South32 sinks on Hermosa project cost blowout and delays, pinning some of the blame on Donald Trump’s tariffs

Shares in South32 are in the red after the diversified miner shocked investors with a huge cost blowout and delays at its much-hyped Hermosa project in the US. The Perth-based company on Thursday revealed that capital costs to build out the project’s first stage Taylor zinc-lead-silver development in Arizona had jumped more than 50 per cent to $US3.3 billion ($4.6b) — up from a $US2.2b feasibility study price tag published in early 2024. Annual sustaining capital once in production was also lifted from $US36 million to $US50m. South32 also pushed back its plant commissioning and first production target to the second half of the 2028 financial year, a year later than planned, with nameplate capacity of 4.3 million tonnes a year also delayed a year to FY31. It pinned part of the blame on “contractor under-performance” and US President Donald Trump’s tariffs. “Shaft sinking and construction productivity on the ventilation shaft has been impacted by challenges related to contractor performance and engineering and procurement delays,” outgoing chief executive Graham Kerr said. “While targeted measures to address shaft sinking productivity have improved performance, our latest assessment has determined that these measures will only partially mitigate the impact of contractor under-performance.” About $US500m of the overrun was also down to “materially higher inflation, industry-wide cost increases in key input costs such as steel, piping, concrete and electrical components, and United States tariff impacts”. South32’s shares dropped 8 per cent in early trade to $3.92. But the miner did increase Taylor’s ore reserves 52 per cent to 99mt and lifted mineral resource to 169mt. “Taylor’s initial operating life has been extended by five years to about 33 years since final investment approval, driven by successful infill drilling programs,” Mr Kerr said. “The deposit remains open in several directions, providing further growth potential, with life extensions beyond the mine plan of operations subject to future regulatory approvals.” RBC Capital Markets analyst Kaan Peker said Hermosa’s expected returns “no longer stand out” following the capex blowout. “While scale, mine life and resource confidence have improved, this is overshadowed by an approximate 50 per cent capex increase , an approximate one year delay, and higher costs,” he said in a note to clients. “Execution issues at the shafts have now translated into both schedule slippage and cost escalation, and importantly, are not fully resolved. “Returns remain acceptable — 19 per cent internal rate of return on higher commodity prices . . . but [returns] no longer stand out given the higher capital intensity and risk profile.” Mr Kerr, who has been South32’s chief executive since 2014, is set to hand the reins to former Anglo American executive Matt Daley at some stage this year. South32’s investment approval for the Taylor deposit was partially responsible for Mr Kerr receiving a $2.6m cash and equity bonus payout as part of his $7.1m remuneration package in 2024.