South32 (ASX: S32) stunned investors on Thursday after raising costs and delaying development of the Taylor deposit at its Hermosa zinc-silver project in southern Arizona, casting doubt on the standout economics of one of its flagship growth projects.
The miner said that first-stage capital costs for the project have surged more than 50% to $3.3 billion from a $2.2 billion estimate outlined in a 2024 feasibility study, while first production has been pushed to the second half of fiscal 2028, a year later than planned.
South32 attributed the increase to contractor underperformance, slower-than-expected productivity and scope changes, alongside inflation, U.S. tariffs and rising input costs.
Annual sustaining capital has also climbed to about $50 million from $36 million, while unit operating costs are now forecast at $100 per tonne, up from $86, said the company which reports in U.S. dollars.
“Targeted measures have been implemented to improve shaft construction productivity,” CEO Graham Kerr said on a call with analysts. “However, our latest assessment has determined that these measures will only partially mitigate the impact of contractor underperformance.”
Shares in South32 closed 5.4% lower in Sydney on Thursday at A$4.03 apiece, valuing the company at A$18.1 billion ($13 billion).
Output delay
Kerr added that construction challenges are centred on a critical ventilation shaft, pushing full production to fiscal 2031 from fiscal 2030.
The announcement wiped value from the stock, with shares falling 5.4% to A$4.03, leaving South32 with a market capitalization of about A$18 billion.
RBC Capital Markets analyst Kaan Peker said the changes undermine the project’s investment case.
“While scale, mine life and resource confidence have improved, this is overshadowed by an approximate 50% capex increase, an approximate one year delay, and higher costs,” he said. Execution issues “have now translated into both schedule slippage and cost escalation, and importantly, are not fully resolved,” he said.
BMO analyst Alexander Pearce said the update reduces near-term free cash flow and leaves Hermosa “essentially break-even” on the bank’s price assumptions, despite an extended mine life. The bank cut South32’s target price by 7% while maintaining a market perform rating. He warned that weaker economics and higher costs have lowered South32’s overall valuation.
Tariffs, Iran war
South32 is developing Taylor as part of a broader strategy to reposition its portfolio toward metals linked to decarbonization, with zinc, copper and manganese all designated as critical minerals by the US Geological Survey.
The Hermosa project also includes the Peake copper deposit and the Clark manganese deposit, underscoring its strategic importance.
The company has said Taylor could become one of the world’s largest, lowest-cost zinc operations, supplying a market critical for galvanizing steel and infrastructure.
Kerr said external pressures have compounded internal execution challenges.
“Since we sanctioned Taylor in 2024, there have been major inflationary shocks and supply chain challenges: the war in Ukraine, U.S. tariffs and recent Middle East conflict,” he said. “These external pressures have recently intensified.”
The company now estimates an internal rate of return of about 19%, down from 22% previously.
Despite the setbacks, South32 highlighted improvements in the project’s scale, reporting a 52% increase in ore reserves and a 10% rise in mineral resources at Taylor, extending the expected mine life to roughly 33 years from 28.
The adjacent Peake deposit also saw a 32% increase in mineral resources, pointing to longer-term growth potential across the Hermosa district.
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