South32 gives green light to Arizona mine as earnings fall

South32 has ticked off on the development of a new $US2.2bn ($3.4bn) mine in the US, cancelling its share buyback to conserve cash as commodity prices fall and the mining major invests in future growth.

South32 booked a 92 per cent fall in net profit for the first half of the year, declaring a $US53m after-tax result – down from $US685m in the previous corresponding period.

The company declared a 0.4c a share dividend on the result, after underlying earnings before interest, tax, depreciation and amortisation fell 48 per cent to $US708m for the year.

But the mining major finally pulled the trigger on the first stage of its Hermosa project in the US state of Arizona, saying it had made a final investment decision on construction of the Taylor zinc, lead and silver mine.

South32 said Taylor would cost about $US2.2bn to build, and enter production in the second half of 2027. Previous feasibility studies had put a $US1.7bn price tag on the mine, with the 30 per cent lift blamed on inflation in the price of steel, cement and electrical components.

South32 chief executive Graham Kerr told The Australian he believed inflationary pressures in the US construction sector had eased recently.

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“We’re out there bidding for some work and we’re certainly not seeing any kind of escalation at the moment. If anything we’re seeing things slightly coming off, but obviously this is a long-term project so we don’t want to count chickens before all the work is done,” he said.

“But we’re seeing that inflationary impact pull back a bit.”

The Taylor deposit is South32’s first development at Hermosa. The company 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.

But South32 wrote off the bulk of that investment in last year’s annual financial statements, slashing $US1.3bn from the carrying value of Taylor as the company approached an investment decision on the deposit.

Hermosa remains South32’s only major growth project eight years after the company was spun out of BHP, but Mr Kerr said on Thursday the development offered had potential to be a centrepiece of South32’s future assets, offering the prospect of copper and manganese mine developments in the future.

Taylor is slated to produce an average 114,000 tonnes of zinc a year across a 28-year mine life, along with 142,000 tonnes of lead and 7.4 million ounces of silver each year.

South32’s latest feasibility study on Taylor flagged annual before-tax earnings for the mine of about $US400m a year.

The company said falling commodity prices and lower production from its NSW coking coal mine were the major factors in its profit slump.

The company also cancelled the last $US98m tranche of its share buyback, saying it had made the decision to “manage our financial position and ensure we retain the right balance of flexibility, efficiency and prudence”. South32 finished December with net debt of $US1.1bn.

Its shares closed down 14c, or 4.5 per cent, to $2.94.