as detailed below. FIXED REMUNERATION Fixed Remuneration for Graham Kerr will increase in FY20 by 2.5 per cent to A$1,815,000 – this is ﬁ rst time we’ve increased Graham’s pay since 2015. As Katie Tovich has only recently been appointed to the role of CFO, her remuneration will remain unchanged in FY20. Modest increases for Mike Fraser and Paul Harvey are also outlined below. Table 1.17 Fixed Remuneration for Executive KMP in FY20, eff ective 1 September 2019 Executive KMP Mr G Kerr Mrs K Tovich(2) Mr M Fraser Mr P Harvey FY19 Fixed Remuneration (A$) FY19 Target Reward(1) (A$) FY20 Fixed Remuneration (A$) FY20 Target Reward(1) (A$) 1,770,000 6,018,000 1,815,000 6,171,000 830,000 988,000 790,000 2,490,000 830,000 2,490,000 3,162,000 1,000,000 3,200,000 2,528,000 810,000 2,592,000 Increase % 2.5 - 1.2 2.5 (1) Target Reward assumes STI paid at 100 per cent of target outcomes, i.e. at 120 per cent of Fixed Remuneration. Target value for the LTI Award takes into account the difﬁculty of achieving performance hurdles and anticipated share price volatility. Target value for the LTI Award is therefore 40 per cent of the Face Value. (2) Katie Tovich was appointed as a member of KMP on 1 May 2019. STI We are not changing the design of the STI plan for FY20. The key metrics are aligned to the business priorities and Breakthroughs for FY20, including: SUSTAINABILITY Safety, health, environment and community FINANCIAL Adjusted Return on Invested Capital Production, cost and capital expenditure STRATEGIC ITEMS Key elements of the FY20 Business Plan 25% 25% 25% 25% X BUSINESS MODIFIER Applied at the discretion of the Board = SOUTH32 BUSINESS OUTCOME This Business Outcome will reﬂ ect our performance over the ﬁ nancial year LTI We’re not changing the design of the LTI in FY20. DIRECTOR FEES Director fees will increase by 2.3 per cent. Table 1.18 FY20 Annual Board fees (eff ective 1 September 2019) Fee Description Board Fees Board of Directors Chair of the Board Other Non-Executive Directors Committee Fees Risk and Audit, Remuneration, Sustainability Committees Committee Chair Members FY19 (A$) FY20 (A$) Increase % 565,000 185,000 578,000 189,250 46,000 23,000 46,000 23,000 2.3 2.3 - - 67 From 1 September 2019, the Travel Allowance will no longer be paid for domestic travel to regularly scheduled Board meetings. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT STATUTORY DISCLOSURES STATUTORY REMUNERATION TABLE In the following table, we’ve set out the statutory disclosures required under the Corporations Act and in accordance with the Australian Accounting Standards. The amounts shown reﬂ ect the remuneration for each Executive that relates to their service as a KMP in FY19. Table 1.19 Statutory remuneration of Executive KMP in FY19 (A$’000) Short-term beneﬁts Post-employment beneﬁts Share-based payments(4) Non- monetary beneﬁts(2) Superannuation beneﬁts Termination beneﬁts Other long-term beneﬁts(3) Executive KMP Mr G Kerr Mr B Harris(5) Mrs K Tovich(6) Mr M Fraser Mr P Harvey(7) TOTAL FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 Salary 1,577 1,654 613 753 122 - 845 858 656 672 Cash bonus(1) 924 1,015 408 480 72 - 474 553 446 388 29 - 18 7 1 - 31 18 38 14 21 27 18 23 20 - 21 21 123 112 203 183 - - - - - - - - - - - - Percentage of Total Remuneration that is Performance Tested Total Remuneration 6,979 6,773 2,422 2,789 330 - 3,428 4,229 3,014 2,797 74% 73% 71% 69% 53% - 71% 77% 71% 69% LTI 3,386 2,971 933 986 98 - 1,476 2,167 1,279 1,152 STI 878 943 367 463 5 - 490 523 404 394 164 163 65 76 12 - 91 89 68 66 3,813 3,937 2,324 2,436 117 39 400 394 7,172 2,144 7,276 2,323 16,173 16,588 (1) STI is provided half in cash (which is included in the cash bonus column of the table) in September following the end of the performance period and half in deferred equity (which is included in the share-based payments column of the table). The value of the deferred equity portion is amortised over the vesting period. (2) Non-monetary beneﬁts are non-pensionable and include such items as insurances and personal tax assistance. (3) Other long-term beneﬁts are the accounting expense of annual and long-service leave accrued in FY19. (4) The amounts were not actually provided to the Executive KMP during FY19. The ﬁgures are calculated in accordance with Australian Accounting Standards and are the amortised fair values of equity and equity-related instruments that have been granted to Executive KMP. Refer to Table 1.20 on page 69 in this report for information on awards outstanding during FY19. (5) Brendan Harris ceased as a member of KMP eff ective 30 April 2019 and was appointed to the role of Chief Marketing Ofﬁ cer (Elect), a non-KMP role. Details above have been pro-rated for time in the KMP role only. (6) Katie Tovich was appointed as a member of KMP on 1 May 2019. Previously, Katie was appointed to the role of Vice President Corporate Aff airs, a non-KMP role. Details above have been pro-rated for time in the KMP role only. (7) Paul Harvey is a member of the South32 Deﬁ ned Beneﬁ t Superannuation Plan. The amount disclosed in Table 1.19 reﬂ ects the Company contribution as calculated under AASB119. A more detailed explanation is provided below. SUPERANNUATION ARRANGEMENTS FOR PAUL HARVEY Paul Harvey is a member of the South32 Superannuation Plan (Deﬁ ned Beneﬁ t plan). The Deﬁ ned Beneﬁ t plan was in place before the Demerger and has been closed to new members since January 2002. In line with other participants in the Deﬁ ned Beneﬁ t plan, Paul’s beneﬁ t is calculated as follows: ■ 20 per cent x Final Average Salary x Membership Period x Beneﬁ t Factor Here’s what this means: ■ The Final Average Salary (which excludes any allowances and bonuses) is the average full-time equivalent of Paul’s salary over the last three years, which is A$734,451. ■ As at 30 June 2019, he has been a member of the plan for 27 years (Membership Period). ■ The Beneﬁ t Factor depends on your age at the time of leaving South32, and the maximum Beneﬁ t Factor for persons aged 55 years and over is 1.00. Paul’s Beneﬁ t Factor is 1.00 as at 30 June 2019. Upon retirement (after preservation age), pension payments are determined by the trustee of the South32 Superannuation Plan on advice from the plan actuary, which may be subject to agreement with South32. The pension payments are not indexed. If a participant resigns or retires prior to preservation age there’s no entitlement to the pension and the beneﬁ t reverts to a lump sum. The superannuation amount we’ve disclosed in Table 1.19 above is Paul’s FY19 current service cost of A$123,000 - calculated under AASB 119. 68 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT DETAILS OF RIGHTS HELD BY EXECUTIVE KMP In the following table, we’ve set out more information about the rights over South32 shares held by Executive KMP, including the movements in rights held during FY19. See page 62 for terms and conditions about our Equity Incentive Plans. Table 1.20 Detail and movement of rights over South32 shares held by Executive KMP during FY19 Award(1) Executive KMP Opening balance Number Mr G Kerr 12,183,804 1,776,544 1,344,220 Number Number(3) Grant Date Granted in FY19(2) Vested in FY19 Forfeited or other change in FY19 Closing balance Vesting date S32 FY18 Deferred STI (S) S32 FY19 LTI (P) - - 7-Dec-18 325,725 7-Dec-18 1,450,819 S32 FY17 Deferred STI (S) 272,055 13-Dec-17 S32 FY18 LTI (P) 2,026,717 13-Dec-17 S32 FY16 Deferred STI (S) 359,190 2-Dec-16 S32 FY17 LTI (P) S32 FY16 LTI (P) Replacement BHP FY14 LTIP Award (P) Replacement BHP FY15 LTIP Award (P) 3,277,777 2-Dec-16 3,002,513 10-Dec-15 1,581,485 29-Jun-15 1,664,067 29-Jun-15 - - - - - - - % 69 - - - - Number % Number 596,455 31 12,019,673 - - - - - - - - 325,725 1,450,819 272,055 2,026,717 - - - - 357,649 99.6 1,541 0.4 - - - - - - - - - 3,277,777 3,002,513 Aug-20 Aug-22 Aug-19 Aug-21 Aug-18 Aug-20 Aug-19 986,571 62 594,914 38 - Aug-18 - - - - 1,664,067 Aug-19 Mr B Harris(4) 3,410,636 618,812 682,155 99.9 917 0.1 3,346,376 S32 FY18 Deferred STI (S) S32 FY19 LTI (P) - - 7-Dec-18 7-Dec-18 154,332 464,480 S32 FY17 Deferred STI (S) 130,648 13-Dec-17 S32 FY18 LTI (P) 633,587 13-Dec-17 S32 FY16 Deferred STI (S) 213,753 2-Dec-16 S32 FY17 LTI (P) S32 FY16 LTI (P) FY16 Transitional Performance Award (P) 1,024,691 2-Dec-16 938,638 10-Dec-15 469,319 10-Dec-15 Mrs K Tovich(5) 1,132,420 FY19 MSP Retention (S) 55,725 7-Dec-18 FY19 MSP Performance (P) 139,314 7-Dec-18 FY18 MSP Retention (S) 75,725 13-Nov-17 FY18 MSP Performance (P) 189,312 13-Nov-17 FY17 MSP Retention (S) 120,296 17-Nov-16 FY17 MSP Performance (P) 300,740 17-Nov-16 FY16 MSP Performance (P) 251,308 16-Nov-15 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 212,836 99.6 917 0.4 - - - - 469,319 100 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 154,332 464,480 130,648 633,587 - 1,024,691 938,638 Aug-20 Aug-22 Aug-19 Aug-21 Aug-18 Aug-20 Aug-19 - Aug-18 1,132,420 55,725 139,314 75,725 189,312 120,296 300,740 251,308 Mr M Fraser(6) 7,182,091 851,508 1,391,364 72 540,520 28 6,101,715 S32 FY18 Deferred STI (S) S32 FY19 LTI (P) - - 7-Dec-18 7-Dec-18 176,645 674,863 S32 FY17 Deferred STI (S) 170,648 13-Dec-17 S32 FY18 LTI (P) 925,572 13-Dec-17 S32 FY16 Deferred STI (S) 171,079 2-Dec-16 S32 FY17 LTI (P) S32 FY16 LTI (P) FY15 Transitional Performance Award (P) Replacement BHP FY14 LTIP Award Replacement BHP FY15 LTIP Award (P) 1,496,913 2-Dec-16 1,371,204 10-Dec-15 538,747 29-Jun-15 1,222,058 29-Jun-15 1,285,870 29-Jun-15 - - - - - - - - - - - - - - - - 171,079 100 - - 457,934 762,351 - - - 85 62 - - - - - - - - - - - - - - - 80,813 459,707 15 38 176,645 674,863 170,648 925,572 - 1,496,913 1,371,204 - - - - 1,285,870 Aug-19 Aug-21 Aug-22 Aug-20 Aug-21 Aug-19 Aug-20 Aug-19 Aug-20 Aug-22 Aug-19 Aug-21 Aug-18 Aug-20 Aug-19 Aug-18 Aug-18 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 69 REMUNERATION REPORT Award(1) Executive KMP Mr P Harvey Opening balance Number 3,096,744 664,409 647,832 100 789 Number Number(3) % Number Grant Date Granted in FY19(2) Vested in FY19 Forfeited or other change in FY19 Closing balance Vesting date S32 FY18 Deferred STI (S) S32 FY19 LTI (P) - - 7-Dec-18 7-Dec-18 124,792 539,617 S32 FY17 Deferred STI (S) 136,342 13-Dec-17 S32 FY18 LTI (P) 739,503 13-Dec-17 S32 FY16 Deferred STI (S) 183,969 2-Dec-16 S32 FY17 LTI (P) 956,790 2-Dec-16 FY17 Transitional Performance Award (P) 239,197 2-Dec-16 FY16 Advance Award (P) 314,136 16-Nov-15 FY16 MSP Retention (S) 150,516 16-Nov-15 FY16 MSP Performance (P) 376,291 16-Nov-15 - - - - - - - - - - - - - - - - - - - - 183,180 99.6 789 0.4 - - - - 314,136 150,516 100 100 - - - - - - - - - - - - % 0 - - - - Number 3,112,532 124,792 539,617 136,342 739,503 - 956,790 Aug-20 Aug-22 Aug-19 Aug-21 Aug-18 Aug-20 239,197 Aug-19 - - Aug-18 Aug-18 376,291 Aug-19 (1) Replacement Awards refer to the BHP awards that were cancelled and replaced with South32 awards in FY15. At the time of vesting, the quantum of all awards that vest based on performance conditions will automatically convert to ordinary South32 shares for nil consideration in the participant’s name. Any rights that do not vest will immediately lapse, hence there is no expiry date associated with the awards. (S) - Service only or (P) - Performance and Service conditions apply. As rights are subject to service and/or performance conditions, the minimum possible total value of rights granted under South32 Equity Plans for future ﬁnancial years is nil. (2) The fair value for awards granted in FY19 is the grant date fair value for accounting purposes being A$2.91 for the FY18 Deferred STI, A$2.79 for the FY19 Management Share Plan (Retention) and A$1.51 for the FY19 LTI/FY19 Management Share Plan (Performance). (3) Rights converted to ordinary South32 shares for nil consideration on 24 August 2018. The South32 closing share price on this date was A$3.39. (4) Brendan Harris ceased as a member of KMP eff ective 30 April 2019. Closing balance is as at this date. (5) Katie Tovich was appointed as a member of KMP on 1 May 2019. Opening balance is as at this date. (6) Mike Fraser’s FY15 Transitional Performance Award was granted in 2015 to bridge the gap between his Target Remuneration as a member of BHP’s Group Management Committee and his Target Remuneration at South32, which was of a lesser value. The award had three equal tranches of 538,747 rights vesting in FY16, FY17 and FY18. The level of vesting was dependent on the Board’s assessment of (1) TSR performance; (2) Company performance; and (3) Mike’s performance in role over the relevant period. DETAILS OF AWARDS FOR PAUL HARVEY AND KATIE TOVICH Before becoming a member of KMP, Paul Harvey and Katie Tovich already held a number of awards. The details of these awards are outlined in Table 1.21. Table 1.21 Key terms and performance conditions of awards Award Key Terms and Performance Conditions Management Share Plan The Management Share Plan is our long-term incentive plan for eligible management employees below Lead Team level. The Plan has two elements: ■ Retention rights with a three-year vesting period from 1 July to 30 June, vesting in August three years from grant provided employees remain employed by us; and ■ Performance rights with a four-year performance and service period from 1 July to 30 June, vesting in August four years from grant, subject to the same performance and vesting conditions as our LTI for Executive KMP (see page 56) There is no retesting if the performance condition is not met and any rights that do not vest will immediately lapse/ be forfeited. Rights won’t attract any entitlement to voting, dividends or dividend equivalent payments. Advance Award The Advance Award is a one-off grant we made in 2015 to employees who moved from BHP and transitioned from a three-year BHP Management Award Plan to our Management Share Plan. The awards have a three-year performance period from 1 July 2015 to 30 June 2018, with vesting in August 2018. These one-off awards are subject to the same service condition and relative TSR performance and vesting as detailed above for the Management Share Plan Performance rights, but over a three-year vesting period. There is no retesting if the performance condition is not met and any rights that do not vest will immediately lapse/ be forfeited. Rights won’t attract any entitlement to voting, dividends or dividend equivalent payments. 70 SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT REMUNERATION REPORT SHAREHOLDINGS OF KMP Table 1.22 South32 shares held directly, indirectly or beneﬁ cially by each KMP, including their related parties Held at 30 June 2018 Received on vesting of rights Received as remuneration Other net change(1) Held at 30 June 2019 % of Fees/ Fixed Remuneration(2) Non-Executive Directors Mr D Crawford AO(3) Ms K Wood(4) Mr F Cooper AO Dr X Liu Dr X Mkhwanazi Dr N Mtoba Mr W Osborn Mr K Rumble Executives Mr G Kerr Mr B Harris(5) Mrs K Tovich(6) Mr M Fraser Mr P Harvey 370,627 367,825 122,866 50,000 34,337 37,405 125,704 125,680 – – – – – – – – 1,278,610 1,344,220 375,690 160,167 682,155 – 1,402,650 1,391,364 98,319 647,832 – – – – – – – – – – – – – – – 5,144 10,000 – 31,981 – – (633,872) (403,802) – (681,771) (304,485) 370,627 367,825 128,010 60,000 34,337 69,386 125,704 125,680 1,988,958 654,043 160,167 2,112,243 441,666 209 207 220 103 59 119 216 216 357 245 61 680 178 (1) Other net change includes purchases and sales of vested shares to cover tax liabilities. Refer to 28 August 2018 ASX announcement for the CEO. (2) Based on the closing share price of South32 shares as at 30 June 2019, of A$3.18. (3) David Crawford retired as Director eff ective 12 April 2019. Closing balance is as at this date. (4) Karen Wood was elected as Chair, eff ective 12 April 2019. (5) Brendan Harris ceased as a member of KMP eff ective 30 April 2019. Closing balance is as at this date. (6) Katie Tovich was appointed as a member of KMP on 1 May 2019. Opening balance is as at this date. ADDITIONAL INFORMATION TRANSACTIONS WITH KMP During FY19, there were no transactions between KMP or their close family members and the South32 Group. There are no amounts payable at 30 June 2019. There are no loans with KMP. A number of Directors of the Group have control or joint control of other entities (also known as personal entities). There have been no transactions between those entities and no amounts were owed by or to the South32 Group during the year. This Remuneration report was approved by our Board on 5 September 2019. SOUTH32 > ANNUAL REPORT 2019 > REMUNERATION REPORT 71 REMUNERATION REPORT DIRECTORS’ REPORT DIRECTORS’ REPORT This report is presented by our Directors, together This report is presented by our Directors, together with the Group’s Financial report, for the ﬁ nancial with the Group’s Financial report, for the ﬁ nancial year ended 30 June 2019. year ended 30 June 2019. The report is prepared in accordance with the requirements of the The report is prepared in accordance with the requirements of the Corporations Act, with the following information forming part of Corporations Act, with the following information forming part of the report: the report: ■ Operating and ﬁ nancial review on pages 22 to 39; ■ Operating and ﬁ nancial review on pages 22 to 39; ■ Director biographical information on pages 11 to 14 and ■ Director biographical information on pages 11 to 14 and Company Secretary biographical information on page 15; Company Secretary biographical information on page 15; ■ Remuneration report on pages 50 to 71; ■ Remuneration report on pages 50 to 71; ■ Note 19 (a) Financial risk management objectives and policies ■ Note 19 (a) Financial risk management objectives and policies on pages 103 to 106; on pages 103 to 106; ■ Note 20 Share capital on page 112; ■ Note 20 Share capital on page 112; ■ Note 21 Auditor’s remuneration on page 113; ■ Note 21 Auditor’s remuneration on page 113; ■ Note 23 Employee share ownership plans on pages ■ Note 23 Employee share ownership plans on pages 113 to 117; 113 to 117; ■ Directors’ declaration on page 126; ■ Directors’ declaration on page 126; ■ Auditor’s independence declaration on page 127; ■ Auditor’s independence declaration on page 127; ■ ■ Shareholder information on pages 132 to 134; and Shareholder information on pages 132 to 134; and ■ Corporate directory (inside back cover). ■ Corporate directory (inside back cover). DIRECTORS AND MEETINGS DIRECTORS AND MEETINGS At the date of this report, the Directors in ofﬁ ce were: At the date of this report, the Directors in ofﬁ ce were: Karen Wood Karen Wood Graham Kerr Graham Kerr Appointed 1 November 2017 Appointed 1 November 2017 Appointed 21 January 2015 Appointed 21 January 2015 BOARD AND COMMITTEE MEETINGS AND BOARD AND COMMITTEE MEETINGS AND DIRECTOR ATTENDANCE DIRECTOR ATTENDANCE In FY19, we had nine scheduled Board meetings. You will ﬁ nd In FY19, we had nine scheduled Board meetings. You will ﬁ nd the number of Board and Committee meetings, as well as the the number of Board and Committee meetings, as well as the Directors who attended them, in Table 1.1. Directors who attended them, in Table 1.1. In our Board meeting schedule, we have six face-to-face Board In our Board meeting schedule, we have six face-to-face Board and Committee meetings every year. Two days are scheduled for and Committee meetings every year. Two days are scheduled for each program and usually include an additional day for a site visit each program and usually include an additional day for a site visit to an operation or a professional development activity. to an operation or a professional development activity. Because we operate around the world, we held meetings in our Because we operate around the world, we held meetings in our main geographic areas. We had three Board meetings in Australia, main geographic areas. We had three Board meetings in Australia, and one each in Singapore, South Africa and the United States. and one each in Singapore, South Africa and the United States. We also held three meetings by teleconference. In at least one We also held three meetings by teleconference. In at least one meeting every year, our Directors take part in a strategy session. meeting every year, our Directors take part in a strategy session. In FY19 this was in Singapore. In FY19 this was in Singapore. Our Chair sets the agenda for each meeting, with the CEO and the Our Chair sets the agenda for each meeting, with the CEO and the Company Secretary. The meetings typically include: Company Secretary. The meetings typically include: ■ Minutes of the previous meeting; ■ Minutes of the previous meeting; ■ Matters arising; ■ Matters arising; ■ Report from our Chair; ■ Report from our Chair; ■ CEO’s report; ■ CEO’s report; ■ ■ Finance report; Finance report; ■ Marketing report; ■ Marketing report; ■ Health, Safety, Environment and Community (HSEC) report; ■ Health, Safety, Environment and Community (HSEC) report; ■ Board Committee Chair reports; ■ Board Committee Chair reports; ■ Continuous disclosure checkpoint; ■ Continuous disclosure checkpoint; ■ Reports on major projects and strategic matters; and ■ Reports on major projects and strategic matters; and ■ Closed sessions with Directors and closed sessions with Non- ■ Closed sessions with Directors and closed sessions with Non- Frank Cooper AO Frank Cooper AO Appointed 7 May 2015 Appointed 7 May 2015 Executive Directors only. Executive Directors only. Dr Xiaoling Liu Dr Xiaoling Liu Appointed 1 November 2017 Appointed 1 November 2017 Dr Xolani Mkhwanazi Dr Xolani Mkhwanazi Appointed 2 July 2015 Appointed 2 July 2015 Dr Ntombifuthi (Futhi) Mtoba Appointed 7 May 2015 Dr Ntombifuthi (Futhi) Mtoba Appointed 7 May 2015 Wayne Osborn Wayne Osborn Keith Rumble Keith Rumble Appointed 7 May 2015 Appointed 7 May 2015 Appointed 27 February 2015 Appointed 27 February 2015 The following person was also a Director and Chairman during The following person was also a Director and Chairman during FY19: FY19: David Crawford David Crawford From 2 February 2015 – From 2 February 2015 – 12 April 2019 12 April 2019 You can ﬁ nd information about our Directors’ qualiﬁ cations, You can ﬁ nd information about our Directors’ qualiﬁ cations, experience, special responsibilities and other directorships on experience, special responsibilities and other directorships on pages 11 to 14. pages 11 to 14. Our Board also receives monthly reports from each of the CFO Our Board also receives monthly reports from each of the CFO and CSO to keep Directors on top of our performance outcomes and CSO to keep Directors on top of our performance outcomes and sustainability matters. Our Board also receives periodic and sustainability matters. Our Board also receives periodic reports on operational and other important business matters reports on operational and other important business matters including global political and market updates, market research including global political and market updates, market research and investor relations activities. and investor relations activities. 72 72 72 SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT DIRECTORS’ REPORT Table 1.1 Board and Committee meeting attendance in FY19 Director Board Nomination and Governance Committee Remuneration Committee Risk and Audit Committee Sustainability Committee Held(1) Attended(2) Held(1) Attended(2) Held(1) Attended(2) Held(1) Attended(2) Held(1) Attended(2) D Crawford(3) G Kerr (CEO) F Cooper X Liu X Mkhwanazi N Mtoba W Osborn K Rumble K Wood(4) ■ Member ■ Chair 8 9 9 9 9 9 9 9 9 8 9 9 9 9 9 9 9 9 4 5 5 5 5 5 5 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 8 9 9 9 8 9 9 9 6 6 6 6 6 6 6 6 6 6 (1) (2) Indicates the number of meetings held during the period the Director was a member of the Board or Committee. Indicates the number of meetings attended during the period the Director was a member of the Board or Committee. (3) Mr Crawford retired as a Director and Chairman, eff ective 12 April 2019. (4) Ms Wood was elected as Chair, eff ective 12 April 2019 and was Chair of the June 2019 Board meeting. All Non-Executive Directors have a standing invitation to attend Committee meetings, with the consent of the relevant Committee Chair. In practice, all Directors generally attend all meetings. Their attendance is included above only if Directors are a member of the Committee. From time to time, our Board also creates other committees to address important matters and areas of focus for the business. PRINCIPAL ACTIVITIES, STATE OF AFFAIRS AND REVIEW OF OPERATIONS PRINCIPAL ACTIVITIES In FY19, the principal activities of the Group were mining and metal production, from a portfolio of assets that included alumina, aluminium, bauxite, energy coal, metallurgical coal, manganese ore, manganese alloy, nickel, silver, lead and zinc. There were no signiﬁ cant changes in the Group’s principal activities during the year. STATE OF AFFAIRS There were no signiﬁ cant changes in the Group’s state of aff airs during the year, other than as set out in the Operating and ﬁ nancial review and Shareholder information on pages 22 to 39, and 132 to 134 respectively. REVIEW OF OPERATIONS We’ve set out a review of the Group’s FY19 operations in the Operating and ﬁ nancial review on pages 22 to 39. It includes likely developments in the Group’s operations in future ﬁ nancial years and expected results. DIVIDENDS We paid the following dividends during FY19: Dividend Total dividend Payment date Final dividend of US 6.2 cents per share (fully franked) for the year ended 30 June 2018 Interim dividend of US 5.1 cents per share (fully franked) for the half year ended 31 December 2018 Special dividend of US 1.7 cents per share (fully franked) US$316 million 11 October 2018 US$256 million 4 April 2019 US$85 million 4 April 2019 MATTERS SINCE THE END OF THE FINANCIAL YEAR On 22 August 2019, the Directors resolved to pay a fully franked ﬁ nal dividend of US 2.8 cents per share (US$140 million) in respect of the 2019 ﬁ nancial year, with a payment date of 10 October 2019. The dividend has not been provided for in the consolidated ﬁ nancial statements and will be recognised in the 2020 ﬁ nancial year. On 22 August 2019, the Group also announced an extension of the existing capital management program, announced on 27 March 2017, by US$250 million to a total of US$1.25 billion along with a 12-month extension to the completion time, expected to be returned by 4 September 2020. This program has US$264 million remaining. No other matters or circumstances have arisen since the end of the ﬁ nancial year that have signiﬁ cantly aff ected, or may signiﬁ cantly aff ect, the operations, results of operations or state of aff airs of the Group in subsequent ﬁ nancial years. SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT 73 DIRECTORS’ REPORT REMUNERATION AND SHARE INTERESTS Table 1.2 Directors’ relevant interests in South32 Limited shares Director D Crawford(1) K Wood G Kerr(2) F Cooper X Liu X Mkhwanazi N Mtoba W Osborn K Rumble Number of shares in which a relevant interest is held as at the date of this Directors’ Report 370,627 367,825 10,373,323 128,010 60,000 53,237 69,386 125,704 161,380 (1) Mr Crawford retired as Director and Chairman eff ective 12 April 2019. Closing balance is as at this date. (2) At the date of this Directors’ Report, Mr Kerr’s total interest includes 3,292,285 South32 Limited ordinary shares and 7,081,038 rights over South32 Limited ordinary shares held under the South32 Equity Incentive Plan. RIGHTS AND OPTIONS OVER SOUTH32 LIMITED SHARES No rights or options over South32 Limited ordinary shares are held by any of our Non-Executive Directors. Our Executive Director and Managing Director, Mr Graham Kerr, holds rights over South32 Limited ordinary shares, granted under the South32 Equity Incentive Plan. You can ﬁ nd more details about this in the Remuneration report on page 62. The total number of rights over South32 Limited ordinary shares on issue as at 30 June 2019 is set out in note 23 Employee share ownership plans to the ﬁ nancial statements on page 113 to 117. No options or rights have been granted since the end of FY19. As of the date of this report, the total number of rights over South32 Limited ordinary shares on issue is 58,580,921. The Remuneration report contains details of rights on issue. No shares have been issued on vesting of rights during or since the end of FY19. COMPANY SECRETARIES Nicole Duncan BA (Hons), LLB, MAICD, FGIA, FCIS Nicole Duncan is the Chief People and Legal Ofﬁ cer of South32 Limited. She was appointed as Company Secretary on 21 January 2015. You can ﬁ nd out more about Nicole on page 15. Melanie Williams LLB, GCertCorpMgt, MAICD, FGIA Melanie Williams is our Vice President Legal (Corporate) and Company Secretariat. She was appointed Company Secretary on 9 August 2016. Before working at South32, Melanie was Company Secretary and General Counsel at Tap Oil Limited, worked as Counsel with an international law ﬁ rm and has held legal and ﬁ nancial roles with Qatar Petroleum and Woodside Petroleum. She holds a Bachelor of Laws from the University of Western Australia and a Graduate Certiﬁ cate of Corporate Management from Deakin University and the Finance and Treasury Association. INDEMNITIES AND INSURANCE We support and hold harmless Directors and employees, including employees appointed as Directors of a Group company, who incur personal liability to others as a result of working for us (while acting in good faith), to the extent we are able under law. Rule 10.2 of the South32 Constitution requires that we indemnify each Director and each Company Secretary on a full indemnity basis and to the extent permitted by law against liability incurred by them in their capacity as an ofﬁ cer of any member of the Group. The Directors and the Company Secretaries named in this report have the beneﬁ t of this indemnity (as do individuals who formerly held one of these positions). As permitted by our Constitution, South32 Limited has entered into Deeds of Indemnity, Access and Insurance with each of our Directors, Company Secretaries and the CFO under which we agree to indemnify those persons on a full indemnity basis and to the extent permitted by law. We’re insured against amounts that we may be liable to pay to Directors, Company Secretaries and Ofﬁ cers of the Group (as deﬁ ned by the Corporations Act) by way of indemnity. Our insurance policy also covers Directors, Company Secretaries and relevant employees against certain liabilities (including legal costs) they may incur in carrying out their duties. Due to conﬁ dentiality obligations and undertakings of the insurance policy, we can’t disclose any further details about the premium or policy. From time to time, we engage our External Auditor to conduct non-statutory audit work and provide other services in accordance with our Provision of Non-Audit Services Policy. The terms of engagement typically include an indemnity in favour of the External Auditor: ■ Against all liabilities incurred by the External Auditor in respect of third party claims arising from a breach of the engagement terms by the Group; and For all liabilities the External Auditor has to the Group or any third party as a result of reliance on information provided by the Group that is false, misleading or incomplete. ■ During FY19 and as at the date of this Directors’ Report, no indemnity in favour of a current or former Director or Ofﬁ cer of the Group, or in favour of the External Auditor, has been called on. CORPORATE GOVERNANCE Under ASX Listing Rule 4.10.3, ASX listed entities are required to benchmark their corporate governance practices against the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Recommendations). We note the release of the fourth edition of the ASX Recommendations on 27 February 2019 (New Recommendations). As at the date of this report, we comply with all relevant ASX Recommendations. While the New Recommendations aren’t eff ective until the ﬁ rst full ﬁ nancial year commencing 1 July 2020, we’re pleased that our practices align with emerging standards in many areas. Where appropriate, we’ve shared this in our Corporate Governance Statement. Our Corporate Governance Statement is available at www.south32.net/about-us/corporate-governance. It also contains the information required under the UK Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR). 74 SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT DIRECTORS’ REPORT AUDITOR Our External Auditor has provided an independence declaration in accordance with the Corporations Act, which is set out on page 127 and forms part of this report. The External Auditor also provides our Directors with an independent assurance conclusion. This relates to certain sustainability information, and is in accordance with the International Standards on Assurance Engagements ISAE 3000 Assurance Engagement other than the Audits and Reviews of Historical Financial Information and ISAE 3410 Assurance of Greenhouse Gas Statements. We’ve included a copy of the External Auditor’s assurance report in the FY19 GRI Navigator, available at www.south32.net. NON-AUDIT SERVICES On page 113, you can ﬁ nd details of the non-audit services undertaken by, and amounts paid to, our External Auditor in note 21 Auditor’s remuneration to the ﬁ nancial statements. All non-audit services provided by our External Auditor were considered and approved in accordance with the process set out in our Provision of Non-Audit Services Policy. No services were conducted in contravention of that policy. The Directors have formed the view, based on written advice from the Risk and Audit Committee, that the provision of non- audit services during FY19 was compatible with, and did not compromise, the general standard of auditor independence for the following reasons: ■ All non-audit services were subject to the corporate governance procedures and Policies we adopted and have been reviewed by the Risk and Audit Committee to ensure they don’t aff ect the integrity or objectivity of the External Auditor; and The non-audit services provided don’t involve reviewing or auditing the External Auditor’s own work or acting in a management or decision-making capacity for us. ■ POLITICAL DONATIONS AND COMMUNITY INVESTMENT Our Code of Business Conduct sets out our approach to political donations and community investment. In FY19, we didn’t contribute funds to any politician, elected ofﬁ cial or candidate for public ofﬁ ce in any country. Our representatives attended political functions that charged an attendance fee, and where attendance was approved beforehand in accordance with our internal approval requirements. We’ve recorded the details of attendances and the relevant costs at a corporate level. In FY19, we contributed US$17.3 million for the purposes of supporting community programs that comprised cash, in-kind support and administrative costs. For more information on our community investment, please visit www.south32.net.. PROCEEDINGS ON BEHALF OF SOUTH32 No proceedings have been brought or intervened in on our behalf, nor any application made under section 237 of the Corporations Act. ENVIRONMENTAL PERFORMANCE PERFORMANCE IN RELATION TO ENVIRONMENTAL REGULATION We classify environmental incidents based on actual and potential impact type as deﬁ ned by our internal material risk management standards. In FY19, we had one environmental event that resulted in a major impact to the receiving environment which occurred at our Worsley Alumina operation. The event related to detection of dieback infestation (an infection which can impact native plant species in Western Australia) in an area of the site that contains a number of threatened species. Following the event, we have engaged with the relevant authorities and remain committed to working with them to identify and implement improvements in our dieback management aimed at avoiding similar occurrences. No further signiﬁ cant environmental events were reported in FY19. FINES AND PROSECUTIONS In February 2019, our Illawarra Metallurgical Coal operation was ﬁ ned A$30,000 by the New South Wales Environment Protection Authority. The ﬁ ne was made up of two A$15,000 amounts for failure to operate/maintain pollution control equipment and alleged pollution/impact to the Georges River against conditions of our Environmental Protection Licence. No impacts to aquatic fauna were observed, and because we promptly pumped the discharge back to on-site storage dams at Appin East colliery, we reduced the potential environmental impacts. Tests we did two weeks after the Environmental Protection Authority inspection showed water in the area was clear with no residue detected. Our environment personnel carried out remediation work and have improved our maintenance and monitoring systems with the intention to avoid a similar occurrence in the future. ROUNDING OF AMOUNTS We’ve applied the Australian Securities and Investments Commission (ASIC) Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 to this report. This means the amounts in the ﬁ nancial statements have been rounded to the nearest million US dollars, unless stated otherwise. SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT 75 DIRECTORS’ REPORT RESPONSIBILITY STATEMENT The Directors state that to the best of their knowledge: a) The consolidated ﬁ nancial statements and notes on pages 78 to 125 were prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, ﬁ nancial position and proﬁ t and loss of the Group and the undertakings included in the consolidation taken as a whole; and b) The Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. This Directors’ Report is made in accordance with a resolution of the Board. Karen Wood Chair Graham Kerr Chief Executive Ofﬁ cer and Managing Director Date: 5 September 2019 76 SOUTH32 > ANNUAL REPORT 2019 > DIRECTORS' REPORT DIRECTORS’ REPORT FINANCIAL REPORT FINANCIAL REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET CONSOLIDATED CASH FLOW STATEMENT CONSOLIDATED CASH FLOW STATEMENT CONSOLIDATED STATEMENT OF CHANGES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN EQUITY NOTES TO FINANCIAL STATEMENTS – NOTES TO FINANCIAL STATEMENTS – BASIS OF PREPARATION BASIS OF PREPARATION 1. Reporting entity 1. Reporting entity 2. Basis of preparation 2. Basis of preparation 3. New standards and interpretations 3. New standards and interpretations NOTES TO FINANCIAL STATEMENTS – NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR RESULTS FOR THE YEAR 4. Segment information 4. Segment information 5. Expenses 5. Expenses 6. Tax 6. Tax 7. Dividends 7. Dividends 8. Earnings per share 8. Earnings per share NOTES TO FINANCIAL STATEMENTS – NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES OPERATING ASSETS AND LIABILITIES 9. Trade and other receivables 9. Trade and other receivables 10. Inventories 10. Inventories 11. Property, plant and equipment 11. Property, plant and equipment 12. Intangible assets 12. Intangible assets 13. Impairment of non-ﬁ nancial assets 13. Impairment of non-ﬁ nancial assets 14. Trade and other payables 14. Trade and other payables 15. Provisions 15. Provisions NOTES TO FINANCIAL STATEMENTS – NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING CAPITAL STRUCTURE AND FINANCING 16. Cash and cash equivalents 16. Cash and cash equivalents 17. Interest bearing liabilities 17. Interest bearing liabilities 18. Net ﬁ nance cost 18. Net ﬁ nance cost 19. Financial assets and ﬁ nancial liabilities 19. Financial assets and ﬁ nancial liabilities 20. Share capital 20. Share capital NOTES TO FINANCIAL STATEMENTS – NOTES TO FINANCIAL STATEMENTS – OTHER NOTES OTHER NOTES 21. Auditor’s remuneration 21. Auditor’s remuneration 22. Pension and other post-retirement obligations 22. Pension and other post-retirement obligations 23. Employee share ownership plans 23. Employee share ownership plans 24. Contingent liabilities 24. Contingent liabilities 25. Commitments 25. Commitments 26. Subsidiaries 26. Subsidiaries 27. Equity accounted investments 27. Equity accounted investments 28. Interest in joint operations 28. Interest in joint operations 29. Key management personnel 29. Key management personnel 30. Related party transactions 30. Related party transactions 31. Parent entity information 31. Parent entity information 32. Acquisition of subsidiaries and joint 32. Acquisition of subsidiaries and joint controlled operations controlled operations 33. Subsequent events 33. Subsequent events 78 78 79 79 80 80 81 81 82 82 83 83 83 83 83 83 83 83 85 85 85 85 90 90 91 91 93 93 94 94 94 94 94 94 94 94 95 95 97 97 98 98 100 100 100 100 102 102 102 102 102 102 103 103 103 103 112 112 113 113 113 113 113 113 113 113 118 118 118 118 119 119 120 120 122 122 122 122 123 123 124 124 124 124 125 125 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 77 77 77 FINANCIAL REPORT CONSOLIDATED INCOME STATEMENT for the year ended 30 June 2019 US$M Revenue: Group production Third party products and services Other income Expenses excluding net ﬁ nance cost Share of proﬁ t/(loss) of equity accounted investments Proﬁ t/(loss) Comprising: Group production Third party products and services Proﬁ t/(loss) Finance expenses Finance income Net ﬁ nance cost Proﬁ t/(loss) before tax Income tax (expense)/beneﬁ t Proﬁ t/(loss) after tax Attributable to: Equity holders of South32 Limited Proﬁ t/(loss) for the year attributable to the equity holders of South32 Limited: Basic earnings per share (cents) Diluted earnings per share (cents) The accompanying notes form part of the consolidated ﬁ nancial statements. Note FY19 FY18 4 4 5 27 18 6 6,468 806 7,274 238 6,682 867 7,549 226 (7,092) (6,577) 467 887 882 5 887 (151) 67 (84) 803 (414) 389 521 1,719 1,694 25 1,719 (168) 68 (100) 1,619 (287) 1,332 389 1,332 8 8 7.7 7.6 25.8 25.4 78 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June 2019 US$M Proﬁ t/(loss) for the year Other Comprehensive Income Items that may be reclassiﬁ ed to the Consolidated Income Statement: Available for sale investments: Net gains/(losses) recognised in equity Net (gains)/losses transferred to the Consolidated Income Statement Tax beneﬁ t/(expense) recognised within Other Comprehensive Income Cash Flow hedges: Net gains/(losses) recognised in equity Transfer of net (gains)/losses recognised in equity Total items that may be reclassiﬁ ed to the Consolidated Income Statement Items not to be reclassiﬁ ed to the Consolidated Income Statement: Investments in equity instruments designated as fair value through Other Comprehensive Income (FVOCI): Net fair value gains/(losses) Tax beneﬁ t/(expense) Equity accounted investments – share of Other Comprehensive Income/(loss), net of tax Gains/(losses) on pension and medical schemes Tax beneﬁ t/(expense) recognised within Other Comprehensive Income Total items not to be reclassiﬁ ed to the Consolidated Income Statement 27 15 Total Other Comprehensive Income/(loss) Total Comprehensive Income/(loss) Attributable to: Equity holders of South32 Limited The accompanying notes form part of the consolidated ﬁ nancial statements. Note FY19 389 FY18 1,332 - - - - (5) (5) (26) 10 66 (3) 1 48 43 432 170 (33) (3) 5 - 139 - - 1 4 (1) 4 143 1,475 432 1,475 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 79 FINANCIAL REPORT CONSOLIDATED BALANCE SHEET as at 30 June 2019 US$M ASSETS Current assets Cash and cash equivalents Trade and other receivables Other ﬁ nancial assets Inventories Current tax assets Other Total current assets Non-current assets Trade and other receivables Other ﬁ nancial assets Inventories Property, plant and equipment Intangible assets Equity accounted investments Deferred tax assets Other Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Interest bearing liabilities Other ﬁ nancial liabilities Current tax payables Provisions Deferred income Total current liabilities Non-current liabilities Trade and other payables Interest bearing liabilities Deferred tax liabilities Provisions Deferred income Total non-current liabilities Total liabilities Net assets EQUITY Share capital Treasury shares Reserves Retained earnings/(accumulated losses) Total equity attributable to equity holders of South32 Limited Non-controlling interests Total equity The accompanying notes form part of the consolidated ﬁ nancial statements. Note FY19 FY18 16 9 19 10 9 19 10 11 12 27 6 14 17 19 15 14 17 6 15 20 20 1,408 2,970 888 108 952 7 38 826 80 886 8 51 3,401 4,821 290 272 68 248 613 76 9,596 8,196 233 688 155 12 221 697 245 16 11,314 14,715 10,312 15,133 880 313 - 179 312 4 830 333 2 135 360 4 1,688 1,664 1 591 334 1,925 8 2,859 4,547 5 596 445 1,705 9 2,760 4,424 10,168 10,709 14,212 14,493 (105) (3,490) (448) (83) (3,333) (367) 10,169 10,710 (1) (1) 10,168 10,709 80 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT CONSOLIDATED CASH FLOW STATEMENT for the year ended 30 June 2019 US$M Operating activities Proﬁ t/(loss) before tax Adjustments for: Non-cash signiﬁ cant items Depreciation and amortisation expense Impairments of property, plant and equipment Employee share awards expense Net ﬁ nance cost Share of (proﬁ t)/loss of equity accounted investments Fair value (gains)/losses on derivative instruments and other investments Other non-cash or non-operating items Changes in assets and liabilities: Trade and other receivables Inventories Trade and other payables Provisions and other liabilities Cash generated from operations Interest received Interest paid Income tax (paid)/received Dividends received Dividends received from equity accounted investments Net cash ﬂ ows from operating activities Investing activities Purchases of property, plant and equipment Exploration expenditure Exploration expenditure expensed and included in operating cash ﬂ ows Purchase of intangibles Investment in ﬁ nancial assets Acquisition of subsidiaries and jointly controlled entities, net of their cash Cash outﬂ ows from investing activities Proceeds from sale of property, plant and equipment and intangibles Proceeds from ﬁ nancial assets Distribution from equity accounted investments Net cash ﬂ ows from investing activities Financing activities Proceeds from interest bearing liabilities Repayment of interest bearing liabilities Purchase of shares by ESOP Trusts Share buy-back Dividends paid Net cash ﬂ ows from ﬁ nancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents, net of overdrafts, at the beginning of the ﬁ nancial year Foreign currency exchange rate changes on cash and cash equivalents Cash and cash equivalents, net of overdrafts, at the end of the ﬁ nancial year 16 The accompanying notes form part of the consolidated ﬁ nancial statements. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT Note FY19 FY18 803 1,619 - 757 504 38 84 (467) 35 1 6 (58) (13) (64) 1,626 71 (70) (346) - 536 (31) 742 - 40 100 (521) 76 (12) (153) (99) (22) (118) 1,621 64 (70) (306) 14 394 1,817 1,717 (652) (74) 46 (30) (411) (1,507) (2,628) 5 305 6 (2,312) 3 (37) (99) (281) (657) (1,071) (1,566) 2,970 2 1,406 (430) (40) 38 (4) (273) - (709) 1 407 - (301) 4 (77) (84) (254) (708) (1,119) 297 2,675 (2) 2,970 81 FINANCIAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2019 US$M Share capital Treasury shares Financial assets reserve(1) Employee share awards reserve(2) Retained earnings/ (accumulated losses) Other reserves(3) Non- controlling interests Total Total equity Attributable to equity holders of South32 Limited Balance as at 1 July 2018 14,493 (83) 164 Adjustments for transition to new accounting standards(4) - Restated balance as at 1 July 2018 14,493 - (83) Proﬁ t/(loss) for the year Other Comprehensive Income/(loss) Total Comprehensive Income/(loss) Transactions with owners: Dividends - - - - Shares bought back and cancelled (281) Accrued employee entitlements for unexercised awards, net of tax Purchase of shares by ESOP Trusts Employee share awards exercised following vesting Tax recognised for employee awards exercised Transfer of cumulative fair value gain on equity instruments designated at FVOCI(5) - - - - - - - - - - - (99) 77 - - Balance as at 30 June 2019 14,212 (105) Balance as at 1 July 2017 14,747 (26) Proﬁ t/(loss) for the year Other Comprehensive Income/(loss) Total Comprehensive Income/(loss) Transactions with owners: Dividends - - - - Shares bought back and cancelled (254) Accrued employee entitlements for unexercised awards, net of tax Purchase of shares by ESOP Trusts Employee share awards exercised following vesting - - - Balance as at 30 June 2018 14,493 - - - - - - (84) 27 (83) (12) 152 - (16) (16) - - - - - - (145) (9) 30 - 134 134 - - - - - 164 88 - 88 - - - - - 49 - (28) - - (3,585) (367) 10,710 (1) 10,709 - 10 (2) - (2) (3,585) (357) 10,708 (1) 10,707 - (5) (5) - - - - - - - 389 64 453 (657) - - - (49) 17 389 43 432 (657) (281) 49 (99) - 17 145 - - - - - - - - - - - 389 43 432 (657) (281) 49 (99) - 17 - 109 (3,590) (448) 10,169 (1) 10,168 57 (3,590) (982) 10,236 (1) 10,235 - - - - - 45 - (14) 88 - 5 5 - - - - - 1,332 1,332 4 143 1,336 1,475 (708) - - - (708) (254) 45 (84) (13) - - - - - - - - - 1,332 143 1,475 (708) (254) 45 (84) - (3,585) (367) 10,710 (1) 10,709 (1) Represents the fair value movement in ﬁ nancial assets designated as FVOCI. (2) Represents the accrued employee entitlements to share awards that have not yet vested. (3) Primarily consists of the common control transaction reserve of US$3,569 million, which reﬂ ects the diff erence between consideration paid and the carrying value of assets and liabilities acquired, as well as the gains/losses on disposal of entities as part of the Demerger of the Group in 2015. (4) Refer to note 3 New standards and interpretations. (5) The Group completed its acquisition of the remaining 83 per cent of issued and outstanding shares of Arizona Mining Inc. and derecognised its existing 17 per cent interest as an investment in equity instruments designated as FVOCI. The accompanying notes form part of the consolidated ﬁ nancial statements. 82 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – BASIS OF PREPARATION (b) Foreign currency translation The functional currency of the majority of the Group’s operations is the US dollar as this is assessed to be the principal currency of the economic environments in which they operate. Transactions denominated in foreign currencies are initially recorded in the functional currency using the exchange rate ruling at the date of the underlying transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange at year end. Exchange gains or losses on retranslation are included in the Consolidated Income Statement, with the exception of foreign exchange gains or losses on foreign currency provisions for closure and rehabilitation which are capitalised in property, plant and equipment for operating sites. 3. NEW STANDARDS AND INTERPRETATIONS (a) New accounting standards and interpretations eff ective from 1 July 2018 The Group has changed some of its accounting policies as a result of new or revised accounting standards which became eff ective for the annual reporting period commencing on 1 July 2018. New policies and standards are: AASB 9 Financial Instruments The Group has adopted AASB 9 with a date of initial application of 1 July 2018. The nature and impact of the key changes to the Group’s accounting policies resulting from the adoption of AASB 9 are summarised below. (i) Classiﬁ cation and measurement of ﬁ nancial assets and ﬁ nancial liabilities AASB 9 contains three principal classiﬁ cation categories for ﬁ nancial assets: measured at amortised cost, fair value through Other Comprehensive Income (FVOCI) and fair value through proﬁ t or loss (FVTPL). The classiﬁ cation of a ﬁ nancial asset is based on the cash ﬂ ow characteristics and the business model used for the management of the ﬁ nancial asset. AASB 9 eliminates the previous AASB 139 Financial Instruments: Recognition and Measurement ﬁ nancial asset classiﬁ cation of held to maturity, loans and receivables and available for sale. On an instrument by instrument basis, a policy choice has been made to designate ﬁ nancial assets previously classiﬁ ed as available for sale investments (under AASB 139) as ﬁ nancial assets designated as FVOCI. In the absence of this policy choice, the investments will be accounted for as FVTPL. The adoption of AASB 9 has not had a signiﬁ cant impact on the Group’s accounting policies for ﬁ nancial liabilities as AASB 9 largely retains the existing requirements in AASB 139 for the classiﬁ cation and measurement of ﬁ nancial liabilities. (ii) Impairment of ﬁ nancial assets AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an expected credit loss model. The new impairment model applies to ﬁ nancial assets measured at amortised cost, contract assets and debt investments classiﬁ ed as FVOCI, but not to investments in equity instruments. Under AASB 9, credit losses are recognised earlier than under AASB 139. This section sets out the accounting policies that relate to the consolidated ﬁ nancial statements of South32 Limited (referred to as the Company) and its subsidiaries and joint arrangements (collectively, the Group) as a whole. Where an accounting policy, critical accounting estimate, assumption or judgement is speciﬁ c to a note, these are described within the note to which they relate. These policies have been consistently applied to all periods presented, except as described in note 3 New standards and interpretations. The consolidated ﬁ nancial statements of the Group for the year ended 30 June 2019 were authorised for issue in accordance with a resolution of the Directors on 5 September 2019. 1. REPORTING ENTITY South32 Limited is a for-proﬁ t company limited by shares incorporated in Australia with a primary listing on the Australian Securities Exchange (ASX), a standard listing on the London Stock Exchange (LSE) and a secondary listing on the Johannesburg Stock Exchange (JSE). The nature of the operations and principal activities of the Group are described in note 4 Segment information. 2. BASIS OF PREPARATION The consolidated ﬁ nancial statements are a general purpose ﬁ nancial report which: ■ Have been prepared in accordance with the requirements of the Corporations Act, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB), International Financial Reporting Standards (IFRS) and other authoritative pronouncements of the International Accounting Standards Board (IASB); ■ Have been prepared on a historical cost basis, except for derivative ﬁ nancial instruments and certain other ﬁ nancial assets and liabilities which are required to be measured at fair value; ■ Are presented in US dollars, which is the functional currency of the majority of the Group’s operations, and all values are rounded to the nearest million dollars (US$M or US$ million) unless otherwise stated, in accordance with ASIC Corporations Instrument 2016/191; ■ Present reclassiﬁ ed comparative information where required for consistency with the current year’s presentation; ■ Adopt all new and amended Accounting Standards and Interpretations issued by the AASB that are relevant to the operations of the Group and eff ective for reporting periods beginning on or after 1 July 2018. Refer to note 3 New standards and interpretations, for further details; and ■ Do not early adopt any Accounting Standards and Interpretations that have been issued or amended but are not yet eff ective except for those described in note 3 New standards and interpretations. (a) Basis of consolidation The consolidated ﬁ nancial statements comprise the ﬁ nancial statements of the Group. A list of signiﬁ cant controlled entities (subsidiaries) at year end is contained in note 26 Subsidiaries. The ﬁ nancial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 83 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – BASIS OF PREPARATION 3. NEW STANDARDS AND INTERPRETATIONS (CONTINUED) (a) New accounting standards and interpretations eff ective from 1 July 2018 (continued) AASB 9 Financial Instruments (continued) (iii) Transition For transition, the Group has elected to apply the limited exemption in AASB 9 relating to the classiﬁ cation, measurement and impairment requirements for ﬁ nancial assets and accordingly has not restated comparative periods. Any resulting adjustments to carrying values in the opening balance sheet have been recognised in opening retained earnings as at 1 July 2018. The following table summarises the impact, net of tax, of transition to AASB 9 on retained earnings at 1 July 2018. US$M Retained earnings/(accumulated losses) Closing balance under AASB 139 (30 June 2018) Recognition of expected credit losses under AASB 9 Reclassiﬁ cation of available for sale investments to investments held at FVTPL(1) Tax impact Opening balance under AASB 9 (1 July 2018) Impact from adopting AASB 9 on 1 July 2018 (367) (2) 17 (5) (357) (1) The investment in unit trusts held by the South32 South Africa Energy Coal Rehabilitation Trust Fund does not meet the deﬁ nition of an equity instrument under AASB 9. These investments are therefore classiﬁ ed as investments held at FVTPL (FY18: Available for sale). Refer to note 19 Financial assets and ﬁ nancial liabilities. (iv) Classiﬁ cation of ﬁ nancial assets and ﬁ nancial liabilities on the date of initial application of AASB 9 Classiﬁ cation under AASB 139 Classiﬁ cation under AASB 9 Carrying amount US$M Financial assets Cash and cash equivalents Trade and other receivables(1) Trade and other receivables – provisional pricing Derivative contracts Derivative contracts Loans to equity accounted investments(1) Interest bearing loans receivable Loans and receivables Loans and receivables Held at FVTPL Held at FVTPL Cash ﬂ ow hedges Loans and receivables Loans and receivables Amortised cost Amortised cost Held at FVTPL Held at FVTPL Cash ﬂ ow hedges Amortised cost Amortised cost Investments in equity instruments – FVOCI(2) Available for sale Designated as FVOCI – Equity Other investments – held at FVTPL(3) Available for sale Held at FVTPL Financial liabilities Trade and other payables Trade and other payables – provisional pricing Derivative contracts Finance leases Unsecured other Other ﬁ nancial liabilities at amortised cost Amortised cost Held at FVTPL Held at FVTPL Held at FVTPL Other ﬁ nancial liabilities at amortised cost Other ﬁ nancial liabilities at amortised cost Held at FVTPL Amortised cost Amortised cost 2,970 575 87 146 5 93 38 406 136 820 2 2 570 359 (1) Trade and other receivables and loans to equity accounted investments are reduced by the recognition of an impairment provision as a result of applying the expected credit loss model under AASB 9, US$1 million each. The impact was recognised in opening retained earnings at 1 July 2018 on transition to AASB 9. (2) Investments in equity instruments designated as FVOCI represent investments that the Group intends to hold for long-term strategic purposes. As permitted by AASB 9, on an instrument by instrument basis, the Group has elected to designate these investments as held at FVOCI at the date of initial application. (3) Other investments held at FVTPL which were previously classiﬁ ed as available for sale, are not equity instruments and are therefore unable to be designated as investments held at FVOCI. 84 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – BASIS OF PREPARATION NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR This section focuses on the results and performance of the Group. This covers both proﬁ tability and the resultant return to shareholders via earnings per share. 4. SEGMENT INFORMATION (a) Description of segments The operating segments (also referred to as operations) are organised and managed separately according to the nature of products produced. Certain members of the Lead Team (the chief operating decision makers) and the Board of Directors monitor the segment results regularly for the purpose of making decisions about resource allocation and performance assessment. The segment information for the manganese operations are presented on a proportional consolidation basis, which is the measure used by the Group’s management to assess their performance. The principal activities of each operating segment as the Group is currently structured are summarised as follows: Operating segment Principal activities Worsley Alumina Integrated bauxite mine and alumina reﬁ nery in Western Australia, Australia Hillside Aluminium Aluminium smelter in South Africa Mozal Aluminium Aluminium smelter in Mozambique Brazil Alumina Alumina reﬁ nery in Brazil South Africa Energy Coal Open-cut and underground energy coal mines and processing operations in South Africa Illawarra Metallurgical Coal Underground metallurgical coal mines in New South Wales, Australia Eagle Downs Metallurgical Coal(1) Exploration and development of metallurgical coal deposit in Queensland, Australia Australia Manganese South Africa Manganese Cerro Matoso Cannington Hermosa(2) Integrated producer of manganese ore in the Northern Territory and alloy in Tasmania, Australia Integrated producer of manganese ore and alloy in South Africa Integrated laterite ferronickel mining and smelting complex in Colombia Silver, lead and zinc mine in Queensland, Australia Exploration and development option for zinc, lead and silver sulphide deposit in Tucson, United States (1) The Eagle Downs Metallurgical Coal operating segment was acquired on 14 September 2018. Refer to note 32(b) Acquisition of the Eagle Downs Metallurgical Coal project. (2) The Hermosa operating segment was acquired on 10 August 2018. Refer to note 32(a) Acquisition of Arizona Mining Inc. All operations are operated or jointly operated by the Group except Brazil Alumina, which is operated by Alcoa. 3. NEW STANDARDS AND INTERPRETATIONS (CONTINUED) (a) New accounting standards and interpretations eff ective from 1 July 2018 (continued) AASB 15 Revenue from Contracts with Customers The Group adopted AASB 15 from 1 July 2018 using the modiﬁ ed retrospective approach where transitional adjustments are recognised in retained earnings. Therefore, the comparative information has not been restated and continues to be reported under AASB 118 Revenue. The impact of the change in accounting policy did not have a material impact on the amount of revenue recognised as the transfer of risk and rewards under AASB 118 is equivalent to the fulﬁ lment of the performance obligation to deliver commodities. Any diff erences arising from freight services for Cost, Insurance and Freight (CIF) contracts are immaterial in the current and comparative periods. Revenue has been recognised net of treatment and reﬁ ning charges, previously recognised on a gross basis with treatment and reﬁ ning charges included as a separate expense. (b) New standards and interpretations issued but not eff ective Certain new accounting standards and interpretations have been published that are not eff ective for the 30 June 2019 reporting period. The Group has reviewed these standards and interpretations, and with the exception of the item listed below, none of the new or amended standards will signiﬁ cantly aff ect the Group’s accounting policies, ﬁ nancial position or performance. The Group does not intend to early adopt any of the new standards or interpretations. AASB 16 Leases (eff ective from 1 July 2019) AASB 16 will generally result in leases being recognised on the Consolidated Balance Sheet, as the distinction between operating and ﬁ nance leases is removed. The Group will elect to apply AASB 16 using the modiﬁ ed retrospective approach and will therefore not restate comparative information. The Group will also apply the practical expedient to ‘grandfather’ previous lease assessments of existing contracts and will apply the AASB 16 lease deﬁ nition only to new contracts entered into after 1 July 2019. On transition, the present value of the Group’s operating lease commitments excluding low-value and short-term leases, will be shown as right-of-use assets and as right-of-use liabilities on the Consolidated Balance Sheet. Optional renewable periods will be included in the lease term if it is reasonably certain that an extension will occur. In addition, variable lease payments linked to a rate or an index, such as CPI, are now required to be recognised within the lease liability and right-of-use asset when eff ective. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. The only exceptions are short-term and low- value leases. The Group has completed an impact assessment of AASB 16 and the expected impact on the Consolidated Balance Sheet at 1 July 2019 is approximately: US$M Right-of-use assets(1) Right-of-use liabilities(1) 140 (140) (1) Includes US$52 million of variable lease payments based on a rate or an index, such as CPI. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 85 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR For certain commodities, the sales price is determined on a provisional basis at the date of sale and adjustments to the sales price subsequently occur based on movements in quoted market or contractual prices up to the date of ﬁ nal pricing. The period between provisional invoicing and ﬁ nal pricing is up to 180 days. Revenue on provisionally priced sales is recognised based on the estimated fair value of the total consideration receivable. The revenue adjustment mechanism embedded within provisionally priced sales arrangements has the characteristics of a commodity derivative. Accordingly, the fair value of the ﬁ nal sales price adjustment is re-estimated continuously and changes in fair value are disclosed separately as ‘Other’ revenue. In all cases, fair value is estimated by reference to forward market prices. Revenue from the provision of freight services The Group sells most of its commodities on either FOB or CIF Incoterms. In the case of CIF Incoterms, the Group is responsible for shipping services after the date at which control of the commodities passes to the customer at the port of loading. The provision of shipping services in these types of arrangements are a distinct service (and therefore a separate performance obligation) to which a portion of the transaction price should be allocated and recognised over time as the shipping services are provided. The Group also provides third party freight services which are recognised as the shipping service is provided. The Group does not disclose sales revenue from freight services separately as it does not consider this necessary in order to understand the impact of economic factors on the Group. Revenue recognition policy applicable up to 30 June 2018 The revenue recognition policy under AASB 118 is principally aligned with the recognition requirements of AASB 15. Under AASB 118 there was no requirement to disaggregate revenue and separately disclose revenue from customers and provisionally priced contracts ('Other' revenue). For provisionally priced contracts the fair value of the ﬁ nal sales price adjustment is re- estimated continuously and changes in fair value are recognised as an adjustment to total revenue, while under AASB 15 these adjustments are disclosed separately as 'Other' revenue. 4. SEGMENT INFORMATION (CONTINUED) (b) Segment results Segment performance is measured by Underlying EBIT and Underlying EBITDA. Underlying EBIT is proﬁ t before net ﬁ nance cost, tax and other earnings adjustment items including impairments. Underlying EBITDA is Underlying EBIT, before depreciation and amortisation. A reconciliation of Underlying EBIT, Underlying EBITDA and the Group’s consolidated proﬁ t after tax is set out on the following pages. Segment revenue is measured on the same basis as in the Consolidated Income Statement. The Group separately discloses sales of group production from sales of third party products because of the signiﬁ cant diff erence in proﬁ t margin earned on these sales. It is the Group’s policy that inter-segment transactions are made on a commercial basis. Group and unallocated items/eliminations represent group centre functions and consolidation adjustments. Group ﬁ nancing (including ﬁ nance expense and ﬁ nance income) and income taxes are managed on a Group basis and are not allocated to operating segments. Total assets and liabilities for each operating segment represent operating assets and liabilities which predominantly exclude the carrying amount of equity accounted investments, cash, interest bearing liabilities, tax balances and certain other ﬁ nancial assets. The carrying amount of investments accounted for using the equity method represents the balance of the Group’s investment in equity accounted investments, with no adjustment for cash, interest bearing liabilities and tax balances of the equity accounted investment. Revenue recognition policy applicable from 1 July 2018 The Group has applied AASB 15 using the modiﬁ ed retrospective method. The impact of changes in accounting standards are disclosed in note 3 New standards and interpretations. Revenue is measured based on the consideration speciﬁ ed in the contract with a customer and excludes amounts collected on behalf of third parties. Revenue is not reduced for royalties and other taxes payable from group production. The following is a description of the principal activities from which the Group generates its revenue. Revenue from the sale of commodities The Group primarily sells the following commodities: alumina, aluminium, energy coal, metallurgical coal, manganese ore, manganese alloy, ferronickel, silver, lead and zinc. The sales of these commodities are considered to be performance obligations as they are the contractual promises by the Group, to transfer distinct goods to customers. The transaction price allocated to each performance obligation is recognised as the performance obligation is satisﬁ ed. Satisfaction occurs when control of the promised commodity is transferred to the customer. For the sale of commodities, revenue is therefore recognised at a point in time, net of treatment and reﬁ ning charges (where applicable). The majority of the Group’s sales agreements specify that title passes on the bill of lading date (the date the commodity is delivered to the shipping agent), and is assessed to be the point of time in which control over the commodity passes to the customer. For these sales, revenue is recognised on the bill of lading date. For certain sales (principally energy coal sales to adjoining power stations), title passes, and revenue is recognised when the goods have been delivered to the customer. 86 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR ) 8 3 ( 2 1 3 7 , 4 7 2 7 , 8 6 4 6 , - 6 0 8 4 7 2 7 , 7 9 1 2 , ) 7 5 7 ( 0 4 4 1 , 1 3 0 1 , ) 6 4 ( 5 0 5 4 0 4 4 1 , ) 8 1 1 ( ) 0 3 3 ( 2 9 9 ) 3 0 6 ( 9 8 3 4 7 2 5 6 8 8 6 5 1 7 4 1 , 7 4 5 4 , p u o r G ) 1 ( t n e m t s u d a j n o i t a n m i i l e d e t a c o l l a n u s n w o D e g a E l a r r a w a l l I y r o t u t a t S / s m e t i o r r e C a c i r f A h t u o S a i l a r t s u A l i a c g r u l l a t e M l i a c g r u l l a t e M a c i r f A h t u o S l i z a r B l a z o M e d s i l l i H d n a p u o r G ) d e u n i t n o c ( s t l u s e r t n e m g e S ) b ( ) D E U N T N O C I ( I N O T A M R O F N I T N E M G E S . 4 ) 0 5 6 1 , ( ) 9 3 ( 0 1 ) 3 ( ) 9 ( - ) 0 4 6 1 , ( ) 1 3 6 1 , ( ) 0 4 6 1 , ( ) 2 6 4 ( ) 2 4 ( - 5 1 8 ) 7 5 8 ( ) 2 4 ( ) 3 5 ( 7 8 ) 0 2 ( ) 5 7 3 ( ) 3 7 ( ) 3 2 8 ( ) 7 4 ( 1 - 7 4 4 ) 1 3 ( 5 - ) 5 7 3 ( ) 3 7 ( - - - - - - - - - - - - - - - ) 1 1 ( ) 9 ( ) 3 ( ) 7 ( 8 7 4 8 9 4 6 5 5 2 0 1 1 , 7 6 4 7 6 4 - - 7 6 4 1 6 1 9 8 4 9 8 4 - - 9 8 4 7 2 1 3 5 5 6 3 5 - 7 1 3 5 5 5 1 2 5 9 0 1 , 5 9 0 1 , - - 5 9 0 1 , 8 9 6 ) 7 5 ( ) 7 8 ( ) 7 2 ( ) 0 6 ( 4 0 1 0 4 8 8 1 8 3 6 7 0 1 8 4 8 8 1 9 3 6 ) 3 ( ) 8 ( - - - - - - - ) 1 ( - - 4 0 1 0 4 8 8 1 8 3 6 - - - - - - - - - - - - - - - a s o m r e H n o t g n n n a C i o s o t a M ) 1 ( e s e n a g n a M ) 1 ( e s e n a g n a M l a o C ) 2 ( ) 5 9 ( 1 7 6 ) 2 8 7 ( ) 1 4 7 ( 1 3 2 - 8 9 4 2 , 6 5 6 1 , 8 1 5 8 - 9 3 7 7 7 1 , 4 5 5 - 3 9 4 0 5 2 0 1 2 3 - 7 9 6 8 1 2 - - 0 3 4 2 5 2 1 2 2 5 6 - 9 7 6 3 6 3 1 6 - 9 2 7 1 ) 4 ( ) 6 ( - - 5 3 1 1 , 5 3 1 1 , - - 7 3 0 1 , 7 3 0 1 , 2 4 5 2 4 5 3 1 1 , 7 3 0 1 , l a o C 9 3 1 1 , 3 4 0 1 , l a o C y g r e n E ) 3 8 1 ( 9 5 3 0 6 3 ) 3 ( - 2 9 5 3 9 3 8 3 1 0 0 3 0 1 7 1 , ) 8 8 ( ) 6 4 ( ) 7 4 ( - - 1 ) 6 4 ( - 3 1 2 4 1 6 3 7 9 0 1 1 , 1 5 6 5 6 6 5 8 4 5 - 8 1 6 6 5 9 1 2 i a n m u A l ) 9 5 ( 0 6 1 0 6 1 - - - 0 6 1 - - 6 2 5 9 7 8 0 1 ) 2 ( 6 5 5 6 5 5 - - 6 5 5 3 1 ) 4 3 ( ) 1 2 ( ) 1 2 ( 9 3 4 1 , - - 9 3 4 1 , ) 7 ( - 7 9 7 2 2 8 9 1 6 1 , 2 0 7 ) 8 6 ( ) 1 6 1 ( ) 5 7 ( ) 5 7 ( 1 4 5 2 4 5 - - - - - - ) 1 2 ( ) 5 7 ( ) 1 ( - - 1 4 5 - - 9 1 4 4 6 0 1 1 - - 9 1 7 7 2 4 0 3 1 , 1 7 5 - 7 3 6 8 6 4 3 , ) ( i 4 s e c v r e s d n a s t c u d o r p y t r a p d r i h T n o i t c u d o r p p u o r G n o i t a s i t r o m a d n a n o i t a c e r p e D i i I T B E g n y l r e d n U I A D T B E g n y l r e d n U i e u n e v e r t n e m g e s - r e t n I ) 2 ( e u n e v e r l a t o T i l g n d u c x e n o i t c u d o r p p u o r G d e s n e p x e n o i t a r o p x e l d e s n e p x e n o i t a r o p x E l : i g n s i r p m o C ) ( i 4 s e c v r e s d n a s t c u d o r p y t r a p d r i h T y t i u q e f o ) s s o l ( / t ﬁ o r p f o e r a h S ) ( 5 s t n e m t s e v n i d e t n u o c c a s t n e m t s e v n i d e t n u o c c a y t i u q E e r u t i d n e p x e n o i t a r o p x E l ) 7 ( e r u t i d n e p x e l a t i p a C ) 8 ( s t e s s a l a t o T x a t r e t f a ) s s o l ( / t ﬁ o r P ) ( j 6 s t n e m t s u d a s g n n r a E i i s g n n r a e g n y l r e d n U i t ﬁ e n e b / ) e s n e p x e ( x a t e m o c n I i I T B E g n y l r e d n U t s o c e c n a n ﬁ t e N ) 8 ( s e i t i l i b a i l l a t o T i i m u n m u A l i i m u n m u A l l y e s r o W i a n m u A l 9 1 0 2 e n u J 0 3 M $ S U 8 5 5 3 4 4 1 , 9 1 6 1 , ) ( 2 s r e m o t s u c m o r f e u n e v e R ) 4 ( - ) ( 3 r e h t O 9 3 4 1 , 9 1 6 1 , ) 2 ( e u n e v e r l a t o T s n o i t a r e p o e s e n a g n a m e h T . e c n a m r o f r e p r i e h t s s e s s a o t t n e m e g a n a m s p u o r G e h t ’ y b d e s u e r u s a e m e h t s i i h c h w , i s s a b n o i t a d i l o s n o c l a n o i t r o p o r p a n o d e t n e s e r p s i d n a s n o i t a r e p o e s e n a g n a m e h t n i t s e r e t n i ’ s p u o r G e h t s t c e ﬂ e r n o i t a m r o f n i t n e m g e s e h T ) 1 ( . n o i t i s o p g n i t n u o c c a y t i u q e e h t o t n o i t a d i l o s n o c l a n o i t r o p o r p e h t s e l i c n o c e r n m u o c l t n e m t s u d a j y r o t u t a t s e h T . s t n e m e t a t s l i a c n a n ﬁ d e t a d i l o s n o c e h t n i d e t n u o c c a y t i u q e e r a s t c u d o r p y t r a p d r i h t n o T B E g n y l r e d n U I i . l s a i r e t a m w a r i m u n m u a l i r o f n o i l l i m 6 1 1 $ S U d n a i s e c v r e s t h g e r f i r o f n o i l l i m 9 3 2 $ S U , l a o c r o f n o i l l i m 2 9 3 $ S U , i a n m u a l r o f n o i l l i m 2 $ S U , i m u n m u a l i r o f n o i l l i m 7 5 $ S U f o e s i r p m o c d o s l i s e c v r e s d n a s t c u d o r p y t r a p d r i h T ) 4 ( . s n o i t a t e r p r e t n i d n a s d r a d n a t s w e N 3 e t o n o t r e f e R . ) e s n e p x e e t a r a p e s a s a d e d u c n l i s e g r a h c g n n ﬁ e r d n a i t n e m t a e r t h t i i w s s a b s s o r g a n o d e s n g o c e r i l y s u o v e r p i ( s e g r a h c g n n ﬁ e r d n a i t n e m t a e r t f o t e n d e t n e s e r p s i s r e m o t s u c m o r f e u n e v e R . s n o i t a t e r p r e t n i d n a s d r a d n a t s w e N 3 e t o n o t r e f e R . s t c a r t n o c d e c i r p y l l i i a n o s v o r p n o s t n e m e v o m e u a v l r i a f o t s e t a e r l i y l t n a n m o d e r p e u n e v e r r e h t O ) 2 ( ) 3 ( l i a c n a n ﬁ i r e h t o n a t r e c d n a l s e c n a a b x a t , s e i t i l i b a i l g n i r a e b t s e r e t n i , h s a c , s t n e m t s e v n i d e t n u o c c a i y t i u q e f o t n u o m a g n y r r a c e h t e d u c x e y l t n a n m o d e r p h c h w s e i t i l i l i i b a i l d n a s t e s s a g n i t a r e p o t n e s e r p e r t n e m g e s g n i t a r e p o h c a e r o f s e i t i l i b a i l d n a s t e s s a l a t o T . s t e s s a ) 8 ( . i I T B E g n y l r e d n U o t s t n e m t s u d a j i s g n n r a e f o s t c a p m i e h t s e d u c n l i s t n e m t s e v n i d e t n u o c c a y t i u q e f o ) s s o l ( / t ﬁ o r p f o e r a h S . e r u t i d n e p x e n o i t a r o p x e d e s l i l a t i p a c d n a i l s e b g n a t n i f o e s a h c r u p e h t l s e d u c x e e r u t i d n e p x e l a t i p a C . s t n e m t s u d a j i s g n n r a E ) i ( ) ( b 4 e t o n o t r e f e R ) 5 ( ) 6 ( ) 7 ( . l s a i r e t a m w a r i m u n m u a l i r o f n o i l l i m ) 1 $ S U ( d n a i s e c v r e s t h g e r f i r o f n o i l l i m ) 5 $ S U ( , l a o c r o f n o i l l i m 9 $ S U , i a n m u a l r o f n o i l l i m 2 $ S U , i m u n m u a l i r o f l i n f o e s i r p m o c i s e c v r e s d n a SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 87 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR - 7 6 8 2 8 6 6 , 9 4 5 7 , 6 1 5 2 , ) 2 4 7 ( 4 7 7 1 , 6 9 2 1 , ) 8 3 ( 5 2 1 9 4 4 7 7 1 , ) 3 2 1 ( ) 4 2 3 ( 7 2 3 1 , 5 2 3 3 1 , 0 4 0 3 4 7 9 6 3 3 1 5 1 , 4 2 4 4 , ) 0 0 6 1 , ( ) 3 ( ) 4 1 ( ) 7 1 6 1 , ( ) 8 3 4 ( 8 8 ) 0 5 3 ( ) 8 3 8 ( 1 - 7 8 4 ) 0 5 3 ( ) 1 ( ) 5 6 ( 4 8 6 ) 7 6 5 ( ) 7 4 5 ( p u o r G ) 1 ( t n e m t s u d a j ) 6 3 ( ) 7 4 ( ) 9 8 ( ) 9 2 ( ) 9 5 ( ) 5 6 1 ( ) 0 0 1 ( ) 5 0 1 ( 3 8 1 0 2 1 6 8 1 1 5 6 5 8 1 8 2 1 6 8 1 2 5 6 ) 2 6 ( ) 6 5 ( ) 0 2 ( ) 2 ( ) 8 ( 5 2 - - - - - - - - ) 1 ( ) 7 ( - - - 1 ) 7 7 ( ) 6 5 ( ) 4 3 ( 6 7 2 6 3 1 3 7 2 6 3 1 - - 3 - - - 9 9 9 9 - - - - 0 7 8 ) 9 4 7 ( 1 2 1 ) 4 6 ( 4 8 5 9 5 5 - - 4 8 5 0 3 2 - - 9 5 5 9 0 2 9 8 4 - 4 1 3 0 5 5 1 2 - - 1 1 1 1 , 0 1 7 - - 6 8 6 3 0 1 - - 6 6 3 1 , 3 5 3 - - 1 5 5 2 9 1 - - 9 2 6 3 3 1 1 1 1 1 , 6 8 6 6 6 3 1 , 1 5 5 9 2 6 3 8 5 1 , - - 3 8 5 1 , 3 7 4 1 , 5 8 2 8 8 5 ) 2 7 ( ) 6 6 1 ( 3 1 2 2 2 4 3 1 2 3 2 4 - - - ) 1 ( - - - 4 2 7 9 4 7 l y e s r o W i a n m u A l i l l n o i t a r o p x e g n d u c x e n o i t c u d o r p p u o r G d e s n e p x e n o i t a r o p x E l d e s n e p x e n o i t a s i t r o m a d n a n o i t a c e r p e D i i I T B E g n y l r e d n U I A D T B E g n y l r e d n U i e u n e v e r t n e m g e s - r e t n I e u n e v e r l a t o T : i g n s i r p m o C ) ( i 3 s e c v r e s d n a s t c u d o r p y t r a p d r i h T n o i t c u d o r p p u o r G 8 1 0 2 e n u J 0 3 M $ S U ) ( 2 e u n e v e R ) ( i 3 s e c v r e s d n a s t c u d o r p y t r a p d r i h T d e t n u o c c a y t i u q e f o ) s s o l ( / t ﬁ o r p f o e r a h S ) ( 4 s t n e m t s e v n i ) 0 0 1 ( 3 8 1 0 2 1 6 8 1 1 5 6 ) 2 6 ( 6 7 2 6 3 1 9 9 3 1 2 2 2 4 i I T B E g n y l r e d n U t s o c e c n a n ﬁ t e N 0 2 2 - 9 3 2 4 , 9 6 6 1 , 3 1 5 - 0 5 4 0 4 2 9 2 2 - 4 6 7 3 1 2 - - 7 1 6 9 4 9 9 1 1 8 4 - 6 9 5 7 0 3 7 9 8 1 7 4 2 5 5 6 1 , - 4 6 1 2 1 6 3 0 1 , 9 5 0 1 , - - 2 1 6 5 7 2 1 1 - - 0 1 5 8 6 2 3 1 - - 8 2 5 0 3 7 0 5 1 , 1 2 5 - 8 8 4 6 1 5 3 , s t n e m t s e v n i d e t n u o c c a y t i u q E e r u t i d n e p x e n o i t a r o p x E l ) 6 ( e r u t i d n e p x e l a t i p a C ) 7 ( s t e s s a l a t o T x a t r e t f a ) s s o l ( / t ﬁ o r P ) ( j 5 s t n e m t s u d a s g n n r a E i i s g n n r a e g n y l r e d n U i t ﬁ e n e b / ) e s n e p x e ( x a t e m o c n I ) 7 ( s e i t i l i b a i l l a t o T d e t a c o l l a n u a r r a w a l l I y r o t u t a t S / s m e t i o r r e C a c i r f A h t u o S a i l a r t s u A l i a c g r u l l a t e M a c i r f A h t u o S l i z a r B l a z o M e d s i l l i H n o i t a n m i i l e n o t g n n n a C i o s o t a M ) 1 ( e s e n a g n a M ) 1 ( e s e n a g n a M l a o C l a o C y g r e n E i a n m u A l i i m u n m u A l i i m u n m u A l d n a p u o r G ) d e u n i t n o c ( s t l u s e r t n e m g e S ) b ( ) D E U N T N O C I ( I N O T A M R O F N I T N E M G E S . 4 88 s n o i t a r e p o e s e n a g n a m e h T . e c n a m r o f r e p r i e h t s s e s s a o t t n e m e g a n a m s p u o r G e h t ’ y b d e s u e r u s a e m e h t s i i h c h w , i s s a b n o i t a d i l o s n o c l a n o i t r o p o r p a n o d e t n e s e r p s i d n a s n o i t a r e p o e s e n a g n a m e h t n i t s e r e t n i ’ s p u o r G e h t s t c e ﬂ e r n o i t a m r o f n i t n e m g e s e h T ) 1 ( . n o i t i s o p g n i t n u o c c a y t i u q e e h t o t n o i t a d i l o s n o c l a n o i t r o p o r p e h t s e l i c n o c e r n m u o c l t n e m t s u d a j y r o t u t a t s e h T . s t n e m e t a t s l i a c n a n ﬁ d e t a d i l o s n o c e h t n i d e t n u o c c a y t i u q e e r a f o n o i t a t n e s e r P . s t n e m e v o m e c i r p l i i a n o s v o r p e s o c s d d n a l i t u o e t a r a p e s o t 8 1 1 B S A A r e d n u t n e m e r i u q e r o n s a w e r e h t 8 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o F . i d e s n g o c e r s i e u n e v e r e t a d e h t t a d e c i r p y l l i i a n o s v o r p e b y a m n o i t c u d o r p p u o r G f o n o i t r o p A ) 2 ( l i a c n a n ﬁ i r e h t o n a t r e c d n a l s e c n a a b x a t , s e i t i l i b a i l g n i r a e b t s e r e t n i , h s a c , s t n e m t s e v n i d e t n u o c c a i y t i u q e f o t n u o m a g n y r r a c e h t e d u c x e y l t n a n m o d e r p h c h w s e i t i l i l i i b a i l d n a s t e s s a g n i t a r e p o t n e s e r p e r t n e m g e s g n i t a r e p o h c a e r o f s e i t i l i b a i l d n a s t e s s a l a t o T . s t e s s a ) 7 ( . l s a i r e t a m w a r i m u n m u a l i r o f n o i l l i m 1 $ S U d n a i s e c v r e s t h g e r f i r o f n o i l l i m ) 1 $ S U ( , l a o c r o f n o i l l i m 2 1 $ S U , i a n m u a l r o f n o i l l i m 2 $ S U , i m u n m u a l i r o f n o i l l i m 1 1 $ S U f o e s i r p m o c i s e c v r e s d n a s t c u d o r p . i I T B E g n y l r e d n U o t s t n e m t s u d a j i s g n n r a e f o s t c a p m i e h t s e d u c n l i s t n e m t s e v n i d e t n u o c c a y t i u q e f o ) s s o l ( / t ﬁ o r p f o e r a h S . e r u t i d n e p x e n o i t a r o p x e d e s l i l a t i p a c d n a i l s e b g n a t n i f o e s a h c r u p e h t l s e d u c x e e r u t i d n e p x e l a t i p a C . s t n e m t s u d a j i s g n n r a E ) i ( ) ( b 4 e t o n o t r e f e R ) 4 ( ) 5 ( ) 6 ( y t r a p d r i h t n o T B E g n y l r e d n U I i . l s a i r e t a m w a r i m u n m u a l i r o f n o i l l i m 4 2 1 $ S U d n a i s e c v r e s t h g e r f i r o f n o i l l i m 8 9 1 $ S U , l a o c r o f n o i l l i m 0 9 2 $ S U , i a n m u a l r o f n o i l l i m 9 4 $ S U , i m u n m u a l i r o f n o i l l i m 6 0 2 $ S U . s e g r a h c g n n ﬁ e r d n a i t n e m t a e r t f o s s o r g s i e u n e v e r f o e s i r p m o c d o s l i s e c v r e s d n a s t c u d o r p y t r a p d r i h T ) 3 ( SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR 4. SEGMENT INFORMATION (CONTINUED) (ii) Signiﬁ cant items (b) Segment results (continued) (i) Earnings adjustments The following table shows earnings adjustments in determining Underlying earnings: Signiﬁ cant items are those items, not separately identiﬁ ed in note (4)(b)(i) Earnings adjustments, where their nature and amount is considered material to the consolidated ﬁ nancial statements. There were no such items included within the Group’s (income)/ expense for the year ended 30 June 2019. US$M Adjustments to Underlying EBIT Signiﬁ cant items(1) Exchange rate (gains)/losses on restatement of monetary items(2) Impairment losses(2)(3) Fair value (gains)/losses on non-trading derivative instruments and other investments(2)(4)(5) Major corporate restructures(2)(6) Earnings adjustments included in proﬁ t/(loss) of equity accounted investments(7)(8) Total adjustments to Underlying EBIT Adjustments to net ﬁ nance cost Exchange rate variations on net debt Total adjustments to net ﬁ nance cost Adjustments to income tax expense Tax eff ect of signiﬁ cant items(1) Tax eff ect of other earnings adjustments to Underlying EBIT(9) Tax eff ect of earnings adjustments to net ﬁ nance cost Exchange rate variations on tax balances Total adjustments to income tax expense Total earnings adjustments FY19 FY18 Year ended 30 June 2018 US$M Gross Tax Net Unwind of the investment in Dreamvision(1)(2) Total signiﬁ cant items (31) (31) 1 1 (30) (30) (1) Recognised in other income in the Consolidated Income Statement. (2) Attributable to Group and unallocated items. Unwind of the investment in Dreamvision The Group’s investment in Dreamvision Investments 15 (RF) (Pty) Ltd (Dreamvision) originated in 2006 through the formation of a Broad-Based Black Economic Empowerment (B-BBEE) transaction. The transaction contained a lock-in period which expired in November 2016 and the process to unwind the investment was triggered. Consequently, the Group elected to receive shares in Exxaro Resources Limited in exchange for its shareholding in Dreamvision. The net valuation gain on the available for sale investment in Dreamvision was transferred from the ﬁ nancial assets reserve and recognised in the Consolidated Income Statement. - 3 504 35 28 (17) 553 (34) (34) - 56 10 18 84 603 (31) (15) - 73 58 (30) 55 (23) (23) 1 (34) 7 (11) (37) (5) (1) Refer to note 4(b)(ii) Signiﬁ cant items. (2) Recognised in expenses excluding net ﬁ nance cost in the Consolidated Income Statement. Refer to note 5 Expenses. (3) Relates to impairment on property, plant and equipment included in the South Africa Energy Coal segment. Refer to note 13 Impairment of non-ﬁ nancial assets. (4) Primarily relates to US$30 million (FY18: US$57 million) included in the Hillside Aluminium segment. (5) The investment in unit trusts held by the South32 South Africa Energy Coal Rehabilitation Trust Fund does not meet the deﬁ nition of an equity instrument under AASB 9. These investments are therefore classiﬁ ed as investments held at FVTPL (FY18: Available for sale). (6) Primarily relates to US$24 million included in the Hillside Aluminium segment (FY18: primarily related to US$12 million included in the Illawarra Metallurgical Coal segment and US$45 million included in Group and unallocated items). (7) Recognised in share of proﬁ t/(loss) of equity accounted investments in the Consolidated Income Statement. Refer to note 27 Equity accounted investments. (8) Relates to (US$17) million (FY18: (US$6) million) included in the Australia Manganese segment and nil (FY18: (US$24) million) included in the South Africa Manganese segment. (9) Primarily includes net US$74 million (FY18: nil) relating to impairment losses in the South Africa Energy Coal segment. Deferred tax assets of US$99 million (FY18: nil) were derecognised as utilisation of the future tax beneﬁ ts is no longer considered probable. Of the US$132 million (FY18: nil) tax eff ect of the impairment loss, a deferred tax asset of US$25 million has been recognised with the balance of US$107 million not recognised. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 89 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR 4. SEGMENT INFORMATION (CONTINUED) (c) Geographical information The geographical information below analyses Group revenue and non-current assets by location. Revenue is presented by the geographical location of customers and non-current assets are presented by the geographical location of the operations. Revenue from external customers Non-current assets US$M Australia China India Italy Japan Middle East Netherlands North America Other Asia Rest of Europe Singapore South America South Korea Southern Africa Switzerland United Arab Emirates Unallocated assets(1) Total (1) Primarily comprises of other ﬁ nancial assets and deferred tax assets. 5. EXPENSES US$M Changes in inventories of ﬁ nished goods and work in progress Raw materials and consumables used Wages, salaries and redundancies(1) Pension and other post-retirement obligations External services (including transportation) Third party commodity purchases Depreciation and amortisation Net foreign exchange (gains)/losses Fair value (gains)/losses on derivative instruments and other investments(2) Government and other royalties paid and payable Exploration and evaluation expenditure incurred and expensed Impairments of property, plant and equipment Operating lease rentals All other operating expenses Total expenses FY19 FY18 601 438 529 188 406 182 437 325 257 549 1,090 48 199 1,214 511 300 - 740 373 487 313 467 243 405 354 159 562 1,076 26 160 1,248 648 288 - 7,274 7,549 Note 11, 12 11, 13 FY19 5,671 FY18 5,454 - - - - - - 1,777 - - 91 1,191 - 2,155 - - 429 11,314 FY19 (96) 2,297 969 77 1,274 801 757 3 35 181 46 504 46 198 7,092 - - - - - - - - - 94 1,300 - 2,594 - - 870 10,312 FY18 (9) 2,341 1,008 79 1,120 842 742 (15) 76 147 38 - 47 161 6,577 (1) (2) Includes earnings adjustments of US$28 million (FY18: US$58 million). Refer to note 4(b)(i) Earnings adjustments. Includes fair value (gains)/losses on non-trading derivative instruments and other investments of US$35 million (FY18:US$73 million). Refer to note 4(b)(i) Earnings adjustments. 90 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR 6. TAX Income tax expense comprises current and deferred tax and is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised directly in the Consolidated Statement of Comprehensive Income. (a) Income tax expense US$M Current income tax expense/(beneﬁ t) Deferred income tax expense/(beneﬁ t) Total income tax expense/(beneﬁ t) Income tax expense/(beneﬁ t) FY19 FY18 313 101 414 333 (46) 287 Income tax expense/(beneﬁ t) for the period is the tax payable on the current period’s taxable income/(loss) based on the applicable income tax rate for each jurisdiction adjusted for changes in deferred tax assets and liabilities attributable to temporary diff erences and to unused tax losses. Current tax is calculated using the tax rates enacted or substantively enacted at period end, and includes any adjustment to tax payable in respect of previous years. (b) Reconciliation of prima facie tax expense to income tax expense FY19 % US$M FY18 % (Proﬁ t)/loss before tax Deduct: Proﬁ t from equity accounted investments (Proﬁ t)/loss subject to tax Income tax on proﬁ t/(loss) at standard rate of 30 per cent Tax rate diff erential on non Australian income Exchange variations and other translation adjustments Withholding tax on distributed earnings Derecognition of future tax beneﬁ ts Future tax beneﬁ ts not recognised on impairments Change in tax rates Resolution of pre-demerger tax disputes Foreign exploration Other (803) (467) (336) 101 61 18 8 111 107 (5) - 7 6 (30.0) (18.2) (5.4) (2.4) (33.1) (31.8) 1.5 - (2.1) (1.8) Total income tax expense/(beneﬁ t) (123.3) 414 (30.0) 0.3 1.0 (1.1) (1.3) - 1.4 4.1 (0.5) (0.1) (26.2) US$M (1,619) (521) (1,098) 329 (3) (11) 12 14 - (15) (45) 5 1 287 When equity accounted investments are included in the proﬁ t before tax used to calculate the Group’s eff ective tax rate, the rate drops from (123.3) per cent to (51.6) per cent (FY18: (17.7) per cent). Proﬁ t from equity accounted investments has been excluded from eff ective tax rate calculations for the Group to enable an accurate comparison of accounting proﬁ t to income tax expense. Proﬁ t from equity accounted investments has been taxed by companies other than South32 Limited, being the companies whose results are disclosed as equity accounted investments in the consolidated ﬁ nancial statements. Refer to note 27 Equity accounted investments for further details of the Group’s equity accounted investments. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 91 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR 6. TAX (CONTINUED) (c) Movement in deferred tax balances The composition of the Group’s net deferred tax asset and liability recognised in the Consolidated Balance Sheet and the deferred tax expense charged/(credited) to the Consolidated Income Statement is as follows: US$M Type of temporary diff erence Depreciation Employee beneﬁ ts Closure and rehabilitation Other provisions Deferred charges Non tax-depreciable fair value adjustments, revaluations and mineral rights Tax-eff ected losses Brazil Alumina incentives(1) Finance leases Other Total Deferred tax assets Deferred tax liabilities Deferred tax charged/ (credited) to the Consolidated Income Statement FY19 FY18 FY19 FY18 FY19 FY18 23 35 204 3 200 77 107 8 (161) (179) (121) (125) 6 - 159 7 155 1 - 168 (12) 245 (354) (384) 12 46 23 - (36) 51 (65) 2 (13) (334) 14 34 18 - (54) 67 (113) 2 (29) (445) 148 25 (109) - (18) (4) 11 30 10 8 101 - (2) (11) 41 (1) (77) 34 7 13 (50) (46) (1) Our Brazilian subsidiary has received a 75 per cent corporate income tax deferral due to reinvestment of capital in the North east region. The tax is deferred until earnings are repatriated from Brazil. (d) Unrecognised deferred tax assets and liabilities The composition of the Group’s unrecognised deferred tax assets and liabilities is as follows: US$M FY19 FY18 Unrecognised deferred tax assets Tax losses(1) Other deductible temporary diff erences Total unrecognised deferred tax assets Unrecognised deferred tax liabilities Taxable temporary diff erences associated with investments and undistributed earnings in subsidiaries Total unrecognised deferred tax liabilities (1) Represents tax losses that have no expiry. 36 1,782 1,818 37 1,572 1,609 (42) (42) (50) (50) Deferred tax is provided using the balance sheet liability method, providing for the tax eff ect of temporary diff erences between the carrying amount of assets and liabilities for ﬁ nancial reporting purposes and the amounts used for tax assessment or deduction purposes. The tax eff ect of certain temporary diff erences is not recognised, principally with respect to: ■ ■ Temporary diff erences arising on the initial recognition of assets or liabilities (other than those arising in a business combination or in a manner that initially impacted accounting or taxable proﬁ t); Temporary diff erences relating to investments and undistributed earnings in subsidiaries, joint ventures and associates to the extent that the Group is able to control its reversal and it is probable that it will not reverse in the foreseeable future; and ■ Goodwill. To the extent that an item’s tax base is solely derived from the amount deductible under capital gains tax legislation, deferred tax is determined as if such amounts are not deductible in determining future assessable income. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁ ts will be available against which the asset can be utilised. Deferred tax assets are reviewed at each balance sheet date and amended to the extent that it is no longer probable that the related tax beneﬁ t will be realised. Deferred tax assets and liabilities are off set when they relate to income taxes levied by the same tax authority and the Group has both the right and the intention to settle its current tax assets and liabilities on a net or simultaneous basis. 92 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR 7. DIVIDENDS US$M FY19 FY18 Prior year ﬁ nal dividend(1) Interim dividend(2) Special dividend(2) Total dividends declared and paid during the year 316 256 85 657 333 221 154 708 (1) On 23 August 2018, the Directors resolved to pay a fully franked ﬁ nal dividend of US 6.2 cents per share (US$317 million) in respect of the 2018 ﬁ nancial year. The dividend was paid on 11 October 2018. The ESOP Trusts received dividends from South32 Limited of US$1 million, therefore reducing the dividends paid externally to US$316 million. (2) On 14 February 2019, the Directors resolved to pay a fully franked interim dividend of US 5.1 cents per share (US$258 million) in respect of the 2019 half year and a fully franked special dividend of US 1.7 cents per share (US$86 million). The dividends were paid on 4 April 2019. The ESOP Trusts received dividends from South32 Limited of US$2 million (comprising of US$1 million for the interim dividend and US$1 million for the special dividend) and a total of 7,486,555 shares were bought back between the declaration and ex-dividend dates, therefore reducing the interim dividend paid externally to US$256 million and special dividend paid externally to US$85 million. Franking Account US$M Franking credits at the beginning of the ﬁ nancial year Credits arising from tax paid/payable by South32 Limited(1) Credits arising from the receipt of franked dividends Utilisation of credits arising from the payment of franked dividends Total franking credits available at the end of ﬁ nancial year(2) FY19 FY18 149 237 152 184 136 100 (277) (271) 261 149 (1) Includes the payment of the Australian FY19 income tax liability of US$98 million due in December 2019. (2) The payment of the ﬁ nal franked FY19 dividend declared after 30 June 2019 will decrease the franking account balance by US$60 million. Refer to note 33 Subsequent events. 6. TAX (CONTINUED) (e) Tax consolidation South32 Limited and its 100 per cent owned Australian resident subsidiaries have formed a tax consolidated group with eff ect from 25 May 2015. South32 Limited is the head entity of the tax consolidated group. Members of the group have entered into a tax sharing agreement in order to allocate income tax expense to the wholly owned subsidiaries on a stand-alone basis. The tax sharing arrangement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. The possibility of such a default is considered remote at the date of this report. Members of the tax consolidated group have also entered into a tax funding agreement. The group has applied its allocation approach in determining the appropriate amount of current taxes to allocate to members of the tax consolidated group. The tax funding agreement provides for each member of the tax consolidated group to pay or receive a tax equivalent amount to or from the head entity in accordance with their notional current tax liability or current tax asset. Such amounts are reﬂ ected in amounts receivable from or payable to the head entity in their accounts and are settled as soon as practicable after lodgement of the consolidated return and payment of the tax liability. Key estimates, assumptions and judgements Deferred tax Judgement is required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised in the Consolidated Balance Sheet. Deferred tax assets are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufﬁ cient future taxable proﬁ ts. Deferred tax liabilities arising from temporary diff erences in investments, caused principally by retained earnings held in foreign tax jurisdictions, are recognised unless repatriation of retained earnings can be controlled and are not expected to occur in the foreseeable future. Assumptions about the generation of future taxable proﬁ ts and repatriation of retained earnings depend on management’s estimates of future cash ﬂ ows. These depend on estimates of future production and sales volumes, commodity prices, reserves, operating costs, closure and rehabilitation costs, capital expenditure, dividends and other capital management transactions. Uncertain tax matters Judgements are required about the application of the inherently complex income tax legislation in Colombia, Brazil and South Africa. These judgements are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the Consolidated Balance Sheet and the amount of other tax losses and temporary diff erences not yet recognised. Where the ﬁ nal tax outcomes are diff erent from the amounts that were initially recorded, these diff erences impact the current and deferred tax balances in the period in which the determination is made. Measurement of uncertain tax and royalty matters considers a range of possible outcomes, including assessments received from tax authorities. Where management is of the view that potential liabilities have a low probability of crystallising, or it is not possible to quantify them reliably, they are disclosed as contingent liabilities. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 93 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – RESULTS FOR THE YEAR NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES FY19 FY18 572 36 280 888 136 33 121 290 545 27 254 826 67 38 143 248 8. EARNINGS PER SHARE Basic earnings per share (EPS) amounts are calculated based on proﬁ t attributable to equity holders of South32 Limited and the weighted average number of shares outstanding during the year. Dilutive EPS amounts are calculated based on proﬁ t attributable to equity holders of South32 Limited and the weighted average number of shares outstanding after adjustment for the eff ects of all dilutive potential shares. The following reﬂ ects the proﬁ t/(loss) and share data used in the basic and diluted EPS computations: This section shows the assets used to generate the Group’s trading performance and the liabilities incurred. Liabilities relating to the Group’s ﬁ nancing activities are addressed in the capital structure and ﬁ nancing section, notes 16 to 20. 9. TRADE AND OTHER RECEIVABLES US$M Current Trade receivables(1) Loans to equity accounted investments(1)(2) Proﬁ t/(loss) attributable to equity holders US$M FY19 FY18 Other receivables(1) Proﬁ t/(loss) attributable to equity holders of South32 Limited (basic) Proﬁ t/(loss) attributable to equity holders of South32 Limited (diluted) Weighted average number of shares Million Basic earnings per share denominator(1) Shares contingently issuable under employee share ownership plans(2)(3) Diluted earnings per share denominator 389 1,332 389 1,332 FY19 5,048 FY18 5,159 57 80 Total current trade and other receivables Non-current Loans to equity accounted investments(1)(2) Interest bearing loans receivable from joint operations Other receivables Total non-current trade and other receivables 5,105 5,239 doubtful debts of US$5 million). (2) Refer to note 30 Related party transactions. (1) Net of allowances for expected credit losses of US$7 million (FY18: Provision for (1) The basic EPS denominator is the aggregate of the weighted average number of shares after deduction of the weighted average number of Treasury shares outstanding and shares permanently cancelled through the on-market share buy- back during the period. (2) Included in the calculation of diluted EPS are shares contingently issuable under employee share ownership plans. (3) Diluted EPS calculation excludes 19,011,659 (FY18: 4,512,861) rights which are considered anti-dilutive and are subject to service and performance conditions. Trade receivables generally have terms of up to 30 days. Trade and other receivables, with the exception of provisionally priced contracts, are recognised initially at fair value and subsequently at amortised cost using the eff ective interest rate method, less an allowance for expected credit losses. Provisionally priced contracts included in trade receivables are measured at FVTPL. Earnings per share US cents Basic earnings per share Diluted earnings per share FY19 7.7 7.6 FY18 25.8 25.4 10. INVENTORIES US$M Current Raw materials and consumables Work in progress Finished goods Total current inventories Non-current Raw materials and consumables Work in progress Total non-current inventories FY19 FY18 366 347 239 952 41 27 68 399 320 167 886 46 30 76 Inventories carried at net realisable value as at 30 June 2019 was US$333 million (FY18: US$25 million). Inventory write-downs of US$17 million (FY18: US$20 million) were recognised in the year. Inventories are valued at the lower of cost and net realisable value. Cost is determined primarily on the basis of average costs. For processed inventories, cost is derived on an absorption costing basis. Cost comprises the cost of purchasing raw materials and the cost of production, including attributable overheads. In respect of minerals inventory, quantities are assessed primarily through surveys and assays. 94 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 11. PROPERTY, PLANT AND EQUIPMENT 30 June 2019 US$M Cost Land and buildings Plant and equipment Other mineral assets Assets under construction Exploration and evaluation At the beginning of the ﬁ nancial year 2,641 Additions(1) Foreign exchange movements in closure and rehabilitation provisions(2) Disposals Acquisitions of subsidiaries and jointly controlled entities(3) Transfers and other movements At the end of the ﬁ nancial year Accumulated depreciation and impairments 15,468 166 (57) (125) 12 379 2 - (4) 6 24 2,669 15,843 At the beginning of the ﬁ nancial year 1,620 9,820 Depreciation charge for the year Impairments for the year(4) Disposals At the end of the ﬁ nancial year Net book value at 30 June 2019(5) 79 - (4) 1,695 974 532 469 (125) 10,696 5,147 2,686 93 - (18) 1,738 2 4,501 1,496 128 35 (13) 1,646 2,855 335 595 - - 65 (403) 592 - - - - - 2 28 - - - (2) 28 - - - - - 592 28 (1) Plant and equipment additions of US$138 million (FY18: US$4 million) relate to capitalised closure and rehabilitation amounts as a result of the change in discount rate, refer to note 15 Provisions. (2) Refer to note 15 Provisions. (3) Refer to note 32 Acquisition of subsidiaries and jointly controlled operations. (4) Refer to note 13 Impairment of non-ﬁ nancial assets. (5) Plant and equipment includes assets held under ﬁ nance leases with a net book value of US$612 million (FY18: US$629 million). 30 June 2018 US$M Cost Land and buildings Plant and equipment Other mineral assets Assets under construction Exploration and evaluation At the beginning of the ﬁ nancial year 2,611 Additions Foreign exchange movements in closure and rehabilitation provisions Disposals Transfers and other movements At the end of the ﬁ nancial year Accumulated depreciation and impairments 15,219 163 2,649 118 (55) (46) 187 - (83) 2 - - (11) 41 2,641 15,468 2,686 At the beginning of the ﬁ nancial year 1,557 9,319 1,484 Depreciation charge for the year Disposals Transfers and other movements At the end of the ﬁ nancial year Net book value at 30 June 2018 73 (9) (1) 1,620 1,021 539 (39) 1 9,820 5,648 94 (82) - 1,496 1,190 252 312 - - (229) 335 - - - - - 335 2 2 - - (2) 2 - - - - - 2 Total 21,132 884 (57) (147) 1,821 - 23,633 12,936 739 504 (142) 14,037 9,596 Total 20,733 595 (55) (140) (1) 21,132 12,360 706 (130) - 12,936 8,196 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 95 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 11. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) (d) Other mineral assets Other mineral assets comprise: (a) Property, plant and equipment ■ Capitalised exploration, evaluation and development Property, plant and equipment is stated at cost less accumulated depreciation and impairment charges. Cost is the fair value of consideration given to acquire the asset at the time of its acquisition or construction and includes the direct cost of bringing the asset to the location and condition necessary for operation and its estimated future cost of closure and rehabilitation. Finance leases Assets held under lease, which result in the Group receiving substantially all the risks and rewards of ownership of the asset (ﬁ nance leases), are capitalised at the lower of the fair value of the property, plant and equipment or the estimated present value of the minimum lease payments. The corresponding ﬁ nance lease obligation is included within interest bearing liabilities. The interest component is charged to ﬁ nance expenses over the lease term to reﬂ ect a constant rate of interest on the remaining balance of the obligation. expenditure (including development stripping) for properties now in production; ■ Mineral rights acquired; and ■ Capitalised production stripping (as described below in ‘overburden removal costs’). Overburden removal costs The process of removing overburden and other mine waste materials to access mineral deposits is referred to as stripping. In open-pit mining, stripping costs are accounted for separately for each component of an ore body. A component is a speciﬁ c section within an ore body that is made more accessible by the stripping activity. The identiﬁ cation of components is dependent on the mine plan and will often comprise a separate pushback or phase identiﬁ ed in the plan. There are two types of stripping activity: ■ Development stripping is the initial overburden removal during Leased assets are pledged as security for the related ﬁ nance lease and hire purchase liabilities. the development phase to obtain access to a mineral deposit that will be commercially produced; and (b) Assets under construction All assets included in assets under construction are reclassiﬁ ed to other categories in property, plant and equipment when the asset is available and ready for use in the location and condition necessary for it to be capable of operating in the manner intended. (c) Exploration and evaluation expenditure Exploration and evaluation expenditure (including amortisation of capitalised licence and lease costs) is charged to the Consolidated Income Statement as incurred except in the following circumstances, in which case the expenditure may be capitalised: ■ ■ The exploration and evaluation activity is within an area of interest which was previously acquired as an asset acquisition or in a business combination and measured at fair value on acquisition or; and The existence of a commercially viable mineral deposit has been established. Capitalised exploration and evaluation expenditure considered to be a tangible asset is recorded as a component of property, plant and equipment at cost less impairment charges. Otherwise, it is recorded as an intangible asset (such as certain licence and lease arrangements). In determining whether the purchase of an exploration licence or lease is an intangible asset or a component of property, plant and equipment, consideration is given to the substance of the item acquired and not its legal form. Licences or leases purchased which allow exploration over an extended period of time meet the deﬁ nition of an intangible exploration lease asset where they cannot be reasonably associated with a known minerals resource. ■ Production stripping is the interburden removal during the normal course of production activity. Production stripping commences after the ﬁ rst saleable minerals have been extracted from the component. Development stripping costs are capitalised as a development stripping asset when: ■ ■ It is probable that future economic beneﬁ ts associated with the asset will ﬂ ow to the entity; and The costs can be measured reliably. Production stripping can give rise to two beneﬁ ts, being the extraction of ore in the current period and improved access to the ore body component in future periods. To the extent that the beneﬁ t is the extraction of ore, the stripping costs are recognised as an inventory cost. To the extent the beneﬁ t is improved access to future ore, the stripping costs are recognised as a production stripping asset if the following criteria are met: ■ ■ ■ It is probable that the future economic beneﬁ t (improved access to ore) will ﬂ ow to the entity; The component of the ore body for which access has been improved can be identiﬁ ed; and The costs relating to the stripping activity can be measured reliably. Production stripping costs are allocated between the inventory produced and the production stripping asset using a life-of- component waste to ore (or mineral contained) strip ratio. When the current strip ratio is greater than the life-of-component ratio a portion of the stripping costs is capitalised to the production stripping asset. The development and production stripping assets are depreciated on a units of production basis based on the Proved and Probable Ore Reserves of the relevant components. 96 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 11. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) (e) Depreciation and amortisation The carrying amounts of property, plant and equipment are depreciated to their estimated residual value over the estimated useful lives of the speciﬁ c assets concerned, or the estimated life of the associated mine or lease, if shorter. Estimates of residual values and useful lives are reassessed annually and any change in estimate is taken into account in the determination of remaining depreciation charges. Depreciation commences on the date of commissioning. The major categories of property, plant and equipment are depreciated on a units of production and/or straight-line basis using estimated lives indicated below. However, where assets are dedicated to a mine or lease and are not readily transferable, the below useful lives are subject to the lesser of the asset category’s useful life and the life of the mine or lease: Buildings Land Plant and equipment Mineral rights 25 to 50 years not depreciated 3 to 30 years straight-line based on Ore Reserves on a units of production basis Capitalised exploration, evaluation and development expenditure based on Ore Reserves on a units of production basis 12. INTANGIBLE ASSETS 30 June 2019 US$M Cost At the beginning of the ﬁ nancial year Additions At the end of the ﬁ nancial year Accumulated amortisation and impairments At the beginning of the ﬁ nancial year Amortisation charge for the year At the end of the ﬁ nancial year Net book value at 30 June 2019 30 June 2018 US$M Cost At the beginning of the ﬁ nancial year Additions Transfers and other movements At the end of the ﬁ nancial year Accumulated amortisation and impairments At the beginning of the ﬁ nancial year Amortisation charge for the year At the end of the ﬁ nancial year Net book value at 30 June 2018 (a) Goodwill Goodwill Other intangibles Total 193 - 193 54 - 54 139 261 30 291 179 18 197 94 454 30 484 233 18 251 233 Goodwill Other intangibles Total 193 - - 193 54 - 54 139 256 4 1 261 143 36 179 82 449 4 1 454 197 36 233 221 Where the fair value of consideration paid for a business combination exceeds the fair value of the Group’s share of the identiﬁ able net assets acquired, the diff erence is treated as purchased goodwill. Where the fair value of the Group’s share of the identiﬁ able net assets acquired exceeds the cost of acquisition, the diff erence is immediately recognised in the Consolidated Income Statement. Goodwill is not amortised, however, its carrying amount is assessed annually against its recoverable amount. (b) Other intangible assets Amounts paid for the acquisition of identiﬁ able intangible assets, such as software, licences and contract based intangible assets are capitalised at the fair value of consideration paid and are recorded at cost less accumulated amortisation and impairment charges. Identiﬁ able intangible assets with a ﬁ nite life are amortised on a straight-line basis over their expected useful life. The useful lives are as follows: Software and licences Contract based intangible assets 5 years up to 35 years The Group has no identiﬁ able intangible assets for which the expected useful life is indeﬁ nite. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 97 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 13. IMPAIRMENT OF NON-FINANCIAL ASSETS In testing for indications of impairment and performing impairment calculations, assets are considered as collective groups and referred to as cash generating units (CGUs). CGUs are the smallest identiﬁ able group of assets, liabilities and associated goodwill that generate cash inﬂ ows that are largely independent of the cash inﬂ ows from other assets or groups of assets. Formal impairment tests are carried out annually for CGUs containing goodwill. In addition, formal impairment tests are performed for all other CGUs when there is an indication of impairment. The Group uses discounted cash ﬂ ow valuations to assess all of its CGUs for impairment or impairment reversal indicators. For any resultant formal impairment testing, and for CGUs containing goodwill, the Group uses the higher of fair value less cost of disposal (FVLCD) and its value in use to assess the recoverable amount. If the carrying value of the CGU exceeds its recoverable amount, the CGU is impaired, and an impairment loss is charged to the Consolidated Income Statement. Previously impaired CGUs are reviewed for possible reversal of a previous impairment at each reporting date. Impairment reversals cannot exceed the carrying value that would have been determined (net of depreciation) had no impairment loss been recognised for the CGU. Goodwill is not subject to impairment reversal. The Group recorded the following impairments for the year ended 30 June: US$M Note FY19 FY18 Property, plant and equipment Total impairment 11 504 504 - - (a) Recognised impairment – 30 June 2019 The Group recognised impairments of property, plant and equipment for the separately identiﬁ able CGUs within South Africa Energy Coal (SAEC) for the year ended 30 June 2019. The Group received external indicative off ers for SAEC which, in combination with the market outlook for thermal coal demand and prices, informed the Group’s assessment of the recoverable amount for SAEC as a collective group of CGUs. The recoverable amount for SAEC is based on a FVLCD calculation and is categorised as a Level 3 fair value based on the inputs in the valuation technique (refer to note 19 Financial assets and ﬁ nancial liabilities). The Group impairment recognised for the year ended 30 June 2019 has been allocated to property, plant and equipment for the CGUs on a pro-rata basis: Year ended 30 June 2019 US$M Impairment recognised Recoverable amount WMC Klipspruit Khutala Other corporate assets Total 253 225 26 - 504 (318) 108 (23) 71 (162) (b) Impairment test for CGUs containing goodwill For the purpose of impairment testing, goodwill has been allocated to CGUs that are expected to beneﬁ t from the synergies of the business combination and which represent the level at which management will monitor and manage the goodwill. The carrying amount of goodwill has been allocated to the following CGU: US$M Note Hillside Aluminium Total goodwill 12 Hillside Aluminium FY19 139 139 FY18 139 139 The goodwill arose from the acquisition of Alusaf in Hillside Aluminium (Pty) Ltd and has been allocated to the Hillside Aluminium CGU which comprises the Hillside aluminium smelter. The recoverable amount of the Hillside Aluminium CGU was determined based on the FVLCD. The determination of FVLCD was most sensitive to: ■ Production volumes; ■ Aluminium and alumina prices; Foreign exchange rates; and ■ ■ Discount rate. Production volumes - estimated production volumes are based on the life of the smelter as determined by management as part of the long-term planning process. Production volumes are inﬂ uenced by production input costs such as electricity prices, jurisdiction based carbon pricing, and the selling price of aluminium. The recoverable amount is informed by near term future cash ﬂ ows that assume forecast thermal coal prices which are comparable to market consensus forecasts, and a forecast South African rand exchange rate which is aligned with forward market rates. It also assumes future production based on management’s short-term planning processes. Aluminium and alumina prices, and foreign exchange rates - key assumptions for aluminium and alumina prices are comparable to market consensus forecasts for each of the years of the life of operation. Foreign exchange rates are aligned with forward market rates in the short-run and thereafter are within the range published by market commentators. SAEC consists of the Khutala colliery (Khutala), an underground bord and pillar operation; the Klipspruit colliery (Klipspruit), a single dragline, multi seam open-cut mine that is combined with a truck and shovel mini pit; the Wolvekrans Middelburg Complex (WMC) and other SAEC corporate assets. The WMC consists of the Ifalethu colliery and Wolvekrans colliery, which are open-cut mines with a number of active pits, and are mined using draglines combined with truck and shovel operations. The long-run aluminium prices, alumina prices and foreign exchange rates used in the FVLCD determinations are within the range when compared with the following range of mid long-run prices published by market commentators: Mid long-run range FY19 FY18 Aluminium price (US$/tonne) 1,900 to 2,865 1,740 to 2,865 Alumina price (US$/tonne) 300 to 400 260 to 400 Foreign exchange rate (South African rand to US$) 12.8 to 15.0 11.4 to 16.1 98 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 13. IMPAIRMENT OF NON-FINANCIAL ASSETS (CONTINUED) (b) Impairment test for CGUs containing goodwill (continued) Discount rate - in determining the FVLCD, a real post-tax discount rate of 7.5 per cent (FY18: 8 per cent), and a country risk premium of up to 2 per cent (FY18: up to 2 per cent), are applied to the post-tax cash ﬂ ows expressed in real terms. The impairment test for the Hillside Aluminium CGU indicated that no impairment was required. At 30 June 2019 the carrying value approximates its recoverable amount. As such any material long-term unfavourable change in the aforementioned key assumptions could lead to the carrying value exceeding the recoverable amount. The relationships between each key assumption are complex, such that a change in one may cause a change in several other inputs. Key estimates, assumptions and judgements The impairment assessment requires management to make estimates and assumptions about expected production and sales volumes, commodity prices (considering current and historical prices, price trends and related factors), Ore Reserves, Mineral Resources, operating costs, closure and rehabilitation costs, future capital expenditure, allocation of corporate costs, global carbon pricing and, where relevant, speciﬁ c jurisdiction based carbon prices. These estimates and assumptions are subject to risk and uncertainty; hence there is a possibility that changes in circumstances will alter these projections, which may impact the recoverable amount of the assets. In such circumstances, some or all of the carrying amount of the assets may be further impaired or the impairment charge reversed with the impact recorded in the Consolidated Income Statement. The basis of key estimates and assumptions used in the assessment of impairment indicators are as follows: Future production Life of operation plans based on Proved and Probable Ore Reserve estimates, Mineral Resource (excluding Inferred Mineral Resources) estimates, economic life of smelters and reﬁ neries and, in certain cases, expansion projects, including future cost of production. Commodity prices Forward market and contract prices, and longer-term price protocol estimates. Exchange rates Discount rates Observable forward market foreign exchange rates. Cost of capital risk-adjusted and appropriate to the resource. Where impairment testing is undertaken, a range of external sources are considered as further input to the above assumptions. When assessing for impairment and impairment reversal indicators, the fundamental characteristics of previously impaired CGUs are relevant to their sensitivity to key estimates and assumptions. For previously impaired CGUs these include: ■ CGUs with higher operating margins and with life of operation plans longer than 10 years which are less sensitive to commodity prices and foreign exchange rates, for example Worsley Alumina; ■ CGUs with lower operating margins which are highly sensitive to movements in commodity prices and foreign exchange rates, for example the Wolvekrans Middelburg Complex, the Klipspruit colliery and South Africa Manganese; and ■ CGUs with higher operating margins and shorter life of operation plans and exposure to commodities that display greater price volatility, for example Australia Manganese. The operating assets for previously impaired CGUs are included in note 4(b) Segment results. Ore Reserve is the economically mineable part of the Measured and/or Indicated Mineral Resource that can be legally extracted, or where there is reasonable expectation that approvals for extraction will be granted, from the Group’s properties. In order to estimate Ore Reserves, consideration is required for a range of modifying factors, including mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental. When reporting Ore Reserves, the relevant studies, to at least a pre-feasibility level, must demonstrate that, at the time of reporting, extraction could be reasonably justiﬁ ed. Management will form a view of forecast sales prices, based on current and long-term historical average price trends. Estimating the quantity and/or grade of Mineral Resources requires the location, quantity, grade (or quality), continuity and other geological characteristics to be known, estimated or interpreted from speciﬁ c geological evidence and knowledge, including sampling in order to satisfy the requirement that there are reasonable prospects for eventual economic extraction. This process may require complex and difﬁ cult geological assessments to interpret the data. The Group reports Ore Reserves and Mineral Resources in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code 2012 Edition), and the Australian Securities Exchange (ASX) Listing Rules Chapter 5: Additional reporting on mining and oil and gas production and exploration activities. Because the economic assumptions used to estimate the Ore Reserves change from period to period, and because additional geological data are generated during the course of operations, estimates of the Ore Reserves and Mineral Resources may change from period to period. Changes in reported Ore Reserves may aff ect the Group’s ﬁ nancial results and ﬁ nancial position in a number of ways, including the following: ■ Asset recoverable amounts may be aff ected due to changes in estimated future cash ﬂ ows; ■ Depreciation, depletion and amortisation charged in the Consolidated Income Statement may change on the units of production basis, or where the useful economic lives of assets change; ■ Overburden removal costs recorded on the Consolidated Balance Sheet or charged to the Consolidated Income Statement may change with stripping ratios or on a units of production basis of depreciation; and ■ Decommissioning, closure and rehabilitation provisions may change where estimated Ore Reserves aff ect expectations about the timing or cost of these activities. The carrying amount of associated deferred tax assets may change due to changes in estimates of the likely recovery of the tax beneﬁ ts. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 99 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 14. TRADE AND OTHER PAYABLES US$M Current Trade creditors Other creditors Total current trade and other payables Non-current Other creditors Total non-current trade and other payables FY19 FY18 798 82 880 1 1 743 87 830 5 5 Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the ﬁ nancial year which were unpaid at the end of the ﬁ nancial year. These amounts are unsecured. Trade and other payables are included in current liabilities, except for those liabilities where payment is not due within 12 months from the reporting date, which are classiﬁ ed as non-current liabilities. Trade and other payables are stated at their amortised cost and are non-interest bearing. The carrying value of trade and other payables is considered to approximate fair value due to the short-term nature of the payables. Note FY19 FY18 15. PROVISIONS US$M Current Employee beneﬁ ts Closure and rehabilitation Other Total current provisions Non-current Employee beneﬁ ts Closure and rehabilitation Post-retirement employee beneﬁ ts Other Total non-current provisions 30 June 2019 US$M 22 Employee beneﬁ ts Closure and rehabilitation Post- retirement employee beneﬁ ts At the beginning of the ﬁ nancial year 211 1,672 90 Charge/(credit) for the year to the Consolidated Income Statement: Underlying Discounting Net interest expense Exchange rate variations Released during the year Amounts capitalised for change in costs and estimates Foreign exchange amounts capitalised Amounts capitalised from change in discount rate(1) Amounts taken to retained earnings Utilisation Acquisitions of subsidiaries and jointly controlled entities(2) At the end of the ﬁ nancial year 191 - - (9) (8) - - - - (182) - 203 12 103 - (8) (1) 26 (57) 138 - (32) 15 1,868 3 - 9 (4) - - - - 3 (9) - 92 199 54 59 312 4 1,814 92 15 205 80 75 360 6 1,592 90 17 1,925 1,705 Other 92 Total 2,065 30 - - - (3) - - - - (45) - 74 236 103 9 (21) (12) 26 (57) 138 3 (268) 15 2,237 (1) The Group has reviewed its discount rates applied to closure and rehabilitation provisions resulting in a decrease in one speciﬁ c country rate. The corresponding increase in the provision is capitalised as an asset or if applicable charged to the Consolidated Income Statement in the case of closed sites. The expected impact for the year ending 30 June 2020 is a decrease in ﬁ nance expenses of US$1 million. (2) Refer to note 32 Acquisition of subsidiaries and jointly controlled operations. 100 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES 15. PROVISIONS (CONTINUED) 30 June 2018 US$M Employee beneﬁ ts Closure and rehabilitation Post- retirement employee beneﬁ ts At the beginning of the ﬁ nancial year 212 1,565 96 Charge/(credit) for the year to the Consolidated Income Statement: Other 87 Total 1,960 79 - - - (2) (1) - - - - (73) 2 92 292 105 3 10 (29) (28) 160 (55) 4 (4) (351) (2) 2,065 208 - - - (8) (14) - - - - (187) - 211 3 105 3 - (15) (13) 160 (55) 4 - (82) (3) 1,672 2 - - 10 (4) - - - - (4) (9) (1) 90 material handling conducted as an integral part of a mining or production process, are not included in the provision. Costs arising from unforeseen circumstances, such as the contamination caused by unplanned discharges, are recognised as an expense and liability when the event gives rise to an obligation which is probable and capable of reliable estimation. The timing of the actual closure and rehabilitation expenditure is dependent upon a number of factors such as the life and nature of the asset, the operating licence conditions and the environment in which the mine operates. Expenditure may occur before and after closure and can continue for an extended period of time dependent on closure and rehabilitation requirements. Closure and rehabilitation provisions are measured at the expected value of future cash ﬂ ows, discounted to their present value and determined according to the probability of alternative estimates of cash ﬂ ows occurring for each operation. Discount rates used are risk-free interest rates speciﬁ c to the country in which the operations are located. Material changes in country speciﬁ c risk-free interest rates may aff ect the discount rates applied. Signiﬁ cant judgements and estimates are involved in forming expectations of future activities and the amount and timing of the associated cash ﬂ ows. When provisions for closure and rehabilitation are initially recognised, the corresponding cost is capitalised as an asset, representing part of the cost of acquiring the future economic beneﬁ ts of the operation. The capitalised cost of closure and rehabilitation activities is recognised in property, plant and equipment and depreciated accordingly. The value of the provision is progressively increased over time due to the eff ect of discounting unwind, creating an expense recognised in ﬁ nance expenses. Underlying Discounting Change in discount rate Net interest expense Exchange rate variations Released during the year Amounts capitalised for change in costs and estimates Foreign exchange amounts capitalised Amounts capitalised from change in discount rate Amounts taken to retained earnings Utilisation Transfers and other movements At the end of the ﬁ nancial year (a) Employee beneﬁ ts Liabilities for unpaid wages and salaries are recognised in other creditors. Current entitlements to annual leave and accumulating sick leave accrued for services up to the reporting date are recognised in the provision for employee beneﬁ ts and are measured at the amounts expected to be paid. Entitlements to non-accumulated sick leave are recognised when the leave is taken. The current liability for long service leave (for which settlement within 12 months of the reporting date cannot be deferred) is recognised in the current provision for employee beneﬁ ts and is measured in accordance with annual leave described above. The non-current liability for long service leave is recognised in the non-current provision for employee beneﬁ ts and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using corporate bond yields at the reporting date. (b) Closure and rehabilitation The mining, extraction and processing activities of the Group normally give rise to obligations for site closure or rehabilitation. Closure and rehabilitation works can include facility decommissioning and dismantling, removal or treatment of waste materials, site and land rehabilitation. Provisions for the cost of each closure and rehabilitation program are recognised at the time that environmental disturbance occurs. When the extent of disturbance increases over the life of an operation, the provision is increased accordingly. Costs included in the provision encompass all closure and rehabilitation activity expected to occur progressively over the life of the operation and at, or after, the time of closure, for disturbance existing at the reporting date. Routine operating costs that may impact the ultimate closure and rehabilitation activities, such as waste SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 101 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OPERATING ASSETS AND LIABILITIES NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 15. PROVISIONS (CONTINUED) (b) Closure and rehabilitation (continued) Closure and rehabilitation provisions are also adjusted for changes in costs and estimates. Those adjustments are accounted for as a change in the corresponding capitalised cost, except where a reduction in the provision is greater than the undepreciated capitalised cost of the related assets, in which case the capitalised cost is reduced to nil and the remaining adjustment is recognised ﬁ rst against other items in property, plant and equipment, and subsequently to the Consolidated Income Statement. In the case of closed sites, changes to estimated costs are recognised immediately in the Consolidated Income Statement. Changes to the capitalised cost result in an adjustment to future depreciation. Adjustments to the estimated amount and timing of future closure and rehabilitation cash ﬂ ows are a normal occurrence in light of the signiﬁ cant judgements and estimates involved. (c) Post-retirement employee beneﬁ ts This relates to the provision for post-employment deﬁ ned beneﬁ t pension plans and medical plans. Refer to note 22 Pension and other post-retirement obligations. Key estimates, assumptions and judgements The recognition of closure and rehabilitation provisions requires signiﬁ cant estimates and assumptions such as: requirements of the relevant legal and regulatory framework; the magnitude of possible contamination; the timing, extent, and cost of required closure and rehabilitation activity; and potential changes in climate conditions. These uncertainties may result in future actual expenditure diff ering from the amounts currently provided. The provision recognised for each site is periodically reviewed and updated based on the facts and circumstances available at the time. In addition to the uncertainties noted above, certain closure and rehabilitation activities may be subject to legal disputes and depending on the ultimate resolution of these issues, the ﬁ nal liability for such matters could vary. If the risk-free rate was decreased by 0.5 per cent, the provision would increase by US$255 million. This section outlines how the Group manages its capital and related ﬁ nancing activities. 16. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash at bank and on hand as well as short-term deposits. US$M Cash Short-term deposits Cash and cash equivalents(1)(2) Bank overdrafts (unsecured) FY19 497 911 1,408 (2) FY18 465 2,505 2,970 - Cash and cash equivalents, net of overdrafts 1,406 2,970 (1) Cash and cash equivalents include US$16 million (FY18: US$18 million) which is restricted by legal or contractual arrangements. (2) Cash and cash equivalents include US$299 million (FY18: US$321 million) consisting of short-term deposits and cash managed by the Group on behalf of its equity accounted investments. The corresponding amount payable is included in note 17 Interest bearing liabilities. 17. INTEREST BEARING LIABILITIES US$M Current Finance leases Unsecured loans from equity accounted investments(1) Unsecured other Total current interest bearing liabilities Non-current Finance leases Unsecured other Total non-current interest bearing liabilities FY19 FY18 12 299 2 313 531 60 591 12 321 - 333 558 38 596 (1) Refer to note 16 Cash and cash equivalents and note 30 Related party transactions. Bank overdrafts, bank loans and other borrowings are initially recognised at their fair value net of directly attributable transaction costs. Subsequent to initial recognition, interest bearing liabilities are measured at amortised cost using the eff ective interest rate method. Gains and losses are recognised in the Consolidated Income Statement when the liabilities are derecognised. Interest bearing liabilities are classiﬁ ed as current liabilities, except when the Group has an unconditional right to defer settlement for at least 12 months after the reporting date in which case the liabilities are classiﬁ ed as non-current. 102 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 17. INTEREST BEARING LIABILITIES (CONTINUED) 19. FINANCIAL ASSETS AND FINANCIAL (a) Reconciliation of movements in liabilities to cash ﬂ ows arising from ﬁ nancing activities Year ended 30 June 2019 US$M Finance leases Interest bearing liabilities At the beginning of the ﬁ nancial year 570 359 Changes from ﬁ nancing cash ﬂ ows: Net payment of ﬁ nance lease liabilities Net receipt/(repayment) of interest bearing liabilities Total changes from ﬁ nancing cash ﬂ ows The eff ect of changes in foreign exchange rates Increase/(decrease) in ﬁ nance leases and interest bearing liabilities Other changes: Interest expense Interest paid At the end of the ﬁ nancial year (11) - (11) (28) 12 47 (47) 543 - (23) (23) (4) 29 23 (23) 361 18. NET FINANCE COST US$M FY19 FY18 Finance expenses Interest on borrowings Finance lease interest Discounting on provisions and other liabilities Change in discount rate on closure and rehabilitation provisions Net interest expense on post- retirement employee beneﬁ ts Fair value change on ﬁ nancial assets Exchange rate variations on net debt Finance income Interest income Net ﬁ nance cost 23 47 18 52 103 105 - 9 3 (34) 151 67 84 3 10 3 (23) 168 68 100 LIABILITIES The Group has adopted AASB 9 with a date of initial application of 1 July 2018. The nature and impact of the key changes to the Group can be found in note 3 New standards and interpretations. (a) Financial risk management objectives and policies The Group is exposed to market, liquidity and credit risk. These risks are managed in accordance with the Group’s portfolio risk management strategy which supports the delivery of the Group’s ﬁ nancial targets while protecting its future ﬁ nancial security and ﬂ exibility by taking advantage of the natural diversiﬁ cation of the Group’s operations and activities. A Cash Flow at Risk (CFaR) framework is used to capture the beneﬁ ts of diversiﬁ cation and to measure the aggregate impact of ﬁ nancial risks on those ﬁ nancial targets. CFaR is measured on a portfolio basis and is deﬁ ned as the expected reduction from projected business plan cash ﬂ ows over a one-year horizon in a pessimistic case. Day to day ﬁ nancial risk management is delegated to the Chief Financial Ofﬁ cer. (i) Market risk Market risk is the risk that the fair value of future cash ﬂ ows of a ﬁ nancial instrument will ﬂ uctuate because of changes in market prices. Market risk comprises interest rate risk, foreign currency risk and other price risk, such as equity price risk and commodity price risk. Financial instruments aff ected by market risk include loans and borrowings, deposits, investments in equity instruments designated at FVOCI, other investments held at FVTPL and derivative ﬁ nancial instruments. Group activities expose it to market risks associated with movements in interest rates, foreign currencies and commodity prices. The Group manages ﬁ nancing costs, currency impacts, input costs and commodity prices on a ﬂ oating or index basis. This strategy gives rise to a risk of variability in earnings which is measured under the CFaR framework. In executing the strategy, ﬁ nancial instruments may be employed for risk mitigation purposes with a strict Board approved mandate, or to align the total Group exposure to the relevant index target in the case of commodity sales, operating costs or debt issuances. Interest rate risk The Group is exposed to interest rate risk on its cash and cash equivalents, trade and other receivables, embedded derivatives and interest bearing liabilities from the possibility that changes in interest rates will aff ect future cash ﬂ ows or the fair value of ﬁ nancial instruments. The Group had the following exposure to interest rate risk: Interest income or expense is recognised using the eff ective interest rate method. US$M Financial assets FY19 FY18 Cash and cash equivalents 1,392 2,902 Trade and other receivables Derivative contracts Financial liabilities Interest bearing liabilities Net exposure 141 113 43 143 (332) 1,314 (359) 2,729 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 103 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (a) Financial risk management objectives and policies (continued) Based on the Group’s net ﬁ nancial assets and liabilities as at 30 June, a weakening of the US dollar against these currencies as illustrated in the table below, with all other variables held constant, would increase/(decrease) proﬁ t after tax and Other Comprehensive Income, net of tax, as follows: (i) Market risk (continued) Interest rate risk (continued) The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of borrowings and ﬁ nancial assets aff ected. With all other variables held constant, the Group’s proﬁ t after tax is aff ected through the impact on ﬂ oating rate borrowings and investments, as follows: 30 June 2019 Currency movement US$M 10% movement in Australian dollar 10% movement in Brazilian real 10% movement in Colombian peso Increase/decrease in basis points +100 –100 Impact on proﬁ t after tax US$M 10% movement in South African rand 10% movement in Canadian dollar FY19 FY18 9 (9) 19 (19) 30 June 2018 Currency movement US$M Other Comprehensive Income, net of tax Proﬁ t after tax (59) (3) (2) 7 2 - 8 - - - Other Comprehensive Income, net of tax Proﬁ t after tax The sensitivity analysis assumes that the change in interest rates is eff ective from the beginning of the ﬁ nancial year and the ﬁ xed/ﬂ oating mix and balances are constant over the year. For the purpose of the sensitivity analysis, the decrease of 100 basis points is applied to the extent that the underlying interest rates do not fall below zero per cent. However, interest rates and the net debt proﬁ le of the Group may not remain constant over the coming ﬁ nancial year and therefore such sensitivity analysis should be used with care. Foreign currency risk Foreign currency risk is the risk that the fair value or future cash ﬂ ows of an exposure will ﬂ uctuate because of changes in foreign exchange rates. The functional currency of the majority of operations of the Group is the US dollar. The Group’s potential currency exposures comprise: ■ ■ Translational exposure in respect of non-functional currency monetary items; and Transactional exposure in respect of non-functional currency expenditure and revenues. Certain operating and capital expenditure is incurred by operations in currencies other than their functional currency. To a lesser extent, certain sales revenue is earned in currencies other than the functional currency of operations, and certain exchange control restrictions may require funds be maintained in currencies other than the functional currency of the operation. When required the Group may enter into forward exchange contracts. The principal non-functional currencies to which the Group is exposed to are the Australian dollar, South African rand, Brazilian real, Colombian peso and Canadian dollar. The following table shows the foreign currency risk arising from ﬁ nancial assets and liabilities, which are denominated in currencies other than the US dollar: Net ﬁ nancial assets/(liabilities) – by currency of denomination US$M Australian dollar Brazilian real Colombian peso South African rand Canadian dollar Other Total 104 FY19 (836) 47 (19) 69 15 1 (723) FY18 (721) 119 (18) 14 255 (1) (352) 10% movement in Australian dollar 10% movement in Brazilian real 10% movement in Colombian peso 10% movement in South African rand 10% movement in Canadian dollar (50) (1) (2) (13) - - 13 - 14 26 Commodity price risk Contracts for the sale and physical delivery of commodities are executed whenever possible on a pricing basis intended to achieve a relevant index target. Where pricing terms deviate from the index, the Group may choose to use derivative commodity contracts to realise the index price. Contracts for the physical delivery of commodities are not typically ﬁ nancial instruments and are carried in the Consolidated Balance Sheet at cost (typically at nil). Provisionally priced commodity sales and purchases contracts Provisionally priced sales or purchases contracts are those for which price ﬁ nalisation, referenced to the relevant index, is outstanding at the reporting date. Provisional pricing mechanisms embedded within these sales and purchases arrangements have the character of a commodity derivative and are carried at FVTPL as part of trade receivables or trade payables. Fair value movements on provisionally priced sales contracts are disclosed in 'Other' revenue. Refer to note 4(b) Segment results. The Group’s exposure at 30 June 2019 to the impact of movements in commodity prices upon provisionally invoiced sales and purchases volumes was predominantly around nickel, silver, lead, zinc and aluminium. The Group had 3.9kt of nickel, 3.0Moz of silver, 29.2kt of lead, 5.6kt of zinc and 2.0kt of aluminium exposure at 30 June 2019 (FY18: 3.7kt of nickel, 2.2Moz of silver, 18.8kt of lead, 4.9kt of zinc and nil of aluminium) that was provisionally priced. The ﬁ nal price of these sales or purchases will be determined during the ﬁ rst half of FY20. A 10 per cent change in the realised price of these commodities, with all other factors held constant, would increase or decrease proﬁ t after tax by US$15 million (FY18: US$10 million). The relationship between commodity prices and foreign currencies is complex and movements in foreign exchange rates can impact commodity prices. The sensitivities should therefore be used with care. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (a) Financial risk management objectives and policies (continued) (ii) Liquidity risk The Group’s liquidity risk arises from the possibility that it may not be able to settle or meet its obligations as they fall due. Operational, capital and regulatory requirements are considered in the management of liquidity risk, in conjunction with short and long-term forecast information. The Group’s policy on counterparty credit exposure ensures that only counterparties of a high credit standing are used for the investment of any excess cash. Standby arrangements and unused credit facilities The entities in the Group are funded by a combination of cash generated by the Group’s operations, working capital facilities and intercompany loans provided by the Group. Intercompany loans may be funded by a combination of cash, short and long-term debt and equity market raisings. Details of major standby and support arrangements are as follows: 30 June 2019 US$M Commercial paper program(1) Available Used Unused 1,500 - 1,500 (1) The Group has an undrawn US$1.5 billion revolving credit facility which is a standby arrangement to the US$1.5 billion US commercial paper program. The size of the multi- currency revolving credit facility is US$1.5 billion until February 2021, and then US$1.4 billion from February 2021 until the facility expires in February 2022. Maturity proﬁ le of ﬁ nancial liabilities The maturity proﬁ les of ﬁ nancial liabilities, based on the contractual amounts, are as follows: 30 June 2019 US$M Trade and other payables(1) Interest bearing liabilities Finance leases Total Carrying amount 872 361 543 1,776 (1) Excludes input taxes of US$9 million included in other payables. Refer to note 14 Trade and other payables. 30 June 2018 US$M Trade and other payables(1) Interest bearing liabilities Finance leases Derivative contracts Total Carrying amount 822 359 570 2 1,753 On demand or less than 1 year 1 to 5 years More than 5 years 871 303 58 1,232 1 45 232 278 - 32 819 851 On demand or less than 1 year 1 to 5 years More than 5 years 818 325 59 2 1,204 3 24 240 - 267 1 37 903 - 941 Total 872 380 1,109 2,361 Total 822 386 1,202 2 2,412 (1) Excludes input taxes of US$13 million included in other payables. Refer to note 14 Trade and other payables. (iii) Credit risk The Group has credit risk management policies in place covering the credit analysis, approvals and monitoring of counterparty exposures. As part of these processes the ongoing creditworthiness of counterparties is regularly assessed. Mitigation methods are deﬁ ned and implemented for higher-risk counterparties to protect revenues, with approximately half of the Group’s sales of physical commodities occurring via secured payment terms including prepayments, letters of credit, guarantees and other risk mitigation instruments. There are no material concentrations of credit risk, either with individual counterparties or groups of counterparties, by industry or geography. The carrying amounts of ﬁ nancial assets represent the maximum credit exposure. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 105 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (a) Financial risk management objectives and policies (continued) (iii) Credit risk (continued) Trade and other receivables – held at amortised cost For trade receivables, the Group uses the simpliﬁ ed approach to recognise impairments based on the lifetime expected credit loss. For other receivables, the Group applies the general approach and recognises impairments based on a 12-month expected credit loss. The Group’s exposure to credit risk is inﬂ uenced by the individual characteristics of each counterparty or customer. However, management also consider other factors that may inﬂ uence the credit risk of its counterparty or customer base. The Group has an established credit policy under which each new customer is assessed for creditworthiness before the Group’s standard payment and delivery terms and conditions are off ered. The Group’s review includes external credit ratings, if available, credit agency information, as well as ﬁ nancial institution information and industry information. Sale limits are established for each customer and reviewed annually or with the new release of information materially impacting the customer’s creditworthiness. Expected credit loss assessment as at 1 July 2018 and 30 June 2019 Impairment allowances are based on a forward-looking expected credit loss model. Where there has been a signiﬁ cant increase in credit risk, a loss allowance for lifetime expected credit losses is required. Exposures are grouped by external credit rating and security options and an expected credit loss rate is calculated accordingly. Where applicable, actual credit loss experience is also taken into account. For all other remaining receivables without an external credit rating or security option, a rating of BB (Standard and Poor’s) is used, on the basis that there is no support that it is investment grade, nor is there any evidence of default. Loans to equity accounted investments Impairments on loans to equity accounted investments have been measured on the 12-month expected credit loss basis, per the general approach. (b) Accounting classiﬁ cation and fair value (i) Recognition and initial measurement All ﬁ nancial assets (with the exception of trade and other receivables without a signiﬁ cant ﬁ nancing component) or ﬁ nancial liabilities are initially recognised at fair value (for all items except those classiﬁ ed as FVTPL) plus transaction costs directly attributable to its acquisition or issue. Trade and other receivables without a signiﬁ cant ﬁ nancing component are initially measured at the transaction price. (ii) Financial Assets: Classiﬁ cation and subsequent measurement On initial recognition, ﬁ nancial assets are measured at: amortised cost; investments in equity instruments, FVOCI; or FVTPL. On initial recognition of an investment in an equity instrument not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This election is made on an investment-by-investment basis. On initial recognition, the Group may irrevocably designate a ﬁ nancial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as FVTPL if doing so eliminates or signiﬁ cantly reduces an accounting mismatch that would otherwise arise. Financial assets are not reclassiﬁ ed subsequent to their initial recognition unless the Group changes its business model for managing ﬁ nancial assets in which case all aff ected ﬁ nancial assets are reclassiﬁ ed on the ﬁ rst day of the ﬁ rst reporting period following the change in the business model. A ﬁ nancial asset is measured at amortised cost if it meets both of the following conditions and is not designated as FVTPL: ■ ■ It is held within a business model whose objective is to hold assets to collect contractual cash ﬂ ows; and Its contractual terms give rise on speciﬁ ed dates to cash ﬂ ows that are solely payments of principal and interest on the principal amount outstanding. All ﬁ nancial assets not measured at amortised cost or FVOCI are measured at FVTPL. This includes all derivative ﬁ nancial assets. Transfers of ﬁ nancial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Group’s continuing recognition of the assets. Financial assets that are held for trading and whose performance is evaluated on a fair value basis are measured at FVTPL. Financial assets: Assessment whether contractual cash ﬂ ows are solely payments of principal and interest For the purposes of this assessment, ‘principal’ is deﬁ ned as the fair value of the ﬁ nancial asset on initial recognition. ‘Interest’ is deﬁ ned as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period and for other basic lending risks and costs (for example, liquidity risk and administrative costs), as well as a proﬁ t margin. In assessing whether the contractual cash ﬂ ows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the ﬁ nancial asset contains a contractual term that could change the timing or amount of contractual cash ﬂ ows such that it would not meet this condition. In making this assessment, the Group considers: ■ Contingent events that would change the amount or timing of ■ cash ﬂ ows; Terms that may adjust the contractual coupon rate, including variable rate features; ■ Prepayment and extension features; and ■ Terms that limit the Group’s claim to cash ﬂ ows from speciﬁ ed assets (for example, non-recourse features). 106 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (b) Accounting classiﬁ cation and fair value (continued) (ii) Financial Assets: Classiﬁ cation and subsequent measurement (continued) Financial assets: Subsequent measurement and gains and losses Classiﬁ cation Subsequent measurement Held at FVTPL Amortised cost Investments in equity instruments – designated at FVOCI Financial assets held at FVTPL are subsequently measured at fair value. Net gains and losses, including any interest, dividend income or movements in provisionally priced sales agreements, are recognised in the Consolidated Income Statement. Forward exchange contracts and interest rate swaps held for hedging purposes are accounted for as either cash ﬂ ow or fair value hedges. Any derivative instrument fair value change that does not qualify for hedge accounting is recognised immediately in the Consolidated Income Statement. Financial assets at amortised cost are subsequently measured at amortised cost using the eff ective interest method. The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairments are recognised in the Consolidated Income Statement. Any gain or loss on derecognition is recognised in the Consolidated Income Statement. Investments in equity instruments designated at FVOCI are subsequently measured at fair value. Dividends are recognised as income in the Consolidated Income Statement unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognised in Other Comprehensive Income and are not reclassiﬁ ed to the Consolidated Income Statement. The measurement of fair value of ﬁ nancial assets is based on quoted market prices in active markets for identical assets or liabilities. Where no price information is available from a quoted market source, alternative market mechanisms or recent comparable transactions, fair value is estimated based on the Group’s views on relevant future prices, net of valuation allowances to accommodate liquidity, modelling, credit and other risks implicit in such estimates. (iii) Financial Liabilities: Classiﬁ cation, subsequent measurement and gains and losses Financial liabilities are classiﬁ ed as measured at amortised cost or FVTPL. A ﬁ nancial liability is classiﬁ ed as FVTPL if it is classiﬁ ed as held for trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in the Consolidated Income Statement. Other ﬁ nancial liabilities are subsequently measured at amortised cost using the eff ective interest method. Interest expense and foreign exchange gains or losses are recognised in the Consolidated Income Statement. Any gain or loss on derecognition is also recognised in the Consolidated Income Statement. (iv) Embedded derivatives A derivative embedded in a hybrid contract, with a ﬁ nancial liability or non-ﬁ nancial host, is separated from the host and accounted for as a separate derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the deﬁ nition of a derivative; and the hybrid contract is not measured at FVTPL. Embedded derivatives are measured at fair value with changes in fair value recognised in the Consolidated Income Statement. A derivative embedded within a hybrid contract containing a ﬁ nancial asset host is not accounted for separately. The ﬁ nancial asset host together with the embedded derivative is required to be classiﬁ ed in its entirety as a ﬁ nancial asset at FVTPL. (v) Derecognition Financial assets The Group derecognises a ﬁ nancial asset when the contractual rights to the cash ﬂ ows from the asset expire, or it transfers the rights to receive the contractual cash ﬂ ows in a transaction in which substantially all risks and rewards of ownership of the ﬁ nancial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised ﬁ nancial assets that is created or retained by the Group is reported as a separate asset or liability. Financial liabilities The Group derecognises a ﬁ nancial liability when its contractual obligations are discharged, cancelled or expire. The Group also derecognises a ﬁ nancial liability when its terms are modiﬁ ed and the cash ﬂ ows of the modiﬁ ed liability are substantially diff erent, in which case a new ﬁ nancial liability based on the modiﬁ ed terms is recognised at fair value. (vi) Accounting classiﬁ cation – policy applicable up to 30 June 2018 All ﬁ nancial assets were initially recognised at the fair value of consideration paid. Subsequently, ﬁ nancial assets were carried at fair value or amortised cost less impairment. Where non- derivative, equity instrument ﬁ nancial assets were carried at fair value, gains and losses on re-measurement were recognised directly in equity unless the ﬁ nancial assets had been designated as being held at fair value through proﬁ t or loss, in which case the gains and losses were recognised directly in the Consolidated Income Statement. Financial assets were designated as being held at fair value through proﬁ t or loss where this is necessary to reduce measurement inconsistencies for related assets and liabilities. All ﬁ nancial liabilities other than derivatives were initially recognised at fair value of consideration received net of transaction costs as appropriate (initial cost) and, with the exception of ﬁ nancial liabilities which had been designated in fair value hedging relationships, were subsequently carried at amortised cost. The Group derecognised a ﬁ nancial liability when its contractual obligations were discharged, cancelled or expired. Derivatives, including those embedded in other contractual arrangements but separated for accounting purposes because they were not clearly and closely related to the host contract, were initially recognised at fair value on the date the contract was entered into and were subsequently re-measured at their fair value. The method of recognising the resulting gain or loss on re- measurement depends on whether the derivative was designated as a hedging instrument, and, if so, the nature of the item being hedged. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 107 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (b) Accounting classiﬁ cation and fair value (continued) (vi) Accounting classiﬁ cation – policy applicable up to 30 June 2018 (continued) Movements in the fair value of ﬁ nancial assets and liabilities may have been recognised through the Consolidated Income Statement or in the Consolidated Statement of Comprehensive Income. Available for sale and trading investments Available for sale and trading investments were measured at fair value. Gains and losses on the re-measurement of trading investments were recognised directly in the Consolidated Income Statement. Gains and losses on the re-measurement of available for sale investments were recognised directly in equity and subsequently recognised in the Consolidated Income Statement when realised by sale or redemption, or when a reduction in fair value represented an impairment. The following table presents the ﬁ nancial assets and liabilities by class at their carrying amounts which approximates their fair value. Note Held at FVTPL Designated as FVOCI Amortised cost 30 June 2019 US$M Financial assets Cash and cash equivalents Trade and other receivables(1) Loans to equity accounted investments Other ﬁ nancial assets: Derivative contracts Total current ﬁ nancial assets Trade and other receivables(1)(2) Loans to equity accounted investments Interest bearing loans receivable Other ﬁ nancial assets: Derivative contracts Investments in equity instruments – designated as FVOCI Other investments – held at FVTPL Total non-current ﬁ nancial assets Total Financial liabilities Trade and other payables(3) Finance leases Unsecured other Total current ﬁ nancial liabilities Trade and other payables Finance leases Unsecured other Total non-current ﬁ nancial liabilities Total 16 9 9 9 9 9 14 17 17 14 17 17 - 103 - 108 211 - - - 7 - 141 148 359 1 - - 1 - - - - 1 - - - - - - - - - 124 - 124 124 - - - - - - - - - Total 1,408 698 36 108 2,250 5 136 33 7 124 141 446 2,696 871 12 301 1,408 595 36 - 2,039 5 136 33 - - - 174 2,213 870 12 301 1,183 1,184 1 531 60 592 1 531 60 592 1,775 1,776 (1) Excludes current input taxes of US$154 million and non-current input taxes of US$33 million included in other receivables. Refer to note 9 Trade and other receivables. (2) Excludes a reimbursable right asset in relation to the closure and rehabilitation provision at South Africa Energy Coal of US$83 million included in other receivables. Refer to note 9 Trade and other receivables. (3) Excludes input taxes of US$9 million included in other payables. Refer to note 14 Trade and other payables. 108 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (b) Accounting classiﬁ cation and fair value (continued) As shown in note 3 New standards and interpretations the comparative designations are presented under AASB 139. 30 June 2018 US$M Financial assets Cash and cash equivalents Trade and other receivables(1) Loans to equity accounted investments Other ﬁ nancial assets: Derivative contracts Shares Total current ﬁ nancial assets Trade and other receivables(1)(2) Loans to equity accounted investments Interest bearing loans receivable Other ﬁ nancial assets: Derivative contracts Shares Other investments Total non-current ﬁ nancial assets Total Financial liabilities Trade and other payables(3) Finance leases Unsecured other Other ﬁ nancial liabilities: Derivative contracts Total current ﬁ nancial liabilities Trade and other payables Finance leases Unsecured other Total non-current ﬁ nancial liabilities Total Loans and receivables Note Available for sale securities Other ﬁ nancial assets and liabilities at amortised cost Held at fair value through proﬁ t or loss Cash ﬂ ow hedges 16 9 9 9 9 9 14 17 17 14 17 17 2,970 572 27 - - 3,569 4 67 38 - - - 109 3,678 - - - - - - - - - - - - - - 3 3 - - - - 403 136 539 542 - - - - - - - - - - - 87 - 72 - 159 - - - 74 - - 74 233 2 - - 2 4 - - - - 4 - - - - - - - - - - - - - - 815 12 321 - 1,148 5 558 38 601 1,749 - - - 5 - 5 - - - - - - - 5 - - - - - - - - - - Total 2,970 659 27 77 3 3,736 4 67 38 74 403 136 722 4,458 817 12 321 2 1,152 5 558 38 601 1,753 (1) Excludes current input taxes of US$140 million and non-current input taxes of US$56 million included in other receivables. (2) Excludes a reimbursable right asset in relation to the closure and rehabilitation provision at South Africa Energy Coal of US$83 million included in other receivables. (3) Excludes input taxes of US$13 million included in other payables. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 109 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (b) Accounting classiﬁ cation and fair value (continued) Investments in equity instruments – designated as FVOCI At 1 July 2018, on an instrument by instrument basis, the Group has elected under AASB 9 to designate investments in equity instruments as FVOCI as they represent investments that the Group intends to hold for long-term strategic purposes. In FY18 these investments were classiﬁ ed as available for sale (refer to note 3 New standards and interpretations). Other investments – held at FVTPL The investment in unit trusts held by the South32 South Africa Energy Coal Rehabilitation Trust Fund does not meet the deﬁ nition of an equity instrument under AASB 9. These investments are therefore classiﬁ ed as investments held at FVTPL (FY18: Available for sale). On transition to AASB 9 (1 July 2018), a net gain of US$12 million was transferred from the ﬁ nancial asset reserve to retained earnings. Measurement of fair value The following table shows the Group’s ﬁ nancial assets and liabilities carried at fair value with reference to the nature of valuation inputs used: Level 1 Valuation is based on unadjusted quoted prices in active markets for identical ﬁ nancial assets and liabilities. Level 2 Valuation is based on inputs (other than quoted prices included in Level 1) that are observable for the ﬁ nancial asset or liability, either directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices). Level 3 Valuation includes inputs that are not based on observable market data. 30 June 2019 US$M Financial assets and liabilities Trade and other receivables Trade and other payables Derivative contracts Investments in equity instruments – designated at FVOCI Other investments – FVTPL Total 30 June 2018 US$M Financial assets and liabilities Trade and other receivables Trade and other payables Derivative contracts Shares – available for sale Other investments – available for sale Total Level 3 ﬁ nancial assets and liabilities Level 1 Level 2 Level 3 Total - - - 48 - 48 103 (1) 2 - 141 245 - - 113 76 - 189 103 (1) 115 124 141 482 Level 1 Level 2 Level 3 Total - - - 277 - 277 87 (2) 6 - 136 227 - - 143 129 - 272 FY19 272 (2) (72) 42 (51) 189 87 (2) 149 406 136 776 FY18 334 (31) (98) 41 26 272 The following table shows the movements in the Group’s Level 3 ﬁ nancial assets and liabilities: US$M At the beginning of the ﬁ nancial year Disposals Realised gains/(losses) recognised in the Consolidated Income Statement(1) Unrealised gains/(losses) recognised in the Consolidated Income Statement(2) Unrealised gains/(losses) recognised in the Consolidated Statement of Comprehensive Income(3) At the end of the ﬁ nancial year (1) Realised gains and losses recognised in the Consolidated Income Statement are recorded in expenses excluding net ﬁ nance cost. (2) Unrealised gains and losses recognised in the Consolidated Income Statement are recorded in expenses excluding net ﬁ nance cost. (3) Unrealised gains and losses recognised in the Consolidated Statement of Comprehensive Income are recorded in the ﬁ nancial assets reserve. 110 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 19. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (CONTINUED) (b) Accounting classiﬁ cation and fair value (continued) Sensitivity analysis The carrying amount of ﬁ nancial assets and liabilities that are valued using inputs other than observable market data are calculated using appropriate valuation models, including discounted cash ﬂ ow modelling, with inputs such as commodity prices, foreign exchange rates and inﬂ ation. The potential eff ect of using reasonably possible alternative assumptions in these models, based on changes in the most signiﬁ cant inputs by 10 per cent while holding all other variables constant, is shown in the following table: 30 June 2019 US$M Financial assets and liabilities Derivative contracts(1) Proﬁ t after tax Other Comprehensive Income, net of tax Carrying amount Signiﬁ cant inputs 10% increase in input 10% decrease in input 10% increase in input 10% decrease in input Aluminium price(2) Foreign exchange rate(2) 113 Electricity price(3) (49) 46 - - Investments in equity instruments – designated as FVOCI(1) Total Alumina price(2) Aluminium price(2) Foreign exchange rate(2) 76 189 - (49) - 46 52 52 (78) (78) (1) Sensitivity analysis is performed assuming all inputs are directionally moving unfavourably and favourably. (2) Aluminium and alumina prices are comparable to market consensus forecasts and foreign exchange rates are aligned with forward market rates. (3) Electricity prices are determined as a market equivalent price. 30 June 2018 US$M Financial assets and liabilities Derivative contracts(1) Investments – available for sale(1) Total Proﬁ t after tax Other Comprehensive Income, net of tax Carrying amount Signiﬁ cant inputs 10% increase in input 10% decrease in input 10% increase in input 10% decrease in input Aluminium price(2) Foreign exchange rate(2) 143 Electricity price(3) (89) 84 - - Alumina price(2) Aluminium price(2) Foreign exchange rate(2) 129 272 - (89) - 84 41 41 (52) (52) (1) Sensitivity analysis is performed assuming all inputs are directionally moving unfavourably and favourably. (2) Aluminium and alumina prices are comparable to market consensus forecasts and foreign exchange rates are aligned with forward market rates. (3) Electricity prices are determined as a market equivalent price based on inputs from published data. (c) Capital management The Group will invest capital in assets where they ﬁ t the strategy. The Group’s priorities for cash ﬂ ow are: ■ Maintain safe and reliable operations and an investment grade credit rating through the cycle; ■ Distribute a minimum of 40 per cent of Underlying earnings as dividends to shareholders following each six month reporting period; and ■ Consistent with the Group’s priorities for cash ﬂ ow and commitment to maximise total shareholder returns, other alternatives including special dividends, share buy-backs and high return investment opportunities will compete for capital. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 111 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – CAPITAL STRUCTURE AND FINANCING 20. SHARE CAPITAL Share capital At the beginning of the ﬁ nancial year Shares bought back and cancelled At the end of the ﬁ nancial year Treasury shares At the beginning of the ﬁ nancial year Purchase of shares by ESOP Trusts Employee share awards exercised following vesting At the end of the ﬁ nancial year FY19 FY18 Shares US$M Shares US$M 5,119,913,775 14,493 5,217,919,888 (114,410,200) (281) (98,006,113) 5,005,503,575 14,212 5,119,913,775 (30,891,376) (33,986,147) 24,394,352 (40,483,171) (83) (99) 77 (13,161,908) (31,714,442) 13,984,974 (105) (30,891,376) 14,747 (254) 14,493 (26) (84) 27 (83) Shares entitle the holder to participate in dividends and the proceeds on winding up of the Group in proportion to the number of shares held. On a show of hands every holder of shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Incremental costs directly attributable to the issue of shares, net of any income tax eff ects, are recognised as a deduction from equity. The Group does not have authorised capital or par value in respect of its issued shares. 112 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 21. AUDITOR’S REMUNERATION The auditor of the Group is KPMG. US$'000 FY19 FY18 Fees payable to the Group’s auditor for assurance services Audit and review of ﬁ nancial statements Other assurance services(1) Fees payable to the Group’s auditor for all other services 4,726 586 4,741 717 All other services(2) Total auditor’s remuneration - 5,312 158 5,616 (1) Mainly comprises assurance in respect of the Group’s sustainability reporting. (2) Includes a number of consulting services. 22. PENSION AND OTHER POST-RETIREMENT OBLIGATIONS The Group operates or participates in a number of pension (including superannuation) schemes throughout the world. The funding of the schemes complies with local regulations. The assets of the schemes are generally held separately from those of the Group and are administered by trustees or management boards. The Group operates two post-retirement medical schemes in South Africa. Full actuarial valuations are prepared for the schemes. Deﬁ ned contribution pension schemes The Group contributed US$75 million (FY18: US$77 million) to deﬁ ned contribution plans and multi-employer deﬁ ned contribution plans. These contributions are expensed as incurred. Deﬁ ned beneﬁ t pension schemes (closed schemes) At 30 June 2019 the Group had deﬁ ned beneﬁ t obligations of US$113 million (FY18: US$116 million) and fair value of deﬁ ned beneﬁ t scheme assets of US$110 million (FY18: US$117 million) with a net liability recognised in the Consolidated Balance Sheet of US$3 million (FY18: nil). The fair value of scheme assets by major asset class is as follows: The principal actuarial assumptions at the reporting date (expressed as weighted averages) for post-retirement medical schemes are as follows: % Discount rate Medical cost trend rate (ultimate) South Africa FY19 10.0 8.0 FY18 9.9 8.2 Assumptions regarding future mortality can be material depending upon the size and nature of the post-retirement medical schemes’ liabilities. Post-retirement mortality assumptions in South Africa are based on post-retirement mortality tables that are standard in the region. For the main post-retirement medical schemes, these tables imply the following expected future lifetimes (in years) for employees aged 65 as at the balance sheet date: male employees in South Africa 20.0 (FY18: 19.7), female employees in South Africa 24.5 (FY18: 24.1). Weighted average maturity proﬁ le of schemes The weighted average duration of the deﬁ ned beneﬁ t obligations are 9 years (FY18: 9 years) and 11 years (FY18: 12 years) for the deﬁ ned beneﬁ t pensions schemes and post-retirement medical schemes respectively. Risks associated with deﬁ ned beneﬁ t pension and post-retirement medical schemes The Group’s deﬁ ned beneﬁ t pension and post-retirement medical schemes expose the Group to the risks pertaining to asset value volatility, uncertainty in future beneﬁ t payments and uncertainty in future contribution requirements. 23. EMPLOYEE SHARE OWNERSHIP PLANS At 30 June 2019 the Group had the following employee share ownership arrangements: Awards granted to Lead Team members(1) Long-Term Incentive Plan FY16, FY17, FY18, FY19 Deferred Short-Term Incentive Plan FY17, FY18 Executive Transitional Award Plan FY17, FY18, FY19 Asset class US$M Bonds(1) Equities Cash and cash equivalents Other(2) Total Fair value Sign-on Award Plan FY19 FY19 FY18 (1) Awards granted on 4 December 2015, 2 December 2016, 13 December 2017 or 7 December 2018. 46 12 9 43 51 11 7 48 110 117 Awards granted to eligible employees(1) Management Share Plan FY16, FY17, FY18, FY19 AllShare Plan 2016, 2017, 2018 Management Transitional Award Plan FY16, FY17, FY18, FY19 (1) Awards granted on 13 May 2016, 17 November 2016, 28 April 2017, 13 November 2017, 7 May 2018, 7 December 2018 or 17 May 2019. Share ownership plans in existence at 30 June 2015 Replacement BHP Long-Term Incentive Plan (1) Comprises Fixed Interest Government bonds of US$8 million (FY18: US$16 million), Index Linked Government bonds of US$31 million (FY18: US$27 million) and Corporate bonds of US$7 million (FY18: US$8 million). (2) Primarily comprises of insurance contracts in South Africa. Deﬁ ned beneﬁ t post-retirement medical schemes (closed schemes) At 30 June 2019 the Group had post-retirement medical scheme obligations of US$89 million (FY18: US$90 million). The post- retirement medical schemes are unfunded. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 113 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 23. EMPLOYEE SHARE OWNERSHIP PLANS FY16, FY17, FY18 and FY19 Management Share Plan (CONTINUED) All awards take the form of rights to receive one share in South32 Limited for each right granted, subject to performance and/or service conditions being met. A portion of the 2016, 2017 and 2018 AllShare Plan awards (participants located in Colombia and Mozambique) take the form of rights to receive a cash payment equivalent to the value of South32 Limited shares at the time of payment. Employees in Africa are granted rights on the JSE and all other employees are granted rights on the ASX. Performance conditions are based on the Group’s Total Shareholder Return (TSR) measured separately against two comparator indicies over the performance period as follows: ■ One third of performance rights are measured against the ■ Morgan Stanley Capital International (MSCI) World Index; and Two thirds of performance rights are measured against the IHS Markit (formerly Euromoney) Global Mining Index. Performance rights vest when the Group’s TSR equals or outperforms the comparator index. Full vesting of performance rights occur if the Group’s TSR outperforms both indicies by at least 5.5 per cent per annum (cumulative) or 23.9 per cent over four years. To the extent that the performance conditions are not met, awards are forfeited and no retesting is performed. Awards do not confer any dividend or voting rights until they convert into shares at vesting. In addition, the awards do not confer any rights to participate in a share issue, however, there is discretion under the plans to adjust the awards in response to a variation in South32 Limited’s share capital. The Replacement BHP Long-Term Incentive Plan and AllShare JSE plans are eligible to receive a payment equal to the dividend amount that would have been earned on the underlying shares awarded to those participants (Dividend Equivalent Payment). The Dividend Equivalent Payment is made to participants once the underlying shares are issued or transferred to them. No Dividend Equivalent Payment is made in respect of awards that lapse. No other awards are eligible for a Dividend Equivalent Payment. (a) Description of share-based payment arrangements (i) Recurring share-based payment plans The awards listed below are subject to the general conditions noted above and may be granted annually subject to approval by shareholders at the annual general meeting for awards to the CEO and by the Board of Directors for all other awards. FY16, FY17, FY18 and FY19 Long-Term Incentive Plan The Long-Term Incentive Plan is the Group’s long-term incentive plan for Lead Team members. Awards have a four year performance period from 1 July 2015 to 30 June 2019, 1 July 2016 to 30 June 2020, 1 July 2017 to 30 June 2021 and 1 July 2018 to 30 June 2022 respectively. FY17 and FY18 Deferred Short-Term Incentive Plan The FY17 and FY18 Deferred Short-Term Incentive Plan is the Group’s short-term incentive plan for Lead Team members. Awards vest in August 2019 and August 2020 respectively, provided participants remain employed by the Group. The FY16, FY17, FY18 and FY19 Management Share Plan is the Group’s long-term incentive plan for eligible employees below the Lead Team. The Management Share Plan comprises two elements: ■ Retention Rights vesting in August 2019, August 2020 and August 2021 provided participants remain employed by the Group; and ■ Performance Rights vesting in August 2019, August 2020, August 2021 and August 2022 subject to performance conditions. 2016, 2017 and 2018 AllShare Plan The 2016, 2017 and 2018 AllShare Plan is the Group’s employee share plan for employees not eligible to participate in the other employee share plans. Awards to the value of at least US$1,250 per employee are granted annually. Awards will vest provided participants remain employed by the Group. The vesting period depends on the participants’ location at the grant date: ■ Participants in Africa including Mozambique: August 2019, August 2020 and August 2021; and ■ Participants elsewhere: August 2019 and August 2020. (ii) Transitional share-based payment plans The awards listed below are subject to the general conditions noted above and are either one-off or will not be granted on an ongoing basis. FY19 Sign-on Award Plan The FY19 Sign-on Award Plan is a one-off grant made to one Lead Team member to replace the equity awards forfeited by the participant when commencing employment with the Group. The Award has two tranches, vesting in August 2019 and August 2020 respectively, provided the participant remains employed by Group. FY17, FY18 and FY19 Executive Transitional Award Plan The FY17 Executive Transitional Award Plan is a one-off grant made to one Lead Team member in recognition of their adjustment from the Management Share Plan (three year retention rights and four year performance rights) to the four year plan at the Group. Awards have a three year performance period from 1 July 2016 to 30 June 2019. The FY18 Executive Transitional Award Plan is a one-off grant made to two Lead Team members in recognition of their adjustment from the Management Share Plan (three year retention rights and four year performance rights) to the four year plan at the Group. Awards have a three year performance period from 1 July 2017 to 30 June 2020. The FY19 Executive Transitional Award Plan is a one-off grant made to one Lead Team member in recognition of their adjustment from the Management Share Plan (three year retention rights and four year performance rights) to the four year plan at the Group. Awards have a three year performance period from 1 July 2018 to 30 June 2021. FY16, FY17, FY18 and FY19 Management Transitional Award Plan The FY16, FY17, FY18 and FY19 Management Transitional Award Plan is a grant made to certain eligible employees to bridge the gap between their total target reward at BHP and their total target reward at the Group. Transitional awards will be made for a maximum of ﬁ ve years until FY20. The FY16, FY17, FY18 and FY19 Management Transitional Award Plans have the same conditions as the FY16, FY17, FY18 and FY19 Management Share Plan and comprises both service and performance conditions. 114 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 23. EMPLOYEE SHARE OWNERSHIP PLANS (c) Measurement of fair values (CONTINUED) (a) Description of share-based payment arrangements (continued) (ii) Transitional share-based payment plans (continued) Replacement BHP Long-Term Incentive Plan The Replacement BHP Long-Term Incentive Plan awards have a ﬁ ve year performance period from grant of the original BHP award. The performance hurdle testing for the awards is split into two periods: the BHP period (from grant up to 24 May 2015) and the Group period (from 25 May 2015 to the date of vesting). During the BHP period, performance was based on BHP’s TSR relative to a combination of the Peer Group TSR (a speciﬁ ed group of peer companies) for two thirds of the award and the MSCI World Index for one third. (b) Employee Share Ownership Plan Trusts The South32 Limited Employee Incentive Plans Trust (the Australian Trust) and the South32 South African AllShare Trust (the South African Trust) are discretionary trusts for the beneﬁ t of employees of South32 Limited and its subsidiaries. The trustee for the Australian Trust (CPU Share Plans Pty Ltd) is an independent company, resident in Australia. The trustee for the South African Trust is made up of employer and employee representatives per the B-BBEE requirements under South African law. The Trusts use funds provided by South32 Limited and/or its subsidiaries to acquire shares to enable awards to be made or satisﬁ ed under the Group employee share ownership plans. The fair value at grant date of equity-settled share awards is charged to the Consolidated Income Statement, net of tax, over the period for which the beneﬁ ts of employee services are expected to be derived. The corresponding accrued employee entitlement is recorded in the employee share awards reserve. Where awards are forfeited because non-market based vesting conditions are not satisﬁ ed, the expense previously recognised is proportionately reversed. Where shares in South32 Limited are acquired by on-market purchases prior to settling the vested entitlement, the cost of the acquired shares is carried as treasury shares and deducted from equity. Where awards are satisﬁ ed by delivery of acquired shares, any diff erence between their acquisition cost and the expected cumulative remuneration expense recognised is charged directly to retained earnings, net of tax. The fair value of performance rights is measured using a Monte Carlo methodology. This model considers the following: ■ Expected life of the award; ■ Current market price of the underlying shares; ■ ■ Expected volatility (of the individual company and of each peer group); Expected dividends; ■ Risk-free interest rate; and ■ Market based performance hurdles. The fair value of retention rights is measured using a Black Scholes methodology. This model considers the following: The shares may be acquired by purchase in the market or by subscription at not less than nominal value. ■ Expected life of the award; ■ Current market price of the underlying shares; ■ ■ Expected volatility; Expected dividends; and ■ Risk-free interest rate. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 115 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 23. EMPLOYEE SHARE OWNERSHIP PLANS (CONTINUED) (c) Measurement of fair values (continued) The inputs used in the measurement of the fair values at grant date of the equity-settled share-based payments plans were as follows: Year ended 30 June 2019 Recurring plans Fair value at grant date (US$)(1) Share price at grant date (US$) Expected volatility (%)(2) Expected life (in years)(1) Risk-free interest rate based on government bonds (%)(1) FY19 Long-Term Incentive Plan(3) FY18 Deferred Short-Term Incentive Plan(3) 1.09 2.11 2.24 2.24 FY19 Management Share Plan - Retention Rights(4) 1.97 – 2.02 2.24 – 2.25 FY19 Management Share Plan - Performance Rights(4) 1.09 2.24 – 2.25 32.50 32.50 32.50 32.50 4.00 2.00 3.00 4.00 2.01 1.88 1.92 – 7.63 2.01 – 7.98 2018 AllShare Plan(4) 2.11 – 2.28 2.24 – 2.25 32.50 2.00 – 3.00 1.88 – 7.63 Transitional plans FY19 Sign-on Award Plan(3) FY19 Executive Transitional Award Plan(3) 2.11 – 2.23 1.14 2.24 2.24 32.50 1.00 – 2.00 1.87 – 1.88 32.50 3.00 1.92 FY19 Management Transitional Award Plan(4)(5) 1.09 – 2.02 2.24 – 2.25 32.50 3.00 – 4.00 1.92 – 7.98 (1) Represents the range of grant date fair values, expected life, and risk-free interest rates based on the amount of rights granted on the ASX or the JSE during the year, and the variations in off er terms and grant dates of each plan where applicable. The risk-free rate and expected volatility does not materially impact service based awards. (2) Expected volatility is based on the historical South32 Limited share price volatility at the grant date. (3) Grant date 7 December 2018. (4) Grant date 7 December 2018 and 17 May 2019. (5) The Management Transitional Award Plan comprises both retention rights and performance rights. The range of risk-free rates for the performance based awards are 2.01 to 7.98 per cent. Year ended 30 June 2018 Recurring plans Fair value at grant date (US$)(1) Share price at grant date (US$) Expected volatility (%)(2) Expected life (in years)(1) Risk-free interest rate based on government bonds (%)(1) FY18 Long-Term Incentive Plan(3) FY17 Deferred Short-Term Incentive Plan(3) 1.33 2.27 2.39 2.39 FY18 Management Share Plan - Retention Rights(4) 2.35 – 2.40 2.54 – 2.57 FY18 Management Share Plan - Performance Rights(4) 1.53 – 2.02 2.54 – 2.57 35.00 35.00 35.00 35.00 4.00 2.00 3.00 4.00 2.07 1.91 1.94 – 8.40 2.04 – 8.60 2017 AllShare Plan(4) 2.47 – 2.58 2.54 – 2.57 35.00 2.00 – 3.00 1.73 – 8.40 Transitional plans FY18 Executive Transitional Award Plan(3) 1.34 2.39 35.00 3.00 1.98 FY18 Management Transitional Award Plan(4)(5) 1.53 – 2.40 2.54 – 2.57 35.00 3.00 – 4.00 1.94 – 8.60 (1) Represents the range of grant date fair values, expected life, and risk-free interest rates based on the amount of rights granted on the ASX or the JSE during the year, and the variations in off er terms and grant dates of each plan where applicable. The risk-free rate and expected volatility does not materially impact service based awards. (2) Expected volatility is based on the historical South32 Limited share price volatility at the grant date. (3) Grant date 13 December 2017. (4) Grant date 13 November 2017 or 7 May 2018. (5) The Management Transitional Award Plan comprises both retention rights and performance rights. The range of risk-free rates for the performance based awards are 2.04 to 8.60 percent. 116 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 23. EMPLOYEE SHARE OWNERSHIP PLANS (CONTINUED) (d) Reconciliation of outstanding share awards None of the awards listed below have an exercise price or are exercisable at 30 June 2019. Year ended 30 June 2019 Number of Rights Recurring plans FY16 Long-Term Incentive Plan FY17 Long-Term Incentive Plan FY18 Long-Term Incentive Plan FY19 Long-Term Incentive Plan FY16 Deferred Short-Term Incentive Plan FY17 Deferred Short-Term Incentive Plan FY18 Deferred Short-Term Incentive Plan FY16 Management Share Plan - Retention Rights FY16 Management Share Plan - Performance Rights FY17 Management Share Plan - Retention Rights FY17 Management Share Plan - Performance Rights FY18 Management Share Plan - Retention Rights FY18 Management Share Plan - Performance Rights FY19 Management Share Plan - Retention Rights FY19 Management Share Plan - Performance Rights 2015 AllShare Plan 2016 AllShare Plan 2017 AllShare Plan 2018 AllShare Plan Transitional plans FY16 Executive Transitional Award Plan FY16 Advance Award Plan FY16 Management Transitional Award Plan Replacement BHP Long-Term Incentive Plan FY15 Transitional Award Plan FY17 Executive Transitional Award Plan FY17 Management Transitional Award Plan FY18 Executive Transitional Award Plan FY18 Management Transitional Award Plan FY19 Executive Transitional Award Plan FY19 Management Transitional Award Plan FY19 Sign-on Award Plan Total awards (1) Retrospective grants related to prior year plans. Rights at beginning of period Granted during the period Vested during the period Forfeited during the period Rights at end of the period - - - - - - - - 6,632,568 7,845,617 5,766,758 4,906,971 (1,054,742) (3,807) - - - - - 796,267 1,131,116 (3,392,208) (48,691) - - (421,770) 9,917,814 (517,953) (284,940) 3,700,699 - (1,048,816) 10,607,898 (162,273) (343,523) 2,475,880 - (973,470) 6,546,153 (2,618) (27,951) 2,621,432 - (71,514) 5,771,094 6,632,568 7,845,617 5,766,758 - - - - 4,906,971 1,058,549 796,267 - - - 1,131,116 - - - - 19,453(1) 48,632(1) 2,652,001 5,842,608 3,440,899 10,339,584 4,503,592 11,656,714 2,962,223 7,470,991 - - 8,851,800 8,808,480 6,552,480 (20,400) (8,766,600) (64,800) - 10,080(1) (3,641,040) (233,280) 4,944,240 6,630(1) (357,000) (239,190) 5,962,920 - 6,534,100 (236,550) (154,375) 6,143,175 1,245,689 10,231,569 3,615,474 5,753,480 538,747 239,197 2,442,581 245,840 1,140,473 - - - - - - - - - - - - 81,967 530,059 437,000 (1,238,958) (6,731) (10,109,842) (121,727) - - (890,901) (77,401) 2,647,172 (1,748,922) (1,054,621) 2,949,937 (457,934) (80,813) - - - 239,197 (74,539) (154,459) 2,213,583 - - (23,045) (145,777) - - (1,082) (44,310) - - 245,840 971,651 81,967 484,667 437,000 112,139,572 22,180,217 (32,676,207) (5,601,966) 96,041,616 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 117 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 24. CONTINGENT LIABILITIES Contingent liabilities not otherwise provided for in the consolidated ﬁ nancial statements are categorised as arising from: US$M Subsidiaries and joint operations Actual or potential litigation Total contingent liabilities FY19 FY18 456 456 522 522 Prior to the Demerger, the Group entered into a Separation Deed with the BHP Group, which deals with matters arising in connection with the Demerger. The Separation Deed principally covers the following key terms: assumption of liabilities, limitations and exclusions from indemnities and claims, contracts, ﬁ nancial support, Demerger costs and litigation. Actual or potential litigation excludes amounts indemniﬁ ed by the BHP Group, as per the Separation Deed. Actual or potential litigations primarily relate to numerous tax assessments or matters relating to transactions in prior years in Colombia and Brazil. Additionally, there are a number of legal claims or potential claims against the Group, the outcome of which cannot be foreseen at present, and for which no amounts have been disclosed. 25. COMMITMENTS US$M Capital expenditure commitments Lease expenditure commitments Finance leases: Within one year After one year but not more than ﬁ ve years More than ﬁ ve years Total minimum lease payments under ﬁ nance leases Less amounts representing ﬁ nance charges Finance lease liability Operating leases: Within one year After one year but not more than ﬁ ve years More than ﬁ ve years Total commitments for operating leases FY19 221 FY18 193 58 232 819 1,109 (566) 543 48 54 21 123 59 240 903 1,202 (632) 570 48 94 26 168 Operating lease assets are not capitalised and rental payments are included in the Consolidated Income Statement on a straight-line basis over the lease term. 118 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 26. SUBSIDIARIES Signiﬁ cant subsidiaries of the Group, which are those with the most signiﬁ cant contribution to the Group’s net proﬁ t/(loss) or net assets, are as follows: Signiﬁ cant subsidiaries Arizona Minerals Inc.(1) Cerro Matoso SA Dendrobium Coal Pty Ltd Endeavour Coal Pty Ltd Country of incorporation Principal activity United States Exploration and development Colombia Australia Australia Ferronickel mining and smelting Coal mining Coal mining Hillside Aluminium (Pty) Ltd South Africa Aluminium smelting Illawarra Services Pty Ltd Australia Coal preparation plant South32 Aluminium (Holdings) Pty Ltd Australia Investment holding company South32 Aluminium (RAA) Pty Ltd South32 Aluminium (Worsley) Pty Ltd South32 Cannington Pty Ltd South32 Group Operations Pty Ltd African Metals (Pty) Ltd South32 Investment 12 B.V. South32 Marketing Pte Ltd South32 Minerals SA Australia Australia Australia Australia South Africa Netherlands Singapore Brazil Bauxite mining and alumina reﬁ ning Bauxite mining and alumina reﬁ ning Silver, lead and zinc mining Administrative services Investment holding company Investment holding company Commodity marketing and trading Alumina reﬁ ning South32 SA Coal Holdings (Pty) Ltd(2) South Africa Coal mining South32 SA Investments Limited United Kingdom Investment holding company South32 SA Limited South Africa Administrative services South32 Treasury Limited Australia Financing company Eff ective interest FY19 % 100 99.9 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 FY18 % - 99.9 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 (1) Arizona Minerals Inc. was acquired on 10 August 2018. Refer to note 32(a) Acquisition of Arizona Mining Inc. (2) The Group’s eff ective interest in South32 SA Coal Holdings (Pty) Ltd will reduce to 92 per cent pursuant to B-BBEE transactions in South Africa. The Group’s voting rights in South32 SA Coal Holdings (Pty) Ltd is 92 per cent. Subsidiaries are entities controlled by the parent entity. Control exists where the parent entity is exposed, or has rights to variable returns from its involvement with the subsidiary and has the ability to aff ect those returns through its power over the subsidiary. A parent entity has power over the subsidiary, when it has existing rights to direct the relevant activities of the subsidiary which are those which signiﬁ cantly aff ect the subsidiary’s returns. The ﬁ nancial statements of subsidiaries are included in the consolidated ﬁ nancial statements for the period they are controlled. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 119 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 27. EQUITY ACCOUNTED INVESTMENTS The Group’s interests in equity accounted investments with the most signiﬁ cant contribution to the Group’s net proﬁ t/(loss) or net assets are as follows: Signiﬁ cant joint ventures Country of incorporation/ principal place of business Australia Manganese(1)(2) Australia South Africa Manganese(1)(3) South Africa Principal activity Reporting date Acquisition date Integrated producer of manganese ore and alloy Integrated producer of manganese ore and alloy 30 June 2019 8 May 2015 30 June 2019 3 February 2015 Ownership interest FY19 % FY18 % 60 60 60 60 (1) While the Group holds a greater than 50 per cent interest in the joint ventures, joint control is contractually achieved as joint venture parties unanimously consent on decisions over the joint venture’s relevant activities. (2) Australia Manganese consists of an investment in Groote Eylandt Mining Company Pty Ltd. (3) South Africa Manganese consists of an investment in Samancor Holdings (Pty) Ltd. A reconciliation of the carrying amount of the equity accounted investments is set out below: Investment in equity accounted investments US$M At the beginning of the ﬁ nancial year Distribution from equity accounted investments Share of proﬁ t/(loss) Other Comprehensive Income/(loss), net of tax Dividends received from equity accounted investments At the end of the ﬁ nancial year Share of proﬁ t/(loss) of equity accounted investments US$M Australia Manganese and South Africa Manganese Individually immaterial(1) Total(2) FY19 FY18 697 (6) 467 66 (536) 688 569 - 521 1 (394) 697 FY19 FY18 448 19 467 503 18 521 (1) Individually immaterial consists of investments in Samancor AG (60 per cent), Samancor Marketing Pte Ltd (60 per cent), Richards Bay Coal Terminal Proprietary Limited (21.1 per cent) and Port Kembla Coal Terminal Limited (16.7 per cent). (2) Includes earnings adjustment of (US$17) million (FY18: (US$30) million). Refer to note 4(b)(i) Earnings adjustments. Carrying amount of equity accounted investments US$M Australia Manganese and South Africa Manganese Individually immaterial(1) Total FY19 FY18 582 106 688 583 114 697 (1) Individually immaterial consists of investments in Samancor AG (60 per cent), Samancor Marketing Pte Ltd (60 per cent), Richards Bay Coal Terminal Proprietary Limited (21.1 per cent) and Port Kembla Coal Terminal Limited (16.7 per cent). 120 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 27. EQUITY ACCOUNTED INVESTMENTS (CONTINUED) The following table summarises the ﬁ nancial information relating to each signiﬁ cant equity accounted investment: US$M Reconciliation of carrying amount of equity accounted investments Current assets Non-current assets Current liabilities Non-current liabilities Net assets – 100% Net assets – the Group's share Elimination of gains/(losses) on intragroup sales Carrying amount of equity accounted investments Reconciliation of share of proﬁ t/(loss) of equity accounted investments Revenue – 100% Proﬁ t/(loss) after tax – 100% Proﬁ t/(loss) after tax – the Group's share Elimination of gains/(losses) on intragroup sales Share of proﬁ t/(loss) of equity accounted investments Other balances of equity accounted investments presented on a 100% basis Cash and cash equivalents Current ﬁ nancial liabilities (excluding trade and other payables and provisions) Non-current ﬁ nancial liabilities (excluding trade and other payables and provisions) Depreciation and amortisation Interest income Interest expense Income tax (expense)/beneﬁ t (excluding royalty related tax) Joint ventures Australia Manganese South Africa Manganese(1) Australia Manganese South Africa Manganese(1) FY19 FY18 432 811 (268) (569) 406 244 (1) 243 1,704 565 339 - 339 - - (140) (97) 3 (24) (309) 261 799 (101) (301) 658 345 (6) 339 850 183 111 (2) 109 17 - (47) (39) 7 (16) (88) 339 742 (295) (336) 450 270 (1) 269 1,730 603 362 1 363 - - - (94) 2 (24) (295) 349 664 (132) (288) 593 318 (4) 314 771 235 142 (2) 140 13 (1) (76) (42) 6 (18) (41) (1) South Africa Manganese includes a 60 per cent interest in Samancor Manganese (Pty) Ltd and 54.6 per cent interest in Hotazel Manganese Mines (Pty) Ltd. The Group’s share of contingent liabilities and commitments of signiﬁ cant equity accounted investments as at 30 June 2019 was US$13 million (FY18: US$5 million) and US$29 million (FY18: US$24 million) respectively. The Group uses the term ‘equity accounted investments’ to refer to associates and joint ventures collectively. Associates are entities in which the Group holds signiﬁ cant inﬂ uence. If the Group holds 20 per cent or more of the voting power of an entity, it is presumed that the Group has signiﬁ cant inﬂ uence, unless it can be clearly demonstrated that this is not the case. Signiﬁ cant inﬂ uence can also arise when the Group has less than 20 per cent of voting power but it can be demonstrated that the Group has the power to participate in the ﬁ nancial and operating policy decisions of the associate. Investments in associates are accounted for using the equity method. Joint ventures are joint arrangements in which the parties with joint control of the arrangement have rights to the net assets of the arrangement. Joint arrangements exist when two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. A separate vehicle, not the parties, will have the rights to the assets and obligations to the liabilities, relating to the arrangement. If more than an insigniﬁ cant share of output from a joint venture is sold to third parties, this indicates that the joint venture is not dependent on the parties to the arrangement for funding and that the parties to the arrangement have no obligation for the liabilities of the arrangement. Joint ventures are accounted for using the equity method. Equity accounted investments are initially recorded at cost, including the value of any goodwill on acquisition. In subsequent periods, the carrying amount of the investment is adjusted to reﬂ ect the share of post-acquisition proﬁ t or loss and Other Comprehensive Income. After application of the equity method, including recognising the Group’s share of the joint ventures’ results, the value of the investment will be assessed for impairment if there is objective evidence that an impairment of the investment may have occurred. Where the carrying value of an equity accounted investment is reduced to nil after having applied equity accounting principles (and the Group has no legal or constructive obligation to make further payments, nor has made payments on behalf of the associate or joint venture), dividends received from the associate or joint venture will be recognised as a ‘Share of proﬁ t/(loss) of equity accounted investments’. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 121 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 28. INTERESTS IN JOINT OPERATIONS Signiﬁ cant joint operations of the Group, which are those with the most signiﬁ cant contributions to the Group’s net proﬁ t/(loss) or net assets, are as follows: Signiﬁ cant joint operations Brazil Alumina Eagle Downs Metallurgical Coal(1) Country of operation Brazil Australia Principal activity Alumina reﬁ ning Metallurgical coal exploration and development Acquisition date 3 July 2014 14 September 2018 Mozal Aluminium SARL(2) Mozambique Aluminium smelting 27 March 2015 Worsley Alumina(3) Australia Bauxite mining and alumina reﬁ ning 8 May 2015 Eff ective interest FY19 % 36 50 47.1 86 FY18 % 36 - 47.1 86 (1) Refer to note 32(b) Acquisition of the Eagle Downs Metallurgical Coal project. (2) This joint arrangement is an incorporated entity. It is classiﬁ ed as a joint operation as the participants are entitled to receive output, not dividends, from the arrangement. (3) While the Group holds a greater than 50 per cent interest in Worsley Alumina, participants are entitled to receive their share of output from the arrangement. Joint operations are joint arrangements in which the parties with joint control have rights to the assets and obligations for the liabilities relating to the arrangement. The activities of a joint operation are primarily designed for the provision of output to the parties to the arrangement, indicating that: ■ The parties have the rights to substantially all the economic beneﬁ ts of the assets of the arrangement; and ■ All liabilities are satisﬁ ed by the joint participants through their purchases of that output. This indicates that, in substance, the joint participants have an obligation for the liabilities of the arrangement. The consolidated ﬁ nancial statements of the Group include its share of the assets and liabilities, revenues and expenses arising jointly or otherwise from those operations and its revenue derived from the sale of its share of output from the joint operation. All such amounts are measured in accordance with the terms of each arrangement, which are usually in proportion to the Group’s interest in the joint operation. 29. KEY MANAGEMENT PERSONNEL (a) Key management personnel compensation US$’000 Short-term employee beneﬁ ts Post-employment beneﬁ ts Other long-term beneﬁ ts Share-based payments Total FY19 6,504 224 285 6,154 13,167 FY18 6,806 219 305 6,961 14,291 (b) Transactions with key management personnel There were no transactions with key management personnel during the year ended 30 June 2019 (FY18: nil). (c) Loans to key management personnel There were no loans with key management personnel during the ﬁ nancial year and as at 30 June 2019 (FY18: nil). (d) Transactions with key management personnel related entities There were no transactions with entities controlled or jointly controlled by key management personnel and there were no outstanding amounts with those entities as at 30 June 2019 (FY18: nil). 122 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 30. RELATED PARTY TRANSACTIONS (a) Parent entity The ultimate parent entity of the Group is South32 Limited, which is domiciled and incorporated in Australia. (b) Subsidiaries, joint ventures, joint operations and associates The interests in subsidiaries, joint ventures, joint operations and associates are disclosed in notes 26 to 28. (c) Key management personnel The compensation of key management personnel is disclosed in note 29. (d) Transactions with related parties Transactions with related parties Joint ventures Associates US$’000 Sales of goods and services Purchases of goods and services Interest income Dividend income Interest expense Short-term ﬁ nancing arrangements to/(from) related parties Loans made to/(from) related parties Outstanding balances with related parties US$’000 Trade amounts owing to related parties Other amounts owing to related parties(1) Trade amounts owing from related parties Other amounts owing from related parties Loan amounts owing from related parties(2) FY19 FY18 232,472 207,560 154 7,544 - 4,864 535,505 393,635 11,404 22,368 84,027 8,585 58,250 FY19 2,711 91,071 FY18 2,851 54,101 - - - - - - - - (168,817) (9,490) 15,866 Joint ventures Associates FY19 77 FY18 - 298,855 321,223 46,428 61,980 - 84,035 - 8 FY19 940 - - 223 88,279 FY18 607 - - 4,453 93,539 (1) Amount owing relates to short-term deposits and cash managed by the Group on behalf of its equity accounted investments. Interest is paid based on the three month London Inter-Bank Off er Rate and the one month Johannesburg Inter-Bank Agreed Rate. (2) Amounts owing from associates include loans to Port Kembla Coal Terminal Limited. An interest free loan repayable by 30 June 2030 and an interest bearing loan repayable by 30 June 2020. Interest is paid based on the Bank Bill Swap Bid Rate and is secured against other shareholders of the associate. Terms and conditions Sales to, and purchases from, related parties of goods and services are transactions at market prices and on commercial terms. Outstanding balances at year end are unsecured and settlement mostly occurs in cash. No guarantees are provided or received for any related party receivables or payables. No provision for expected credit losses has been recognised in relation to any outstanding balances with the exception of US$1 million on initial application of AASB 9 on 1 July 2018. No expense has been recognised in respect of expected credit losses from related parties in FY19. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 123 FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 31. PARENT ENTITY INFORMATION 32. ACQUISITION OF SUBSIDIARIES AND JOINTLY CONTROLLED OPERATIONS (a) Acquisition of Arizona Mining Inc. On 10 August 2018, the Group completed its acquisition of the remaining 83 per cent of issued and outstanding shares of Arizona Mining Inc. that it did not already own via a plan of arrangement. The transaction was completed for a total consideration of US$1,351 million via a fully funded, all cash off er. The Group’s existing 17 per cent interest was derecognised as an investment in equity instruments designated as FVOCI and US$253 million was transferred to form part of the consolidated investment in Arizona Mining Inc. The acquisition was treated as an acquisition of assets including mineral rights, exploration licences and exploration surface facilities. (a) Summary ﬁ nancial information The individual ﬁ nancial statements for the parent entity, South32 Limited, show the following aggregate amounts: US$M FY19 FY18 Result of parent entity Proﬁ t/(loss) after tax for the year Total Comprehensive Income Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Net assets Total equity of the parent entity comprising: Share capital Treasury shares Other reserves Proﬁ t reserve(1) Retained earnings/(accumulated losses) 382 382 1,302 1,302 437 11,976 875 885 1,231 11,764 108 113 11,091 11,651 US$M Cash outﬂ ow on acquisition Net cash acquired Direct costs relating to the acquisition(1) Net consolidated cash outﬂ ow Net assets 14,212 14,493 Cash and cash equivalents (82) 88 1,451 (4,578) (83) 68 1,726 (4,553) Other assets Property, plant and equipment(2) Other liabilities Net assets FY19 10 (1,392) (1,382) 10 1 1,661 (27) 1,645 Total equity 11,091 11,651 (1) Current and prior year proﬁ ts, net of dividends paid, have been appropriated to a (1) Inclusive of acquisition related transaction costs and other directly attributable costs. proﬁ ts reserve for future dividend payments. (2) Includes mineral rights of US$1,629 million. (b) Parent company guarantees The parent entity has guaranteed a US commercial paper program of US$1,500 million. The parent entity has also guaranteed a Group revolving credit facility of US$1,500 million, which backs the US commercial paper program and remains undrawn as at 30 June 2019. The parent entity is party to a Deed of Support with the eff ect that the Company guarantees debts in respect of South32 Group Operations Pty Ltd. (b) Acquisition of the Eagle Downs Metallurgical Coal project On 14 September 2018, the Group completed its acquisition of a 50 per cent interest in the Eagle Downs Metallurgical Coal project in Queensland’s Bowen Basin. The remaining 50 per cent interest continues to be held by Aquila Resources Pty Ltd, a subsidiary of China BaoWu Steel Group. The transaction was completed for a total upfront payment of US$106 million, a deferred payment of US$27 million and a coal price-linked production royalty capped at US$80 million. The acquisition was treated as an acquisition of assets including mineral rights, site infrastructure and dual drifts which are approximately 40 per cent complete. The joint arrangement is an unincorporated entity and is classiﬁ ed as a joint operation as activities are primarily designed for the provision of output to the parties of the arrangement. US$M Cash outﬂ ow on acquisition Direct costs relating to the acquisition(1) Net consolidated cash outﬂ ow Net assets Property, plant and equipment(2) Interest bearing liabilities(3) Other liabilities Net assets FY19 (112) (112) 160 (35) (13) 112 (1) (2) (3) Inclusive of acquisition related transaction costs. Includes mineral rights of US$107 million. Includes the deferred payment obligation of US$27 million. The coal price-linked production royalty capped at US$80 million will be expensed as incurred. 124 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT NOTES TO FINANCIAL STATEMENTS – OTHER NOTES 33. SUBSEQUENT EVENTS On 22 August 2019, the Directors resolved to pay a fully franked ﬁ nal dividend of US 2.8 cents per share (US$140 million) in respect of the 2019 ﬁ nancial year. The dividend will be paid on 10 October 2019. The dividend has not been provided for in the consolidated ﬁ nancial statements and will be recognised in the 2020 ﬁ nancial year. On 22 August 2019, the Group also announced an extension of the existing capital management program, announced on 27 March 2017, by US$250 million to a total of US$1.25 billion along with a 12-month extension to the completion time, expected to be returned by 4 September 2020. This program has US$264 million remaining. No other matters or circumstances have arisen since the end of the ﬁ nancial year that have signiﬁ cantly aff ected, or may signiﬁ cantly aff ect, the operations, results of operations or state of aff airs of the Group in subsequent accounting periods. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 125 FINANCIAL REPORT DIRECTORS’ DECLARATION In accordance with a resolution of the Directors of the Group, we state that: 1. In the opinion of the Directors: (a) The consolidated ﬁ nancial statements and notes that are set out on pages 78 to 125 of the Annual Report are in accordance with the Corporations Act, including: (i) Giving a true and fair view of the Group’s ﬁ nancial position as at 30 June 2019 and of its performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and Corporations Regulations 2001. (b) There are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by Section 295A of the Corporations Act from the Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer for the ﬁ nancial year ended 30 June 2019. 3. The Directors draw attention to note 2 to the ﬁ nancial statements on page 83, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Board of Directors. Karen Wood Chair Graham Kerr Chief Executive Ofﬁ cer and Managing Director Dated 5 September 2019 126 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 To the Directors of South32 Limited I declare that, to the best of my knowledge and belief, in relation to the audit of South32 Limited for the ﬁ nancial year ended 30 June 2019 there have been: i. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and ii. no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Denise McComish Partner Perth 5 September 2019 KPMG, an Australian partnership and a member ﬁ rm of the KPMG network of independent member ﬁ rms afﬁ liated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 127 FINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT To the shareholders of South32 Limited REPORT ON THE AUDIT OF THE FINANCIAL REPORT Opinion We have audited the Financial report of South32 Limited (the Company). In our opinion, the accompanying Financial report of the Company is in accordance with the Corporations Act 2001, including: ■ giving a true and fair view of the Group’s ﬁ nancial position as at 30 June 2019 and of its ﬁ nancial performance for the year ended on that date; and The Financial report comprises: ■ Consolidated Balance Sheet as at 30 June 2019 ■ Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Cash Flow Statement for the year then ended ■ Notes including a summary of signiﬁ cant accounting policies ■ Directors’ Declaration. ■ complying with Australian Accounting Standards and the Corporations Regulations 2001. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the ﬁ nancial year Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial report in Australia. We have fulﬁ lled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identiﬁ ed are: ■ Asset valuation ■ Closure and rehabilitation provision Key Audit Matters are those matters that, in our professional judgement, were of most signiﬁ cance in our audit of the Financial report of the current period. These matters were addressed in the context of our audit of the Financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. KPMG, an Australian partnership and a member ﬁ rm of the KPMG network of independent member ﬁ rms afﬁ liated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 128 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT Asset valuation Refer to Note 13 Impairment of non-ﬁ nancial assets to the Financial report. As at 30 June 2019 the Group’s balance sheet includes property, plant and equipment of US$9,596m, intangible assets of US$233m, and equity accounted investments of US$688m, assessed for impairment purposes as part of their respective cash generating units (CGUs). The key audit matter How the matter was addressed in our audit The assessment of the existence of impairment or reversal indicators and impairment testing, where required, of CGUs was a key audit matter given the size of property, plant and equipment, intangible assets and equity accounted investments, and the sensitivity of valuations to certain assumptions. Historically the Group has impaired the carrying value of some CGUs to recoverable amount. Combined with the volatility in both commodity and foreign exchange markets, this increases the sensitivity of the carrying value of the Group’s CGUs to potential impairment and reversal. The Group received indicative off ers for the sale of South Africa Energy Coal, which incorporates three CGUs. These off ers informed the Group’s assessment of the recoverable amounts of these CGUs. A pre-tax impairment expense of US$504m was recorded, necessitating additional audit eff ort in this key audit area. The Group uses sophisticated models to perform their assessment of impairment or reversal indicators and impairment testing, where required. This testing included the one CGU which contains goodwill (Hillside Aluminium). The models are largely developed in-house, and use life of operation and development plans, approved budgets, and a range of external sources as inputs to the assumptions. Complex modelling using forward-looking assumptions tends to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us, in particular to address the objectivity of inputs, and their consistent application. We focused on the signiﬁ cant forward-looking assumptions the Group applied in their models, including: ■ ■ forecast commodity prices and foreign exchange rates – certain sectors in which the Group operates have experienced signiﬁ cant volatility in forecast commodity prices, particularly manganese, thermal coal, aluminium and alumina. The Group’s models are sensitive to small changes in these price assumptions, as well as changes to foreign exchange rates, particularly the South African Rand and the Australian Dollar, increasing forecasting risk forecast operating cash ﬂ ows, production volumes, capital expenditure and reserve and resource estimates – these are determined by the Group based on historical performance adjusted for expected changes or development plans. This drives additional audit eff ort speciﬁ c to the feasibility of the forecasts and consistency with the Group’s strategy ■ discount rates - these are complicated in nature and vary according to the conditions and environment the CGUs are subject to from time to time. The Group uses fair value less cost of disposal models to assess recoverable amount when testing for impairment. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Our procedures included: We considered the appropriateness of the fair value less cost of disposal method applied by the Group for impairment testing purposes against the requirements of the accounting standards. We assessed the integrity and consistency of the models used on a sample basis, including the accuracy of the underlying calculation formulas. We assessed the scope, objectivity and competence of the Group’s experts responsible for preparation of the resource and reserve estimates and compared these estimates to those incorporated in the life of operation and development plans where applicable. We compared the forecast operating cash ﬂ ows, production volumes, capital expenditure and reserve and resource estimates contained in the models to the life of operation and development plans incorporating the approved budgets. We also assessed the accuracy of the Group’s previous forecasts to assist with this assessment. Using our knowledge of the Group and our industry experience, and considering the Group’s strategy and past performance, we assessed the feasibility of the forecast operating cash ﬂ ows, capital expenditure and production volumes. Working with our valuation specialists, and considering the risk factors speciﬁ c to the Group, we compared the discount rates to publicly available market data for comparable entities. We also compared foreign exchange rates to published views of market commentators. We compared forecast commodity prices to published views of market commentators on future trends. We considered the sensitivity of the models by varying key assumptions, such as forecast commodity prices, foreign exchange rates and discount rates, within a reasonably possible range, to identify those CGUs at higher risk of impairment or reversal and to focus our further procedures. We assessed the disclosures in the Financial report using our understanding obtained from our testing and against the requirements of the accounting standards. We recalculated the impairment charge to the South Africa Energy Coal group of CGUs, with reference to the indicative off ers received, and compared to the impairment expense recorded. SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 129 FINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT Closure and rehabilitation provision Refer to Note 15 Provisions to the Financial report. As at 30 June 2019 the Group’s balance sheet includes current and non-current closure and rehabilitation provisions of US$1,868m. The key audit matter How the matter was addressed in our audit Closure and rehabilitation provisioning was a key audit matter due to the size of the provision and the judgement we used to audit the provision estimates across the multiple sites the Group operates. Closure and rehabilitation activities are governed by Group policies based on legal and regulatory requirements, which diff er across multiple jurisdictions. We focused on the following assumptions the Group applied in determining the provisions in accordance with the closure and rehabilitation plans: ■ ■ ■ ■ nature and extent of activities required across the multiple sites, including the magnitude of possible contamination, which are inherently challenging to assess timing of when closure and rehabilitation will take place, which increases estimation uncertainty given the unique nature of each site and long timeframes involved forecast cost estimates incorporating historical experience, which may not be a reliable predictor of such costs, and risk adjustments. The Group engages external experts periodically to assist in their determination of these estimates economic assumptions, including country speciﬁ c discount rates, which are complicated in nature. Our procedures included: We tested key controls in the provision estimation process. These include management review and authorisation controls on activities such as: ■ plans for closure and rehabilitation in accordance with legal and regulatory requirements and Group policies; and sourcing inputs to the estimation models. ■ We assessed the scope, objectivity and competence of the Group’s external experts to provide rehabilitation cost estimates, where engaged. We evaluated key assumptions used in the closure and rehabilitation provision, relevant to the jurisdictions of the Group’s sites, by: ■ ■ ■ ■ comparing the nature and extent of activities costed to the Group’s closure and rehabilitation plans and relevant regulatory requirements comparing the timing of closure and rehabilitation activities to the Group’s resources and reserve estimates and the expected production proﬁ le contained in the life of operation plans comparing a sample of cost estimates of the activities, incorporating risk adjustments, to historical experience and underlying documentation, the Group’s external expert estimates, and against our knowledge of the Group and its industry working with our valuation specialists, comparing country speciﬁ c discount rate assumptions to market observable data, including risk free rates. Other Information Other Information is ﬁ nancial and non-ﬁ nancial information in South32 Limited’s annual reporting which is provided in addition to the Financial report and the Auditor's Report. The Directors are responsible for the Other Information. Our opinion on the Financial report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration report and our related assurance opinion. In connection with our audit of the Financial report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. 130 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT FINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT Responsibilities of the Directors for the Financial report The Directors are responsible for: ■ preparing the Financial report that gives a true and fair view in accordance with Australian Accounting Standards and the ■ ■ Corporations Act 2001 implementing necessary internal control to enable the preparation of a Financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial report Our objective is: ■ ■ to obtain reasonable assurance about whether the Financial report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂ uence the economic decisions of users taken on the basis of the Financial report. A further description of our responsibilities for the audit of the Financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. REPORT ON THE REMUNERATION REPORT Opinion Directors’ responsibilities In our opinion, the Remuneration report of South32 Limited for the year ended 30 June 2019, complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration report included in pages 55 to 71 of the Directors’ report for the year ended 30 June 2019. Our responsibility is to express an opinion on the Remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Denise McComish Partner Perth 5 September 2019 SOUTH32 > ANNUAL REPORT 2019 > FINANCIAL REPORT 131 FINANCIAL REPORT SHAREHOLDER INFORMATION SHAREHOLDER INFORMATION VOTING RIGHTS VOTING RIGHTS South32 Limited ordinary shares carry voting rights of one vote per share. South32 Limited ordinary shares carry voting rights of one vote per share. Shareholders may hold a beneﬁ cial entitlement to dematerialised ordinary shares in South32 Limited, UK Depositary Interests and Shareholders may hold a beneﬁ cial entitlement to dematerialised ordinary shares in South32 Limited, UK Depositary Interests and American Depositary Shares (ADS) through the Central Securities Depositories of Strate (Strate), CREST and Depository Trust Company American Depositary Shares (ADS) through the Central Securities Depositories of Strate (Strate), CREST and Depository Trust Company respectively. Each share held dematerialised in Strate, or as a Depositary Interest held in CREST, entitles the holder to one vote. Each respectively. Each share held dematerialised in Strate, or as a Depositary Interest held in CREST, entitles the holder to one vote. Each ADS is represented by ﬁ ve ordinary shares, with ADS voting managed by South32 Limited’s ADS Depositary. ADS is represented by ﬁ ve ordinary shares, with ADS voting managed by South32 Limited’s ADS Depositary. SUBSTANTIAL SHAREHOLDERS SUBSTANTIAL SHAREHOLDERS As at 26 July 2019, South32 Limited has three substantial shareholders who, together with their associates, hold ﬁ ve per cent or more of As at 26 July 2019, South32 Limited has three substantial shareholders who, together with their associates, hold ﬁ ve per cent or more of the voting rights in South32 Limited, as notiﬁ ed to South32 under the Australian Corporations Act and the UK Disclosure Guidance and the voting rights in South32 Limited, as notiﬁ ed to South32 under the Australian Corporations Act and the UK Disclosure Guidance and Transparency Rules (DTR). Transparency Rules (DTR). Name Name BlackRock Group BlackRock Group Schroder Investment Management Australia Limited Schroder Investment Management Australia Limited The Vanguard Group The Vanguard Group Date notice received Date notice received Number of shares Number of shares Percentage of capital Percentage of capital 29 August 2018 29 August 2018 10 July 2019 10 July 2019 5 June 2018 5 June 2018 357,382,337 357,382,337 432,674,873 432,674,873 256,669,781 256,669,781 6.98% 6.98% 8.57% 8.57% 5.01% 5.01% DISTRIBUTION OF SHAREHOLDINGS AND NUMBER OF SHAREHOLDERS DISTRIBUTION OF SHAREHOLDINGS AND NUMBER OF SHAREHOLDERS The following table shows the distribution of South32 Limited shareholders by size of shareholding and number of shareholders and The following table shows the distribution of South32 Limited shareholders by size of shareholding and number of shareholders and shares as at 26 July 2019. shares as at 26 July 2019. Size of holding Size of holding 1 – 1,000 1 – 1,000 1,001 – 5,000 1,001 – 5,000 5,001 – 10,000 5,001 – 10,000 10,001 – 100,000 10,001 – 100,000 100,001 and over 100,001 and over Total Total Number of Number of shareholders shareholders Number of shares Number of shares Percentage of capital Percentage of capital 138,256 138,256 89,026 89,026 20,388 20,388 17,458 17,458 567 567 67,550,229 67,550,229 207,887,059 207,887,059 147,942,241 147,942,241 394,886,379 394,886,379 4,187,237,667 4,187,237,667 265,695 265,695 5,005,503,575 5,005,503,575 1.35 1.35 4.15 4.15 2.96 2.96 7.89 7.89 83.65 83.65 100.00 100.00 DISTRIBUTION OF RIGHTS HOLDINGS AND NUMBER OF RIGHTS HOLDERS DISTRIBUTION OF RIGHTS HOLDINGS AND NUMBER OF RIGHTS HOLDERS The following table shows the distribution of rights holders in South32 Limited by size of rights holding and number of rights holders and The following table shows the distribution of rights holders in South32 Limited by size of rights holding and number of rights holders and rights as at 26 July 2019. rights as at 26 July 2019. Size of holding Size of holding 1 – 1,000 1 – 1,000 1,001 – 5,000 1,001 – 5,000 5,001 – 10,000 5,001 – 10,000 10,001 – 100,000 10,001 – 100,000 100,001 and over 100,001 and over Total Total Number of rights Number of rights holders holders Number of rights Number of rights 6,026 6,026 6,807 6,807 8 8 117 117 131 131 13,089 13,089 5,291,530 5,291,530 11,624,134 11,624,134 69,272 69,272 5,456,060 5,456,060 73,451,480 73,451,480 95,892,476 95,892,476 132 132 132 SOUTH32 > ANNUAL REPORT 2019 > SHAREHOLDER INFORMATION SOUTH32 > ANNUAL REPORT 2019 > SHAREHOLDER INFORMATION SOUTH32 > ANNUAL REPORT 2019 > SHAREHOLDER INFORMATION SHAREHOLDER INFORMATION20 LARGEST SHAREHOLDERS IN SOUTH32 LIMITED The following table sets out the 20 largest shareholders of fully paid ordinary shares listed on our shareholder register and the details of their shareholding as at 26 July 2019. Name 1 2 3 4 5 6 7 8 9 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Computershare Clearing Pty Ltd Citicorp Nominees Pty Ltd South Africa Control A/C\C National Nominees Limited BNP Paribas Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited – A/C 2 Citicorp Nominees Pty Limited 10 HSBC Custody Nominees (Australia) Limited 11 BNP Paribas Noms Pty Ltd 12 HSBC Custody Nominees (Australia) Limited 13 CPU Share Plans Pty Ltd 14 HSBC Custody Nominees (Australia) Limited 15 Citicorp Nominees Pty Limited 16 AMP Life Limited 17 Australian Foundation Investment Company Limited 18 BNP Paribas Nominees Pty Ltd 19 National Nominees Limited 20 CPU Share Plans Pty Ltd Number of fully paid shares Percentage of capital 1,342,709,306 1,021,804,134 449,715,767 404,260,374 167,141,098 122,701,325 106,282,745 75,833,803 66,017,055 38,043,342 35,392,918 33,711,185 32,655,466 15,475,062 15,104,804 14,171,351 13,990,941 13,294,000 12,176,052 8,885,510 26.82 20.41 8.98 8.08 3.34 2.45 2.12 1.52 1.32 0.76 0.71 0.67 0.65 0.31 0.30 0.28 0.28 0.27 0.24 0.18 Total 3,989,366,238 79.70 RESTRICTED AND ESCROWED SECURITIES DIVIDEND POLICY As at 26 July 2019, South32 Limited does not have any restricted securities or securities subject to voluntary escrow on issue. SHAREHOLDERS WITH LESS THAN A MARKETABLE PARCEL As at 26 July 2019, there were 12,337 shareholders on the Australian South32 Limited register holding less than a marketable parcel (A$500) based on the closing market price of A$3.16. ON-MARKET PURCHASES OF SOUTH32 LIMITED SECURITIES FOR EMPLOYEE INCENTIVE PLANS The Group purchases South32 Limited ordinary shares on-market through the ESOP Trusts for the purposes of the South32 Equity Incentive Plans. During FY19, 29,914,758 shares were purchased on-market for the Australian ESOP Trust. The average price at which the shares were purchased was A$3.51. A further 5,895,851 shares were purchased on-market for the South African ESOP Trust. The average price for which the shares were purchased was ZAR35.29. Our dividend policy is determined by the Board at its discretion. Our priorities for cash ﬂ ow are to maintain safe and reliable operations and an investment grade credit rating through the cycle. South32 Limited intends to distribute a minimum 40 per cent of Underlying earnings as dividends to its shareholders following each six-month reporting period. South32 Limited intends to distribute dividends with the maximum practicable franking credits for the purposes of the Australian dividend imputation system. DIVIDEND DETERMINATION AND PAYMENT Our dividends are determined in US dollars. Dividends for shareholders of South32 Limited on the Australian register are paid by direct credit into their nominated bank account in Australian dollars, UK pounds sterling, New Zealand dollars or US dollars, provided direct credit details and currency election information are submitted no later than close of business on the dividend record date. Dividends for shareholders of South32 Limited on the South African branch register and UK Depositary Interest holders are paid by direct credit in South African rand and UK pounds sterling respectively. For further information about dividends visit www.south32.net/investors-media/investor-centre/dividends. SOUTH32 > ANNUAL REPORT 2019 > SHAREHOLDER INFORMATION 133 SHAREHOLDER INFORMATIONCAPITAL MANAGEMENT PROGRAM SHARE REGISTRIES In February 2018 we expanded our capital management program to US$1 billion, comprising a US$761 million on-market share buy-back and special dividends of US$154 million paid in 2018 and US$85 million paid in April 2019. As at 30 June 2019, we have returned to shareholders a total value of US$986 million of the capital management program. Subsequent to 30 June 2019, the Board increased and extended our program by US$250 million to US$1.25 billion, leaving US$264 million to be returned by 4 September 2020. AUSTRALIA Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 Australia Telephone (Australia): Telephone (International): +61 (3) 9415 4169 +61 (3) 9473 2500 Facsimile: 1800 019 953 The on-market share buy-back was initially announced on 27 March 2017 and purchasing commenced on 19 April 2017. During the year ended 30 June 2019, South32 Limited purchased 114 million shares under the on-market share buy-back, which represented 2.23 per cent of share capital at the beginning of the ﬁ nancial year. Total consideration paid for these shares was US$281 million. Between the commencement of purchasing under the on-market share buy-back on 19 April 2017 and 30 June 2019, South32 Limited purchased a total of 318 million shares under the on- market share buy-back, which represented 5.98 per cent of share capital at the commencement of the program. The total consideration paid for the shares bought back up to 30 June 2019 was US$747 million. All of the shares purchased by South32 Limited under the on-market buy-back have been cancelled. From 30 June 2019, South32 has observed a blackout period in accordance with its Securities Dealing Policy. As at 26 July 2019 the blackout remained in place and no further shares had been purchased. ANNUAL GENERAL MEETING (AGM) Our AGM will be held on Thursday 24 October 2019 at 10.30am Australian Western Standard Time (AWST) in the Golden Ballroom at the Pan Paciﬁ c Hotel, 207 Adelaide Terrace, Perth, Western Australia 6000, Australia. If there is a change to the date, time or location of the AGM, then all relevant stock exchanges will be notiﬁ ed. Presentations delivered at the AGM and the results of voting will be provided to all stock exchanges and will be available on our website. STOCK EXCHANGES As at 26 July 2019, South32 Limited has a primary listing on the Australian Securities Exchange, a secondary listing on the Johannesburg Stock Exchange, is admitted to the standard segment of the Ofﬁ cial List of the UK Listing Authority and its ordinary shares are traded on the London Stock Exchange. South32 Limited also has a Level 1 American Depositary Receipts program, which trades in the United States over-the-counter market. SHAREHOLDER ENQUIRIES Shareholders can access their current holding details as well as their transaction history, view dividend statements and payments made, download statements and documents, change their address, update their communication preferences and banking details, and check their tax details online via Computershare Investor Centre at www.computershare.com. Alternatively, refer to the following contacts: SOUTH AFRICA Computershare Investor Services (Pty) Limited Rosebank Towers, 15 Biermann Avenue Rosebank, 2196 South Africa Telephone: Facsimile: Email enquiries: +27 (0) 11 373 0033 +27 (0) 11 688 5217 web.queries@computershare.co.za Holders of shares dematerialised into Strate should contact their Central Securities Depository Participant or stockbroker. UNITED KINGDOM Computershare Investor Services PLC The Pavilions, Bridgwater Road Bristol BS99 6ZZ United Kingdom Telephone: Facsimile: Email enquiries: +44 (0) 370 873 5884 +44 (0) 370 703 6101 web.queries@computershare.co.uk AMERICAN DEPOSITARY RECEIPTS (ADR) ADR holders should deal directly with Citibank Shareholder Services. Citibank Shareholder Services PO Box 43077 Providence, Rhode Island 02940-3077 Telephone: Facsimile: Email enquiries: Website: BRANCHES +1 877 248 4237 (+1-877-CITIADR) (toll-free within US) +1 781 575 4555 (outside of US) +1 201 324 3284 citibank@shareholders-online.com www.citi.com/dr In accordance with DTR 4.1.11R(5), South32, through various subsidiaries, has established branches in a number of diff erent jurisdictions in which the business operates. REGISTERED OFFICE Information regarding the South32 Limited Registered Ofﬁ ce is included in the Corporate directory on the inside back cover. Shareholders are encouraged to access all South32 communications electronically at www.south32.net. Shareholders that wish to receive electronic communications can update their preferences online or telephone the relevant Computershare Investor Centre. 134 SOUTH32 > ANNUAL REPORT 2019 > SHAREHOLDER INFORMATION SHAREHOLDER INFORMATION GLOSSARY OF TERMS AND ABBREVIATIONS GLOSSARY OF TERMS AND ABBREVIATIONS MINING RELATED TERMS MINING RELATED TERMS Alumina Alumina Aluminium oxide (Al₂ O₃). Alumina is Aluminium oxide (Al₂ O₃). Alumina is produced from bauxite in the Bayer produced from bauxite in the Bayer reﬁ ning process. It’s then converted reﬁ ning process. It’s then converted (reduced) in an electrolysis cell to produce (reduced) in an electrolysis cell to produce aluminium metal. aluminium metal. Ash Ash Inorganic material remaining after Inorganic material remaining after combustion of coal. combustion of coal. ASX Listing Rules (Chapter 5): Additional ASX Listing Rules (Chapter 5): Additional reporting on mining and oil and gas reporting on mining and oil and gas production and exploration activities production and exploration activities This chapter of the ASX Listing Rules sets This chapter of the ASX Listing Rules sets out additional reporting and disclosure out additional reporting and disclosure requirements for mining entities, oil and requirements for mining entities, oil and gas entities, as well as other entities gas entities, as well as other entities reporting on mining and oil and gas reporting on mining and oil and gas activities. activities. AusIMM AusIMM The Australasian Institute of Mining and The Australasian Institute of Mining and Metallurgy. Metallurgy. Bauxite Bauxite Principal commercial ore of aluminium. Principal commercial ore of aluminium. Beneﬁ ciation Beneﬁ ciation The process of physically separating The process of physically separating ore from gangue to produce a mineral ore from gangue to produce a mineral concentrate prior to subsequent concentrate prior to subsequent processing. processing. Brownﬁ eld Brownﬁ eld An exploration or development project An exploration or development project located within an existing mineral province, located within an existing mineral province, which can share infrastructure and which can share infrastructure and management with an existing operation. management with an existing operation. Coal Reserve Coal Reserve The same meaning as Ore Reserve, but The same meaning as Ore Reserve, but speciﬁ cally concerning coal. speciﬁ cally concerning coal. Coal Resource Coal Resource The same meaning as Mineral Resource, The same meaning as Mineral Resource, but speciﬁ cally concerning coal. but speciﬁ cally concerning coal. Coking coal Coking coal Used in the manufacture of coke, which is Used in the manufacture of coke, which is used in the steelmaking process by virtue used in the steelmaking process by virtue of its carbonisation properties. Coking coal of its carbonisation properties. Coking coal is a form of, and may also be referred to is a form of, and may also be referred to as, Metallurgical Coal. as, Metallurgical Coal. Competent Person Competent Person A minerals industry professional who is A minerals industry professional who is a Member or Fellow of The Australasian a Member or Fellow of The Australasian Institute of Mining and Metallurgy, or of Institute of Mining and Metallurgy, or of the Australian Institute of Geoscientists, or the Australian Institute of Geoscientists, or of a ‘Recognised Professional Organisation’, of a ‘Recognised Professional Organisation’, as included in a list available on the JORC as included in a list available on the JORC and ASX websites. These organisations and ASX websites. These organisations have enforceable disciplinary processes, have enforceable disciplinary processes, including the powers to suspend or expel including the powers to suspend or expel a member. a member. A Competent Person must have a A Competent Person must have a minimum of ﬁ ve years’ relevant experience minimum of ﬁ ve years’ relevant experience in the style of mineralisation or type of in the style of mineralisation or type of deposit under consideration and in the deposit under consideration and in the activity that the person is undertaking activity that the person is undertaking (JORC Code). (JORC Code). Cut-off grade Cut-off grade The lowest grade, or quality, of mineralised The lowest grade, or quality, of mineralised material that qualiﬁ es as economically material that qualiﬁ es as economically mineable and available in a given mineable and available in a given deposit. It may be deﬁ ned on the basis deposit. It may be deﬁ ned on the basis of economic evaluation, or on physical of economic evaluation, or on physical or chemical attributes that deﬁ ne an or chemical attributes that deﬁ ne an acceptable product speciﬁ cation (JORC acceptable product speciﬁ cation (JORC Code). Code). Energy coal Energy coal Used as a fuel source in electrical power Used as a fuel source in electrical power generation, cement manufacture and generation, cement manufacture and various industrial applications. Energy coal various industrial applications. Energy coal may also be referred to as steaming or may also be referred to as steaming or thermal coal. thermal coal. Flotation Flotation A method of selectively recovering A method of selectively recovering minerals from ﬁ nely ground ore using a minerals from ﬁ nely ground ore using a froth created in water by speciﬁ c reagents. froth created in water by speciﬁ c reagents. In the ﬂ otation process, certain mineral In the ﬂ otation process, certain mineral particles are induced to ﬂ oat by becoming particles are induced to ﬂ oat by becoming attached to bubbles of froth and the attached to bubbles of froth and the unwanted mineral particles sink. unwanted mineral particles sink. Grade Grade Any physical or chemical measurement Any physical or chemical measurement of the characteristics of the material of of the characteristics of the material of interest in samples or product (JORC interest in samples or product (JORC Code). Code). Greenﬁ eld Greenﬁ eld An exploration or development project An exploration or development project located outside the area of inﬂ uence of our located outside the area of inﬂ uence of our existing mine operations/ infrastructure. existing mine operations/ infrastructure. Indicated Mineral Resource Indicated Mineral Resource That part of a Mineral Resource for which That part of a Mineral Resource for which quantity, grade (or quality), densities, quantity, grade (or quality), densities, shape and physical characteristics are shape and physical characteristics are estimated with sufﬁ cient conﬁ dence. estimated with sufﬁ cient conﬁ dence. This allows the application of Modifying This allows the application of Modifying Factors in sufﬁ cient detail to support mine Factors in sufﬁ cient detail to support mine planning and evaluation of the economic planning and evaluation of the economic viability of the deposit (JORC Code). viability of the deposit (JORC Code). Inferred Mineral Resource Inferred Mineral Resource That part of a Mineral Resource for That part of a Mineral Resource for which quantity and grade (or quality) which quantity and grade (or quality) are estimated on the basis of limited are estimated on the basis of limited geological evidence and sampling. geological evidence and sampling. Geological evidence is sufﬁ cient to imply Geological evidence is sufﬁ cient to imply but not verify geological and grade (or but not verify geological and grade (or quality) continuity (JORC Code). quality) continuity (JORC Code). JORC JORC Joint Ore Reserves Committee comprising Joint Ore Reserves Committee comprising representatives of The Australasian representatives of The Australasian Institute of Mining and Metallurgy Institute of Mining and Metallurgy (AusIMM), Australian Institute of (AusIMM), Australian Institute of Geoscientists (AIG) and Minerals Council Geoscientists (AIG) and Minerals Council of Australia (MCA) as well as the Australian of Australia (MCA) as well as the Australian Securities Exchange (ASX), the Financial Securities Exchange (ASX), the Financial Services Institute of Australasia (FinSIA) Services Institute of Australasia (FinSIA) and the accounting profession. and the accounting profession. JORC Code JORC Code The Australasian Code for reporting of The Australasian Code for reporting of Exploration Results, Mineral Resources and Exploration Results, Mineral Resources and Ore Reserves 2012 Edition prepared by Ore Reserves 2012 Edition prepared by the JORC. the JORC. Leaching Leaching The process by which a soluble metal can The process by which a soluble metal can be economically recovered from minerals be economically recovered from minerals in ore by dissolution. in ore by dissolution. Marketable Coal Reserves Marketable Coal Reserves Represents beneﬁ ciated or otherwise Represents beneﬁ ciated or otherwise enhanced coal product where enhanced coal product where modiﬁ cations due to mining, dilution and modiﬁ cations due to mining, dilution and processing have been considered (JORC processing have been considered (JORC Code). Code). MAusIMM MAusIMM Member of The Australasian Institute of Member of The Australasian Institute of Mining and Metallurgy. Mining and Metallurgy. MAusIMM (CP) MAusIMM (CP) Accredited Chartered Professional status Accredited Chartered Professional status of members of The Australasian Institute of members of The Australasian Institute of Mining and Metallurgy. These members of Mining and Metallurgy. These members have undergone an assessment of their have undergone an assessment of their competencies, which are maintained competencies, which are maintained through continuing professional through continuing professional development activities. development activities. Measured Mineral Resource Measured Mineral Resource That part of a Mineral Resource for which That part of a Mineral Resource for which quantity, grade (or quality), densities, quantity, grade (or quality), densities, shape and physical characteristics are shape and physical characteristics are estimated with conﬁ dence sufﬁ cient to estimated with conﬁ dence sufﬁ cient to allow the application of Modifying Factors allow the application of Modifying Factors to support detailed mine planning and to support detailed mine planning and ﬁ nal evaluation of the economic viability of ﬁ nal evaluation of the economic viability of the deposit (JORC Code). the deposit (JORC Code). Metallurgical Coal Metallurgical Coal A broader term than coking coal, which A broader term than coking coal, which includes all coals used in steelmaking, includes all coals used in steelmaking, such as coal used for the pulverised coal such as coal used for the pulverised coal injection process. injection process. SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS 135 135 135 GLOSSARY OF TERMS AND ABBREVIATIONS Mineral Resource A concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade (or quality), and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade (or quality), continuity and other geological characteristics of a Mineral Resource are known, estimated or interpreted from speciﬁ c geological evidence and knowledge, including sampling. Mineral Resources are sub- divided, in order of increasing geological conﬁ dence, into Inferred, Indicated and Measured categories (JORC Code). Mineralisation Any single mineral or combination of minerals occurring in a mass, or deposit, of economic interest (JORC Code). Modifying Factors Considerations used to convert Mineral Resources to Ore Reserves. These include, but are not restricted to, mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors (JORC Code). MSAIMM Member of the Southern African Institute of Mining and Metallurgy. Net Smelter Return (NSR) An estimate of revenue derived from the sale of products and concentrates following the application of metallurgical recoveries and deducting transport costs, treatment and reﬁ ning charges, penalties and royalties. OC/OP (Open-cut/open-pit/open-cast) Surface working in which the working area is kept open to the sky. Ore Reserves The economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined or extracted and is deﬁ ned by studies at pre-feasibility or feasibility level as appropriate that include application of Modifying Factors. Such studies demonstrate that, at the time of reporting, extraction could reasonably be justiﬁ ed (JORC Code). Probable Ore Reserves The economically mineable part of an Indicated and, in some circumstances, a Measured Mineral Resource. The conﬁ dence in the Modifying Factors applying to a Probable Ore Reserve is lower than that applying to a Proved Ore Reserve (JORC Code). Proved Ore Reserves The economically mineable part of a Measured Mineral Resource. A Proved Ore Reserve implies a high degree of conﬁ dence in the Modifying Factors (JORC Code). Pr.Sci.Nat. Professional Natural Scientist of the South African Council for Natural Scientiﬁ c Professions. Reserve Life The scheduled extraction period in years for the Total Ore Reserves in the approved Life of Operation Plan reported to two signiﬁ cant ﬁ gures. ROM (Run of Mine product) Product mined in the course of regular mining activities. SACNASP South African Council for Natural Scientiﬁ c Professions. SAIMM Southern African Institute of Mining and Metallurgy. Sands Tailings produced as a by-product during beneﬁ ciation of ore. SP (Stockpile) An accumulation of ore or mineral built up when demand slackens or when the treatment plant or beneﬁ ciation equipment is incomplete or temporarily unable to process the mine output; any heap of material formed to create a buff er for loading or other purposes, or material dug and piled for future use. Tailings Those portions of washed or milled ore that are too poor to be treated further or remain after the required metals and minerals have been extracted. FINANCE, MARKETING AND GENERAL TERMS AASB Australian Accounting Standards Board. Adjusted ROIC (Adjusted Return On Invested Capital) Calculated as Underlying EBIT, adjusted for uncontrollable and one-off impacts in the current ﬁ nancial year, divided by the sum of ﬁ xed assets (excluding any rehabilitation asset and unproductive capital associated with our major projects) and inventories. Underlying EBIT is adjusted by excluding the current period impacts of foreign currency on revenue and cost, and commodity prices on revenue and associated price-linked costs, less the discount on rehabilitation provisions included in net ﬁ nance cost, and tax eff ected by the Group’s prior period Underlying eff ective tax rate. AGM Annual General Meeting. AO Ofﬁ cer of the Order of Australia. ASIC (Australian Securities and Investments Commission) The independent Australian Government body that is Australia’s integrated corporate, markets, ﬁ nancial services and consumer credit regulator. ASX ASX Limited or Australian Securities Exchange. ASX Listing Rules The rules governing the listing of an entity and the quotation of its securities on the ASX. B-BBEE Broad-Based Black Economic Empowerment. Total Mineral Resources The sum of Inferred Mineral Resources, Indicated Mineral Resources and Measured Mineral Resources. BHP The group of companies headed by, and including, BHP Billiton Ltd and BHP Billiton plc. Total Ore Reserves Proved Ore Reserves plus Probable Ore Reserves. Yield The percentage of material of interest that is extracted during mining and/ or processing. A measure of mining or processing efﬁ ciency (JORC Code). Black People Refers to Africans, Coloureds and Indians who are citizens of the Republic of South Africa by birth or descent (as more fully deﬁ ned in the Broad-Based Black Economic Empowerment Amendment Act 2013 (South Africa)). Board The Board of Directors of South32 Limited. CEO Chief Executive Ofﬁ cer. CFO Chief Financial Ofﬁ cer. CIF Cost, insurance and freight. 136 SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS GLOSSARY OF TERMS AND ABBREVIATIONS CO₂ -e Carbon dioxide equivalent. Community investment Contributions made to support communities that we operate in, or have an interest in. Our contributions to community programs comprise cash, in- kind support and administration costs. COO Chief Operating Ofﬁ cer. Corporations Act Corporations Act 2001 (Cth). CPP (Commodity Price Protocol) Refers to the process whereby price forecasts and updates are governed internally within South32 to ensure that a consistent set of macroeconomic inputs and assumptions are used to develop the commodity prices to be applied across South32. CSO Chief Sustainability Ofﬁ cer Demerger The separation of assets from BHP eff ected in May 2015 to create a separate entity South32 Limited, listed on the ASX, LSE and JSE. DTR UK Financial Conduct Authority’s Disclosure Guidance and Transparency Rules. A reference to DTR followed by a number is a speciﬁ c rule under the DTR. EBIT Earnings before interest and tax. EBITDA Earnings before interest, tax, depreciation and amortisation. Eff ective tax rate (ETR) Income tax expense divided by proﬁ t before tax; both the numerator and denominator exclude equity accounted investments. ESOP Trusts The trusts which purchase and hold South32 Limited shares for the purpose of the South32 Equity Incentive Plans. South32 has an Australian ESOP Trust and South African ESOP Trust for employees located in the respective countries. Executive KMP Lead Team members who are classiﬁ ed as KMP. External Auditor KPMG. FOB (Free On Board) The seller delivers when the goods pass the ship’s rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of, or damage to, the goods from that point. The FOB term requires the seller to clear the goods for export. This term can be used only for sea or inland waterway transport. Free cash ﬂ ow Free cash ﬂ ow before interest and tax represents operating cash ﬂ ows including dividends received from equity accounted investments, before ﬁ nancing activities and tax, and after capital expenditure. FX Foreign exchange. FYXX Refers to the ﬁ nancial year ending 30 June 20XX, where XX is the two-digit number for the year. Gearing The ratio of net debt to net debt plus net assets. GHG (Greenhouse Gas) For our reporting purposes, these are the aggregate anthropogenic carbon dioxide equivalent (CO₂ -e) emissions of carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydroﬂ uorocarbons (HFCs), perﬂ uorocarbons (PFCs) and sulphur hexaﬂ uoride (SF₆). These are measured according to the World Resources Institute/ World Business Council for Sustainable Development Greenhouse Gas Protocol. GRI (Global Reporting Initiative) This is the world’s most widely used sustainability reporting framework, consisting of principles, guidelines and indicators to measure and report on an organisation’s economic, environmental and social performance. The G4 Guidelines is the fourth and current generation of this framework. The GRI Navigator and Sustainability data tables are available on our website at www.south32.net. Group Refers to South32 Limited and its subsidiaries and joint arrangements. HSEC Health, safety and environment and community. International Council on Mining and Metals (ICMM) A membership organisation led by the Chief Executive Ofﬁ cers of 23 mining and metals companies, along with national and regional mining associations and global commodity associations. ICMM is an international organisation dedicated to improving the social and environmental performance of the mining and metals industry. IFRS (International Financial Reporting Standards) Accounting standards as issued by the IASB (International Accounting Standards Board). JSE Johannesburg Stock Exchange. KMP Key management personnel are people who have authority and responsibility for planning, directing and controlling the activities of South32 either directly or indirectly. LBMA London Bullion Market Association. Lead Team All Chief positions within South32. LME London Metal Exchange. LSE London Stock Exchange. LTI Long-term incentive. Margin on third party products Comprises Underlying EBIT on third party products, divided by third party product revenue. MRN Mineração Rio do Norte. Net cash Comprises cash and cash equivalents less interest bearing liabilities, including ﬁ nance leases. Net debt Comprises interest bearing liabilities, including ﬁ nance leases, less cash and cash equivalents. Net operating assets Represents operating assets net of operating liabilities which predominantly excludes the carrying value of equity accounted investments, cash, interest bearing liabilities, tax balances and certain other ﬁ nancial assets. Occupational illness An illness that occurs as a consequence of work-related activities or exposure. It includes acute or chronic illnesses or diseases, which may be caused by inhalation, absorption, ingestion or direct contact. Occupational Exposure Limit (OEL) The concentration of a substance or agent, exposure to which, according to current knowledge, should not cause adverse health eff ects nor cause undue discomfort to nearly all workers. SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS 137 GLOSSARY OF TERMS AND ABBREVIATIONS TERMS USED IN RESOURCES AND RESERVES A.Al₂ O₃ available alumina Ag silver Al₂ O₃ alumina CV caloriﬁ c value Fe iron HCFeMn high-carbon ferromanganese Met metallurgical coal Mn manganese Ni nickel Pb lead R.SiO₂ reactive silica S sulphur SiO₂ silica SiMn silica manganese Th thermal coal VM Volatile Matter Zn zinc OSHA The Occupational Safety and Health Administration (OSHA) of the United States Department of Labor. We adopt these guidelines for the recording and reporting of occupational injuries and illnesses to ensure that classiﬁ cations are applied uniformly across our workforce. Post-demerger The period from 25 May 2015 when South32 Limited began as an independent entity. Pre-demerger The period from 1 July 2014 to 24 May 2015 when South32 Limited and its controlled entities were subsidiaries of BHP. ROIC (Return On Invested Capital) Calculated as Underlying EBIT less the discount on rehabilitation provisions included in net ﬁ nance costs, tax eff ected by the Group’s Underlying eff ective tax rate, divided by the sum of ﬁ xed assets (excluding any rehabilitation asset and unproductive capital associated with our major projects) and inventories. Senior Leadership The Senior Leadership Team are our leaders who report directly to the South32 Lead Team. Shared value The identiﬁ cation of opportunities that create economic value while also advancing the environmental and social outcomes of the communities and regions in which we operate. South32 Equity Incentive Plan An equity incentive plan that allows the Board to make off ers to employees to acquire securities in South32 Limited and to otherwise incentivise employees. STI Short-term incentive. Transformation A national strategy in South Africa aimed at attaining national unity, promoting reconciliation through negotiated settlement and non-racism. Total Recordable Injury Frequency (TRIF) The sum of (fatalities + lost-time cases + restricted work cases + medical treatment cases) x 1,000,000 ÷ actual hours worked. This is stated in units of per million hours worked for employees and contractors. We adopt the United States Government Occupational Safety and Health Administration guidelines for the recording and reporting of occupational injury and illnesses. Total Recordable Illness Frequency (TRILF) The sum of total occupational illness x 1,000,000 ÷ actual hours worked, for employees and contractors. This is stated in units of per million hours worked. Total Shareholder Return (TSR) TSR measures the return delivered to shareholders over a certain period through the change in share price and any dividends paid. It is the measure used to compare our performance to that of relevant peer groups under the LTI. TSX Toronto Stock Exchange. Underlying earnings Underlying earnings is proﬁ t after tax and earnings adjustment items. Earnings adjustments represent items that don’t reﬂ ect our underlying operations. We believe that Underlying earnings provides useful information, but shouldn’t be considered as an indication of, or an alternative to, proﬁ t or attributable proﬁ t as an indicator of operating performance. Underlying EBIT Underlying EBIT is proﬁ t before net ﬁ nance costs, tax and after any earnings adjustment items, including impairments, impacting proﬁ t. It’s reported inclusive of our share of net ﬁ nance costs and tax of equity accounted investments. It isn’t an IFRS measure of proﬁ tability, ﬁ nancial performance or liquidity and may be deﬁ ned and used in diff ering ways by diff erent entities. We believe that Underlying EBIT provides useful information, but shouldn’t be considered as an indication of, or alternative to, proﬁ t or attributable proﬁ t as an indicator of operating performance. Underlying EBIT margin Comprises Underlying EBIT excluding third party product EBIT, divided by revenue excluding third party product revenue. Underlying EBITDA Underlying EBIT before depreciation and amortisation. Underlying EBITDA margin Comprises Underlying EBITDA excluding third party product EBITDA, divided by revenue excluding third party product revenue. Underlying Eff ective Tax Rate (ETR) Comprises Underlying income tax expense divided by underlying proﬁ t before tax; both the numerator and denominator exclude equity accounted investments. 138 SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS GLOSSARY OF TERMS AND ABBREVIATIONS US$/lb US dollars per pound US$/oz US dollars per ounce US$/t US dollars per tonne US$/toz US dollars per troy ounce UNITS OF MEASURE % percentage or per cent dmt dry metric tonne dmtu dry metric tonne unit g/t grams per tonne ha hectare KCal/Kg Kilo calories per kilogram Kdmt thousand dry metric tonne kL kilolitre km kilometre koz thousand ounces kt kilotonnes ktCO₂ -e kilotonnes of carbon dioxide equivalent ktpa kilotonnes per annum kW kilowatt kwmt thousand wet metric tonnes m metre ML megalitre Moz million ounces Mt million tonnes Mtpa million tonnes per annum oz ounce t tonnes tpa tonnes per annum tpd tonnes per day tph tonnes per hour SOUTH32 > ANNUAL REPORT 2019 > GLOSSARY OF TERMS AND ABBREVIATIONS 139 GLOSSARY OF TERMS AND ABBREVIATIONS This page is intentionally left blank. CORPORATE DIRECTORY CORPORATE DIRECTORY CORPORATE DIRECTORY GROUP HEADQUARTERS GROUP HEADQUARTERS GROUP HEADQUARTERS (REGISTERED OFFICE) (REGISTERED OFFICE) (REGISTERED OFFICE) Level 35 Level 35 Level 35 108 St Georges Terrace 108 St Georges Terrace 108 St Georges Terrace Perth 6000 Perth 6000 Perth 6000 Western Australia Western Australia Western Australia Phone: +61 8 9324 9000 +61 8 9324 9000 Phone: +61 8 9324 9000 Phone: Facsimile: +61 8 9324 9200 Facsimile: +61 8 9324 9200 Facsimile: +61 8 9324 9200 SOUTH AFRICA OFFICE SOUTH AFRICA OFFICE SOUTH AFRICA OFFICE 39 Melrose Boulevard 39 Melrose Boulevard 39 Melrose Boulevard Melrose Arch Melrose Arch Melrose Arch Johannesburg 2076 Johannesburg 2076 Johannesburg 2076 PO Box 61820 PO Box 61820 PO Box 61820 Marshalltown 2107 Marshalltown 2107 Marshalltown 2107 Phone: Phone: Phone: +27 11 376 2000 +27 11 376 2000 +27 11 376 2000 SINGAPORE MARKETING OFFICE SINGAPORE MARKETING OFFICE SINGAPORE MARKETING OFFICE South32 Marketing Pte Ltd South32 Marketing Pte Ltd South32 Marketing Pte Ltd 138 Market Street 138 Market Street 138 Market Street #26-01 CapitaGreen #26-01 CapitaGreen #26-01 CapitaGreen Singapore 048946 Singapore 048946 Singapore 048946 Phone: +65 6679 2600 +65 6679 2600 Phone: +65 6679 2600 Phone: Facsimile: +65 6826 4143 Facsimile: +65 6826 4143 Facsimile: +65 6826 4143 LONDON MARKETING OFFICE LONDON MARKETING OFFICE LONDON MARKETING OFFICE South32 SA Investments Limited South32 SA Investments Limited South32 SA Investments Limited 4th Floor, 62 Buckingham Gate 4th Floor, 62 Buckingham Gate 4th Floor, 62 Buckingham Gate London SW1E 6AJ London SW1E 6AJ London SW1E 6AJ United Kingdom United Kingdom United Kingdom +44 20 7798 1700 Phone: +44 20 7798 1700 Phone: +44 20 7798 1700 Phone: Facsimile: +44 20 7798 1701 Facsimile: +44 20 7798 1701 Facsimile: +44 20 7798 1701 This Annual Report is printed on This Annual Report is printed on This Annual Report is printed on paper that is FSC (Forest Stewardship paper that is FSC (Forest Stewardship paper that is FSC (Forest Stewardship Council) certiﬁ ed and manufactured Council) certiﬁ ed and manufactured Council) certiﬁ ed and manufactured from plantation-grown timber. Both from plantation-grown timber. Both from plantation-grown timber. Both the paper manufacturer and printer the paper manufacturer and printer the paper manufacturer and printer are certiﬁ ed to the highest possible are certiﬁ ed to the highest possible are certiﬁ ed to the highest possible internationally recognised standard internationally recognised standard internationally recognised standard for environmental management. for environmental management. for environmental management. CORPORATE DIRECTORYSOUTH32.NET SOUTH32.NET SOUTH32.NET

Continue reading text version or see original annual report in PDF format above