Earnings Transcript for SHTLF - Q4 Fiscal Year 2016

Executives: Graham Kerr - CEO Brendan Harris - CFO Mike Fraser - Chief Operating Officer of Africa Ricus Grimbeek - Chief Operating Officer of Australia

Analysts: Lyndon Fagan - JP Morgan Paul Young - Deutsche Bank Duncan Simmonds - Merrill Lynch Brendan Fitzpatrick - Morgan Stanley

Operator: Thank you for standing by. And welcome to the South32, 2016 Annual Results Announcement and Analyst and Investor Question-and-Answer Session. All the participants are in a listen-only mode [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Mr. Graham Kerr, CEO. Please go ahead, Mr. Kerr.

Graham Kerr: Good morning everyone and welcome to our FY16 results presentation. I’m joined here in Perth by Brendan Harris, our Chief Financial Officer; and Ricus Grimbeek, our Chief Operating Officer for the Australia region. Mike Fraser, our Chief Operating Officer for the Africa region, joins us by phone from Johannesburg. I will start by sharing our key highlights then Brendan will take you through our financial resultsm before I conclude with our outlook. Firstly, can I direct your attention to the important notice on slide two? If we turn to slide three, I’m pleased to report that despite the challenging price environment, our operating performance and underlying financial performance was strong. Consistent with our strategy, we’ve optimized our existing operations as we transition to our regional model, and completed the restructuring initiatives announced at our half year results. We tick five production records and achieved guidance for the majority of our upstream operations. We reduced controllable costs and capital expenditure by $692 million, and generated free cash flow of $597 million to finish the year net cash of $312 million. Against this backdrop, our Board has announced an inaugural dividend of $0.01 per share. Turning to slide four, while our share performance on volume, cost and capital expenditure was strong, sadly we lost four of our colleagues in the financial year. These fertilities had an immense impact, not only on their families and loved once but on all of us at South32. We are working hard to deliver a step change in our safety performance by building an inclusive workplace with a strong culture of care and accountability where work is well designed, and we continuously improve and learn. Our team is committed to invest in time, energy and leadership to make a sustainable and lasting change to our safety performance. I will now hand over to Brendan.

Brendan Harris: Thanks, Graham. Slide six shows that FY16 underlying EBIT was all but accounted for by uncontrollable factors, as lower commodities prices and associated reduction in price linked costs a stronger U.S. dollar and inflation reduced profit by $979 million. We responded by restricting operations including higher margin businesses, and curtailing or closing loss making capacity. Our focus on value, cash flow and returns rather than volume, reduced underlying EBIT by $258 million. But as a result, we have a more flexible stronger Company, having reduced controllable costs by $386 million. These savings and $120 million reduction in depreciation, included in other, underpinned underlying EBIT of $356 million premised on an EBITDA margin of 21.5%. Depreciation, excluding equity accounted investments, is expected to decline further to $720 million in FY17, as a result of impairments recorded in the first half. These impairments and other earnings adjustments are described in the appendix. Separately, I remind you that power sales in Brazil will no longer be recognized within profit and loss, as we booked a $24 million provision within other items to reflect the onerous nature of remaining power commitments across FY17 and FY18. Power sales in Brazil contributed $68 million to underlying EBIT in FY16, a $60 million reduction year-on-year. Underlying net interest expenses of a $125 million, includes the $96 million unwind of the discount applied for rehabilitation provisions, and a $37 million finance lease expense primarily at Worsley. Underlying income tax expense of $93 million and our effective tax rate of 36.6%, reflects the tax closings of the countries in which we operate and the profitability mix. A simple depletion of cost is presented on slide seven, with the start and end points being revenue less EBITDA, including equity accounted investments less other incomes for FY15 and FY16. Deflation rate pressure is evident across the industry, and in our case, appreciation of the U.S. dollar reduced cost by $707 million. Lower commodity prices led to lower price linked cost and royalties for $188 million benefit and lower third-party product costs. Conversely inflation, most notably in Africa, increased cost by $141 million. Now to the controllables, on slide eight, you can see a detailed reconciliation of the $386 million reduction in controllable costs. Major savings have been embedded in the regions, marketing and corporate with around 80%, arising from the lower utilization of and rates paid for, contractors for $102 million. At lower labor costs for $98 million, lower consumable and energy input costs for $66 million and lower freight and logistics costs for $45 million. We further reduced our functional structures in the fourth quarter to create a lean organization and generate savings in the corporate center of $65 million. This net to a benefit of $36 million once cost associated with each group sales are eliminated upon consolidation. Looking ahead, annual cost to the corporate of around $70 million will be around half the level envisaged at the time of listing. Our segment note on Page 37 of our profit release shows that around $30 million relates to the depreciation of facilities in construction and technology. So, with more than 85% of these savings being sustainable, we are well-position to achieve our operational cost targets. Finally, within earnings adjustments, we provided $63 million for one stop restructuring costs, with $28 million still to be paid at year-end. On slide nine, you can see that we reduced capital expenditure by $306 million and generated free cash flow of $597 million. We also received dividends of $33 million from our investments in Manganese and MRN while cash flow in the second half benefited as a $38 million overdraft facility owing to the group was repaid by the Manganese joint venture. Working capital remained well in controlled as every stage debtors declined from 21 at December 31, to 19. In FY17, we expect capital expenditure, including equity accounted investments to remain largely unchanged at around $450 million. This includes study and land acquisition costs associated with our energy coal projects, the latter of which remains subject to approval. At similar rate of sustained investment is expected in FY18, although the total level of expenditure depends on the progression of our major projects. The Klipspruit Life Extension project is the sole major project scheduled for approval before the end of FY18. To our balance sheet on slide 10, here, you can see that we converted an already strong start in net debt position of $402 million to a 30 June of net cash balance of $312 million. The $630 million contribution from free cash flow and dividend was supplemented by an FX related reduction in finance leases, and the closure of the legacy financing arrangement, which reduced net debt by further $111 million. Given consistently low cash rate, we reviewed the discount rate applied to closure provisions for a relatively flat year-end balance of $1.04 billion. The accounting treatment is noted in the appendix. So, reflecting on our first year, a willingness to act decisively, optimize production, costs and capital expenditure, leaves me no doubt that we have a much stronger and more flexible Company. It is important that we remain disciplined and predictable in approving an unplanned shareholder dividend of $0.01 per share we have adhered to our capital management framework. This framework will continue to guide our decision making as we seek to maximize total shareholder returns. Graham, back to you.

Graham Kerr: Thank you, Brendan. Our strategy designed to deliver circulating shareholder returns is simple; to optimize our existing operations; convert high quality resource to reserve; and identify and pursue investment opportunities beyond our current portfolio. The strict application of this strategy and an overarching focus on cash flow, value, and investment returns, delivered strong results in the areas we control in FY16 and has positioned us well to stretch performance in FY17. To slide 13, our operations have significant reserve loss that underpin a stable production outlook, in most cases, with minimal capital investment. Our FY17 production guidance remains largely unchanged with the exception of Cannington and South Africa energy coal, which I will talk to you shortly. And we have provided production guidance for FY18 for the first time. Worsley Alumina is expected to maintain production at its nameplate capacity of 4.6 million tonnes per annum across FY17 and FY18. Guidance for Brazil Alumina for FY17 is unchanged at 1.32 million tonnes, with a small increase in production expected in FY18 to 1.35 million tonnes. At Illawarra Metallurgical Coal, the Appin Area 9 project completed ahead of schedule and below budget in January 2016 has significantly increased longwall utilization and cutting rates. Due to two longwall moves and one step around planned in FY '17, guidance for FY17 is unchanged at 9.5 million tonnes, and is expected to be maintained in FY18. Australia Manganese produced a record 3.1 million tonnes in FY16 as concentrated performance improves and the premium concentrate ore project was completed. Consistent with prior guidance, we will continue to prioritize value over volume at 3.1 million tonnes for FY17 and FY18. At South Africa Manganese, while we will continue to produce subject to demand, we expect to maintain production at 2.9 million tonnes in FY17. Moving to slide 14, in February, we provided all-in unit cost targets for FY17 to farther their operations. These targets shown by the light gray bars on this slide were based on disclosed commodity price and foreign exchange assumptions at the time. The dark gray bar shows our current unit cost targets updated from our May commodity and FX assumptions. We have also shown our updated cost guidance using our February commodity and FX assumptions to demonstrate the progress we have made against these targets by some factors within our control. This is shown by the yellow bars on this slide. As you can see, our revised unit cost targets at all operations by one are equal to or lower than our original guidance. This shows we’re making real progress against these targets, despite factors outside of our control such as the impact of price and FX. To give you some examples, at Worsley Alumina, we restructured our teams to create discrete mining and refining operations to provide greater focus. We reduced employee and contractor numbers by 24% and embedded procurement savings, including lower energy costs, to reduce all-in costs in FY16 by 17%. Moving to FY17, as shown by the dark gray bar, we expect a further reduction in unit costs of 8%, including updated currency and FX assumptions. At Illawarra Metallurgical Coal, we reorganized the mine into two teams, surface processing and logistics and underground mining, to create a greater focus and it moves layers in management and functional support. In FY16, we reduced cost by 23% and are well on our way to achieve our revised cost target of $71 per tonne. Our FY '17 targets were and remain p50 targets, meaning there is a 50% probability that we will achieve them. Yet, despite the impact of FX and commodity price assumptions, we remain on track to achieve a further meaningful reduction from our already our lower FY16 cost base to ensure all of our operations are cash flow positive and resilient to any further price shocks. For the first time, we have also provided operating unit cost guidance for Cannington and South Africa Energy Coal, which I will now talk to in more detail if we turn to slide 15. Cannington continues to be an excellent operation, generating $234 million of EBIT in FY16. We have reduced unit costs by 16% from a $182 tonne of ore processed to $153. As the employee and contractor numbers declined by 17% contractor rates were reduced and we realized to Q1 savings. We expect operating unit cost, including sustaining capital expenditure, to decline further in FY17 to $132 per tonne of ore processed from $153 in FY16. This includes planning and sustaining capital of $45 million and a further reduction in employees and contractors to $770. Turning to slide 16, following the completion of our first annual planning cycle, we have provided production guidance for Cannington for FY20 based on our new optimized mine plan. As you can see, the new mine plan impacts the production in FY 2017 with guidance of silver and lead reduced by 2% and 3% respectively, while zinc increases by 3%. In FY18, payable mill production will further reduced by 10% to 13% to 16.5 million ounce of silver, 147,000 for lead and 72,000 tonnes for zinc. If you turn to slide 17, over the remaining life of underground operation, the reconfigured longer term mine plan optimizes total silver, lead, and zinc extraction. To provide an uplift, in total payable mineral production of between 5% and 10%, between now and the end of the life of the underground operation from the independent experts report published in the information memorandum at the time of risking. It also reduced geotechnical risk through the re-sequencing of the stope design. We will continue to look at options to extend the life of the operation from both the underground resource, as well as the potential open pit. However, we won’t need to make an investment decision on the open pit before the end of this decade. On slide 18, you can see our production guidance, as well as the production mix for each of our energy coal operations in South Africa. Our domestic coal business is underpinned by two long-term energy supply contracts; at Khutala, a cost plus agreement to the Kendal power station until 2033 and at tonnes a fixed price agreement to supply Duvha power station until 2024 with an option to Eskom to extend for additional 10 years. We transport coal for export from Klipspruit and Wolvekrans to the Richards Bay Coal Terminal in which we have an ownership interest by take-or-pay contracts with Transnet. So this is a business with both opportunity and challenges. Take for example, the Klipspruit Life Extension project, which has the potential to extend the life of their export energy coal business using existing infrastructure and leveraging existing obligations. This project entered feasibility in FY16 as we look at the viability of a significantly lower capital cost option. At Khutala, studies are less advanced. However, we continue to work with Eskom under the existing coal sales agreement to progress a lower capital cost option to extend the life of the underground mine. At Wolvekrans, given the supply agreements in place, we are currently assisting various options that will likely lead to further investment to maintain production. To slide 19, consistent with our focus on value, in FY16, we reduced production at South Africa Energy Coal primarily through reduction in contractor activity at Wolvekrans leading to the decline in headcount you see on the slide. We have maintained production guidance of FY17 at approximate 30.9 million tonnes with a higher proportion of domestic sales. In FY18, we expect a small decrease to 29.8 million tonnes. Despite South African rand denominated cost pressures, a weaker currency, together with a significant improvement in labor productivity, help to reduce all-in costs by 21% from $33 per tonne in FY15 to $26 per tonne in FY16. In FY17, operating unit costs, including sustaining capital expenditure, are expected to decline further, albeit marginally. Despite the expected local inflationary cost pressures and the need for additional contractors as we access new mining areas and increase stripping activity. Consistent with our strategy to unlock the potential of our operations, in June, we signed a landmark agreement with traditional owners to access the Eastern leases in Southern areas at GEMCO, one of the largest and lowest cost manganese ore producers in the world. The Eastern leases open up new mining areas within our existing operating footprint to extend the current mine life. The Southern areas are adjacent to our existing operations and substantially increased our exploration footprint in highly perspective tenements with work due to start this field season. At Cerro Matoso, guidance of payable nickel production remains unchanged at approximately 36,000 tonnes to FY17 with a small decrease in production expected in FY18. Production will rise to more than 40,000 tonnes in FY19 and FY20 as we access the higher grades La Esmeralda resource through the construction of a very low cost river crossing. In summary, our business is performing well in a challenging environment. We have reduced controllable costs and capital expenditure by $692 million to generate free cash flow of $597 million. We have further strengthened our balance sheet to a net cash position of $312 million. We met or exceeded production guidance in FY16 and have maintained FY17 production guidance for the majority of our operations. And we are on track to meet our cost targets. 12 months on, South32 is a much stronger company with significantly lower costs and a balance sheet that provides flexibility. We will continue to unlock the potential of our portfolio, identify opportunities, and pursue investments where we see value. But we will not compromise our strong balance sheet and investment grade credit rating. Thank you. I will now hand over to the operator to commence Q&A.

Operator: Thank you. [Operator Instructions] Your first question comes from Lyndon Fagan with JP Morgan. Please go ahead.

Lyndon Fagan: First question is just on the dividend. So you’ve declared a $0.01 dividend, which is only a little bit over 50 million, whereas your cash balance is over -- or net cash, I should say, over 300 million. This seems a very conservative payment there. Can you perhaps shed some light around the Board’s thinking, around why they want to retain such a high net cash balance given the outlook for earnings going forward as well? And then the second question is just on the coal projects in South Africa. You mentioned both of them are CapEx light option that’s getting looked at. Can you talk a bit more about that, because I think the latest guidance was around 500 million for the Klipspruit extension? Thanks.

Graham Kerr: Thanks Lyndon, obviously I’ll tackle the first question around the cash first. I mean, you are correct. I mean, obviously, we’ve had a stronger than expected performance on cash flow. And as a consequence, we have net cash of $312 million at the end of the period. We have a look at where we are. We’ve made good inroads in terms of taking costs and CapEx out of the business. We’ve done a good job, if you think about our starting net debt position of $402 million to get to where we are today, roughly a $700 million year-on-year improvement in terms of cash flow. And I think that's a credit to our people and the reflection of the quality of our portfolio and the work that’s been done. From day one, we’ve been quite clear around our capital management framework; first and foremost, ensure safe and reliably do the our operations; then to distribute a minimum of 40% of underlying earnings as dividends to shareholders; and then ensuring excess capital of subject to strong competition. We have, as you pointed out, today announced an inaugural dividend, equivalent to roughly to $50 million. We wanted to have that first dividend come out to basically establish a track record of delivering on our commitments. And we think this satisfies, stage one if you like, of our capital management framework. Now, we want have that track record build overtime. Unfortunately, because of the consequences of our earning profile we’ll just see some of those -- that dividend today as un-franked. We do expect to generate franking curves in the future. But obviously depending on how we perform in Australia, keeping in mind, obviously, we’ll have some additional deductions or probably the merger, and sort of the impact overtime was we increased earnings in Australia. Look, in practice, we made the last comment around we refer the competition for excess capital, to me that means all investment opportunities compete with other alternatives and that include things like special dividends and share buybacks. At the moment when you look at our investment profile, we don’t have significant cash cost for the next period of time in terms of internal projects. We have worked hard a lot over the last 12 months to look at our internal options in terms of going forward and raise two coal projects. And so I’ll get Mike to talk about soon. But essentially, we’ve worked really hard to lower the cost of La Esmeralda in those capital projects, but basically in South Africa, but also future options such as Cannington. But when we look about the current investment suite that we have all the options we have, we’ve always been quite clear that M&A is part of it. And we certainly see M&A as opportunistic, not something we have to do, and it’ll always be done through a lens of value. At the moment, there is a series of opportunities basically out in the marketplace. In particular, there is two that we’re closely following at the moment; one being the well publicized side minority stake in manganese joint venture with the other been the smaller of the two. There are deferring stages in maturity and the outcome in both instances is far from certain. So we watched that with the interest. Now clearly from that perspective, anything we do in that space, we’re not looking to stretch our balance sheet. And we’re absolutely committed to keeping our investment grade credit rating. So in summary, we won’t compromise our strong balance sheet investment grade credit rating. We think we’re in a good position at the moment, if we watch those two opportunities continue to progress. I will remind you that, in December, we spoke about the right post code for our balance sheet being somewhere between where we started, which is net debt position of $500 million and a modest cash position. And in today’s volatile world, you can high grade the upper end of that band, but I think it provide with some flexibility as you watch out those two opportunities play out. Brendan, anything you want to add on that?

Brendan Harris: No. I think that’s it Graham. I think the point around dividend, obviously we would prefer the franked special dividend as you referred to, or always a consideration but in the absence of franking it’s a little trickier. As part of the major process, there was the tax reset where we stepped up, if you like, our tax base through the recognition of additional deductions. You can buy in that with the low level of profitability and that had delayed, if you like, the point at which we would start building franking balance within the Australian tax consolidation unit, which really covers everything outside of GEMCO and Australia. Look, we would expect to move into a strong franking position, somewhere post FY ’17, and I think that obviously is one of the reasons, as you said, while we wanted to develop a track record as a dividend payer, particularly as I think we’ve been pointed out that as processes there are today, one would hope that profitability rises again as it did in the second half of this year substantially. And then the payout ratio really phase through to high shareholder dividends.

Graham Kerr: Maybe, just on your second question around coal and before I hand it over to Mike, just so I guess a little bit of context to me, we made the commitment last year when we first came after the markets space that we’d be talking or looking at, if you like, in detail the capital options we have internally. And clearly Khutala and Klipspruit two of those options. We talked about going back and revisiting those options and working them harder, and that’s what we’ve really done over the last 12 months. Important to note, the Klipspruit is probably, while it’s clearly ahead of Khutala in terms of the work that were actually done, and as we commented as part of the results, we might have mentioned the Klipspruit at best, we’re looking to approve that towards the end of FY18. Maybe Mike, you can give a bit of an update of how you’re thinking about the capital intensity of both of those projects, in particular, I think we flagged Klipspruit at just below $500 million about 12 months ago. And we talked about Khutala potentially being less than that but also noting accounting at that stage under negotiation with Eskom.

Mike Fraser: Thank you, Graham and thanks Lyndon for the question. I think if you just start with Klipspruit, clearly what we have being trying to do is to look at ways at de-risking that project and certainly in terms of what the capital call will be as we think about moving that projects into execution. The option that we study at the moment is one way we’d actually instead of being purely an own operator is that we look for the execution contracts component to it. And in doing that, we’ll certainly in the first nine years of that project and then the extension project reduce the capital call for South32 and moving into the new mining area. And so that’s the option that we’re looking at the moment. It's one that will have a significant reduction in the early capital requirements and certainly in the first nine years of that project. And that’s the one that looks like the more optimized cost going forward for us. We will, over the next 12 months, have a much clear idea of that project ahead of moving into the execution decision, but at this point in time it's a significantly lower capital option. And in respect to Khutala, 12 months ago in the conversation and continued conversations about the further development to this operation in order to meet the volume requirements, optimize volume requirements out of this operation through to the -- into the contract term, which is 2033. And probably important to note that Kindle at this stage in the fleet got a planned graph of around 344, so there is broad potential, 10 years of additional call out of Khutala, and if then required from Khutala to support Kindle. And under the existing coal sales agreement, however, it's a cost operation. So in the planned configuration the capital call is actually from Eskom 12 months ago we will certainly in the conversation of exploring options for South32 to put capital in. But at this point in time, it can continue to engage in the further recapitalization and the existing coal sales agreement, which would be instant capital. So that’s why, at this point in time, we think that it's a probably more likely to be an instant capital input but that conversation is still unfolding. In the current phase, Eskom is providing capital for the study phase of that project.

Graham Kerr: Lyndon, maybe just a little bit more color. I mean, you made the comment around the $500 million guidance that was given previously. Look I would say, yes, the project is still going through, if you like, the final scrub and the work but we would expect the component to be half of the prior estimate that we actually guide. And I think that’s a good reflection of the work that Mike and his team has done. But I wouldn’t say it's just in Africa. Ricus has done a lot work with his team around Cannington where I think we need to make a decision on an open pit to basically about 2020. And also although which are previously giving capital guidance on it's probably now looking at something below $20 million as they finalize that study and work.

Mike Fraser: So just to clarify, we are looking at $250 million project instead of 500 million…

Graham Kerr: It's too early to decide, but I would expect that Mike is going to say more probably below 250 to be perfectly honest but they need a little bit more time to do that work. And again it's not going to get approved towards the end of FY18 but that’s certainly the postcard we are looking at.

Operator: Thank you. Your next question comes from Paul Young with Deutsche Bank. Please go ahead.

Paul Young: First question is on the cost. This is a great result taking $396 million of controllable cost out of the business. I guess exceeding $350 million target in one year had a schedule. You’ve obviously identified additional cost out opportunities along the way. I am just really interested and you’ve given cost guidance, which is spot pricing, which is right, so obviously more to grab. But just from perspective, what percentage you think you're actually through the cost out journey that’s the first question?

Graham Kerr: Look, maybe Paul if we just break that into a couple of components. And first thanks for the question. I mean, look, yes, we have certainly pulled cost out of business quicker than we expected. But I think when we had the half year results, we spoke quite clearly that at stage we’d only have the asset for about six to 10 weeks, when we came up at that original time. But I think what you're seeing over the last 12 months is the great work that Ricus has done in Australia and Mike has done basically in the African area, African regions. But I think we should also note this and if you look at our corporate costs, they’re probably half of what we envisaged at the timing of the merger. So I think across the Board from corporate, to marketing, to the Africa, and to the Australian region, it's been a lot of work done on that. The $350 million target at the time was interesting, because we always have the three types of comments too soft, good target just billion dollars and now and kind of reconcile it. So we made the fundamental decision of the half year that we wanted to move away from giving a number we're talking through very difficult number to sort of reconcile back to, and it's not very transparent in any shape of form. And we went down the path of let's simplify how we think about our business. And as a consequence rather than giving be carrier, there is just call in terms of target that you’ll never reconcile back to. We’ve gone and given you detailed guidance by the assets at that size we're restructuring plus with its full year results with our energy cost South Africa and also Cannington to give the absolute transparency. But those targets, it's important to note for us are 350, they're the same targets subsiding my metrics, they’re the same target subsiding Ricus' team scorecard, in Mike's scorecard, there is no between any -- there is no set of numbers to the external market and no set of numbers to the internal market. So we're trying to take away a lot of all the noise of the existing and many other companies. If you asked the question about where are we only that journey? I think we've made good progress in the first 12 months, probably exceeded our own expectation. And I'll give Ricus and maybe Mike the opportunity to wear a comment. But outside, when I look across our business today I still see opportunities. I certainly see opportunities in a lot of the businesses we have in Australia. I think Africa had some different opportunities in terms of how we can correct value. But absolutely we're not coming through of that cost strategy, I mean, there is more to come. So maybe, Ricus, on that you want to add a comment from the Australian region.

Ricus Grimbeek: Yes, too much to that other than we're really focused on creating improvement in cost throughout our business. And that improvement in cost savings is including every single employee that works for us to be part of creating just a great business. And Paul as you know that we always keep on pushing and finding new ways to pull more costs out of the business, create more efficiency, and now we've produced every small tonne that we have. And as we implemented the region out this year, we started discovering a whole bunch of new opportunities, and I think that's part of why we were able to deliver the cost out of that, definitely exceeded the expectations. And as we go long, we'll just keep on pushing that and come up with ways to create this great Company.

Graham Kerr: Mike, I don’t know, if you had anything you wanted to add?

Mike Fraser: No, probably not a lot more to add, just as you state, and I think there is value opportunities, not just within the cost opportunity that we obviously continue to explore. But I think, as Ricus has said, continue to invest in the improvement culture and delivering a predictable business, I think is really important for us and that will deliver value as well.

Brendan Harris: Graham, just before we go the next question, just to put some addition numbers around that. I think two things; one, if you look at the guidance that we gave at the half year and normalize, if you like, for the differences in exchange and price that were seem to push through. On a controllable basis, what you can see is that we’re around $30 million that were up than we were. You can run that through the numbers. So I think again that’s new and it's good progress. If you look at the corporate, as I mentioned earlier, we’re looking at a run rate around $70 million of around $30 million of that relates to depreciation and the point being at 70, we’re around $30 million better off than we would have said six months ago. So we are already capturing more than what we’ve said at the half year. And again as you pointed out, we’re certainly out there trying to capture more again.

Graham Kerr: But Paul I’ll just add to that comment, we’re being clear and transparent on the targets we lay out of 350s, so Ricus and Mike have jobs cut out from this year, but that’s actually [indiscernible] for themselves deliver as well.

Paul Young: Question, Graham, on Cannington, it was a bigger journey during the period. And just want to talk bit more about the changes in mine plan. What you guys proposing here is very similar to what was in the independent expert report, when you incorporate inferred resources, so you’re maximizing the mining rates. Can you just comment about the benefits of this? And also the value differential between the old mine plan and this new mine plan, considering that it's pretty -- considering as you guys through this year-by-year, you’re mining more stopes and you’re mining -- and you’re mining smaller stopes. Just wondering if you could talk about the value differential between this and the old mine plan? Thanks.

Graham Kerr: Yes, and Paul will give you a bit more color, if you like, in context around that and then I’ll get you Ricus to talk you through the process. But again if we take a step back first, obviously, again this is sort of operations that we’ve had for a period of time. We’ve made a fair number of changes in the management team. At Cannington as you rightly pointed out one of the challenges with Cannington was always the increasing number of stopes. So, when we think about value, so why is that value at risk, so the teams had a very big focus on how do we make sure we deliver an optimal return of the right risk profile. And I’ll get Ricus to run through you the detail. But if you compare, for example, the independent expert report that came out as part of the merger process and you look at the actual total payable metals, you’ll be looking at with the new plan versus what they had of 6% increase in lead, and $0.11 increase in zinc, and about 5% increase in silver. So now that’s a big step change in what we’re saying. But perhaps Ricus can sort of look at that process of how we’ve got there.

Ricus Grimbeek: Thank you, Graham. Yes, and as you pointed out, this is our first full year that we’ve been able to plan the operations. Cannington is a very interesting place, because it's coming towards the end of its life. Last year, we ran 70 stopes, this year we’re going to be running a 84 stopes. And after that it starts cluttering back to on again, and in terms of numbers of stopes. But the key thing there is you’ve got to protect the shaft, you’ve got to protect the underground working so that’s actually keeps the mine open until the end of the mine life. So, the key value driver there is find way to economically mine and not destroy the shaft. A lot of the work that we’ve done this year and we’ve now been able to sequence this kind of stopes in a way that we actually produce more metal towards the end of the operation, and that sequence I feel is have a much safer way to run the operation as well. We’ve also done quite a bit of work on the crusher replacements and projects. I think in the IM we had number of about $45 million in there as a projected capital cost for that, doing that project somewhere in FY17, FY18. It’s currently in the FY17 budget. We’re going to be executing that work this year. But we have been able to get the capital cost down to about $20 million. So a lot of work has done into that, some good thinking, and I think overall just a lot more value and credit for Cannington.

Operator: Thank you. Your next question comes from Duncan Simmonds with Merrill Lynch. Please go ahead.

Duncan Simmonds: Just wanted to talk about markets for second manganese 440, I think at the moment. How are you seeing demand for the products that you produce stay in some of these less than nine commodities? And also how are you seeing producers with fund as well to the higher than expected prices? Thanks.

Graham Kerr: Duncan thanks for that question. I mean, obviously, manganese is an area where we are a large producer. From our perspective, the way I’ll describe manganese is volatile. If I look at the price, for example, at the end of July at 44% growth, we are probably looking at a price of about $3.50 btu, today that's probably close to $4.40. We are seeing that kind of stock will big out stands all the way since probably January. I think if you take a step back and think about the assets we have, obviously we have GEMCO, which is probably the lowest cost and best quality producer and closes to the customers. So GEMCO for us is always important in the scheme of things that how we operate in. You would say an issue, we commission the PTO2 project and we are not actually running GEMCO at full capacity because we’re adopting a value added volume business. If we look at our South African manganese business, that’s also an operation where we’ve gone to a value add volume approach and we significantly reduced our airport in line with market demand. And if you think about the dynamics of the marketplace at the moment as we go forward, manganese still has a reasonable demand in the marketplace long term. Obviously, steel production not forecasted to be at levels it was perhaps five years ago but manganese can't be used in recycled. So it's always constantly on demand. From our perspective, the challenge is obviously more today in Kalahari, the South Africans have a large resource base with their constraint then if you like the logistic infrastructure and the cost to get it from the mines and basically the customers. So to some degree depending on the supply coming out of South Africa very much determines what the price is. And we’re certainly seeing generally not only with at the time of the production but other producers that we’re seeing South Africa respond million responding quite rapidly. And that’s also reflected if you take a look at for example June and you annualize their exports, they increased to 10.4 million tonnes to basically take advantage of the products. So they’re certainly in and out of the marketplace. But to some degree it’s -- does sort of draw the flow in my view long-term around the price of somewhere between like 350s or like $3 to $3.50. And that’s really probably depicted by the additional cost of tracking additional lower out of South Africa to the customers. What we have seen on the demand side, there has been obviously some changes, if you like, in China in terms of some of the environmental compliance where that has been pushed particularly hard. And as a consequents, we are seeing, if you like, some of the capacity gets squeezed in the marketplace and we are seeing small demand coming through at the same time, which I think is the triggered the recent volatility. We don’t expect the higher prices to last we expect them to modernize a little bit over the short to medium term. But long term, we still think we have got the best operation in the industry and we think it's an attractive industry.

Operator: Thank you. [Operation Instruction] Your next question comes from Brendan Fitzpatrick with Morgan Stanley. Please go ahead.

Brendan Fitzpatrick: With the various corporate strategies being discussed today, wondering if we could get a few comments around that small but new step towards an exploration exposure up into the stage and regions, the couple of Australia group metals, also potentially being brought into the portfolio and how that fits with the regional hubs and the broader strategy on the big picture around it? Thanks Graham.

Graham Kerr: If we take a step back, we've been very clear from day one that we're driven by value and not volume. And we'll only actually do things if we see an opportunity to create value for our shareholders. Yes, we’ve spoken quite clearly that where we see ourselves creating value is where we can leverage perhaps some of our specific skills we have, maybe it's slightly stopings capability we have at Cannington, or at markets and do with longwall mining that we actually do in Illawarra. The other place we see ourselves adding value is basically through the regional model. But they are two veins that we think about things. Look, we've always said, if you look at the range of commodities, there are things like thermal coal where we probably wouldn't commit to building a new basin. We like what we have in South Africa today because of the proximity to India. And we have some low cost capital development options that make sense but we wouldn’t go building ourselves in other basin. The other end of the spectrum in terms of commodity and attractiveness, we’ve always said that the base metals, in particular, look a lot attractive. And if you look at zinc, for example, today, you look at nickel, you look at copper, long term they'll have good industry fundamentals. The challenge I guess in my perspective is when you look at some of the copper transactions that occurred recently and you look at the implied price that people have paid. I just struggled to see how they will ever generate, if you like, a descent return. So we do continue to look at opportunities to grow outside of our portfolio, but through a very disciplined lanes of creating value for our shareholders. And certainly if you think of that copper space, we still think it's attractive but we're not going to pay the price of some people have been paying. So we have been looking, as I previously spoken about, what we call icons, which are exploration programs or really exploration programs and maybe early project developments. And in that space, to be realistic, I think, that's the only area we can sort of bet in copper space just because of what people are paying for copper projects or copper operations today. If you look at that project Huckleberry, Northern Quebec, you’re basically in the Labrador Trough. It is very exciting in terms of prospective. And if you think about what we're looking for there, you're looking at copper, nickel, platinum group, et cetera. Its early days but certainly our guys are quite encouraged by the early work that's going on. We've committed to what we think is a modest program over couple of years that potentially leads us to a growth option. It's plenty of time before it plays out yet, there is certainly the kind of things that I think we can do more of in that icon space. But again, we'll only do that where we see an opportunity to create value for our shareholders.

Brendan Fitzpatrick: The other question with your cost guidance being provided, will we would be expecting that on the half yearly basis or a -- so we’re still providing the unit costs in the quarterly production cost going forward?

Graham Kerr: Look we would speak to, I mean one of the things we've been very big about is trying to simplify the corporate process. One of things we've been very clearly about is if you look to some degree corner and move the surface of running a corporation. So we'll actually give you transparency in detail, but in line with how we do our normal financial close, it’ll be on a half yearly basis we'll provide updates on that.

Mike Fraser: I think what we’ll do is we’ll continue to provide the net cash balance in the off quarters to ensure that you’ve got a good sense for the cash generating capacity of the Group. And obviously on the reporting periods, being the half year and the full year, we’ll bring that sure with -- at the reporting date as we work through our processes and so on. But again I think hopefully that will give you a good sense as to how price and operation performance is converting to cash generation on that off quarter.

Operator: Thank you. There are no further questions at this time. I’ll now hand back to Mr. Kerr for closing remarks.

Graham Kerr: Well, I just want to thank everyone for the opportunity today to update you on our progress. We think we’ve actually had a very strong year in terms of operational and financial performance. I think it's a reflection of how hard everyone has worked in South32 this year. Obviously, we’ve given you the cost targets for FY17 and the CapEx guidance. And again, the targets are very detailed, they’re very transparent. It's a kind of Company you want to be, you can track our performance. We’ve got nothing to hide, but we think we’ve got a great management team and great sort of assets and a great opportunity. Thank you everyone.