South32 hails US metal project despite writedown

South32 chief executive Graham Kerr says the company’s Hermosa project in the US is still valuable to it, despite taking a massive impairment on the asset.

South32 boss Graham Kerr says the company’s Hermosa base metals project in the US will deliver strong returns for the company for decades to come, despite taking a $US1.3bn impairment on the assets in its annual account.

South32 will pay a US3.2c a share dividend after tumbling to a $US173m net loss for the year on the back of the massive writedown at the Hermosa project.

The loss was largely generated by the non-cash impairment, but South32’s underlying earnings also tumbled 65 per cent to $US916m for the year.

The US3.2c a share dividend is well below the US22.7c dividend paid a year ago, and comes after a 20 per cent fall in revenue to $US7.43bn, and a 47 per cent drop in underlying EBITDA to $US2.53bn.

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, a decision Mr Kerr says triggered the impairment.

Hermosa remains South32’s only major growth plank, eight years after the company spun out from BHP and listed separately on the Australian exchange.

Mr Kerr, who has led the company for its entire life, said on Thursday he still viewed Hermosa as having the same potential as South32’s Cannington mine in Queensland, which started its life as a low-profile part of BHP’s portfolio but has delivered enormous returns for the company during operations over more than 25 years.

South32 is due to announce a final feasibility study on Hermosa by the end of the year, but Mr Kerr confirmed on Thursday he expects the final construction costs to come in well ahead of the $US1.7bn estimate contained in a prefeasibility study released in early 2022.

Mr Kerr said some parts of the new study were showing costs broadly in line with South32’s 2022 study, including the cost of building shafts to service the mine, but the costs of other major components had risen sharply since he dismissed cost concerns at the company’s half-year results in February.

“The US building construction index is now back up about 37 per cent. If you look at some of the things like fabricated structural metal, that’s up about 60 per cent and concrete’s up by about 30 per cent,” he said.

“On top of that, with the war going on between Russia and Ukraine, and the constant bombing of the electrical equipment there, plus the world’s general move to renewable energy systems, the time frame and costs of electrical equipment have substantially moved as well.”

South32 shares closed down 9c to $3.66 on Thursday.