31 October 2016 South32 Limited (Incorporated in Australia under the Corporations Act 2001 (Cth)) (ACN 093 732 597) ASX / LSE / JSE Share Code: S32 ISIN: AU000000S320 south32.net MARKETING UPDATE South32 Limited (ASX, LSE, JSE: S32) Chief Executive Officer, Graham Kerr and Head of Marketing, Peter Finnimore, will present to investors and analysts today in London, United Kingdom. The presentation will cover the structure of our marketing function, the contracting strategy for some of our key commodities and our long term view of these markets. The presentation is attached and will also be available on our website at: https://www.south32.net/investors-media/reports-and-presentations About South32 South32 is a globally diversified mining and metals company with high quality operations in Australia, Southern Africa and South America. Our purpose is to make a difference by developing natural resources, improving people s lives now and for generations to come. We are trusted by our owners and partners to realise the potential of their resources. We have a simple strategy to maximise the potential of our assets and shareholder returns by optimising our existing operations, unlocking their potential and identifying new opportunities to compete for capital. FURTHER INFORMATION INVESTOR RELATIONS Alex Volante T +61 8 9324 9029 M +61 403 328 408 E Alex.Volante@south32.net Rob Ward T +61 8 9324 9340 M +61 431 596 831 E Robert.Ward@south32.net MEDIA RELATIONS Diana Wearing Smith T +61 8 9324 9198 M +61 436 482 290 E Diana.Smith@south32.net James Clothier T +61 8 9324 9697 M +61 413 319 031 E James.Clothier@south32.net Further information on South32 can be found at www.south32.net. JSE Sponsor: UBS South Africa (Pty) Ltd 31 October 2016 Registered Office: Level 35, 108 St Georges Terrace, Perth Western Australia 6000, Australia ABN 84 093 732 597 Registered in Australia
MARKETING UPDATE 31 OCTOBER 2016
IMPORTANT NOTICES THIS PRESENTATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL RESULTS AND OUTLOOK YEAR ENDED 30 JUNE 2016 ANNOUNCEMENT RELEASED ON 25 AUGUST 2016, WHICH IS AVAILABLE ON SOUTH32 S WEBSITE (WWW.SOUTH32.NET). FORWARD LOOKING STATEMENTS This presentation contains forward-looking statements, including statements about trends in commodity prices and currency exchange rates; demand for commodities and production forecasts; plans, strategies and objectives of management. These forward-looking statements reflect expectations at the date of this presentation, however they are not guarantees or predictions of future outcomes. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual outcomes to differ materially from those expressed in the statements contained in this presentation. Readers are cautioned not to put undue reliance on forward-looking statements. Except as required by applicable laws or regulations, the South32 Group does not undertake to publicly update or review any forward looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance. The denotation (e) refers to an estimate or forecast year. NO OFFER OF SECURITIES Nothing in this presentation should be read or understood as an offer or recommendation to buy or sell South32 securities, or be treated or relied upon as a recommendation or advice by South32. RELIANCE ON THIRD PARTY INFORMATION Any information contained in this presentation that has been derived from publicly available sources (or views based on such information) has not been independently verified. The South32 Group does not make any representation or warranty about the accuracy, completeness or reliability of the information. This presentation should not be relied upon as a recommendation or forecast by South32. NO FINANCIAL OR INVESTMENT ADVICE SOUTH AFRICA South32 does not provide any financial or investment 'advice' as that term is defined in the South African Financial Advisory and Intermediary Services Act, 37 of 2002, and we strongly recommend that you seek professional advice. 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 2
A GLOBAL MARKETING TEAM SERVING DIVERSIFIED MARKETS Americas 4% Australia 9% Southern Africa 14% Marketing Centre London Europe 28% Other Asia 11% Singapore 11% South Korea 5% India 5% Japan 6% China 7% FY16 revenue by market From TEMCO To China 1. Image is a diagrammatical representation of primary markets for our products 2. Singapore marketing centre is a wholly owned subsidiary of South32 Limited Cerro Matoso Nickel MRN Bauxite Alumar Alumina Marketing Centre Johannesburg Hotazel Manganese ore Metalloys Manganese alloys Global Marketing Centre Singapore 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 3 Mozal Aluminium Hillside Aluminium South Africa Energy Coal Energy coal Worsley Alumina TEMCO Manganese alloys GEMCO Manganese ore Cannington Silver, Lead, Zinc Illawarra Coal Metallurgical coal From Cerro Matoso To USA
ACTIVELY PURSUING VALUE FOR OUR PRODUCT Passive Active Equity Optimisation Hybrid Model Traders Agent Marketing Marketing Optimisation Integrated Short Term Optimiser Third Party Product Proprietary Trader Marketing operates along the spectrum to create value for South32 South32 marketing is Responsible for selling our products and purchasing strategic raw materials Managing the supply chain for our sales and strategic raw materials purchases Buying and selling third party product where we have a market or logistics advantage Gathering market intelligence to assist in defining the South32 view of the commodity markets South32 marketing delivers Understanding of the quality of South32 s products to ensure a market price that reflects the value in use of our product Deep freight and logistics knowledge and optimised supply chain outcomes A trusted partnership with our customers and our suppliers knowing what each partner values most Market insights to inform regional and corporate strategy to maximise value Our centralised structure and multi-national, multi-lingual team allows us to collaborate, make faster and better decisions, and better manage risks (counterparty, credit, and market) 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 4
Australia South Africa Gabon Brazil Ghana Others China India Rest of Asia Rest of World MANGANESE ORE MARKET OVERVIEW Manganese ore price and China port stocks 1 (US$/dmtu; Mt) 7.5 6.0 4.5 Mn Ore Port Stocks Mn ore 44% Mn, CIF China Increasing ore supply tightness due to rail disruptions in South Africa, environmental-related stoppages in China, limited stocks and strong steel output End user demand recovered as destocking cycle completed, while ore supply remained tight from closures 8 7 6 5 4 Manganese ore trade flows 2 (Mt, Mn content unadjusted) CY14 CY15 CY16 YTD³ Exports 18 15 12 9 Australian high grade supply cuts offset in part by increase in mid grade South African supply Imports Chinese import demand has remained strong in CY16 3.0 1.5 Manganese ore in oversupply Destocking by end users 3 2 1 6 3 0 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 1. Sources: SteelOrbis, Metal Bulletin 44% CIF China index 2. Sources: GTIS, South32 analysis 3. CY16 YTD reflects up to September 2016 annualised Long term outlook: Manganese intensity in steel is expected to decline due to changing mix of steel production in China from construction-driven long products to consumer-driven flat products The impact of steel recycling on manganese demand is less pronounced than other steel inputs due to its loss in the process China s high import dependency expected to continue due to lower supply from domestic grade decline and orebody depletion Future marginal supply is likely to come from South Africa where the ZAR rate will impact the cost curve 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 5
MANGANESE ORE MARKETING Where we sell our products Internal consumption (Temco and Metalloys) Exports predominately to China, South Korea, India and Europe FY16 sales revenue by region 1 2% 2% 3% 8% Product types Contract strategy Pricing and price exposure Gemco and Wessels produce high grade oxide ore (> 44%Mn), Mamatwan produces semi carbonate ore (~37% Mn) GEMCO PC02 (~40% Mn) project completed in FY16 Australia and South Africa produce sinter for internal consumption and external markets (~ 44% - 54% Mn) Market price reflecting value in use of the ore Opportunistic third party product is placed There are no industry standard manganese contracts or pricing approaches Market, especially China, is predominantly fixed price negotiated at prevailing market prices for delivery in the following month Index transactions are generally priced with a quotation period of Month or Month -1 In a falling market fixed sales typically outperform index. Vice versa in a rising market 9% 37% 39% Other Asia China India Europe Middle East Africa Americas Relative share 1Q17 of Manganese ore sales end market Internal External contracting approach² Fixed Index 1. Revenue breakdown by country excludes intercompany sales and third party product 2. Reflects allocation of external Manganese ore sales pricing approach² Month -1 Month 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 6
Australia United States Canada China India JKT METALLURGICAL COAL MARKET OVERVIEW Monthly average HCC price 1 (US$/t) Metallurgical coal trade flows 2 (Mt) 250 200 150 US supply begins to exit, stabilising prices China supply impacted by 276 day rule, Australia supply impacted by production disruptions 200 160 120 CY14 CY15 CY16 YTD³ Exports Reduced North America supply as a result of bankruptcy and other financial constraints Imports Increased Chinese imports due to impact of 276 day rule, regional weather and credit stimulus 100 80 50 China credit easing stimulates demand. Supply is impacted by weather in Australia, disruptions in Mozambique and US producer bankruptcy proceedings 40 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 1. Source: Platts 2. Sources: GTIS, HDR 3. CY16 YTD reflects up to August 2016 annualised Long term outlook: The metallurgical coal market continues to grow, albeit modestly, driven by steel use in industrialisation and urbanisation Recent price movement heavily impacted by short term supply factors, unlikely to continue in the long term India will be the key driver for demand growth given outlook for steel production and lack of domestic hard coking coal supply Marginal supply likely to come from Australia or North America 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 7
METALLURGICAL COAL MARKETING Where we sell our products Domestic steelmakers (BlueScope and Arrium) Exports predominately to India, Japan, South Korea, Taiwan and Europe FY16 sales revenue by region 17% 1% Product types Contract strategy Pricing and price exposure Illawarra Metallurgical Coal produces a premium hard coking coal and limited thermal coal (FY16: 84%/16%) Market price reflecting value in use premium Zero hedging undertaken Opportunistic third party product placed Premium received to HCC low vol FOB Australia index due to coal quality Sales are largely negotiated with a mechanism to fall back to index 1 Limited exposure to quarterly benchmark Prices realised on a Month or Month -1 basis 38% 20% 24% Australia Other Asia India Europe Americas Relative share of 1Q17 Metallurgical coal sales end market External 1. Where a sale for a shipment is negotiated with a customer and mutual price agreement cannot be reached the contract reverts to index contracting approach pricing approach Term Negotiated with index fall back Quarterly Spot fixed Spot 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 8
Q1 CY13 Q2 CY13 Q3 CY13 Q4 CY13 Q1 CY14 Q2 CY14 Q3 CY14 Q4 CY14 Q1 CY15 Q2 CY15 Q3 CY15 Q4 CY15 Q1 CY16 Q2 CY16 Q3 CY16 ALUMINA MARKET OVERVIEW Alumina monthly price 1,2 (US$/t) South-West China domestic price (US$/t) Australia FOB price (US$/t) 500 400 Start of Indonesian ban on ore exports Decreasing Chinese prices prompted by refinery curtailments China bauxite imports 3 (Mt annualised) Indonesia India Australia Malaysia Guinea Other 100 75 300 50 200 Rising bauxite supply from Malaysia 25 100 Chinese smelter restarts and rising South-West China domestic price provides support for Australia FOB price Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 1. Sources: Platts, Aladinny, South32 analysis 2. South-West China domestic price excludes VAT (ex-smelter) 3. Source: GTIS Long term outlook: Healthy outlook for alumina demand, driven by growth in primary aluminium production China will remain short alumina units. Unit cost of importing and refining bauxite will provide price support in the short to medium term Indian market likely to remain unbalanced (short alumina and bauxite) Marginal alumina supply likely to come from Indonesia in the long term 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 9
ALUMINA MARKETING FY16 sales revenue by region 3% 2% Where we sell our products Internal consumption (Hillside and Mozal smelters) Exports predominately to Middle East, Asia and Europe 10% 26% Product types Contract strategy Smelter grade alumina that may attract a premium for its value in use characteristics Market price reflecting value in use ~85% sold on long term contracts of 1-3+ years that realise an index price Some shipments will be sold on a spot basis each quarter to support overall liquidity in the market 13% 21% 25% Other Asia Europe Middle East Africa Americas China India Pricing and price exposure Industry pricing has transitioned from LME Aluminium percentage linked pricing to index pricing Other than one legacy contract, no contracts are priced on LME Aluminium percentage linked basis All term contracts are on an index basis with an Month -1 quotation period Negotiated prices for spot shipments Relative share of 1Q17 Alumina sales end market contracting approach¹ Internal Term External Negotiated 1. Reflects percentage allocation of external Alumina sales including third party product pricing approach¹ Month -1 Spot 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 10
NICKEL MARKET OVERVIEW LME nickel price and exchange Stocks 1 (LHS: US$/t, RHS: kt) 25,000 20,000 15,000 10,000 5,000 SHFE Stocks (RHS) LME Stocks (RHS) LME Nickel Price (LHS) Market surplus and Qingdao port scandal reveal a heavily oversupplied market Start of Indonesian ban on ore exports Amid falling prices, Chinese NPI producers implement plans to decrease production Market deficit and risks to ore exports from the Philippines have stabilised price 600 500 400 300 200 100 China nickel ore imports and NPI supply 2 (LHS: Mt ore, RHS: kt) 9 8 7 6 5 4 3 2 1 Indonesia Ore Imports (LHS) Philippines Ore Imports (LHS) China NPI Production (RHS) 50 45 40 35 30 25 20 15 10 5 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 1. Sources: LME, SHFE 2. Sources: GTIS, SMM Long term outlook: Healthy outlook for demand driven by rising output of nickel-bearing stainless steel China is structurally short of nickel units and will depend on imports to meet demand Ore availability for Chinese Nickel Pig Iron production from the Philippines and Indonesia is a function of government policy Marginal production likely to come from Indonesian NPI production 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 11
FERRONICKEL MARKETING FY16 sales revenue by region 2% Where we sell our products Product types Exports mainly to Asia Small amount of off-specification product sales made Ferronickel (an alloy of nickel and iron) 29% nickel content Sold predominately to stainless steel producers 18% 7% 4% 37% Contract strategy Pricing and price exposure Market price reflecting value in use Zero hedging Ferronickel is sold based on its nickel content (referencing the LME price for refined nickel) plus a differential (premium or discount) Typically South32 product is sold on quarterly or spot contracts 32% Other Asia China Europe Americas Africa India Relative share of 1Q17 Ferronickel sales 1. Reflects percentage allocation of external Ferronickel sales type contracting approach¹ pricing approach¹ Month Spec Quarterly Off-spec Spot Month -1 Month +1 31 OCTOBER 2016 SOUTH32 MARKETING UPDATE SLIDE 12