By Peter Milne
South32 has slashed the value of a key mine it is developing in the United States by $US1.3 billion ($1.93 billion) after the project was hit by a blowout in construction costs and delays, which sparked a slump in the mining giant’s share price.
The Perth-based diversified miner paid $US1.44 billion to buy Arizona Mining in 2018, giving it ownership of a zinc, lead and silver mine in Arizona called the Hermosa project, with the Taylor zinc, lead and silver deposit and the Clark manganese deposit.
South32 floated on the ASX in 2015 with a diverse set of assets considered non-core by BHP.Credit: Fairfax Media
On Monday, South32, a former spin-off from global giant BHP, cut its carrying value of Taylor by $US1.3 billion to $US482 million ($716 million).
South32 chief executive officer Graham Kerr said he was disappointed by the delays that were attributed to the pandemic, unexpected amounts of water to remove from the mine site that has cost $US365 million so far, and an increasing cost of construction materials which include steel, cement and electrical components.
“The Hermosa project has the potential to sustainably produce commodities critical for a low-carbon future, from multiple development options, for decades to come,” Kerr said.
The value of Hermosa, with Clark unchanged, is now $US1 billion ($1.49 billion), much lower than the purchase price.
South32 shares fell 2.6 per cent to $3.72 in a weak day for mining stocks, as shares in mining giants Rio Tinto and BHP also dipped lower.
The setback for the critical minerals project is the latest sign of the difficulty of delivering resource projects on budget, after Woodside last week delayed production from its West African oil project due to problems on a production vessel.
Mining investors are also preparing for profit results this week from global giant Rio Tinto, which last week highlighted that China’s economic recovery had fallen short of expectations.
Despite the impairment from South32, Kerr said there were substantial opportunities to unlock additional value across Taylor, Clark and from nearby exploration that was not included in the impairment assessment. South32 plans to complete the feasibility study for Taylor and make a final investment decision this year.
“Beyond Taylor, Clark is well positioned to supply high-purity manganese sulphate monohydrate for the electric vehicle supply chain in North America, creating a second development option at Hermosa,” Kerr said.
“Hermosa was also confirmed as the first mining project in the United States to be covered by the FAST-41 process, underlining its potential to strengthen the domestic supply of critical minerals.”
South32’s results in the fourth quarter, also released on Monday, showed record annual production from its Australian and South African manganese mines and the Hillside aluminium smelter in South Africa.
RBC Capital Markets analyst Kaan Pecker said it was a strong production rebound from the previous quarter for all products except alumina, which experienced technical issues in WA and Brazil.
The production of metallurgical coal in NSW was down 21 per cent for the final quarter of 12 months, which meant a decline in the price of almost all the commodities South32 produces.
The price of zinc fell 34 per cent, metallurgical coal dropped 27 per cent, nickel dipped 23 per cent and aluminium was down 20 per cent.
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