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Edited Transcript of S32.AX earnings conference call or presentation 17-Feb-21 11:00pm GMT

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Half Year 2021 South32 Ltd Earnings Call (Australia) PERTH Feb 19, 2021 (Thomson StreetEvents) -- Edited Transcript of South32 Ltd earnings conference call or presentation Wednesday, February 17, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Graham Kerr South32 Limited - CEO, MD & Executive Director * Jason Economidis South32 Limited - Joint COO * Katie Tovich South32 Limited - CFO * Mike Fraser South32 Limited - COO ================================================================================ Conference Call Participants ================================================================================ * J. Timothy Clark SBG Securities (Proprietary) Limited, Research Division - Head of Metals and Mining * Myles Allsop UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the South32 H1 FY '21 Financial Results and Outlook Investor and Analyst Briefing, U.K. and SA. (Operator Instructions) I would now like to hand the conference over to Mr. Graham Kerr, CEO. Please go ahead. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [2] -------------------------------------------------------------------------------- Thank you. Good morning, everyone, and thanks for joining us for our financial results conference call for the half year ended December 31, 2021 (sic) [December 31, 2020]. I'm joined at my end by our Chief Financial Officer, Katie Tovich; and on the lines, I have our 2 Chief Operating Officers, Jason Economidis; and Mike Fraser, to answer any questions you might have around their operations. Look, I'll start by just calling out we provided a short video that provided an overview of our financial results. And it's available on our website. But then if we take a step back and think where are we today, a couple of introductory comments. Look, we have a simple strategy we've had in place since day 1 of the merger that we believe is still fit for purpose across all cycles. It's underpinned by a strong balance sheet and disciplined allocation of capital, and it's built around 3 simple pillars: optimize the existing operations, unlock the potential of those operations and identify new opportunities to grow the portfolio. If we sort of look at those in slices, and start with optimize. Look, it was really great to see another period of good operating performance for the heads of the operations. We achieved 3 records of production for the half: Worsley Alumina, Brazil Alumina and GEMCO. We also upgraded full year guidance at Illawarra Metallurgical Coal, Cerro Matoso and Cannington. And the work that's been done on the volume efficiencies and cost control means that unit costs are well controlled despite the strengthening currencies we've actually seen. It was really pleasing to see, and you'll see it in the slide pack, our core markets are rebounding, and we're starting to see prices increase as we start calendar year 2021, which has given us confidence going forward. Today, you would have seen that we are paying a dividend of $0.014 per share, and we increased our capital management program by USD 250 million, which means we've got $259 million to be returned by at least September '21. If we sort of move to the next pillar of the strategy about unlock. There's some great examples in the pack about what's been done in the operations to unlock the full potential of the business. After doing a great job at La Esmeralda, the team at Cerro Matoso have now accelerated the development of the Q&P project at Cerro. And they're also progressing numerous improvement in life extension studies across the business to get us to a sustainable level and increase the life of Cerro Matoso. At the same time, we're in the middle of rolling out the energy technology at Mozal and studying its application to be rolled out at Hillside. And of course, we're doing all the work around the decarbonization studies that we've spoken about in the past as we get prepared to release our updated targets later this calendar year. In terms of our mix of growing or changing the portfolio, we continue to exit to lower returning businesses. In the half, TEMCO sale was complete. Metalloys, on care and maintenance. We have made some good progress on South Africa Energy Coal with a couple of significant milestones. At the same time, we unlock value through the sale of a noncore precious metals royalty portfolio for USD 55 million, to Elemental. At the same time, there were a few surprises in the period, I'm sure we'll touch on it, but Independent Planning Commission's decision on refusing Dendrobium Next Domain for the year expansion project, certainly came in as a surprise to ourselves and our stakeholders, and we can talk through the implications of that. On top of the things that we're working on that way, we've also made good progress, if you like, on the pipeline of growth functions, particularly around Hermosa, where we continue to progress the Taylor study to be completed into quarter 4, and the Clark to be finished in the first half of FY '22 with regards to a scoping study. The Ambler PFS is progressing, and we'll be back on the ground with exploration this season following the COVID impacts for the previous year. At the same time, we've got 20-plus exploration partnerships, where we now have with junior companies with a bias towards base metals. So in summary, our balance sheet remains strong. We exit the half with $275 million net cash, and that has grown to USD 452 million by the end of January with working capital unwinding. Our buyback is continuing, and we have major catalysts coming up that will move the quality of the portfolio in the coming year as we start to see a strong uptick in our prices. With that, I'll open it up to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Tim Clark with SBG Securities. -------------------------------------------------------------------------------- J. Timothy Clark, SBG Securities (Proprietary) Limited, Research Division - Head of Metals and Mining [2] -------------------------------------------------------------------------------- Congratulations on the results. Just a couple of quick questions on those. The new projects, the Cerro project and then GEMCO projects, just the life of mines there are sort of 9 years and 5.7, 6 years. So I just wonder if you could comment on the project versus life. And then my second question, just -- I'd really appreciate a little bit of color on the Cannington volumes upgrades. What's happening there? Why the higher volumes? And does that also impact the 11-year life? Or is it just better recovery? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [3] -------------------------------------------------------------------------------- Yes. Well, maybe we'll start with Cerro Matoso. And I'll get Mike, maybe you can talk about the projects in the pipeline and where the team's up to there? -------------------------------------------------------------------------------- Mike Fraser, South32 Limited - COO [4] -------------------------------------------------------------------------------- Tim, thanks for the question. Look, Cerro has been on a really interesting journey. And one of the things that underpins Cerro's life is what we call Contract 051, which is essentially the concession agreement that determines our arrangements with the mining agency. The first part of the contract runs through to 2029, but we have an option agreement to extend the life for a further 15 years to 2044. And the option agreement requires us to pay an additional one-off royalty of around $42 million to obtain that life extension. Obviously, we've been working with the mining agency around the terms of that extension, particularly given when this was negotiated in 2012. The conditions have changed. So we're looking at alternative ways of structuring that payment. But the projects that we're looking at are all options that we believe provide a very good return even within this initial period of the contract, i.e., until 2029. In particular, Queresas and Porvenir, as Graham has said, it's an additional satellite deposit, which provides us the opportunity of increasing the nickel grade and provides a sweetener in the same way that La Esmeralda did to provide us with a lift in nickel production over the next 9 years. The second project that's been explored is the mechanical ore concentration project, which also provides us an opportunity of lifting production by increasing the nickel ore content over the next 9 years. What is also interesting about the mechanical ore concentration project is that in the life extension option with -- to 2044, one of the requirements was to lift the processing capacity by 50%. And this mechanical ore concentration, whilst the economics pay back within the next 9 years more than sufficiently, it also meets that other condition on the life extension. So it kind of hits both those bubbles. But what is important to take away is that even without that decision to extend the life, these projects are all hugely value-accretive with very, very good IRRs and allows us to really deliver a nickel volume of around that 40 to 42 kilotons over their remaining life. But again, if we make that decision to extend the life to 2044, this gives us a really good base to continue there. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [5] -------------------------------------------------------------------------------- And probably worth noting, Mike, reflected those good IRRs, it's actually not very large amounts of capital. And the team, I think, of Sean Wood can do at La Esmeralda when they deliver that quicker and then the lower cost than what the original estimate was. Tim, you're okay if we move on to Cannington next? -------------------------------------------------------------------------------- J. Timothy Clark, SBG Securities (Proprietary) Limited, Research Division - Head of Metals and Mining [6] -------------------------------------------------------------------------------- Yes. That was very helpful. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [7] -------------------------------------------------------------------------------- Jason, you want to talk a little bit about Cannington? -------------------------------------------------------------------------------- Jason Economidis, South32 Limited - Joint COO [8] -------------------------------------------------------------------------------- Sure. So in short, it's a combination of bringing forward some higher-grade stopes, but also higher production. But what we are working on is creating some longer life at the back end with some additional stopes and remnants in the tail. So that's the production profile for Cannington. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [9] -------------------------------------------------------------------------------- Maybe just a little bit of detail on the shaft potentially and the work around that, that will probably conclude in the next 6 months is worth sharing as well, Jason. -------------------------------------------------------------------------------- Jason Economidis, South32 Limited - Joint COO [10] -------------------------------------------------------------------------------- Yes. Thanks, Graham. Yes. So we are busy at the moment working through a progression to not use the shaft for hoisting, but to go to 100% trucking. That will actually also give us access to higher-grade stopes that were positioned around the shaft itself, which has actually been quite value-accretive for us. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [11] -------------------------------------------------------------------------------- So Tim, that's probably Cannington, if you like. I'll take the last one around GEMCO. Look, I mean, GEMCO, as you rightly point out the moment, has a resource life of about 5.7. And that has -- sorry, reserve life of 5.7 and a resource of about 11. The Eastern Leases, if you like, is certainly designed to basically add at least 3 more years into the reserve life. It is relatively low CapEx. It's currently into the feasibility study. And we would aim to make a final investment decision towards the back end of FY '22. On top of that, we think, look, there are a couple of years on top of that, that probably haven't been included in the resource reserve that will eventually move across. But probably the big opportunity for us lies in the southern east areas, we're relatively unexplored. We're in the second stage of an exploration project there. Yes, that's a 2-year program, which basically has about 94 kilometers of drill lines and 792 infill RC drill holes. Yes, that program commenced in October. We've done about 221 holes as at the end of December. Exploration will restart this year when the dry season commences in '21, being the wet season at the moment. And we expect that to be completed by the end of 2021 in terms of calendar year. I think, look, the opportunity there is the resource is large. It's not well explored. So this exploration program is going to be important to understand the potential. But as we have mentioned starkly in the past, I think we're also conscious of the area, probably more culture heritage, moving ahead with traditional owners. So we also work with them about what will be available. Too early to give you some color yet on that. We just don't know if it's going to be 2, 5, 10, 15 years until we have actually finished the program. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Your next question comes from Myles Allsop with UBS. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [13] -------------------------------------------------------------------------------- Yes. And maybe to sort of to go into a little bit more detail as I've been listening to the call overnight on sort of Dendrobium and the implications for Illawarra, the options you have. Does Illawarra stack up as a sort of single longwall, medium term? Or are we talking about potential closure in 4 years if you cannot find a way forward with the water closes? That's the first question. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [14] -------------------------------------------------------------------------------- Yes. So maybe let's sort of break those into a couple of components. We'll talk a little bit about the IPC, then we'll talk about what it means, implications. And if we decide not to progress with the resubmission, what does that look like. I mean what we would start by saying, the submission that was made for the government and then referred on to Independent Planning Commission was around Area 5 and Area 6. The government was very supportive in terms of what we were doing there, in terms of how we're managing the water issues, the cultural heritage issues and the mine planning and subsidence, et cetera. The Independent Planning Commission, unfortunately, last Friday, so it's relatively fresh, surprised ourselves, the government, our supporters of the project and probably the appointments of the project with the refusal to actually give us approval to go forward. I think the other thing that probably disappointed us was there was not really an opportunity to actually address, if you like, some of their concerns, which we think are factually correct. So that was probably disappointing from our side. But the reality is, look, we take our environmental responsibilities very seriously there. We've been working in that sensitive area in terms of underwater catchment for a period of time. We'll continue to engage all our stakeholders to understand the right way forward. If you think about what's in front of us, what we can do now, there are essentially 4 avenues that are there. One is to actually appeal the decision. That appeal is based on process and not merits. There are a number of instruments, which the government has to intervene and overturn the IPC, if you like, decision. That's sitting there as well. There actually has been a bill raised by one of the independents, if you like, into legislation about trying to get that moving. There is also the option for us to submit a revised plan that addresses some of the concerns from the IPC or we can accept the decision and optimize the business, if you like, without Dendrobium Next Domain. What we have guided the market through at the moment -- because that decision was made last Friday, what we are doing, obviously, at the moment is understanding all our options, talking to each of the stakeholders, like the government where we can, some of the key customers and all key stakeholders, such as BlueScope, et cetera. And there was a round table held by the government this week in Illawarra, which Jason participated in, just to understand all the options that sit in front of us. And at the same time, what we're doing is also looking at a plan for DND or Dendrobium Next Domain area, which would really -- Area 5, which would really focus, if you like, on minimizing why we don't agree with them to some of the concerns that the IPC raised. Clearly, we want to complete that plan to understand the economic impact. What does it actually mean for returns because we're not interested in doing a project that's not value-accretive to our actual business. At the same time, just in case that is not the option that we choose to pursue, we are continuing to look at ways to optimize the Appin complex. And also what's left at Dendrobium. So if we sort of break that into components, the way we talked about Dendrobium Next Domain is we needed that to sort of come online around 2025. We have some alternate areas that we can look at in terms of the mining areas that we can work in, such as Area 3C. The first, probably, almost 2 long walls or 1 or half-long walls are pretty easy to mine. After that, it would require a bit of time for gas extraction. There is some options around remnant material that's left at Dendrobium that we could actually mine as well. So that's something the team will look at. At the same time, equally important is what we've been doing at Appin in the background. Now obviously, we returned last April to the 3 wall long configuration around the complex, i.e., the 2 in Appin. And at that time, we've been upgrading the guidance about how we've been performing. And the hybrid plan at Appin at the moment is certainly working well by maximizing the productivity of the 2 longwall faces. And that will continue over the next 3 years before we transition to a simplified mine layout. And we'll talk about that in a second. If you think about where are we today? Appin itself, that's probably running at about a unit cost, at the moment, about $112 million a tonne. And then it's probably about $27 a tonne, which is basically sustaining CapEx. As we go into the next phase of Appin, where we increase the longwall length, which reduces the number of longwall moves, it takes away some of the delayed relocating longwalls, obviously, and have benefits for productivity and costs. It also means that we have 30 kilometers of underground development to do. We go from 4 bench shafts to 4. We go from 7 to 4 continuous miners, and our gas rigs drop as well. We believe without optimizing it, that sort of takes you to a number which is probably much closer to somewhere between $105, $110 a tonne all-in. Clearly, Jason and the team also think they have some opportunities to improve that, around what they could do around alternate access as the mine gets older and further away and some other productivity metrics. Their target in that case would be pushing Appin only closer to $100 a tonne. But clearly, the preferred case for us, if the economics stack up, would be to do Dendrobium Next Domain because it allows you to basically, if you like, average the costs. The only other thing you shouldn't sort of lose sight of is, generally speaking, while higher cost, Appin does attract a higher premium. But in time, as you move into Dendrobium Next Domain, you start achieving that anyway. Does that sort of help, Myles, around that? -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [15] -------------------------------------------------------------------------------- Yes. So just to be clear with Appin, that all-in, so unit cost plus sustaining, after your optimization, would be $105 to $110 a tonne? Is that right? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [16] -------------------------------------------------------------------------------- Correct. Correct. And look, you guys -- so that will kick in from about beyond 2025. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [17] -------------------------------------------------------------------------------- Okay. Okay. No, that's helpful. So when will we... -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [18] -------------------------------------------------------------------------------- Sorry, just on top of that, I think there's more opportunity to optimize what we do in that space, that alternate access, et cetera, to push it close to that $100 a tonne. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [19] -------------------------------------------------------------------------------- Okay. And when will we get the next development here in terms of understanding which of those 4 avenues with Dendrobium are going to be kind of sort of adopted as such? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [20] -------------------------------------------------------------------------------- Look, I would say, certainly... -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [21] -------------------------------------------------------------------------------- Then we'll get more clarity. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [22] -------------------------------------------------------------------------------- Very much by the end of this financial year, we would actually have the firm way forward in terms of what it looks like for costs and CapEx. If we decide to go down the appeal process, that is actually -- you've got a 3-month time limit to actually do that. And at that time, we'd probably start indicating before that, obviously, what our options are. The key to the answer at the moment, Myles, is to do the work around what the options are, to understand what the value is for our shareholders and other stakeholders. And that takes a bit of time to make sure we get that right. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [23] -------------------------------------------------------------------------------- And then second question was just on sort of South Africa Energy Coal. Hopefully, we don't have to keep asking this every half. Soon it will all be over. But are you still absolutely confident that by the end of this quarter, we'll have the deal done? Are there any risks to the deal? And then how are you thinking about reshaping the balance sheet after the exits and the provisions have gone? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [24] -------------------------------------------------------------------------------- Yes. Well, I'll let Katie talk about the balance sheet, if you like, in a second because that's in her domain. What I would say though, at the moment, is it was an interesting set of results when you look across our peer group. And if you look across Glencore Australia, BHP Australia and Whitehaven, there's about AUS 1.5 billion worth of paying if you like, U.S. -- sorry, rough Australian in terms of write-offs and impacts. And it's a very tough space to be at the moment, energy coal. I think you see that in our results with SAEC. Look, what I would say is, as we sort of progress this deal, if you look at those critical approvals, what actually has been fully done, Myles, is Section 11 department minerals resource and energy is done with no onerous conditions. We obviously had a long process around South African competition, which is approved with no onerous conditions. We've been working really hard with Eskom and Seriti about putting together a deal that sort of works for us with Seriti, and Eskom by lowering the average cost of coal by putting the 2 businesses together. We feel that's in a strong place now where we're fairly aligned. And then it needs to go through, if you like, the governance process internally of Eskom and then our international treasury, all the time lines, all the assurances are, that you know we should meet that deadline by the end of this quarter. I think the only thing that sits in my mind is, obviously, there's 2 things going on in South Africa at the moment, that it probably slows this down a little bit in the last 3 months, and hopefully, we're behind those. And we're seeing the back of the second wave hopefully now, but obviously, South Africa has been hit very hard by COVID cases, officially about 1.5 million, 46,000 deaths, whereas the media speculates it's well in excess of 100,000. And it's a country that was already reining around fiscal challenges, their ability to fund, put a vaccine out there has been a real stretch for them. So that certainly had some impact, some people like National Treasury and our ability to engage as they're being focused on other issues. The other one that's sort of being bouncing around for the last couple of months is the Zondo commission of inquiry into state capture has been going on for a period of time now since Zuma left the presidency. The last 3 or 4 months has been very much focused on Eskom's involvement and the purpose of Optimum Colliery by the affiliated groups. So that certainly, if you like, had a number of current and previous Eskom executives and senior people going through that process. So that's also slowed down involvement of people. And as you would expect and as we would want, it's resulting in them following it very carefully in terms of their governance framework into the (inaudible). There are just 2 things that are sort of playing in the background. Both of them seem to be heading more on a positive trajectory now, but obviously, they are a little bit of 2 wildcards that sit out there. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [25] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [26] -------------------------------------------------------------------------------- Balance sheet, Katie? -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [27] -------------------------------------------------------------------------------- In terms of the balance sheet? -------------------------------------------------------------------------------- Katie Tovich, South32 Limited - CFO [28] -------------------------------------------------------------------------------- Yes. Thanks, Myles. Look, yes, in terms of the balance sheet, I mean, I think, maybe just sort of -- just as a refresher. We certainly still believe that a strong balance sheet is fundamental to our strategy, and we don't believe in combining operational and financial leverage. So as we think about our balance sheet going forward, we will absolutely continue to maintain that same philosophy. We have talked about a net debt range of sort of 0 to $250 million being our sort of optimal range in terms of our current structure. Certainly, post the divestment of SAEC and also TEMCO, Metalloys, we have said we'll come back with a relook at that. I think the other thing not to forget is we actually -- it's a fairly dynamic process for us in any case. We review our balance sheet six monthly with a forward view in terms of what our capital profile looks like, our capital intensity and so on. So while we'll come back, it will be an ongoing dynamic process as that capital profile changes, as our portfolio changes. But certainly, the removal of SAEC specifically will improve our capital intensity as a business. The removal of the rehabilitation provisions is also supportive of a more robust balance sheet in terms of certainly rating agency perspective. So all of those elements will be considered as we complete that work. And it's probably back end of April where we'll be in a better position to have that conversation with you again. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [29] -------------------------------------------------------------------------------- Okay. But we shouldn't just add the $800 million provisions to the flat to $250 million net debt? I think that, that's the new level going forward. It's going to be somewhere probably a bit less than that. -------------------------------------------------------------------------------- Katie Tovich, South32 Limited - CFO [30] -------------------------------------------------------------------------------- Yes. Look, if you think about the provisions, they're actually just part of your denominator. So it's a ratio-based way that we think about this. So it's definitely not a direct translation. Yes. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) We have a follow-up from Myles Allsop of UBS. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [32] -------------------------------------------------------------------------------- Okay. That's great. A few other questions I had that I'll be able to -- and then I'll hop back in the queue. Just in terms of restructuring and how we -- well, how you guys are going to take the business forward, what other assets kind of sit kind of as marginal? How are you thinking about processing assets in view of climate commitments and all the rest of it. Does -- how does aluminum sit in the portfolio longer term and other assets? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [33] -------------------------------------------------------------------------------- Yes. So maybe break that into components. I mean obviously, we have an aluminum chain, if you like, from bauxite to alumina to aluminum. We're a long in alumina. We would probably -- well, we would never build another aluminum smelter. But I would say both Hillside and Mozal for a period of time now have been actually testing if you like, the maximum technical capacity. And I think both Sam and Calvin have done a great job in terms of not only managing the distraction of COVID-19 and the challenges, but also continuing to lowering the cost base and improve the efficiency of those operations. And I think that's reflective of the margins you see in the presentation today, that we've seen a growth. Obviously helped by price, but also helped by self help. And from our perspective, I'm not sure in the current marketplace if you want to be more long in alumina. So there's sort of that connectivity for us. You do raise a good point, Myles, around carbon footprint. We also had a slide pack in there that talk about Scope 1, Scope 2. And clearly, when you look at the 4 operations that make a difference for us, it is Hillside, it is Mozal, it is Worsley, it is Illawarra. Both Worsley and Illawarra have a number of decarbonization projects underway. Obviously, we've got a number of energy efficiency projects underway at both Mozal and Hillside. At Mozal, one of the challenges for Mike, Sam and the team is to try and secure the future energy supply in that space. And certainly, in that space, we're working hard to continue to have that hydro preferential access that we have today. We back that up with gas rather than coal from Eskom, as they develop the new fields in the North. And likewise, when it comes to Hillside, and Mike can give you an update in a second about how the power contract is going, but there is a strong push there in South Africa to obviously move down the renewables half as well and also looking at gas as an option to potentially reduce some of the energy requirements or intensity. So these are kind of things we're talking about in that space. We do plan towards the back end of this calendar year to give some very clear targets and plans to what those decarbonization milestones look like, so we can share those with our investors. The team are working hard on the numbers now. Maybe, Mike, you can make a little bit of comments, if you like, around the Eskom contract and where that's up to for Hillside? -------------------------------------------------------------------------------- Mike Fraser, South32 Limited - COO [34] -------------------------------------------------------------------------------- Yes. Thanks, Graham. Look, it's been a long journey for us, but we've made excellent progress with Eskom. And it's taken -- been engaging with Eskom for around 5 years on resolving what initially was a dispute over the term. But then we realized that this needed to be resolved commercially. So what we have landed on is we've got an agreement with Eskom around a new tariff structure for Hillside, which is very similar to the way that we structured Mozal, which is essentially a fixed rand price contract for all 3 potlines, so unified contract for a period of 10 years with a -- it's got a PPI escalator on that. I think just -- so where it's at in the process, we've got an agreement with Eskom. It's been through their internal processes, and it was submitted to NERSA, the energy regulator, in the beginning of January. They theoretically have 120 days to assess that. What is also pleasing and partly why it took so long to ultimately get to NERSA is that the regulator had asked the DMRE for an updated long-term incentive tariff policy for them to assess this against, and that was released also in around November. So that's all available now to NERSA to determine. And I think, pleasingly, this agreement is in line with that. So we should see very low level of anxiety because it will be aligned to that policy framework. So we feel quite good, and we expect that to be delivered in this half. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [35] -------------------------------------------------------------------------------- The other thing to talk about... -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [36] -------------------------------------------------------------------------------- And how much... -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [37] -------------------------------------------------------------------------------- Sorry, Myles. Keep going. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [38] -------------------------------------------------------------------------------- I was just going to say how much -- what was the relative cost differential of the power that you'll be paying under the new contract versus the current contractors as the world looks today? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [39] -------------------------------------------------------------------------------- So Tim (sic) [Myles], it's already embedded in there at the moment because of the internal agreement. So you're seeing that. The way I think about it in broad brushstrokes, as Michael -- Mike described it, is think about the Mozal kind of cost to contract. It's similar around that. -------------------------------------------------------------------------------- Mike Fraser, South32 Limited - COO [40] -------------------------------------------------------------------------------- And Myles, maybe the one thing that makes it really hard to determine is because you are moving away from a contract that was U.S. dollar-denominated and linked to the price of -- the LME price to a fixed rand based, it actually is very volatile from periods depending on where the currency is and depending on where the price sits -- where the, yes, the LME price sits. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [41] -------------------------------------------------------------------------------- Myles, probably the other one worth -- currently, when you're talking about portfolio obviously is the work we're doing on exploration, but probably more importantly, both Hermosa and Ambler metals, is the rebalance of the portfolio for base metals. And there's a couple of drivers to that. Obviously, one is around the demand-supply fundamentals. And as you know, those are the kind of products that are used more, if you like, in the decarbonization and greening. But I think the other option there is that both new operations that certainly give you the opportunity to have a much small line, not only footprint overall, but obviously an impact on the climate. For example, we've been looking at things of tests around battery-operated trucks, electric equipment underground with Sandy. So they will bring those kind of benefits. And obviously, the other one is some of those will be used, silver in solar panels from Taylor. And if you think about Clark, now that's a zinc manganese oxide resource, and that's certainly tilted towards the manganese sulfate monohydrate, which is a precursor of the battery market. So I think that helps us sort of move the portfolio away from those heavy and processing-intensive industries to those metals that are more suited to that growing demand and that opportunity. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [42] -------------------------------------------------------------------------------- Okay. Maybe -- it's always good to hear your views on the manganese market. Obviously, we've seen a bit of a recovery in the price. And how sustainable do you think that is as we look through the rest of this year? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [43] -------------------------------------------------------------------------------- Look, it's an interesting one because, obviously, we had a slide in the pack, as we always do, about some of the markets that matter to us. And manganese is certainly one of those. And you'll see that's in the pack towards the back end of the pack. It's actually on page -- just bear with me for a second, it's on Page 28 of the pack. And what we're really showing there, I guess, is the continued charts that we're showing in the back. But maybe before we touch the chart, if we just touch on the themes. Global supply remains tight despite the rebound, which is providing support to (inaudible). If you look at calendar year '21, the outlook will be driven by supply with alloy demand expected to remain strong, as steel production actually stays strong. Long term, our view hasn't changed that the marginal cost of production will be set by supply transitioning underground over time. But probably the real informative chart that we showed on the bottom is, if you look at the bottom right-hand slide, you'll actually see in that space there, but what you do see is while the stockpiles, which is the gray back area, have increased in China, the reality is the port consumptions in months haven't moved up the same relativity. And that's really driven by that comment we've made over the last couple of years, where you've seen the domestic product really fall away, if you like, in China. And they are heavily dependent, if you like, on the imports. So as a consequence, support stocks have gone up. But if you look at port consumption in months, it's not such a big jump. Clearly, what you have seen in the last couple of quarters, if you actually see the seaborne exports recover, particularly coming out of COVID, and particularly you see the jump between quarter 2 calendar year '20 to for quarter 3 calendar year '20, we have actually seen, if you like, and the South Africans come back in a relatively big way. I think trucking out of South Africa probably jumped from 20% the prior year to about 40% this year as people continue to look at those opportunities. -------------------------------------------------------------------------------- Myles Allsop, UBS Investment Bank, Research Division - Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [44] -------------------------------------------------------------------------------- Where do you see the marginal cost now at the support level? -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [45] -------------------------------------------------------------------------------- Yes. Look, we'd still say that the marginal costs in where you are today will actually be driven obviously by the trucking costs. And that is still very dependent on your position on rand and the grade that's actually coming out. From our perspective, we see that -- we generally talk about somewhere between $4 to $5, but it's probably sitting around the $4.20, $4.50 at the moment, depending on your view on currency. And that's a 44 CFR equivalent. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Kerr for closing remarks. -------------------------------------------------------------------------------- Graham Kerr, South32 Limited - CEO, MD & Executive Director [47] -------------------------------------------------------------------------------- Yes. Look, thank you very much, and thanks, everyone, for your time today because I know it's a busy day ahead. And it has been a busy day for many of you. Look, well, I would leave you with the comment, it's great to see a strong operating performance in the teams again in this 6-month period, which I think is building a strong track record. We're really pleased to see some of our key commodities that have been under price pressure for probably the last 12 months has very much turned the corner at the start of this calendar year, which is always a positive. But I think our strong balance sheet, our ability to increase shareholder returns and the fact that we have a couple of key inflection points with momentum around our portfolio with the divestments and project progress, I think, is important. And I think that positions us well to be in a great spot to actually create value for our shareholders as we go forward. And finally, just to thank you for your time again today and your support.