South32 flags major writedown at US base metals project

The Australian major joins the likes of Rio, Hastings, BCI, IGO and a host of other miners flagging blowouts and writedowns ahead of reporting season.

South32 has joined mining’s blowout confession season, slashing $US1.3bn from the value of its Hermosa base metals project in the US and warning of “significant” inflationary pressure on the previous $US1.7bn estimate of developing mines at the project.

The Australian mining major paid $US1.3bn to take out the remaining 83 per cent of Arizona Mining to acquire the project in 2018, valuing the company at $US1.6bn.

Five years later the company says the combined deposits at the project carry a book value of $US1bn, after slashing $US1.3bn from the carrying value of the main Taylor zinc, lead and silver deposit – targeted for first development.

The company kept the valuation of the Clark manganese project, and its regional exploration tenements, unchanged at $US519m, with Taylor now worth only $US482m.

The Arizona mine is a key plank in South32’s growth strategy, after chief executive Graham Kerr spent the bulk of the eight years since the company’s spin-out from BHP in winnowing down its sprawling asset base.

South32 split the development of the two deposits after the acquisition, and in early 2022 – after significant delays related to the Covid-19 pandemic – put a $US1.7bn development cost on Taylor in a prefeasibility study.

Final costs are due to be released before December, but South32 warned on Monday that figure is under “significant inflationary pressure” due to rising input costs including steel, cement and electrical components.

The warning is a significant reversal of the company’s position at its half-year results in February, when Mr Kerr told analysts the US construction cost index had declined since the completion of the initial feasibility study.

“Since that time, we have seen the index decline, and we have actually seen it level off for a period of time. And from that perspective we have a reasonable degree of confidence about where we see the capital cost coming in for Taylor,” he said.

South32 upgraded the size and its confidence levels of the mineral resources at the Taylor deposit on Monday, and Mr Kerr said he was confident of its long-term value to the mining major.

“We continue to see substantial opportunity to unlock additional value across Taylor, Clark and our highly prospective regional exploration package and that optionality is not included in today’s impairment assessment,” he said.

But South32 joins a growing list of Australian-listed miners disclosing blowouts at development projects. Last week IGO slashed almost the complete book value of the assets its acquired in the company’s $1.25bn takeover of Western Areas, and flagged further blowouts of the cost of its Cosmos nickel mine.

Rio has flagged rising costs at its Rincon lithium project in Argentina, with Lake Resources, Hastings Technology Metals and BCI Minerals also joining mining’s pity party ahead of financial reporting season.

South32 shares closed down 10c to $3.72 on Monday.