Earnings Transcript for SOUHY - Q2 Fiscal Year 2021

Graham Kerr: Good morning, everyone, and thank you for joining us for our Financial Results Conference Call for the Half Year Ended December 31, 2021. Our Chief Financial Officer, Katie Tovich is also here on the line. And I have our, Chief Operating Officers, Jason Economidis and Mike Fraser joining us on the line as well. Look there's a short video, which provides an overview of our financial results available on our website. So I'll keep my introductory comments relatively brief and then we can get into some of the detail if you like in the Q&A. Look I always start with the point that we have a strategy that's been in place since day one. It's a simple strategy that we think is fit for purpose across all cycles. It is underpinned by a belief in a strong balance sheet and a focus on a disciplined application of capital. And if I sort of break that strategy into components the first piece is around optimize our existing operations. I think in the period you would have seen that we had another good operating performance from the teams. We achieved production records at Worsley Alumina, Brazil Alumina and GEMCO. We've upgraded the full year guidance at Illawarra Metallurgical Coal, Cerro Matoso and Cannington. And the volume efficiencies and cost controls that the teams have achieved mean unit costs are well-controlled despite strengthening currencies. It's great to see that our core markets are rebounding and we've seen our prices start to reflect this and increase at the start of 2021, which gives us confidence going forward. As a consequence we announced today, we'll be paying a dividend of $0.014 per share and we increased our capital management program by US$250 million with US$259 million to return by September 2021. It's also good to see the teams doing a lot of work on the second pillar of our strategy, which is around unlocking the full value of our business. You would have seen us announce that we accelerated the development of the Q&P project at Cerro Matoso and the progress and numerous improvements in life extension studies across that business and other businesses, a couple of examples being the rolling of the energy efficiency technology we're rolling out at Mozal. And we're also looking at that being incorporated at Hillside by doing the study. And we've also got a number of decarbonization studies ahead of us releasing our updated targets later this year. At the same time, we continue to work the portfolio, which is the third element of our strategy by continuing to exit low-returning businesses. GEMCO is now gone. Metalloys is on care and maintenance and South Africa Energy Coal is progressing. We have also in the half unlocked value through the sale of a noncore precious metals royalty portfolio. And at the same time, while we're surprised by the IPC decision, we've got a number of options we'll look at that I'm sure we'll dive into today on that space. We've also established an attractive pipeline of growth projects. The studies at Hermosa are progressing with the Taylor due at the end of this financial year and Clark in the first half of FY 2022 in terms of the concept study. The annual pre-feasibility study will be completed with the exploration program starting this season, following the COVID impacts from 2020. All our growth initiatives in our drive is around increasing our exposure to the base metals that we think are important for a lower carbon world. It's reflected also by the 20 exploration partnerships we have achieved with companies, which have a bias to base metals. If you think about our balance sheet, it remains strong. We exited the half with $275 million worth of net cash and that has grown to US$452 million by the end of January with working capital unwinding as expected. Our buyback is continuing and there are major catalysts coming that will move the quality of the portfolio forward in the coming year. With that, I'll open it up to questions.

Operator: Thank you. [Operator Instructions] Your first question comes from Paul Young with Goldman Sachs. Please go ahead.

Paul Young: Morning, Graham and Katie and team. The first question Graham is on Illawarra and Dendrobium Next Domain. Can you just talk through what is a realistic plan B as far as a mine redesign there, and what that could look like just conceptually? And second to that on the base case assumption, or the assumption I should say that you cannot get a plan B up through the IPC what does Appin look like on a mid to long-term basis as far as all-in costs at that operation? When you move to the longer panels just conceptually what would the cost structure look like at Appin if it was running a standalone? Thanks.

Graham Kerr: Yes. Thanks, Paul. Appreciate the question. Perhaps if we start, I guess, and take a step back and we think about the complex that we have there. Obviously, we have Appin and Dendrobium. Appin itself is, obviously, the base of the business. And as we've spoken about over the last period of time, we've been executing a plan to, sort of, get Appin back to its nameplate capacity. It was great to see again the teams return to that three-longwall configuration layout across the whole complex. Obviously, our guidance this year is being upgraded by 4% to 8 million tonnes. The hybrid plan that we talked about at Appin is maximizing productivity of the two longwall places and that continues over the next three years. And then to your point Paul, we've transitioned to a simplified mine layout with larger panels from FY 2025. Previously, we've spoken about getting back to that 7.6 million tonnes with an all-in cost of about $100 a tonne. If we, sort of, look at Appin only and talk about that new plan to the point that you made that plan will be going to the longer-length longwalls. It reduces the number of longwall moves. We don't have the same delay with relocating longwalls and we benefit from further productivity. For example, there's about 30 kilometers left underground development of the sewer vent shafts. You go from four to two. We continue with mines with a drop from seven to four and we only have less gas rigs. I think your question around the cost is a good challenge. If we have a look at where we are today, obviously, Appin's cost base excluding sustaining CapEx was about $112 a tonne and about $27 a tonne in FY 2021 for sustaining CapEx. If you think about where we would aim to be beyond FY 2025 with these changes, we'd be pushing for an all-in cost at Appin at around $100 a tonne. That's certainly the objective of Jason and the team. To answer your question around the IPC, look the IPC it is fair to say that our submission around Dendrobium, which included Area 5 and Area 6 to be clear. You know that was an unexpected outcome from the IPC not only for us, but probably all the stakeholders. So that is something obviously, we're engaging with all the key stakeholders now about what the way forward looks like. From our perspective there are a number of options that we have in terms of how we go forward. One is to appeal. The appeal is basically on process not merits. We can seek to have a government intervention. We can submit a revised plan or we can accept the decision. But before we maybe sort of dive into that detail, I think it is important to sort of recognize that we also have some other options around Dendrobium in the short-term. Clearly, we've already got some work underway in the year we're currently mining. We essentially have some opportunities around Area 3C even though longer term that has some gas challenges around extraction. And then there's potentially some regular mining. So we think there's some work we can do with Dendrobium. But obviously, our preferred case is around doing Dendrobium Next Domain, which is essentially Area 5. What we will have a look at now is, obviously, what options we have around the revised mine plan that makes economic sense addresses some of the concerns potentially that were raised by the IPC. But at this stage, Paul it is too early to make any decisions because the team is just commencing that work. But what I would say, the important point is if you think about the base business Appin, the team absolutely with the redesign that we've put in place and talked about over the last couple of periods has the opportunity to get to roughly an all-in cost of $100 a tonne.

Paul Young: Yes. Great. Thanks and good info there. I've got a second question on the portfolio more broadly over the long run now that Eagle Downs is out and some challenges certainly on Dendrobium Next Domain. If I look at the pipeline, obviously, Hermosa is still -- it's a big project. It will take multi-years to execute on. There's lots of upside through the drill bit et cetera. Trilogy is more longer-dated. It appears, sort of, 2030 as far as potentially first production. It looks like there could be a little bit of a gap there three years or four years where post the build of Hermosa and before you get stuck into Trilogy. Just thinking around about your pipeline and options, I know you're doing all the farm-ins which is the right thing to do. But do you think you need another larger project, or can you take on another larger project say in between Hermosa and Trilogy?

Graham Kerr: So I'll start with Paul, I think, they're all good questions. And certainly appreciate there is a potential time lag with the development of post-Hermosa in terms of Taylor and Clark. And obviously, Arctic is a bit further out as we've always spoken about. I think, the critical point for us Paul is what we did with the existing operations. And I think it was great to see for example the work that's been done at Cerro Matoso around basically Q&P, but also some of the work that we're now doing, if you like around the next stage of development for them, which is really around ore sorting and the mechanical ore concentration project. And that potentially has the ability to increase the processing capacity by 50% offset some of the grade decline, but also getting the extension on what's called Contract 51. We've also got Hillside AP3XLE. We're looking at it. We've been implementing that in Mozal at the moment. So the existing operations are working what they can do to sort of look at growth and how they contain or sustain their production levels. I think look the gap in between when we develop our first project, you can look at that in two ways as

Paul Young: Yeah. Thanks, Graham. I’ll pass it on.

Operator: Your next question comes from Lyndon Fagan with JPMorgan. Please go ahead.

Lyndon Fagan: Thanks, Graham. Graham, just to expand a bit more on Cerro Matoso. Can you perhaps shed some light on the medium to longer-term production expectations, we should be expecting out of that asset now given the changes?

Graham Kerr: Yeah. Look I think that is certainly something Lyndon, we'll give more detail on as we do some more of the work. I mean, obviously we've given some of the guidance around what if you like the actual Q&P project looks. I mean, essentially that would allow us to lift our production for a period of time. We're probably between FY 2022 to 2028, we'll be slightly pushing the production up. I mean, our objective at Cerro Matoso is to roughly get to 40,000 to 42,000 if you like tonnes of nickel produced there. And we think that's about the right level we're aiming for with the number of different projects the teams are working off. The team at Cerro, look I think they've just done an amazing job over the last 12 months. As they battled COVID-19, they developed these options as well as they've done a major furnace rebuild. And if you recall that major furnace rebuild, have also opened up the envelope to allow our strategy to process the material. So that 40,000 to 42,000 is probably about the right number we're looking to achieve.

Lyndon Fagan: Right. And I suppose, I'll be the one to ask it. Anything you can say on the South African Energy Coal sale just to update us on progress?

Graham Kerr: Yeah. Look probably not a lot new than we've disclosed in the past. I mean, it does feel like it is taking time. But I guess, people have got to understand that's in the backdrop of a country at the moment that is having a huge battle with COVID-19. But we're working very closely with Eskom at the moment through that approvals process. Obviously, we've got South African competition. We've got the Department of Mineral Resources and Energy the minorities that own the share in South Africa Energy Coal for a nominal amount. We're engaged really extensively with both Seriti and Eskom and are making good progress. We're still on track we believe to complete it by the end of March this year. And certainly, all the signs have been positive from the government interactions. There's just a lot of distractions in the country at the moment.

Lyndon Fagan: Great. And look final one from me, if I may. Just with – great to see the buyback capital return amount. Can you steer us in any direction about how you choose to allocate money between a buyback and a dividend going forward?

Graham Kerr: Yeah. Look, Lyndon, I'll pass that one to Katie as she runs the – that capital allocation framework.

Katie Tovich: Yeah. Thanks, Graham. Look, I mean maybe just to reemphasize our capital management framework is unchanged. And we obviously set within that, we have the minimum payout ratio of 40%. And as we see earnings expand we expect to return incremental dividends via that mechanism to our shareholders. We've got a capital management program that's flexible, and we've always said we seek return cash to shareholders in the most efficient manner. And we don't plan to carry excess cash. So at current share price levels, we certainly see value in our shares at this level. We also believe in the longevity of our capital management, or market share buyback program. And so we do intend to continue to buy through the cycle, while we see value. We do have that flexible execution approach, where we buy higher volumes at lower price. And if you look back through, history you can see, we've had some good success in terms of the value approach to that dividend -- sorry that buyback approach. But I do think it's worth noting that, we can switch. And we continue to assess that right form of return, as we progress through the execution of the program.

Lyndon Fagan: Okay. Thanks a lot.

Operator: Your next question comes from Kaan Peker with Royal Bank of Canada. Please go ahead.

Kaan Peker: Hi. Good morning, Graham and Katie. And thanks for taking my questions. Just on the portfolio maybe extending on Paul's question. Is the ability to take on additional projects dependent on the South Africa Energy Coal sale? And maybe -- I mean it's been deferred in the past. But just wanted to check, if you've got an update on, how much capital you believe will be freed up, post the sale or post the divestment of the South Energy -- South Africa Energy Coal asset? And I've got another question afterwards.

Graham Kerr: Okay. Well, maybe, I'll address the first question. Look, from a portfolio perspective, there's nothing more important enough, in terms of completing that South Africa Energy Coal transaction. Now we've talked in the past, about the complexity that that business brings, in terms of physical size and footprint, just the sheer number of people, plus the government involvement through the state-owned enterprise Eskom, Department of Mineral Resources and obviously National Treasury. It's a complicated business. And you can look across the industry at the moment. And just look at the results, over the last six months, where there's been roughly losses of $1.5 billion in most of the energy coal businesses, because it is a business long-term that we don't think fits with a company like ourselves. Look from our perspective, it is about completing the deal for those reasons. There are other benefits in terms of it does obviously help us from the balance sheet perspective. Because if you look pretty much day one of that business, to where we are today it's always been a drawdown on cash. And it also has large closed provisions, but recognizing those closed provisions are quite long dated. So it certainly has those challenges. And then, maybe Katie, you can add some thoughts about, how you think about the balance sheet post-SAEC.

Katie Tovich: Yeah. Thanks Graham. Certainly, in terms of sustaining capital, we do see that our sustaining capital will reduce post-SAEC divestment of South Africa Energy Coal, in the region of around about $100 million a year. So certainly from a capital intensity perspective, that will be accretive to the balance of the portfolio. The other element that we've talked about so, we'll be freeing up our balance sheet in the context of provisions. And you will note that, South Africa Energy Coal has at the moment about $870 million worth of rehabilitation provisions associated with it. So that's about 35% of our total provisions. And so we will release those also, as we divest South Africa Energy Coal. And those elements will be reflected, as we reconsider our optimal balance sheet, as we've said post the divestment of SAEC.

Graham Kerr: But I also wouldn't just sort of close that out. I wouldn't want to -- people to think that we're building a war chest for our balance sheet to go out there. And do M&A or make decisions. We will continue to focus on growth options, as we have in the past. It's all about creating value not chasing coal units. That same discipline, worked so far. Is there a second question?

Kaan Peker: Sorry just finding a bit, tough to hear. But just on that, I sort of -- I missed that last part. Hello?

Graham Kerr: Okay. So let's see, if I can …

Kaan Peker: Sorry…

Graham Kerr: -- we're losing [Technical Difficulty] might view it online. We'll, wait and try to take the next question, and see if we can circle back.

Operator: Your next question comes from Hayden Bairstow with Macquarie. Please go ahead.

Hayden Bairstow: Yes. Thanks, Graham. I'm having the same problem in terms of dropping in and out a bit. Just a quick one on Cannington, I mean obviously you sort of lifted this year a little bit. Just interested in sort of the outlook, I mean, you haven't provided full year guidance previously. What -- how do we think about that, as some of these high-grade areas likely to deliver better results into the sort of medium term and the rest of the project and the reserve upside? Just sort of trying to get a better feeling for that. And then just on manganese in the NT, just obviously that's on reserves. It has a reasonably short life. There's obviously potential to convert all of that. I mean just some timing on when we might see updates to the mine life assumption at GEMCO.

Graham Kerr: Yes. Maybe I'll deal with the manganese one and I'll get Jason to talk about the Cannington one. I mean, obviously, GEMCO has the beauty of I guess of being the best asset in the industry from a unit cost basis and grade and also proximity to the customer. Look, we have a number of different options on the go at the moment around GEMCO. As you rightly pointed out, at the moment we have about 5.7 years' worth of reserve and about 11 years of resource. At the moment, the team has been working hard to basically get into the Eastern Leases, which essentially has a project moving into feasibility, where we'd expect if you like the final investment decision on that to be made around May 2022. And first production will be about FY 2025. And that will basically work for about three years. That will move if you like from the resource to the reserve. I think the – and they'll probably scrape out another two or three years on other work they're doing around just general stuff around the property. I think the big one for us is really around the Southern areas. And the Southern area is just a large unexplored area free to work the way we've been doing over the last 12 to 18 months. We are in stage two of that exploration program that will run for roughly two years. In that we'll do about 94 kilometers of new drill lines. And pads we'll do roughly 792 RC drill holes, of which we've probably completed I think roughly last summer of just around 220 at the end of December. And we'll really start the program in 2021 when the dry season is sort of back. And we expect to complete the drilling in FY 2021. The challenge with the Southern leases is really understanding what we have

Jason Economidis: Yes. Thanks Graham and thanks for the question Hayden. Look Cannington is actually stabilized in production. I think our access to high-grade stopes continues. There's no sort of – nothing no impact sort of foreseen in the future. We've got some studies underway at the moment looking at different areas that we can go into. So I'm not sure if there's anything else you wanted to ask Hayden but Cannington's in good shape.

Graham Kerr: So I think Cannington is running well Hayden. I think the one thing that we've always flagged is obviously the mine is in excess of 20 years now. The shaft itself we've talked about eventually what do we do with that shaft because eventually you've got to move out of the shaft because it actually has high-grade ore in there and probably the highest grade ore in the mine at the moment. So certainly one of the initiatives that Joe has been leading, Joe who runs Cannington is what is the right time to sort of literally from using the shaft that's taking tonnes up to actually going back to trucking. If you remember during the trucking replacement underground we were sort of roughly for a period of time 100% trucking more out of the mine than we've done it in the past. That's a trade-off study that the team's sort of focused on. I think to Jason's point mine production is back up to where it needs be and we always have extra capacity. I think the key for them at the moment is as we pointed out in the past, you don't have that many different if you like options to sort of move the mine sequence because of limited openings. I think what I would say the team has done a really good job on is going back to some of the old stopes that we've talked about cutting in half and accessing. I think the more we've done that the better the team's got around productivity. So what you should expect

Hayden Bairstow: Yes. Okay. So year-on-year fluctuations still likely. Okay. Cool.

Graham Kerr: So I imagine we'll make a decision on the shaft within the next six months to give you a timing of what that looks like.

Hayden Bairstow: Okay. Thanks a lot.

Operator: Your next question comes from Glyn Lawcock with UBS. Please go ahead.

Glyn Lawcock: Good morning, Graham. So a few quick ones hopefully. Just in the report you talk about your long-term coal supply agreement and you're going to assess the impact from the IPC ruling. I'm sure we should know this. But could you just refresh, so what is that long-term coal supply agreement? I mean are you having to supply coal? And what's the risk like if you can't – have to shut Illawarra in 2024 because you can't make it work? That's the first one. Thanks.

Graham Kerr: Yes. Look, we obviously have a -- you'll see in our sales numbers we have a domestic product that we actually sell to BlueScope as well as we sell a little bit to [indiscernible]. I mean that contract has been since the demerger of this business from BHP many years ago. It's an interaction if you like over [Technical Difficulty] long period of time [Technical Difficulty] plant is actually sort of based on their lease. They obviously have specifications around what they're looking for in tonnage, Glyn. That's something we engage with them on a regular basis as the mine plan changes. In many ways, when you have some of the challenges around China and other places in placing a product at the moment, it's natural to hedge that. So we have a good relationship with BlueScope and we'll continue to work through that as the mine life changes and the composition of the plan changes.

Glyn Lawcock: But is it a supply or a pay agreement sort of thing that if -- you have to provide coal for a certain period, or this closure unexpectedly could negate your obligation under that supply agreement?

Graham Kerr: Yes. Look probably some commercial sensitivity around some of the details of the contract. But what I would say is it is a turndown contract. There are some bets in debtors, of course, contained in that contract. But also both parties recognize that the coal could lead to changes over time. So we work through that in a good way.

Glyn Lawcock: Okay. And then just -- you spoke a lot about Eskom already. And obviously, the SA Coal sale, would -- you will have seen overnight the deal that Eskom has just been allowed to put up price hikes by 15-plus percent. How does that play into what's happening? Is that something that had to happen to help you move forward on the sale, or are they completely separate events? So I'm just trying to understand if that's a positive for the sale process. Thanks.

Graham Kerr: Look that's I mean if you think about Eskom at the moment they're a standalone enterprise that's under pressure reliable base at a competitive price. Their balance sheet is stretched. So one of the things they are looking to obviously is the way that we get to increase prices to decide if they're looking to pursue a high-quality coal from a variety of different sources. We actually think while we're not focused on the revenue side that their component has started impacting us I'd say. We're more focused on how do we help them out on the coal side. And we think part of the attractiveness of the deal with Seriti is the combination of the two resources. And the infrastructure actually allows them to lower their average unit cost of coal per yield. So I think from that side where it is walking the other side on the expense side, so I don't think it impacts our view whatsoever. Mike you might have a frame and have a slightly different view being in South Africa [Indiscernible]?

Mike Fraser: Hi. Good day. Good morning, Glyn. Yes. Look nothing much to add from what Graham has said. I think the key issue here is Eskom is severely under pressure. They still absolutely believe their way out of their balance sheet pressure is through some kind of price relief, which they're obviously trying for so through -- in managing their revenue line. But I think as Graham has said from our point of view, they're pretty separate. But I think if there is any linkage it's really that they are talking to National Treasury about an integrated plan. And as Graham has said I think the deal that Seriti brings in terms of their club deal is really one that gives them much more certainty on longer-term coal supply prices, which on the cost side their primary fuel costs have really been climbing. So we do believe that this is a good deal for them and they are very supportive.

Glyn Lawcock: Okay. Thanks. Graham can I slip in one quick one if you may? Just the time frame for the buyback is that over the next 12 months or six months?

Graham Kerr: Six months. Well, $250 million plus the $9 million that we didn't get completed in the time frame. So that would be the objective to try and get that away obviously before they hit bottom.

Glyn Lawcock: All right. Thank you.

Operator: Your next question comes from Paul McTaggart with Citigroup. Please go ahead.

Paul McTaggart: Good morning. So I just wanted to circle back to the provisions. So obviously they increased -- you dropped your discount rate. I'm just not sure from what to what maybe you can tell me that. But I was interested those provisions that relate to SA Coal have obviously gone up. I think you said, Katie, it would now whatever it was I thought you said something $870 million. It was $100-odd million lower than that before I recall. Is there any given that that's now gone up and you haven't yet completed the sale process is there any adjustment in terms of what Seriti pays or what -- or anything you need to put in to recognize that adjustment?

Graham Kerr : So maybe I'll just pass across at Katie for the talk about provisions.

Katie Tovich: Yes. Look, Paul, I mean those provisions they will move up and down through time depending on the discount rates and also FX. FX has had a pretty significant impact in terms of the provisions. You will see on that slide that we have captured sort of the breakdown of FX discount rates and closure cost estimate changes. But certainly, yes, if you ballpark I think it's about $130 million, $140 million movement, which is roughly 50-50 in terms of FX and discount rate. You've all seen our accounts. We don't disclose the discount rates but we -- but we do have a sensitivity that we note that 0.5% discount rate movement has that $405 million impact on the group's provision valuation.

Graham Kerr : Sorry. Paul the only comment I'll just make the second part of your question was around impact on the deal. Look that really will form their own view of what closure looks like. So if you like the current and future liabilities because they are quite long-dated. And obviously, as we've spoken about in the past they're looking to combine and look at some synergies between the two operations which will allow to reform a view. They will also have a different view on what the appropriate discount rate is. I think there are look some legacy rehab issues that clearly have provided the provision. They're probably a little bit more solid, but the forward-looking one's very much their perspective. And it's certainly not been an issue for the future liabilities that they raise any questions or issues around or where the change is in our internal discount rate.

Paul McTaggart: Okay. Thanks, guys.

Operator: Your next question comes from Peter O'Connor with Shaw and Partners. Please go ahead.

Peter O'Connor: Good morning, Graham and Katie. Graham, I have a series on Illawarra if I may. Firstly the outcome from the IPC, do you have the ability -- you gave three options that you had. Is a fourth option going back with an alternate proposal i.e. to reconfigure completely away from the dams in history et cetera?

Graham Kerr: Yes. Look Peter thanks for the question. And as you pointed out, we have a number of options including an appeal, do nothing seek out an intervention or look to revise the mine plan. As you would expect before we make any kind of decision we were going to understand all those options. The submission for DND was really Area 5 and 6. So clearly we'll have a look at the importance of 6 versus 5 what the trade-offs are. I expect there will be a mine plan that we'll have to look at that potentially has optionality. But I think the key for us is understanding what do the economics look like around that plan and that's the work that the team's yet to do. The flip side is obviously without the Dendrobium piece there's still opportunities to optimize Appin even more and that's that objective to move around $100 a tonne. So the sense is we're doing both pieces of work. So we need to do that work and then we'll come back to the market with an update. But there is certainly an option to cover different plans.

Peter O'Connor: Is it fair to say that Area 6 has less dam issues than Area 5?

Graham Kerr: Look, I think they both have some -- again we want to be very clear. If we think about the IPC process, the regret that we would have is not having the opportunity to actually if you like can't support the arguments put forward in terms of how actually accurate we think they are. There are certainly some impacts in areas both 5 and 6. There are trade-offs in both of their rigs. So I think moving Area 6 potentially has some benefits and reducing the footprint of 5 will also have some benefits. But yes if the project doesn't make economic sense it doesn't matter. The teams will have to do the work and then we will come back to the market on the outcomes.

Peter O'Connor: To your point about government intervention and given the notion of the ecosystem in the Illawarra you've mentioned BlueScope et cetera, but the entire ecosystem this is a big deal. It's a bigger deal under South32. So is government intervention your key option?

Graham Kerr: I think look from our perspective, obviously there's a number of stakeholders involved here. I would start at the point again that all stakeholders even people against the project were probably surprised by the IPC's ruling. I think it is a reminder of how does this get into approved projects, our coal projects on the East Coast whether they are thermal or met coal understanding every mine have some of its own individual challenges. I think look from our perspective, we'll engage with the government stakeholders like the Illawarra, people and unions and also politicos because to your point we're very much if you like interconnected there. And the jobs and the economic benefit, I think, flows and now that BlueScope is out there too, but also the broad Illawarra community. So they're the stakeholders who we'll be engaging with. But I think what we really need to do first is look at what the long-term mine plan would look like in terms of value addressing some of the issues before we make our mind up, which is four options we've observed.

Peter O'Connor: And just on the life of Dendrobium, based on how we see it today, what life is left in Area 3B? What's left in -- or what's available in 3C? And is it all Wongawilli, or is it Bulli and Wongawilli seams in those areas?

Graham Kerr: Look, as we work our way through that and we've spoken in the past ideally without us, sort of, getting if you like into Dendrobium Next Domain about 2025, that's when we sort of started coming out of the current mining area and particularly at 3A and 3B where you're doing a lot more in 2017, 2018, 2019 and 2021. The area that we can work on and we have consent with is the Area 3C. There's potentially two longwalls here that we can easily access. Other longwalls potentially will be gas streams. So that's on the time to look at and the time that would take. The other piece, obviously, is mining where you always leave some remnants behind. So the other option we'd look at is what -- could you access some of those remnants for a period of time. Again, Peter, they're all -- all the work that the team needs to make a final decision but there are a number of options we need to work through.

Peter O'Connor: Just a final one, a clarification on Appin. You said the cost of $100 target, is that an all-in sustaining -- including sustaining capital, or is that a cost target?

Graham Kerr: So that's the all-in costs target from FY 2025 when we're done for the new longwall configuration at Appin. And there's some options there that the team is pursuing about alternate access and a few other pieces. But that would be the target the team would be looking for.

Peter O'Connor: Did that include sustaining capital?

Graham Kerr: Yes.

Peter O'Connor: Okay. Thank you.

Operator: We are experiencing call quality issues today due to a major telco outage on the East Coast. We apologize for the inconvenience. Your next question comes from Jack Gabb with BoA. Please go ahead.

Jack Gabb: Thanks and good morning, all. Just one more question on closure provisions and sorry to belabor the point. But I think your overall provisions actually went up by around $600 million, which I guess significantly outweighed the $100 million or so in South Africa. Just curious where the rest of that provision increase comes from. And how much of that is FX? And then just one other question. Thanks.

Graham Kerr: Katie, can you answer that one?

Katie Tovich: Yes. Thanks, Jake. Yes, you're absolutely right. We saw about a $650 million increase. Look, almost 50% of that increase came specifically in relation to Worsley Alumina and about 73% of that movement is the combination of Worsley and South Africa Energy Coal. And what you'll see in our presentation pack, we have actually provided a breakdown of the FX and discount rate impacts, in terms of impact across the board portfolio, but we haven't broken it down specifically by individual operation.

Jack Gabb: Thanks. And sorry, what's driving the Worsley increase outside of FX?

Katie Tovich: It's the discount rate.

Jack Gabb: Okay. And then one more question, just on Hermosa. Has there been any change in the permitting time line or your expectation Graham, just reflecting the change in the administration over there?

Graham Kerr: It's an interesting question, because, obviously, the new President coming in, Biden, has made a policy objective around a couple of things which we think are interesting. One obviously is around -- more move to a decarbonized green world by embracing what they've done around climate change. The second thing he's been very public about is, looking for self-sufficiency around battery technology, which obviously Clark has that potential. So from our perspective, there's been no negative policy, if you like, issues that have come out. In fact, there's more positives around what he's looking to try and do for the demand of some of our commodities. No changes around the permitting legislation or even talk about that. Naturally in the past, the Democrats have probably been a little bit slower than the Republicans on approving projects. But we haven't heard any noise like that. I think the bigger issue for us is more about completing the pre-feasibility at Taylor, which we expect by the end of this financial year. And the challenge here for the team is understanding -- we've looked at decline, looked at shafts. What's the right nameplate capacity for actually Taylor? And how does Clark, which has the battery-leaning minerals, how does that fit together their development? And I think that's probably going to be more informative around what permitting looks like versus what the new government policy looks like at the moment.

Jack Gabb: Yes. Because presumably, the existing time line reflects just an underground development. Whereas if you're doing open pit, do you need to resubmit a single application, or can you run two concurrently?

Graham Kerr: Well, we'll probably -- if you think about the two deposits, so Taylor's team can still open laterally and at depth. Clark it's top -- across the top as a separate ore body. They did talk originally about accessing that as an open pit, but they didn't put in any real work into it. Our perception would be if you do a decline or perhaps you do a shaft and if you want more throughput, you'd probably drive through it that way. So understanding how the two would work would be important because Clark's, obviously, a lot shallower and we might get to it quicker.

Jack Gabb: Perfect. Thanks, Graham. That’s all for me.

Operator: Your next question comes from Sam Webb with Credit Suisse. Please go ahead.

Sam Webb: Thanks, Graham and Katie. Just two quick ones please. Just noting the net cash jump in January, so just trying to get a sense of how much is that working capital driven. And to what extent is there more working capital release still to come? And then the second one is, is there a net debt range or a net cash range that we can or should be thinking about once you exit Energy Coal? I'm just trying to get a sense of what the capacity could be for future capital returns here?

Graham Kerr: Both great questions Sam for Katie. Go Katie.

Katie Tovich: Yeah. Thanks Sam. Look I think starting with -- probably with the second question in terms of net debt right? We haven't actually provided that information at this stage. And we did say we would come back to you post the completion of the SAEC divestment. And probably the other element for us to consider in that context is also what our future capital profile looks like, and so certainly that will be kind of that assessment. In terms of working capital, yeah, we did see pretty big unwind in working cap in January, which you've seen flowing through in terms of that increase in net cash in the month. Biggest unwind is probably in relation to receivables and also some inventory unwind. Yeah, if I look forward probably the biggest impacts in terms of working capital are going to be cost and FX as we look into the next six months. I would expect at the moment if I think about the work the team has done, we have really optimized our inventory levels at each of the operations. And also our debtor days are pretty stable. So it's really the price FX overlay that's probably going to impact us there. And I think the other thing is to consider you have manganese. There's an opportunity for us to increase the distributions out of the manganese business. We had timing issue across the half year and we've also probably got a bit of a long inventory position in terms of our raw materials ahead of the smelters and the refineries in the value chain. And that's really just in terms of managing COVID. So as COVID and the logistics issues settle, we would probably expect to see a bit more of an unwind in terms of our aluminum and value chain working cap.

Sam Webb: Got it. So just back to that net debt question. So, I mean, should we expect once you exit here that we'll get an update with that exit around how you're thinking about the balance sheet now something -- some wording around that?

Graham Kerr: Yeah.

Sam Webb: Okay, great. Thank you.

Operator: That's all the time we have for questions today. I'll now hand back to Mr. Kerr for closing remarks.

Graham Kerr: Thank you and thanks everyone for their time today. I know it's a really busy day with other calls on the go as well. Look I would like to apologize. The audio quality despite what you're thinking we have actually [indiscernible]. But the line has actually quite poor quality, so apologies with some of the issues going on. Maybe just a couple of real quality comments, it was great to see the really strong operating performance by the teams this half, and I think that reflects the number of past earnings that seems that we have done a great job at the operations in terms of our actual unit costs. I think you know we're in the unique position that we haven't been for a while now where we see a rebound in demand for markets outside of China, which is driving up some of our key commodity prices, which is a positive sign for us to see. I think at the same time despite COVID and some of the challenges we've kept a strong balance sheet. We continue to increase our shareholder returns. And importantly there are a number of key catalysts milestones around the portfolio over the next six to 12 months that certainly make me and the team very excited. But again thank you for your time today and your support.