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South32 to sink US$2bn on zinc

South32 (ASX:S32) suffered a massive 92% crunch in after tax profits in the first half of 2024, with lower commodity prices seeing it make just US$53m in the December half, down from US$685m a year earlier.

But that fact, which has seen a share buyback paused and dividend payments slashed 92% from 4.9c to just 0.4c a share, has done little to dull the miner’s plan to invest further.

Significantly, the BHP spinoff has ignored weak near term conditions for battery and base metals to take a major plunge into the zinc market, announcing a US$2.16 billion ($3.33b Aussie) investment to build the Taylor mine in Arizona.

It has already parted with US$366m for critical path infrastructure and pre-sink shaft activities since a PFS in January 2022. South32 spent US$1.3b buying TSX-listed owner Arizona Mining in 2018.

Part of the company’s Hermosa project, it will run for 28 years at an average EBITDA margin of around 50% but an internal rate of return of just 12%, lower than the 15% typically cited to back investments by majors.

Coming to market in the second half of 2027 and expected to hit nameplate output of 132,000tpa zinc, 163,000tpa lead and 8.5Mozpa silver by 2030, equivalent to 290,000tpa zinc a year.

On an average life of mine basis, production will come in at 114,000tpa zinc, 142,000tpa lead and 7.4Moz silver for 253,000t ZnEq.

The mine is expected to turn over US$400m in EBITDA annually at average all in sustaining costs of 16 US cents per pound of zinc, with commodity prices from FY31 expected to total US$3207/t Zn, US$2069/t lead and US$20.2/oz for silver.

Currently zinc is paying just US$2314.5/t on the LME, but South32 boss Graham Kerr is confident severe shortages are going to emerge in the coming years as its use in EVs, wind turbines and solar panels lifts.

“As one of the few shovel ready projects in the United States, and as industry-wide inflationary pressures begin to ease, we see potential opportunity to optimise the construction costs of Taylor,” Kerr said.

“Once in production, Taylor is expected to add an additional 8% to Group volumes relative to FY23 levels, increasing our supply of critical commodities and sustainably lifting margins due to its first quartile cost position.

“With global zinc demand growth expected to outpace production by ~3Mt to 2031, we expect higher incentive prices for zinc as Taylor ramps up to nameplate capacity.”

On the nose

It comes despite concerns around other battery and base metals in the South32 portfolio.

Notably, its Cerro Matoso ferronickel project in Colombia, which only receives prices equivalent to around 70% of the already sapped LME benchmark, is under review after losing US$14m in the first half.

Nickel prices accounted for US$121m of the dive in first half underlying EBIT from US$922m to US$236m, with manganese and thermal coal price impacts coming in at US$102m and US$22m, on top of a US$136m hit on aluminium pricing and US$33m on alumina.

That was only partially ameliorated by higher copper and silver prices, which made a positive contribution of US$15m and US$8m.

Lower caustic soda and coke prices will bring costs down across S32’s operations, especially in its aluminium and alumina businesses.

But inflationary pressure, lower sales volumes and controllable costs saw an almost US$500m to earnings between them, with a notable US$267m hit coming from lower sales at the Illawarra met coal operations.

S32 expects production to improve in the second half, rising 7% on a copper equivalent basis.