South32 Regulatory News (S32)

17 January 2022

South32 Limited

(Incorporated in Australia under the Corporations Act 2001 (Cth))

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32 ADR: SOUHY

ISIN: AU000000S320

south32.net

HERMOSA PROJECT UPDATE

Conference call at 11.00am Australian Western Standard Time, details overleaf.

South32 Limited (ASX, LSE, JSE: S32; ADR: SOUHY) (South32) is pleased to provide an update following completion of a pre-feasibility study (PFS) for the Taylor Deposit, which is the first development option at our 100% owned Hermosa project located in Arizona, USA.

The PFS results support Taylor's potential to be the first development of a multi-decade operation, establishing Hermosa as a globally significant producer of metals critical to a low carbon future, delivering attractive returns over multiple stages. An initial development case demonstrates a sustainable, highly productive zinc-lead-silver underground mine and conventional process plant, in the first quartile of the industry cost curve [footnote 1].

The Taylor Deposit will progress to a feasibility study, including work streams designed to unlock additional value by optimising operating and capital costs, extending the life of the resource and further assessing options identified to target a carbon neutral operation. Completion of the feasibility study and a final investment decision to construct Taylor are expected in mid CY23.

Separately, a scoping study [a] for the spatially linked Clark Deposit has confirmed the potential for a separate, integrated underground mining operation producing battery-grade manganese, as well as zinc and silver. Clark has the potential to underpin a second development stage at Hermosa, with future studies to consider the opportunity to integrate its development with Taylor, potentially unlocking further operating and capital efficiencies.

While exploration drilling to date has been focused on the Taylor and Clark Deposits, we have continued to complete surface geophysics, soil sampling and other exploration programs across our land package. This work has resulted in the definition of a highly prospective corridor including Taylor and Clark as well as the Peake and Flux exploration targets [b] which will be prioritised for drill testing in CY22.

Further details of the Taylor PFS are contained in the attached report and accompanying presentation.

South32 Chief Executive Officer, Graham Kerr said: "The Taylor Deposit provides an important first development option for our Hermosa project in Arizona, USA. The project has the potential to sustainably produce the metals critical for a low carbon future across multiple decades from different deposits.

"Completing the pre-feasibility study for the Taylor Deposit is an important milestone that demonstrates its potential to be a globally-significant and sustainable producer of base and precious metals in the industry's first cost quartile. Beyond Taylor, Clark offers the potential to realise further value from our investment in Hermosa through the production of battery-grade manganese, a mineral designated as critical in the United States.

"Additional exploration targets around Taylor and Clark are indicative of further upside while the broader land package contains highly prospective areas for polymetallic and copper mineralisation.

"We are designing the Taylor Deposit to be our first 'next generation mine', using automation and technology to minimise our impact on the environment and to target a carbon neutral operation in line with our goal of achieving net zero operational carbon emissions by 2050.

"The future development of Taylor provides a platform from which to realise Hermosa's immense potential. It will further strengthen our portfolio and align with the already substantial growth in production of metals critical to a low carbon future that we have embedded in the portfolio over the past six months."

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(a) The references to the scoping study in respect of the Clark Deposit are to be read in conjunction with the cautionary statement in footnote 2 (can be viewed on page 18 in the full announcement available on the NSM).

(b) The references to the Exploration Target for the Hermosa project (including Peake) are to be read in conjunction with the cautionary statement in footnote 3 (can be viewed on page 18 in the full announcement available on the NSM

Conference call

South32 will hold a conference call at 11.00am Australian Western Standard Time (2.00pm Australian Eastern Daylight Time) on 17 January 2022 to provide an update of the Hermosa project including Q&A, the details of which are as follows:

Conference ID

Please pre-register for this call at link.

Website

A replay of the conference call will be made available on the South32 website.

HERMOSA PROJECT

Hermosa is a polymetallic development option located in Santa Cruz County, Arizona, and is 100% owned by South32. It comprises the zinc-lead-silver Taylor sulphide deposit (Taylor Deposit), the zinc-manganese-silver Clark oxide deposit (Clark Deposit) and an extensive, highly prospective land package with the potential for further polymetallic and copper mineralisation. Hermosa is well located with excellent access to skilled people, services and transport logistics.

We have completed a PFS for the Taylor Deposit, our first development option at Hermosa. The Taylor Deposit is a large, carbonate replacement massive sulphide deposit which extends to a depth of approximately 1,200m over an approximate strike length of 2,500m and width of 1,900m. The Mineral Resource estimate for the Taylor Deposit is 138Mt, averaging 3.82% zinc, 4.25% lead and 81 g/t silver [footnote 4]. The deposit remains open at depth and laterally, offering further exploration potential.

The preferred mine design applied to the PFS is a dual shaft access mine which prioritises higher grade mineralisation early in the mine's life. The mining method is longhole open stoping, with the geometry of the orebody enabling the operation of multiple concurrent mining areas. This supports our assumption of an initial 22 year resource life [footnote 5] with high mining productivity. Ramp up to nameplate capacity [c] of up to 4.3 million tonnes per annum (Mtpa) [footnote 7] is expected to be achieved in a single stage. The process design applies a conventional sulphide ore flotation circuit producing separate zinc and lead concentrates with substantial silver credits.

In addition to the current Mineral Resource estimate for Taylor, we have defined an Exploration Target ranging from 10 to 95Mt [footnote 3] indicating the potential for further exploration upside. The exploration opportunity at Taylor includes depth and extensional opportunities as well as new prospects in proximity to the deposit. We have identified an Exploration Target at depth to the Taylor Deposit known as Peake, with initial drilling results returning copper and polymetallic mineralisation. Further drilling at Peake is planned in CY22.

Separately, we have completed a scoping study for the spatially linked Clark Deposit, confirming the potential for an underground mining operation producing battery-grade manganese, as well as zinc and silver. We are undertaking a PFS for Clark to increase our confidence in the mining and processing assumptions of a preferred development option and customer opportunities in the rapidly growing battery-grade manganese markets.

The Clark Deposit is interpreted as the upper oxidised, manganese-rich portion of the mineralised system that hosts Taylor. As we advance both our Taylor and Clark studies, we maintain the option to merge this work and assess an integrated underground mining operation. While such a scenario would require separate processing circuits to produce base and precious metals, and battery-grade manganese, an integrated development has the potential to unlock further operating and capital efficiencies.

Our third focus at Hermosa remains on unlocking value through exploration of our regional scale land package. Through the completion of surface geophysics, soil sampling, mapping and interpretation of recently acquired data, we have identified a highly prospective corridor which will be prioritised for future drilling. Within this corridor, we plan to drill the Flux prospect following receipt of required permits, anticipated in the second half of CY22. The Flux prospect is located down-dip of a historic mining area that has the potential for carbonate hosted, Taylor-like mineralisation [footnote 8].

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(c) The references to all Production Targets and resultant financial forecast information in this announcement is to be read in conjunction with the cautionary statement in footnote 6 (can be viewed on page 18 in the full announcement available on the NSM). The key facts and material assumptions to support the reasonable basis for this information is provided in Annexure 2 of this announcement.

Strategic alignment

We continue to actively reshape our portfolio for a low carbon future, investing in opportunities that increase our exposure to base and precious metals, with strong demand fundamentals and low carbon production intensity. The Taylor Deposit is our most advanced development option at the Hermosa project, which has the potential to provide a multi-decade platform at the operation that would further improve the Group's exposure to the metals required for the transition to a low carbon future.

Sustainable development

Sustainable development is at the heart of our purpose at South32 and forms an integral part of our strategy. The Taylor Deposit has been designed as our first "next generation mine" using automation and technology to drive efficiencies, minimise our impact and reduce carbon emissions. We have completed initial work programs and studies with respect to our communities, cultural heritage, environment and water, and any future development at Hermosa will be consistent with our approach to sustainable development.

The Taylor Deposit has been designed as a low-carbon operation, with the feasibility study to target the further potential to achieve carbon neutrality. This may be achieved through identified options to access 100% renewable energy from local providers, and the potential use of battery electric vehicles and underground equipment. The development of the Taylor Deposit would be consistent with our commitment to a 50% reduction in our operational carbon emissions by FY35 and net zero by 2050.

Capital management framework

A final investment decision for the Taylor Deposit and its potential tollgate to construction will be assessed within our unchanged capital management framework. Our framework, which prioritises investment in safe and reliable operations, an investment grade credit rating and returns to shareholders via our ordinary dividends, also seeks to establish and pursue options that create enduring value for shareholders, such as capital investments in new projects. Our preferred funding mechanism for any future developments at Hermosa will be consistent with our commitment to an investment grade credit rating through the cycle that supports our strong balance sheet.

PFS HIGHLIGHTS

The PFS results demonstrate Taylor's potential to be a globally significant producer of green metals critical to a low carbon future, in the first quartile of the industry cost curve. Taylor has the potential to underpin a regional scale opportunity at Hermosa, with ongoing activities to unlock additional value from the Clark Deposit and exploration opportunities across the regional land package.

· Our initial development scenario outlines the potential for a large scale, highly productive underground mine

- Dual shaft access which prioritises higher grade ore in early years

- Proposed mining method is low technical risk, employing longhole open stoping with paste backfill

- Single stage ramp-up to nameplate production of up to 4.3Mtpa

- Conventional sulphide ore flotation circuit

· Potential to be a globally significant producer of metals for a low carbon future

- PFS estimates annual average production ~111kt zinc, ~138kt lead and ~7.3Moz silver (~280kt zinc equivalent (ZnEq) [footnote 9], with output ~20% higher across the years of steady state production [footnote 10]

- Zinc is used in renewable energy infrastructure such as solar and wind for energy conversion and to protect against corrosion; silver is a key element used in solar panels; while lead demand is expected to be supported by its use in renewable energy storage systems

· Potential for a low cost operation in the industry's first quartile

- Average Operating unit costs ~US$81/t ore milled (all-in sustaining cost (AISC) [footnote 11] ~US$(0.05)/lb ZnEq) benefitting from high underground productivity

· Directs capital to establish a multi-decade base metals operation and platform for growth at Hermosa

- Project capital of ~US$1,230M (direct) and ~US$470M (indirect) to establish the first development option

- Low sustaining capital ~US$40M per annum

- Potential to realise capital efficiencies through an integrated development of Taylor and Clark

· A large Mineral Resource with substantial exploration potential

- Taylor Deposit supports an initial resource life of ~22 years, and remains open at depth and laterally

- 10 to 95Mt Exploration Target identified, indicating the potential for further exploration upside

- Copper-lead-zinc-silver mineralisation intercepted at the proximal Peake prospect

· Pursues the sustainable development of critical metals

- We are investing in local programs and partnerships that reflect the priorities of our communities

- We are committed to working with Native American tribes to protect cultural resources

- We have completed key biodiversity, ecosystem and water studies

- We are pursuing a pathway to net zero carbon emissions with identified options for renewable energy

FURTHER OPPORTUNITIES TO UNLOCK VALUE

Reflecting the early stage nature of the project we have identified numerous opportunities to unlock further value at Taylor that will be pursued prior to a final investment decision. Opportunities identified include the potential to:

· Extend the resource life, which is underpinned by the current Taylor Mineral Resource estimate and does not include the further potential identified in our Exploration Target.

· Reduce operating costs through:

- Further optimisation of the mining schedule, power consumption and comminution circuit;

- Supplying smelters in the Americas to realise a material reduction in transport costs; and

- Adopting emerging technologies and further automation opportunities, targeting enhanced productivity.

· Reduce capital costs through further optimisation of the shaft design, construction and procurement.

· Achieve a carbon neutral operation through access to 100% renewable energy from local suppliers.

· Integrate the underground development with the Clark Deposit.

NEXT STEPS

Taylor will now progress to a feasibility study which is targeted for completion in mid CY23. To maintain the preferred development path in the PFS, critical path items including construction and installation of infrastructure to support additional orebody dewatering is planned to commence in H2 FY22. Total pre-commitment capital expenditure associated with dewatering of approximately US$55M is expected in H2 FY22, with further investment expected in FY23. This expenditure is included in the growth capital estimate in Table 1 below.

The PFS assumes a single stage ramp-up to the nameplate production rate. Based on the PFS schedule, and subject to a final investment decision and receipt of required permits, shaft development is expected to commence in FY24. First production is targeted in FY27 with surface infrastructure, orebody access, initial production and tailings storage expected on patented lands which require state-based approvals. Surface disturbance and additional tailings storage on unpatented land will require completion of the National Environmental Policy Act (NEPA) process with the United States Forest Service (USFS). The project may benefit from the classification of metals found at Hermosa as critical minerals in the United States. Zinc is proposed to be added as a critical mineral by the U.S. Geological Survey while manganese (found at the Clark Deposit) already has this designation.

PFS SUMMARY RESULTS

Key PFS outcomes are summarised below. Given the project's early stage nature, the accuracy level in the PFS for operating costs and capital costs is -15% / +25%. The cost estimate has a base date of H1 FY22. Unless stated otherwise, currency is in US dollars (real) and units are in metric terms.

Table 1: Key PFS outcomes

Taylor DEPOSIT PFS

The PFS for the Taylor Deposit provides confirmation that it is a technically robust project that has the potential to deliver an attractive return on investment. The PFS is based on an underground zinc-lead-silver mine development using longhole open stoping and a conventional sulphide ore flotation circuit producing separate zinc and lead concentrates, with silver by-product credits. The preferred development scenario is based on a mining and processing rate of up to 4.3Mtpa, with a resource life of approximately 22 years.

The PFS was completed with input from consultants including Fluor for the process plant and on-site infrastructure, SRK Consulting for geological and technical reviews, Stantec for mining studies, NewFields for hydrogeology, Montgomery & Associates for dewatering and tailings, Black and Veatch, and BQE for water treatment design and CPE for off-site roads. The PFS has been subject to an independent peer review.

Mineral Resource estimate

The Taylor Deposit is a carbonate replacement style zinc-lead-silver massive sulphide deposit. It is hosted in Permian carbonates of the Pennsylvanian Naco Group of south-eastern Arizona. The Taylor Deposit comprises the upper Taylor sulphide (Taylor Mains) and lower Taylor deeps (Taylor Deeps) domains that have a general northerly dip of 30° and are separated by a low angle thrust fault.

The Taylor Mineral Resource estimate is reported in accordance with the JORC Code (2012) at 138Mt, averaging 3.82% zinc, 4.25% lead and 81 g/t silver with a contained 5.3Mt of zinc, 5.9Mt of lead and 360Moz of silver. The Mineral Resource estimate is reported using a net smelter return (NSR) cut-off value of US$80/t for material considered extractable by underground open stoping methods.

The Taylor Deposit has an approximate strike length of 2,500m and a width of 1,900m. The stacked profile of the thrusted host stratigraphy extends 1,200m from near-surface and is open at depth and laterally. It is modelled as one of the first carbonate replacement deposit occurrences in the region, with all geological and geochemical information acquired to date being consistent with this model.

Figure 1: Taylor Mineral Resource (image can be viewed in the full announcement available on the NSM)

Exploration Target

The Taylor Mineral Resource is within a highly prospective mineralised system and is open at depth and laterally, offering the potential for further exploration upside.

We have completed work aimed at developing an unconstrained, spatial view of the Exploration Target at the Taylor Deposit, considering extensional and near-mine exploration potential.

The Hermosa project has sufficient distribution of drill data to support evaluation of the size and quality of Exploration Targets. Tables of individual drill hole results are provided in Annexure 1 of this announcement, as well as a listing of the total number of holes and metres that support the assessment of the Exploration Target size and quality.

The tonnage represented in defining Exploration Targets is conceptual in nature. There has been insufficient exploration to define a Mineral Resource and it is uncertain if further exploration will result in the determination of a Mineral Resource. It should not be expected that the quality of the Exploration Targets is equivalent to that of the Mineral Resource.

Estimations were performed using resource range analysis, in which deterministic estimates of potential volumes and grades are made over a range of assumptions on continuity and extensions that are consistent with available data and generic models of carbonate replacement, skarn and vein styles of mineralisation.

The estimates are supported by exploration results from prospects in and around the Taylor Mineral Resource. These results are all of carbonate replacement, skarn, and vein styles of mineralisation and are currently explored at varying degrees of maturity and exploration drilling density.

Outcomes for the Exploration Target are provided in Table 2 below. The mid case Exploration Target is approximately 45Mt.

Table 2: Ranges for the Exploration Target for Taylor sulphide mineralisation (as at 31 December 2021)

Notes:

a) Net smelter return cut-off (US$80/t): Input parameters for the NSR calculation are based on South32's long term forecasts for zinc, lead and silver pricing, haulage, treatment, shipping, handling and refining charges. Metallurgical recovery assumptions are 90% for zinc, 91% for lead, and 81% for silver.

b) All masses are reported as dry metric tonnes (dmt). All tonnes and grade information have been rounded to reflect relative uncertainty of the estimate, hence small differences may be present in the totals.

Peake prospect

Our drilling programs at the Taylor Deposit have focused on improving confidence in the mine plan for the potential development, extending the resource and testing near-mine exploration prospects.

As part of our work on near-mine exploration targets, we have intersected the skarn hosted copper-lead-zinc-silver Peake prospect, located south of the Taylor Deposit at a depth of approximately 1,300-1,500m. To date, 13 drill holes have been completed at Peake, a deeper zone prospective for copper mineralisation, returning results that intersected copper, lead, zinc and silver. The geological model interpreted from these results and other recently acquired data indicates the potential for a continuous structural and lithology-controlled system connecting Taylor Deeps and Peake. Further exploration drilling is planned in CY22.

Selected exploration drilling results from the Peake prospect are shown in Table 3 below.

Table 3: Selected Peake drilling results

All exploration drilling results from the Peake prospect are shown in Table 4 below. All drill intersections used to define the Exploration Target are included in Annexure 1 of this announcement.

Table 4: All Peake drilling results

Figure 2: Peake prospect (image can be viewed in the full announcement available on the NSM)

Mining

The PFS design for Taylor is a dual shaft mine which prioritises early access to higher grade mineralisation, supporting ZnEq average grades of approximately 12% [footnote 9] in the first five years of the mine plan. The proposed mining method, longhole open stoping, maximises productivity and enables a single stage ramp-up to our preferred development scenario of up to 4.3Mtpa. In the PFS schedule, shaft development is expected to commence in FY24 with first production targeted in FY27 and nameplate production in FY30.

Ore is expected to be mined in an optimised sequence concurrently across four independent mining areas, crushed underground and hoisted to the surface for processing. The mine design contemplates two shaft stations, one for logistics and access, and the other for material handling. The primary haulage material handling level is expected to be located at a depth of approximately 800m.

The operation would be largely resourced with a local owner-operator workforce, with a mining fleet consisting of jumbo drills, rock bolters, production drills, load, haul and dump machines and haulage trucks. Taylor's feasibility study will evaluate the potential use of battery electric underground equipment and trucks within the mining fleet, bringing further efficiency benefits, reducing diesel consumption and carbon emissions.

Processing

The PFS process plant design is based on a sulphide ore flotation circuit to produce separate zinc and lead concentrates, with silver by-product credits. The flowsheet adheres to conventional principles with a primary crusher, crushed ore bins, comminution circuit, sequential flotation circuit, thickening and filtration. Tailings are processed by either filtration and drystacking, or by converting to paste and returning them underground. Approximately half of the planned tailings will be sent underground as paste fill, reducing the surface environmental footprint.

Pre-flotation and pre-float concentrate cleaning steps have been included in the plant design to prevent magnesium oxide and talc from affecting flotation performance and concentrate quality. Jameson cell technology is proposed to be used in place of some traditional mechanical flotation cells to enhance recoveries. Once filtered, concentrate would be loaded directly into specialised bulk containers.

The PFS processing facility has design recoveries of 90% for zinc and 91% for lead, and target concentrate grades of 53% for zinc and 70% for lead. Silver primarily reports to the lead concentrate, with a design recovery of 81%. The zinc concentrate is considered mid-grade with relatively high silver content for zinc, and the lead concentrate is considered high-grade. Indicative production rates in the PFS are shown in Figure 3.

Figure 3: Payable ZnEq production and head grade (image can be viewed in the full announcement available on the NSM)

The PFS mine ramp-up enables nameplate capacity to be reached in FY30. Annual average payable production is ~111kt zinc, ~138kt lead and ~7.3Moz silver (~280kt ZnEq [footnote 9]). Production over the steady state years (FY30 to FY44) is expected to be approximately 20% higher, averaging ~130kt zinc, ~166kt lead and ~8.7Moz silver (~340kt ZnEq [footnote 9]).

Site infrastructure

PFS capital includes estimates for non-processing infrastructure, including required tailings, power and water infrastructure.

Figure 4: Site infrastructure (image can be viewed in the full announcement available on the NSM)

The tailings storage facilities (TSF) have been designed in accordance with South32's Dam Management Standard, with our approach being consistent with the International Council on Mining and Metals (ICMM) Tailings Governance Framework. We are also progressing work on compliance with the Global Industry Standard on Tailings Management. Approximately half of the tailings produced will be thickened and filtered and sent back underground as paste backfill, reducing the surface environmental footprint. The remaining filtered tailings will be placed in one of two dry stack TSFs. The first facility is located on patented land and is an expansion to the existing TSF which was constructed as part of the voluntary remediation program completed in CY20. This already completed work established a state-of-the-art dry stack facility which will provide initial tailings capacity to support the commencement of operations. The PFS contemplates a second purpose-built facility on unpatented land, requiring Federal permits.

Future site power needs are expected to be met through transmission lines connecting to the local grid. Grid power is currently generated from a combination of coal, natural gas and renewables including solar, hydro and wind power. We have commenced discussions in relation to securing 100% renewable energy for the project, with options for grid-based renewable energy as well as new solar power projects to be advanced through the feasibility study.

Orebody dewatering is a critical path activity in the PFS schedule and capital expenditure has been committed to support construction and the installation of its related infrastructure, commencing from H2 FY22. The hydrogeological studies completed in the PFS and the design of the required water wells and infrastructure have been completed to feasibility-stage standards to support the execution of these early works.

Water treatment requirements are expected to met through two proposed water treatment plants (WTP). WTP1 is already installed and treatment upgrades are expected to be commissioned in Q3 FY22, while WTP2 is expected to be commissioned in Q4 FY23.

Logistics

Hermosa is well located with existing nearby infrastructure for both bulk rail and truck shipments to numerous North American ports. The transportation of concentrates is expected to be a combination of trucking to a rail transfer facility (for subsequent rail transfer to port) and directly to port, for shipping to Asian and European smelters. Specialised bulk containers will be used to eliminate dust exposure from the time of load out until discharge to the ocean vessel. The expected trucking route in the PFS includes the construction of a connecting road to a state highway and other upgrades to road infrastructure.

PFS shipping costs assume transportation of concentrate to Asia and Europe. During feasibility we will continue to investigate the potential to supply smelters in the Americas, substantially lowering our assumed transport logistics and shipping costs.

Operating cost estimates

The PFS includes estimates for mining, processing, general and administrative operating costs.

Mining costs (~US$35/t ore processed) include all activities related to underground mining, including labour, materials, utilities and maintenance. Processing costs (~US$13/t ore processed) include consumables, labour and power. General and administrative costs (~US$10/t ore processed) include head office corporate costs and site support staff. Other costs (~US$23/t ore processed) include shipping and transport (~US$16/t ore processed), marketing and royalties, with private net smelter royalties averaging 2.4% (~US$4/t ore processed).

Average PFS operating unit costs of ~US$81/t ore processed (~US$77/t at steady state production) reflect the high productivity rates expected from concurrently mining multiple independent underground areas and the benefit from access to local, skilled service providers.

Average PFS Operating unit costs expressed on a zinc equivalent basis of ~US$(0.71)/lb and AISC [footnote 11] of ~US$(0.05)/lb place the Taylor Deposit in the first quartile of the industry cost curve1.

Table 5: Operating unit costs - $t/ore processed

Table 6: Operating unit costs - $/lb ZnEq

Capital cost estimates

Direct PFS capital expenditure estimates to construct Taylor are shown below. The construction period following a final investment decision is expected to be approximately four years. Indirect costs include contingency, owner's and engineering, procurement, and construction management (EPCM) costs to support the project. The Group will also continue to incur ongoing costs for work being undertaken across the broader Hermosa project that will be separately guided.

Table 7: Growth capital expenditure (from 1 January 2022)

Mining capital expenditure includes the shafts (~US$310M), development, mobile equipment and infrastructure. Surface facilities includes the processing plant (~US$350M), tailings and utilities. The capital estimate reflects assumptions for key inputs including steel, cement and labour as at H1 FY22.

Additional capital is included in the PFS estimates for critical path orebody dewatering. The direct capital expenditure estimate of US$225M includes expenditure directly attributable to water wells and a second required water treatment plant. A further ~US$140M of owner's costs across the period of dewatering are included within indirect costs (~US$470M).

Further value engineering work in the feasibility study will target a potential reduction in capital costs through further optimisation of the shaft design, construction and procurement.

Sustaining capital expenditure is expected to average approximately US$40M per annum and primarily relates to mine development.

Development approvals

The Hermosa project's mineral tenure is secured by 30 patented mining claims totaling 228 hectares that have full surface and mineral rights owned by South32. The patented land is surrounded by 1,957 unpatented mining claims totaling 13,804 hectares. The surface rights of the unpatented mining claims are administered by the USFS under multiple-use regulatory provisions.

The initial PFS mine development and surface infrastructure, including the processing plant, on-site power and the first TSF are designed to be located on patented mining claims. As a result, construction and mining of the Taylor Deposit can commence with approvals and permits issued by the State of Arizona. Several required permits for dewatering are already held, with the timeframe to receive the remaining State-based approvals expected to take up to approximately two years. Surface disturbance and additional tailings storage on unpatented land will require completion of the NEPA process with the USFS, in order to receive a Record of Decision (RoD). The ramp-up to nameplate production assumed in the PFS could take longer than contemplated if the RoD was delayed, as production may need to be slowed so tailings capacity could be restricted to patented lands until the RoD is received.

Our approach to sustainability at Hermosa

Sustainable development is at the heart of our purpose at South32 and forms an integral part of our strategy. Our commitment to sustainable development is embedded in the approach we are adopting at Taylor.

We have developed a comprehensive stakeholder identification, analysis and engagement plan. Our key stakeholders include local communities within Santa Cruz County, Native American tribes with historic affiliation around the project area, and county, state and federal government agencies.

Partnering with local communities

We have developed a community investment plan for Hermosa. Key investment initiatives include a South32 Hermosa Community Fund developed in partnership with the Community Foundation for South Arizona, community sponsorships and grants to community programs that reflect the priorities of the communities around Hermosa. In addition to community investment programs, we have established local procurement and employment plans designed to provide direct economic benefits for our communities.

Preserving cultural heritage

We are committed to working with Native American tribes who have a historic affiliation with the area around the Hermosa project. While there are no Native American trust lands near Hermosa, historic habitation or use of the region by Indigenous Peoples may establish culturally significant connections. We have completed initial surveys for cultural resources on both our patented lands and unpatented mining claims and will continue to engage with Native American tribes who have historic affiliations to gain a more thorough understanding of sensitive cultural resources.

Managing our environmental impact

An environmental management plan (EMP) has been developed for Hermosa that is consistent with the South32 Environment Standard. Key aspects of the EMP include baseline studies, risk assessments and mapping of key features with respect to biodiversity, ecosystems and water. The baseline studies have included several biological studies and surveys, including for species listed under the Endangered Species Act (ESA) and USFS sensitive species, as well as monitoring of surface water, ground water and air quality. The ongoing collection, analysis and modelling of baseline information and survey data will align with the South32 Environment Standard and support the required permits and approvals for Hermosa.

Hermosa is in a semi-arid environment, with most rainfall occurring in the "monsoon" season of July through October. Water resource monitoring and management plans have been developed to support an understanding of the baseline conditions and numerical modelling of surface and groundwater resources. Additional studies are planned for completion as part of the Taylor feasibility study.

Targeting net zero carbon operational emissions

Taylor has been designed as a low carbon operation, with the primary sources of carbon emissions being residual diesel consumption and grid power. We have identified several opportunities to improve this starting position, with active discussions to secure 100% renewable energy for site power and the feasibility study to include further evaluation of the potential use of battery electric vehicles and underground mining equipment. We are testing technology solutions to support this, with a trial of electric vehicles planned at our Cannington zinc-lead-silver mine during FY22 and our ongoing participation in the Electric Mine Consortium [footnote 13].

Commodities for a low carbon future

The proposed development of Taylor is consistent with our focus on reshaping our portfolio for a low carbon future, increasing our exposure to base and precious metals and reducing our carbon intensity.

The metals produced at Taylor are expected to play a role in supporting global decarbonisation. Zinc demand is expected to benefit from an increase in renewable energy infrastructure such as solar, where it allows for higher energy conversion, and wind, given its use in protecting key elements from corrosion. Silver is used in solar panels due to its superior electrical conductivity and has higher intensity of use in electric vehicles compared to internal combustion engine (ICE) cars. In the medium term, the ongoing growth in ICE vehicles sales will continue to see demand for lead-acid batteries grow, with lead demand also expected to be supported by its use in renewable energy storage systems.

Taylor project summary

Key PFS assumptions and outcomes are summarised below.

Table 8: Taylor PFS assumptions

Clark Deposit SCOPING STUDY

Clark is a manganese-zinc-silver oxide deposit located adjacent, and up-dip of the Taylor Deposit, which has a Mineral Resource estimate of 55 million tonnes, averaging 9.08% manganese, 2.31% zinc and 78 g/t silver using a NSR cut-off of US$175/t [footnote 4] in accordance with the JORC Code. The Clark Deposit is interpreted as the upper oxidised, manganese-rich portion of the mineralised system, with the resource extending from near surface to a depth of approximately 600m.  

The Clark Deposit has the potential to underpin a second development at Hermosa. We recently completed a scoping study [footnote 2] for the Clark Deposit which has confirmed viable flowsheets to produce battery-grade manganese, in the form of electrolytic manganese metal (EMM) or high purity manganese sulphate monohydrate (HPMSM). Clark has advanced to a PFS for a potential underground mine development using longhole open stoping accessed from existing patented mining claims. The PFS is designed to increase confidence in our technical and operating assumptions and customer opportunities in the rapidly growing battery-grade manganese markets. The first phase of the PFS is expected to be completed in late CY22, at which point a preferred development pathway will be selected. Many areas of the PFS, including mine planning, hydrogeology, infrastructure, sustainability and permitting will benefit from work completed in the Taylor PFS.

Our study work will also review the potential to pursue an integrated development of Taylor and Clark. An integrated development would comprise underground mining operations for Taylor and Clark with separate processing circuits to produce base and precious metals, and battery-grade manganese. An integrated development has the potential to realise operating and capital efficiencies.

Figure 5: Clark and Taylor deposits (image can be viewed in the full announcement available on the NSM)

Regional exploration

Our third area of focus at Hermosa is unlocking value through exploration of our highly prospective regional land package. Since our initial acquisition, we have increased our tenure by 66%, consolidating our position in the most prospective areas. We have completed surface geophysics, soil sampling, mapping and other exploration activity, resulting in the definition of a highly prospective corridor across our land package which will be prioritised for future testing.

Within this highly prospective corridor, we plan to drill test the Flux prospect in the second half of CY22 following the receipt of required permits. The Flux prospect is located down-dip of an historic mining area in carbonates that could host Taylor-like mineralisation [footnote 8]. Our ongoing exploration strategy will focus on identifying, permitting and drilling new exploration targets across the land package while continuing to refine our understanding of the regional geology.

Figure 6: Regional exploration (image can be viewed in the full announcement available on the NSM)

FOOTNOTES

1. Based on Taylor's estimated all-in sustaining costs (AISC) in the PFS and the Wood Mackenzie Lead/Zinc Asset Profiles. AISC includes operating unit costs (including royalties), treatment and refining charges (TCRCs), and sustaining capital expenditure.

2. Clark Deposit scoping study cautionary statement: The scoping study referred to in this announcement is based on low-level technical and economic assessments and is insufficient to support estimation of Ore Reserves or to provide assurance of an economic development case at this stage, or to provide certainty that the conclusions of the scoping study will be realised. The study is based on 60% Indicated and 40% Inferred Mineral Resources (refer to footnote 4 for the cautionary statement).

3. Competent Persons Statement and cautionary statement - Exploration Results and Exploration Target: The information in this announcement that relates to Exploration Results and Exploration Targets for Hermosa (including Peake) is based on information compiled by David Bertuch, a Competent Person who is a Member of The Australasian Institute of Mining and Metallurgy and is employed by South32. Mr Bertuch has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity being undertaken to qualify as a Competent Person as defined in the 2012 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr. Bertuch consents to the inclusion in the report of the matters based on his information in the form and context in which it appears. The JORC Table 1 (sections 1 and 2) related to the Exploration Results and Exploration Targets is included in Annexure 1. In respect of those Exploration Targets, the potential quantity and grade is conceptual in nature. There has been insufficient exploration to determine a Mineral Resource and there is no certainty that further exploration work will result in the determination of Mineral Resources.

4. Mineral Resource Statements for the Taylor and Clark deposits: The information in this announcement that relates to Mineral Resources for the Taylor and Clark deposits is extracted from South32's FY21 Annual Report (www.south32.net) published on 3 September 2021. The information was prepared by a Competent Person in accordance with the requirements of the JORC Code. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement, and that all material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

5. Resource life is estimated using Mineral Resources (extracted from South32's FY21 Annual Report published on 3 September 2021 and available to view on www.south32.net) and Exploration Target (details of which are available in this announcement) converted to a run-of-mine basis using conversion factors, divided by the nominated run-of-mine production rate on a 100% basis. Whilst South32 believes it has a reasonable basis to reference this resource life and incorporate it within its Production Targets, it should be noted that resource life calculations are indicative only and do not necessarily reflect future uncertainties such as economic conditions, technical or permitting issues. Resource life is based on our current expectations of future results and should not be solely relied upon by investors when making investment decisions.

6. Production Targets Cautionary Statement: The information in this announcement that refers to the Production Target and forecast financial information is based on Measured (20%), Indicated (62%) and Inferred (14%) Mineral Resources and Exploration Target (4%) for the Taylor Deposit. All material assumptions on which the Production Target and forecast financial information is based is available in Annexure 1. The Mineral Resources underpinning the Production Target have been prepared by a Competent Person in accordance with the JORC Code (refer to footnote 4 for the cautionary statement). All material assumptions on which the Production Target and forecast financial information is based is available in Annexure 2. There is low level of geological confidence associated with the Inferred Mineral Resources and there is no certainty that further exploration work will result in the determination of Indicated Mineral Resources or that the Production Target will be realised. The potential quantity and grade of the Exploration Target is conceptual in nature. In respect of the Exploration Target used in the Production Target, there has been insufficient exploration to determine a Mineral Resource and there is no certainty that further exploration work will result in the determination of Mineral Resources or that the Production Target itself will be realised. The stated Production Target is based on South32's current expectations of future results or events and should not be solely relied upon by investors when making investment decisions. Further evaluation work and appropriate studies are required to establish sufficient confidence that this target will be met. South32 confirms that inclusion of 18% tonnage (14% Inferred Mineral Resources and 4% Exploration Target) is not the determining factor of the project viability and the project forecasts a positive financial performance when using 82% tonnage (20% Measured and 62% Indicated Mineral Resources). South32 is satisfied, therefore, that the use of Inferred Mineral Resources and Exploration Target in the Production Target and forecast financial information reporting is reasonable.

7. Preferred case design capacity based on Taylor PFS outcomes.

8. Flux Exploration Target: The information in this announcement that relates to the Exploration Target for Flux is extracted from "South32 Strategy and Business Update" published on 18 May 2021 and is available to view on www.south32.net. The information was prepared by a Competent Person in accordance with the requirements of the JORC Code. South32 confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement. South32 confirms that the form and context in which the Competent Person's findings are presented have not been materially modified from the original market announcement.

9. Payable zinc equivalent was calculated by aggregating revenues from payable zinc, lead and silver, and dividing the total revenue by the price of zinc. Average metallurgical recovery assumptions are 90% for zinc, 91% for lead and 81% for silver in lead concentrate. FY21 average index prices for zinc (US$2,695/t), lead (US$1,992/t) and silver (US$25.50/oz) (excluding treatment and refining charges) have been used.

10. Based on steady state production years (FY30 to FY44).

11. AISC includes Operating unit costs (including royalties), TCRCs and sustaining capital expenditure.

12. Lead and silver credits are calculated using FY21 average index prices for lead (US$1,992/t) and silver (US$25.50/oz).

13. South32 is a founding member of the Electric Mine Consortium, which aims to accelerate progress towards a fully electrified zero carbon, zero particulates, mine. More information is available at www.electricmine.com.

14. Federal tax of 21.0% and Arizona state tax of 4.9% of taxable income, subject to applicable allowances. Hermosa has an opening tax loss balance of approximately US$83M as at 30 June 2020. Property and severance taxes are also expected to be paid. Based on the PFS schedule, we expect to commence paying income taxes from FY29.

About us

South32 is a globally diversified mining and metals company. Our purpose is to make a difference by developing natural resources, improving people's lives now and for generations to come. We are trusted by our owners and partners to realise the potential of their resources. We produce bauxite, alumina, aluminium, metallurgical coal, manganese, nickel, silver, lead and zinc at our operations in Australia, Southern Africa and South America. With a focus on growing our base metals exposure, we also have two development options in North America and several partnerships with junior explorers around the world.

Further information on South32 can be found at www.south32.net.

Approved for release by Graham Kerr, Chief Executive OfficerJSE Sponsor: UBS South Africa (Pty) Ltd17 January 2022

Forward-looking statements

This release contains forward-looking statements, including statements about trends in commodity prices and currency exchange rates; demand for commodities; production forecasts; plans, strategies and objectives of management; capital costs and scheduling; operating costs; anticipated productive lives of projects, mines and facilities; and provisions and contingent liabilities. These forward-looking statements reflect expectations at the date of this release, however they are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed in the statements contained in this release. Readers are cautioned not to put undue reliance on forward-looking statements. Except as required by applicable laws or regulations, the South32 Group does not undertake to publicly update or review any forward-looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance. South32 cautions against reliance on any forward looking statements or guidance, particularly in light of the current economic climate and the significant volatility, uncertainty and disruption arising in connection with COVID-19.

Annexure 1: JORC Code Table 1

Hermosa Project - Exploration results

The following table provides a summary of important assessment and reporting criteria used for the reporting of Taylor sulphide exploration results for the Hermosa project, which is located in southern Arizona, USA (Figure 1), in accordance with the Table 1 checklist in The Australasian Code for the Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code, 2012 Edition) on an 'if not, why not' basis.

Section 1 Sampling Techniques and Data

(Criteria in this section apply to all succeeding sections.)

Section 2 Reporting of Exploration Results

(Criteria listed in the preceding section also apply to this section.)

Figure 1: Regional location plan (image can be viewed in the full announcement available on the NSM)

Figure 2: Hermosa project tenement map (image can be viewed in the full announcement available on the NSM)

Figure 3: Hermosa project regional geology (image can be viewed in the full announcement available on the NSM)

Figure 4: Taylor Deposit local geology and Exploration Target collar locations (image can be viewed in the full announcement available on the NSM)

Figure 5: Plan view of the Taylor and Clark Mineralisation Domains with exploration drill holes and the Peake Copper-Skarn Prospect (image can be viewed in the full announcement available on the NSM)

Figure 6: Cross-section through the Taylor and Clark mineralisation domains showing exploration drill holes, simplified geology, Taylor Thrust and the Peake Copper-Skarn Prospect - looking east (image can be viewed in the full announcement available on the NSM)

Table 1: Hole ID, collar location, dip, azimuth and drill depth

Table 2: Significant intersections