South32 Limited (S32) Earnings Call Transcript & Summary

Thank you, and good morning, everyone. Thanks for joining us today for an update on our Hermosa project in Arizona. Following our announcement this morning, which included a summary of key findings from our pre-feasibility study for the Taylor deposit. We have Pat Risner, our President of the Hermosa project joining us on the line today from Tucson, Arizona. Pat has a wealth of experience operating and permitting in North America, and he's here to answer any questions on the pre-feasibility study as well as the work planned for both Taylor and the broader Hermosa project. If we think back to 2018, the acquisition of Arizona Mining was an important milestone to South32. It was the first step in our journey to reshape our portfolio for a low-carbon future as we work to identify and direct capital towards projects with a bias to base metals. Since then, and while progressing Taylor's pre-feasibility study, we have made several other decisions that have accelerated this journey. In the past year, we have completed the divestment of South Africa LNG coal, concluded our exit from manganese alloys, announcing the divestment of Metalloys having, previously divested TEMCO, agreed the acquisition of a 45% stake in the Sierra Gorda copper mine in Chile and exercise our preemptive rights to increase our ownership in the green powered Mozal Aluminium smelter. In addition to this, earlier in the month, we announced our intention to partner with Alcoa and restarting the Alumar aluminum smelter in Brazil using 100% renewable power. But coming back to Hermosa. Taylor is the first development option of what we anticipate will be many opportunities here. 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 in that it demonstrates its potential to be a globally significant and sustainable producer of metals critical to the green energy transition in the industry's first quartile. Beyond Taylor, the Clark Deposit offers a potential to unlock further value from our investment in Hermosa through the production of battery-grade manganese. The scoping study has confirmed that 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. We continue to progress work on Clark and increase our exploration activity across a broader land package. The combination of Taylor, Clark and the broad land package gives us the platform from which to realize Hermosa's full potential. We are designing Taylor using automation technology to minimize our impact on the environment and to develop a carbon-neutral operation in line with our goal of achieving net zero operational carbon emissions by 2050. Taylor will be a low impact, low carbon, zinc-led silver underground mine using conventional mining and processing techniques. The dual shaft mine design prioritizes higher grade ore in the early years while the orebody geometry enables multiple concurrent areas of mining over the mine life of more than 20 years. This design supports high productivity with nameplate capacity of up to 4.3 million tonnes per annum leading to operating costs in the industry's first quartile. Hermosa is close to existing infrastructure, skilled service providers and crucial supply chains in North America, making it an ideal location to develop a line that will produce metals to support the world's transition to a low carton future. Zinc is used to a renewable energy infrastructure such as solar and wind for energy conversion and to protect against corrosion, and silver is a key element in solar panels. Both zinc and silver will benefit from the uptake of renewable energy in our base case with the benefit to increase further in a 1.5-degree climate change scenario. Taylor will now progress to a feasibility study where we look to unlock further value from the deposit. Taking time now to reflect on the acquisition, it's important for us to acknowledge that some of the reasons that first attracted us to Hermosa, including the Taylor orebody and the prospectivity of the broader land package have turned out to be better than we expected at the time. We've increased our confidence in the 138 million tonne Taylor Deposit, which remains open at depth and laterally. The significant exploration upside is highlighted an exploration target we announced today between 10 million and 95 million tonnes. Very nearby targets like Peake have confirmed our belief of copper on the property while we are excited to drill the flux prospect once we get approvals. In terms of the broader land package at Hermosa, we believe we are yet to truly scratch the surface. Outside of the prospect of finding further base metal deposits at Hermosa, the Clark Deposit is also better than we first expected and we look forward to completing a PFS focused on the battery-grade manganese market, a market with significant potential. Notwithstanding this, it's important to acknowledge other areas that have not been as positive including the disruption of COVID and the additional time of talk to have actually completed the PFS. While the requirement for dewatering beyond our initial expectation has resulted in the need for some $200 million of additional upfront direct capital, through feasibility, we'll focus on opportunities to further enhance turns, establishing the project as a carbon-neutral development, identifying opportunities to optimize operating and capital costs and completing further drilling to extend the already substantial resource life. As I've already said, the future development of Taylor provides a platform from which to realize Hermosa's full 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 our portfolio over the past 6 months. Thank you. We will now open the line for questions, so I'll hand back to the operator who will direct the call.

[Operator Instructions] Your first question comes from Paul Young from Goldman Sachs.

Graham, first question, is on the capital estimate. It's come in, I think, a fair bit higher than what the market was expecting now. I think part of that, I think you just alluded to, was the $300 million out of water CapEx. And obviously, steel prices and inputs are pretty high at the moment. But Graham, Arizona is a pretty cheap place to operate when it comes to mining relative to Australia. So I guess the question I have is that -- and I should add, sorry, the feasibility study assets typically only go one way versus PFS estimate. So question I have, Graham, is this a BHP style bells and whistles estimate? Or is this a first quantum oily rag South32, what it should be optimized and that really thought through capital efficiencies upfront? And also, what escalation and sort of contingency actually having built in to that $470 million number?

Yes. Thanks, Paul. I mean Pat can sort of talk a little bit more specifically about the project itself. But I guess a couple of things that you do call out is, one, that as we alluded to actually in the release, this is really reflecting the latest market prices that you're actually seeing in the U.S. And obviously, over the last couple of years, we've seen, particularly in the last 6 to 12 months, an increase in what some of those inflationary factors actually look like. Now we can go into that in some detail. I think you sort of hit the nail on the head on the other piece, note I did that in the introductory comments. The dewatering, there are lots of things that I can talk about geology, prospectivity to the land that are better than we expected. But the dewatering is certainly -- while it's not relatively unknown in that area and in fact can go into some benchmarking data, the dewatering is certainly higher than we expected. You're looking at a direct cost of roughly $225 million and indirect cost of $140 million. But it's also probably the item that's now on the actual critical path. It's certainly not a BHP style line in terms of size, quantum, what we're looking for. It's probably not -- First Quantum obviously has the reputation of building some things really quick and good and a strong track record of that. I think we've got to balance, if you like, on what that looks like, but we've also been considered at how we've developed it. And the classic example there, Paul, is when we first picked up the project from Arizona, Arizona Mining had already started 2 declines, very quickly worked out that we've stopped those declines within a month of basically acquiring this because they had not done any work, if you like, around hydrology or geotech. And if we continue to actually go through with those declines, we would have probably flooded the mine. So I think that's an important consideration. So it's certainly not a gold standard mine, but we have certainly been thoughtful about what one of the critical risks, what do we need to understand around the geology, particularly around the water. Maybe, Pat, you can talk a little bit about how we develop the capital estimate? And to your point, Paul, just before I hand over to Pat, a couple of comments I would make is, obviously, there is continency in there. There is considerations on what an EPCM could look like. I think we have actually both got opportunities to improve. A lot of the work on this is actually not actually the PFS study and Pat can sort of take you through that. But the other piece is we see a lot of opportunities in the feasibility study potentially with the integration with Clark and other work that will allow us to get more synergies out of this project. The one thing I've said from day 1 and probably sound like a broken record, obviously, people put a lot of value on the moats around Taylor. We've always talked about the 3 components of value. The Taylor and the Clark, the broader land package. And probably where we are now, we're in a position to start talking about some of those opportunities outside of Clark. For example, we talked about Peake. We're going to get the actual approval to get into blocks, and I think you'll see a lot more information flow around that. But maybe Pat, worth you talking about the capital estimates and your sense of comfort around that.

Sure. Thanks, Graham. Yes. So I think maybe a couple of things. Graham has talked about the dewatering element. I won't go over that again. That's obviously one factor. I think 1 other thing I would note, as you've probably noted, we are capitalizing for a higher production rate than what we have originally flagged. And I think with regards to open stope mines, one of the higher productivity open stope mines that will be out there in the market. So there is an element of that. But the capital cost escalation certainly in this market is real in the 18 months up to the middle of this past year. We've seen particularly lumber and steel with some extremely high escalation rates, one thing. We have seen since the middle of the year is for that to soften, we've been able to contain costs over the last 6 or 8 months pretty well in our estimates. But in regards to the confidence in the estimate and your question around contingency and class, what you would see in terms of contingency would be pretty typical for a PFS level estimate. We aim for what we call a Class 4 estimate at this phase. The entire estimate is built up to that level. What I would comment though is we have gone a bit beyond that in the mining area and particularly with the production rate we are planning and the development around that. The mining portion of the capital estimate, which is about 40% of the planned project expenditures with respect to the growth capital goes beyond the Class 4 estimate and through an external review has been being closer to a Class III, which is pushing more towards a feasibility level estimate. However, our contingencies and allowances would very much be what you would expect for a pre-feasibility phase with some allowance for what we have seen in terms of cost escalation in the market more recently.

And maybe just the last comment on that, Paul, would be, look, surface facilities are looking at around processing. There's nothing fancy in that. There's nothing we're doing new. It's a pretty standard process with standard materials, so we're not sort of looking to try something amazingly different in that space. Maybe worth just touching on some of the benchmarking work have you done an operating cost because Paul sort of made the comment about operating in Arizona added this stack up, I guess, around other similar kind of operations.

Sure. So around benchmarking, we've conducted some external benchmarking with external partners, our mining operating cost, which is just under $35 a tonne, at least with respect to analog operations that would be similar mining method, similar conditions would rank nearly the lowest in the sector for similar like type mines. Similarly, with processing around $13 a tonne, would be 1 of the 2 or 3 lowest cost processing -- operating cost processing operations for similar type facilities and analogs. And with respect to the question around the BHP versus sort of a lower scale or a lower end of the scale in terms of -- it's certainly not an operation that's gold plated. We do have a small footprint on which we need to build this project with the land base that we have. So I would say, if anything, we've had to be extremely efficient and thoughtful about how we place and build infrastructure to make sure we contain ourselves to that small footprint. We've looked at a lot of modularization in the capital estimate so that we can access lower-cost labor, which has been necessitated by the smaller footprint but generates capital efficiencies as well because you can access lower cost labor off-site and bring it in, in modules. And we will do that at significant scale given the setting, where we are. Last thing I'd just add, we're going through a value engineering phase at the moment before we prepare to start the feasibility study where we are looking at some additional opportunities around capital, particularly with the shafts.

Excellent detail. So Graham, can I ask you a second one, please? And that's around I know you now have given economics on the project, you haven't given what metal prices you've been seeing. But it's fair to say that probably some 15% IRR is the outcome if we did use consensus numbers. So it's a line in a sense, it's a starting point. So clearly, you think that exploration upside or higher prices will improve economics. And just on that, as far as upside is concerned, with Clark, are you seeing a higher mining rate a second plant. And then with the Peake prospects, very early days, I know you've got a lot of drilling to do, but potentially here, we could be looking at a copper float circuit added into the design, correct?

Correct. So Pat can sort of talk a little bit more both of those, Paul. I mean I'll come back to the position we've always said that Taylor's the first -- is the most advanced piece of work, but it's always been the first part of the development. People sometimes confuse Taylor with the motion. We've always been clear that we see 3 pockets of value. And even in Taylor itself, before we answer the other 2 questions, it's important to understand, to Pat's point, there's a whole lot of opportunities around the value engineering work we do, but also on the operating cost. We've been pretty conservative at the moment and assuming that all that material will actually be sent overseas to China, to Europe. As we all know, obviously, in the U.S., there's a push by -- including by than the prior administration to get access to critical minerals. There's a huge opportunity in that for actually to continue to lower our operating costs by actually sending the concentrate to parts in the Americas. So that's the other piece that we'll have a look at in the next part of the study. So look, I think what we do give you is we give you recoveries. We give you CapEx. We give you production profile, et cetera, which allows people to work out their returns. I mean I would have the view that, look, we've probably always been slightly more bullish on zinc because of the way we see the market. We do see the world is going to be in a position as time goes by. You see grade degradation, new projects in places like Peru, South America and the U.S. are going to be more and more challenging. You can see that with all the projects that are going on today. But in some ways, that's actually -- you've got to need inducement of new projects to actually support, if you like, what's going to be the demand to actually green the world. And we had a good slide in the pack in the supplementary information on zinc. And you can just sort of see what we're talking about in terms of demand in a 1.5-degree world climate change, which is what makes people are sort of mining now, you're going to see a huge increase in what people need for zinc. And as we know, supply side is becoming more and more challenging across the world. So I think that does actually provide it. PFS studies are always interesting. Feasibility studies are always interesting. I mean you made the comment about cost escalation or CapEx escalation between those papers. I think you're right. But if I go back to when I came to when we actually completed the feasibility and went into execution, I think we had a silver price of $4.50. We had a mine life of 14 years. We had a throughput rate of 2.2 million tonnes. If I think back to probably almost 30 years in the industry now, if you think about a return on invested capital, I would say that Canyon has probably been the best asset I've seen in terms of one of them. So I think there's all those unknowns that are still sort of play out in this space. What it's going to be at a particular point in time the project has got a lot of things to be done in front of, but I think what Hermosa has for is optionality, optionality potential around copper, around manganese, further exploration and maybe Pat worth talking about those circuit changes because you all certainly thought about that a little bit more than [indiscernible]. So that said, do you want to comment on both the manganese and the copper?

Sure. Thanks, Graham. So on Clark, Paul, it would need to be a separate processing facility. Obviously, we'd have a hydrometallurgical circuit to process the oxide ore and produce the battery-grade manganese products. And that's probably the biggest takeaway from the scoping study we just completed is really validating the technical feasibility to produce battery-grade manganese materials from Clark. So it was a very significant milestone for us, but it would have to be a separate facility. We do -- that being said, you've noted in the release, we do see significant opportunities to look at an integrated underground development, shared underground infrastructure and development, potentially utilizing multiple access points for both ore bodies. So we will look to leverage some of those synergies going forward with Clark. With respect to Peake, yes, certainly, we could see an additional copper circuit in due course if that were to continue to evolve into an opportunity. We do see some connection with the Taylor Deeps now with this Peake prospect. And so we have some drilling to do in some areas where we had not drilled previously to prove that out some more, and that's an exciting opportunity for us. And the last thing I would add, the real opportunity on the value side for Taylor, too, are our extension options to convert some of that exploration target into resource and ultimately, reserve. Those opportunities in this latest mine resource estimate and model have been much more clear to us than we are working quickly to try to bring those to fruition in the next miner resource estimate.

Yes. Basically, you consume [indiscernible] because it's [ 13 ] holes, so we're going to sort of balance where we've up to it now had some good results. But if that is actually connected, obviously, to Taylor Deeps, that gives opportunities about how you mine in sequencing. But I think more importantly, chasing the source of where it's coming from, there's still a lot of work to be done on that as well.

Your next question comes from James Redfern from Bank of America.

I just wanted to -- maybe if you could please discuss or go into a bit more detail around the permit improvements required for Taylor. Just in terms of, I guess, I think in the past, you've mentioned that you've got approvals for the first 7 years of mining, but just maybe if you can elaborate on that. And just wondering if you would FID this project in mid-2023, if that was the case, if you still only had mine approvals in place for the first 7 years of mining, given the 22-year mine life and the CapEx that's required to be spent.

So Maybe, James, I'll get Pat on the detail of the permitting, maybe a couple of points to be made upfront. The original assumption that Arizona Mining had is that they would do, if you like, roughly 7.5 years of mining before they went on to federal land and that's when that made the federal approval process. For us, it's important to understand the distinction, and Pat can do this in far more detail. I'll give you the opportunity in a second. The distinction between Rosemont and Resolution is very important in this space. When we talk about federal land, what we're talking about is disturbing federal land to simply put the second tailing facilities on there, which is a dry stack. So it's not more infrastructure. It's not a large open pit mine. It's a second tailings, if you like, facility or dry stack tailings facility, which Pat can talk to about the size and what does that look like. But I'll also wind back the clock and say that, look, it's not actually the approvals at some of our critical path. It's actually the deep watering. But maybe, Pat, you can talk about the permitting process and maybe some of the other logs that are worth talking about.

Sure. So I think the key is with all of our facilities, initial tailings storage, orebody access located on the private lands, it's initially a state permitting regime. We already hold the state permits that are required for the dewatering program. Those were granted in July and August. We would require a couple of other state approvals to move forward into the production phase. But those are approvals we typically plan on 13 to 15 months. They have statutory time lines. The first 2 that we just received, we got within 12 months. So that's essentially the permitting regime to get started on the private lands for that initial period that Graham spoke about. On the federal permitting, definitely a very different situation, as Graham alluded to, with some of the peer projects in the region. I guess the real key is if you look at projects like Rosemont, Resolution and any of the others, if you go through the files and the database of federal mine permitting, they're typically disturbing around thousands of acres of federal land. And NIPA, the federal permitting process being very much a statutory or a procedural statute, it really has to take a hard look at impact on federal resources. For us, because we're able to contain most of the development to the private lands, almost all of it, other than some incremental tailings storage, our disturbance on federal lands is going to be orders of magnitude lower than almost all of the peer projects. And that is key. We've designed the project to have a small footprint to meet our sustainability and objectives and goals, but it actually should be a significant advantage for us when the time comes for us to conduct those permitting processes because the impacts being analyzed are very different. So Resolution would be on the order of 6,000 or 7,000 acres, Rosemont nearly 4,000. We'd be talking about a few hundred acres in our case because of the design of the project and the small footprint. So that's very advantageous for us in that sense. We're doing a lot of front-end loading to look at how we prepare for that process, and we believe that gives us the best opportunity to get through it in a reasonable time frame. One other thing I might add just in terms of an analogous project, there was one -- another project that got a record of decision on its federal permitting in the region in the last 6 months or so, probably one of the few that is similar to us in that it's a tailings facility only a few hundred acres. They've got through the process in about 4 years.

Your next question comes from Lyndon Fagan from JPMorgan.

Graham, look, the first question I've got is just to flesh out the grade profile a little bit more. Previously, there had been some information released about higher grades up front. I'm wondering how high they get, and I guess whether you can help us try and model that and how quickly it fades. The next question is just to try and understand the CapEx a bit more. So I'm just wondering if you can help us bridge the gap. So Arizona Mining put out a budget of $519 million dated January 2018. Obviously, there's been significant changes to the scope, and it's bigger. But one of the main buckets, if you like, to add $1.2 billion just to get it into production, I'd like to just try and understand that a bit more if it's possible. And a third question, if I can sneak that, just to talk about traditional owner consent and where that's at. We've seen other projects in the U.S. basically stalled because of not just traditional owner consent but local is not wanting a legal challenges obviously, Sandfire's Black Butte project as an example. Just wondering what the feedback is on all of that.

Yes, absolutely. Look, I'll give the bulk of that to Pat because he can talk about traditional owners, the CapEx buildup in the profile. I can come back and talk a little bit about [indiscernible] a little bit about the PEA CapEx. I mean, keep in mind the Peake by Arizona, you'd always expect was a promotional PA, and we talked not about numbers at the time of where we saw there were weaknesses. I think the other thing that we were very clear about that when we made the acquisition, it wasn't based on the PEA numbers, we had our own view of numbers, and we can come back to that. The grade profile, you'll see a comment on Slide 16 that we talk about, in the first 5 years, we actually target high-grade material, roughly about 12% zinc equivalent. But what we are doing, obviously, is lots of work to continue to add to the resource and focus on what looks beyond that. But maybe, Pat, I'll get you to talk about the grade profile and the mining profile, the traditional lines and then I'll come back to the CapEx PEA.

Okay. Thanks, Graham. In terms of grade profile, so this was a big focus in the move to the dual shaft orebody access. It puts us in the sweet spot or the heart of the orebody immediately, which is on patented lands. And so that does give us, as Graham alluded to, the first 5 years, we averaged right at 12% in equivalent grade. And then for years 6 through the end of the mine life, it hovers between about 9.5% and 10%, so fairly flat in level from year 6 to the end of the mine life. The work we're doing on that exploration target, some of that extensional opportunities are looking to bring in potential higher grade areas around the shaft to try to extend, obviously, that period of initial high grade for as long as we can. So that's some of the work we've been doing around infill and extension opportunities for Taylor. On traditional owners, so the project is not located on what we call travel trust lands in the United States, so not on reservation lands. There are tribes that have historic affiliation and habitation. And so at some point, when we go through federal approvals, there will be a consultation process with Native American tribes who have had some historic affiliation. And so we have really front-end loaded our work around that. We are still quite a ways away from that consultation, but we've done a significant amount of engagement with all of the tribes who we believe have come to learn to have historic affiliation in the area, even though we're well ahead of that permitting process. We've already conducted all of the Class III cultural surveys that are required on all of our lands. It's not required by law on private lands, but we've done it anyway. We've collaborated with the local traditional owners from the mountain tribe, the closest neighbors we have for them to provide travel monitors for those surveys, and we've proactively engaged the leadership of the tribes on the results of those surveys, all of those voluntary measures to really get out in front of this issue, share, be proactive, engage and learn and understand to set ourselves up for the best outcome in that space. And so I would say that's going well so far. There will be a formal process run by the federal authorities at some point in consultation as part of the NIPA or federal permitting process. Graham, did you want to talk about the CapEx first?

Yes. Back to the PEA, if you go back to the PEA, again, we didn't base the acquisition on the PEA, we did our own estimate. But the obvious 1 is when you look back in hindsight now, where they had virtually, well, let's call it, almost 0 when it comes to indirect scenarios when you go back and look at their PEA, so it's really the direct capital costs. Probably the other easy ones that fall out if you talk about would be we moved from the decline to 2 shafts that will allow us to get to the high-grade material that allows you to get the throughput. So that's considerably high throughput. So they probably hadn't allowed for memory when you had to think about they're -- they talked about the decline. There's probably a couple left, sort of about $176 million, whereas roughly dual sales were about $300 million. They talked about a throughput for the first 5 years of 3.3% and then also again to 3.9%. We're pretty much doing a single-stage jump to 4.3%. The dewatering is probably worth a difference of about $360 million over the life of the CapEx. So those would probably be the big buckets. But again, I'd be clear, they will not be acquisition costs when we used to evaluate it. I'll also be very clear, the one that we did not expect to be as large as what it actually is, is the dewatering costs. And obviously, you have the knock-on impact of time, owners' costs and the indirects that are associated with that.

Your next question comes from Brenton Saunders from Pendal Group.

Thanks for the update. I just wondered, for clarity, in terms of permitting, I understand the distention to the state and the federal processing and the federal permitting process only requires -- only require additional dry stack tailings. So can I take that as read that there's nothing unquantifiable in the way of -- from a permitting perspective to FID and commence construction on this project?

Brent, I'll just give that straight to Pat. He can talk about it.

Thanks, Brenton. No, nothing to get to FID. We would require 2 state permits or actually modifications to 2 permits we hold, let me correct myself there, modifications to 2 permits that we already hold for the PFS on private lands as well as a discharge permit and then an air permit for the emissions from on private lands infrastructure. That's all that would be required to move into full production. And we would plan to commence those processes towards the end of this calendar year, early next calendar year with, as I said before, sort of a 13 to 15-month duration. And so that's all that would be required to commence to full production on private lands.

And maybe the distinction of the litigation risk between the federal and the state process, Pat?

Yes. So we -- in our -- we assume that most, if not all, of the permits could be appealed and potentially litigated in court. Obviously, the state permits, if they are appealed and the 2 we've received recently, 1 was not appealed, which was a really good outcome. We are going through the appeals process on the second one, but it is a state agency appeals board. That is a pretty sort of a process that's well understood. And then if it's litigated, it's litigated in state court, whereas if in the federal permitting process, you end up in Federal District Court and eventually the Circuit Court of Appeals. So we do think that it is, I guess, a more clear path to achieve the approvals that we need and get through the appeals and litigation on the state jurisdiction. Certainly, as I said before, we have some real advantages as we get to the federal permitting compared to some of the other projects, but we do see the state permitting regime in Arizona is very efficient.

Your next question comes from Rahul Anand from Morgan Stanley.

One quick clarification before my 2 questions, if that's okay. The access to federal lands, is that fair to say still year 6 that you reply that? Or has that changed in this -- in the new plan?

So that will bounce around depending on the throughput and the ramp-up. And probably, the other opportunity we'll have a look at the PFS is do you actually look potentially raising potentially the tailings wall or the percentage of taste you have. So at the moment, it's driven much by the throughput. I think the current estimates is probably what Pat -- it's probably around 5-ish years at the current throughput rate. But again, that's got some upside as you go through that next piece of work.

Okay. Perfect. That's helpful. Okay. So first question was around operating cost then. We've talked a fair bit about CapEx today. I wanted to touch a bit about on those. So obviously, PEA around that $50 a tonne mark milled and then today, we're at 81. I guess 2 of the key drivers there are, firstly, the other cost line, which sits at $23 a tonne. And then the G&A, it was just $10 a tonne and used to be 2 in the PEA. Perhaps if you can provide a bit more clarity around what makes up some of that extra $30 in costs, please, that will be beneficial and I come back to the second.

Yes. So again, I would be -- PEA is quite a promotional document from Arizona and not what we would have used to face the acquisition. If you go to the $23 and strip it down, the single biggest component is $16 a tonne for transportation. And again, as I mentioned earlier, we assume that ever all the concentrate at the moment goes to Asia or goes into Europe, so that's actually quite a high transportation cost. I think the opportunity we've got, particularly if you think about what the government is trying to do around critical minerals, they've already added manganese and zinc is actually on the list now and putting aside any potential permitting opportunities. It's more for us around what does that mean for the market in the Americas. So that's the next part of the marketing team study about how do we either look at the smeltering opportunity to exist in terms of customers in the Americas, or how do we actually induce that as that continues to actually change.

Okay. Perfect. And then, look, 2 other small ones, I guess, on Clark and Peake. Now Clark, if you can help me understand by when do you need to have a decision on that for it to neatly fit in the production or rather the construction time line once you've reached FID stage. And then secondly, with relation to Peake, is that something that you can accommodate within the current shaft design? Or do you need a potential expansion beyond this for it to run concurrently?

I mean, Peake, I would say 13 holes. We think we're pretty comfortable it's probably going to be an extension of Taylor Deep. What we don't know is how big, how fast does it go back to the heat source that's actually driving the copper. So that's probably going to be a couple of years. I'm guessing, Pat, you can correct me, I've got [ Robert Moore ] drilling to understand that because it could be potentially be very large in terms of the growth of that. So then you reevaluate what you do with it. But maybe Clark, you can answer that one pretty easily, Pat, because I know you've been doing the work on that.

Yes. So I think the key on Clark, we're accelerating through some of the key selection study work at the front end of the pre-feasibility study phase now. The real critical path for the study work on Clark is to get to a point where we understand what's the optimal production rate based on market primarily and the engineering around the facilities. So we can make some key decisions to understand what the permitting path for Clark looks like, and therefore, what an integrated development might look like from a permitting standpoint. And so we've got probably about a little less than 12 months' work to do on that. And then we'll be in a position to be able to make some of those key strategic decisions around what an integrated development looks like from a permitting standpoint. And that's what really unlocks and enables our ability to potentially bring Clark to fruition in the near term is being able to make those decisions so that we know when we could have approvals in hand to consider an integrated development.

Obviously, Clark is quite close to the surface. So one of the options to think about is a relatively easy decline into it. But then does that open up opportunities like [indiscernible] around sharing development, potentially trucking, some of the higher-level Taylor material. There are all the things that I'll go through to sort of work out fits together.

Your next question comes from Glyn Lawcock from Barrenjoey.

Look, I want to go back to the capital question a little bit. I'm just trying to square the circle. You gave us $400 million of additional capital for dewatering, direct and indirect. But I mean, we've increased by $1.2 billion. So you've given me 1/3. You've mentioned inflation. It just feels like there's a lot of gap to bridge. And I guess when I look at the PEA, I mean, obviously, it's a long time ago and as you say, promotional. They use $1 a pound of zinc and got $2 billion of NPV. If you add -- if you think about what you're just going to have to spend additional does sound like you're a lot more positive than $1 a pound zinc. So I'm just -- if you could make some comments around -- on face value, it's not economic anymore to do this project unless you are well north of the long-term cost, long-term prices that they were talking about back then. And I've got one other quick question after that.

Yes. So look, the CapEx, when you think about the CapEx, we talked about direct costs of about $1.2 billion. And we talk about, if you like, indirect of just under $500 million, say, $472 million. I would start by saying that they essentially had virtually 0 in terms of indirect, so I think that's a big difference to start with. If you sort of focus on the direct dewatering costs, they are about $225 million, including the indirects. Then obviously, the shafts are probably about double what the decline would be, but it allows you to get to that throughput production range. And then I think it's an element of inflation across the line that sort of drives that. We can certainly circle back up a little bit more than that. But to be honest, as you know, from day 1, we've always distanced ourselves away from the PEA for part of those reasons, but also careful not to shoot them down. Does that sort of help with the capital sweep?

I get that. I get that. Okay. That's fine. But then you've got an OpEx that's 60% greater. And so if I take the higher CapEx or the higher OpEx, if you still use what the market thinks is $1 a pound zinc, this project doesn't work. So I heard what you said earlier about you've got a very different view of the zinc market. So is it fair to say that's for us to get comfortable like you're getting comfortable with this project, given the new dynamics, we've got to move our thinking materially like you seem to have done.

Yes. So maybe a couple of comments I'd sort of make is, one, when it comes to those operating costs, like we mentioned earlier, roughly $16 a tonne of the number we gave out of $23 is related to the transportation cost to get this material somewhere else. I think that's a big opportunity for us to actually improve in that space. They didn't really have any material numbers associated with that. I think, look, there is no doubt that if you think about lead, we're certainly not above consensus on lead. Zinc is always an interesting one to try and be a silver price, like I said, it was $450 when we did Cannington. But certainly, from our perspective, we have been, for a period of time, more, if you like, a believer in the fundamentals of zinc. We think it is something the market doesn't understand. We do think it's a place where there's an opportunity, if you like, where there is going to be a strong demand for new material. And the reality is for that to occur, you're going to have to induce new projects, and those projects are going to be more and more challenging.

Okay. Fair enough. And then just a quick point of clarification. Everyone has talked about the surface and federal approval. Is there any -- can you go under federal land? And does that trigger any requirements as well?

Yes, Pat is the expert on permitting. So Pat, over to you to cover that one.

So what triggers the federal permitting is if you create what's called a significant surface resource disturbance on federal land. So if you were conducting activities subsurface and you were not creating any impacts on the surface or risking any of those impacts, then technically, it wouldn't trigger it. But for the most part, any activity on or under federal lands, we consider would trigger that. So that's the criteria though.

So you don't expect -- Pat, sorry, that any of your underground activity will trigger federal permit requirement then just when you do the tailings dam on top?

So we will confine our underground activities to the private lands until we get to the point where we are creating surface disturbance on federal lands. And there is sufficient high-grade resource to do that. Actually, as I said before earlier, the best part of the orebody from a grade standpoint is where the shaft is, is on the private land. So we would not step out of those boundaries until we have the federal approvals in hand.

Sorry, is that timing the same as the above-ground disturbance? Or is the underground when you step out different time frame?

Same timing.

The one thing, sorry, to close, we did talk about operating costs, but I did fail to sort of say, look, when you do the benchmarking, yes, the cost has moved different from Arizona for different reasons, and there's still opportunity around transport and other items, but we're in the first quartile.

Your next question comes from Peter O'Connor from Shaw and Partners.

I had a couple of questions. Is there an element of sharing of CapEx for Clark? And should we think about some cross subsidization for that sort of that $1.7 billion actually include a component underground on surface facilities that may be included? And then on Slide 16, you've already answered that question about the production profile, but can you just square up that slide with those comments? Because the way I read that slide, I don't read it the way you answered that last question, and I've got a follow up after that.

Pat, have you got those?

Yes. So I'm not sure which slide on Slide 16 is the production profile, which part you have a question about that I...

So the 2 bars, the left-hand bar is the life of mine, 27 to 49, and it's an equipment grade at 9.9 and output of sub-300, and which would include the high-grade first 5 years. The second part increases that first couple of years of higher grade, but it's a higher annual production, then it's a higher equivalent grade -- sorry, slightly lower equipment grade. I was just wondering if you could square those. If you were grade rich, as you said 12% in the first couple of years, I thought the left-hand bar would be lower, the right-hand bar would higher. Look if you're [indiscernible], I'm happy to take it offline.

We're circle back to you because it's actually the breakdown of the components because the little box talks about the first 5 years, whereas the steady state here talks about 30 to 44, so it's beyond the high ramp-up that [indiscernible]. And the other piece is the life of the resource. So I think there's probably a little bit of work just to sort of match up the period that actually handles that one, Peter.

Okay. That's fine. On the CapEx, just thoughts on what does Clark user Taylor builds? And how significant is that number? Is that a part of that overall escalation?

Yes. I would say in the first instance, the capital estimate you see now is for the Taylor development. But what we would see are some synergies potentially created to bring Clark on in an integrated way as opposed to look at Clark in an independent way. And so potentially down the track, that presents opportunities for sustaining capital savings for Taylor and growth upfront capital savings for Clark should an integrated option prove to be viable and able to be permitted in the right time frame. So I would see opportunities for upside on [ Sussex ], sustaining capital for Taylor and potentially for initial capital for Clark should there be those opportunities.

Royalties? Sorry, Graham.

I was going to say, Peter, the way I think about this is, this is what it takes to build Taylor. If you actually do Clark, you get some benefits from the upfront capital. If you're just doing Clark by itself, but you also get some synergistic benefits for both on that.

Got it. And you've noted the tax rate, is there any royalty component we should be aware of, private or government, federal state?

Yes. So you'll see it actually on page, I think it is 12 of the release from memory, where we actually talk about there's some private net smelter royalties at average about 2.5% -- or 2.4% or roughly $4 per tonne of ore processed. And that comes in on the Page 12, you can see all the detail there, Peter.

Okay. It's not on Page 12, but I'll find it. That's good, I just couldn't find it.

That would be on Page 12, operating costs.

Of the release, sorry.

Yes, yes, second to last paragraph. We break that down in detail of what they are on the percentages.

Perfect. And last one, Graham, thinking over the next 1, 2, 3 years, what are the major milestones? I know you noted some of these in the presentation in the release. What milestones would we be expecting the feasibility study date, Clark PFS date, approval dates, if they are a little obvious over the next little while? Just to give us some milestones.

Yes. Well, Pat, maybe I'll hand that one to you from the project perspective, and then I'll talk about it from a group perspective.

Yes. So middle of next year, for commencement of dewatering as well as final investment decision, early calendar '24 for sort of shaft excavation. And then lateral development coming off the underground exploration and lateral development coming off the ventilation shaft later in calendar year '24. And then obviously, first stoping ore in FY '27.

Great. And Clark, feasible [ op visit ]?

We're aiming to get through the selection portion of the PFS late this calendar year. That's probably the next big milestone for Clark, because that will give us the direction of where we're going.

Your next question comes from Robert Stein from CLSA.

Thanks for the update. Just 2 questions for market. One, I noticed that the by-product prices in your -- in the presentation are FY '21 rates, which for silver is, as we discussed, higher than the long-term average and lead seems to be sort of in the midpoint of the last 10 years. But just wondering, the mine -- the production profile seems to be a bit more of a co-product relationship than a byproduct relationship just on the relative zinc equivalent metals. Just wondering how sensitive are the project returns to those byproduct prices? And should we think about this purely as a zinc mine? Or do we think about this as a co-product mine in times when the zinc price drops, but still a strong production focus may shift and that may change how you plan your mind? That's question one. I've got a shorter one, a follow-up.

Yes, Rob. We certainly see it as a co-product mine. I mean, you get the 2 concentrates. It's, obviously, when you mine in a particular area, you don't separate them as part of the processing that you pull them out. Obviously, zinc and silver are far more attractive in a world that needs green metals, particularly if you believe in the 1.5-degree scenario where you see the demand to both significantly increase. And I think the reality is people are just getting their minds around that. In the base case, funny enough, lead still continues to actually be attractive. If you go to a 1.5-degree world, obviously, lead isn't as attractive in that world as the world pushes hard with decarbonization agenda. But I guess the flip side is the majority of zinc mines are like their coproduct ones. So if you -- though lead isn't as very, you probably need a higher inducement price to induce this. So I think that's the way we think about it. We see the value in the zinc and the silver, but the reality is the zinc and you get the lead [indiscernible] and it still will more naturally migrate towards the actual lead concentrate. And then you have a second question, sorry?

Yes. So the second question was just in terms of looking at the zinc market going forward and seeing over the last sort of 12 to 18 months, TCs have been quite low. A lot of the ranges, I guess, handed off to the refiner in times when that reverts back to the arrangement where TCs are around the $250, $300 a tonne mark. Is there any plan when you sort of look at those North American customers that you go downstream at all? Or is it pretty much you'll just take whatever the market price you can get is?

Yes. Look, I mean, that's a constant evolving situation. The one thing that's not evolving is we're not interested in going downstream and building a smelter. But when that's evolving moving quickly, you're seeing a fair bit of political portion demand just actually appearing in the Americas for that to actually happen. I think the IR article said it well today, the last thing [indiscernible] wants to do is actually go to China and ask them to actually produce more critical minerals that they need for their own energy security. So I think that's the unknown piece in the background. But I'll come back to one about our earlier comments. If you think about a 1.5-degree climate change scenario with the zinc, that means you need roughly a 6x increase in renewable energy capacity. Wind increasing by 10x solid by 14. And it actually means the primary zinc demand will effectively almost, while it will be 2x, it will go to 24 million tonnes. Conversely, if you think about it from the actual supply side, we expect to see supply expected to fall by probably -- fall by about 3.5% to 2030. And that really is driven by mine depletions that we're seeing, lower average grade, longer approval pathways and constraints to supply. So we think the zinc is a very attractive market. Everyone, including ourselves, likes and look at copper and what that looks like. But I think there's equally a strong story in zinc, but in fact, the market is probably much more fragmented. And when you think about where a lot of the zinc supply comes from, I think there are areas of higher risk as well. So we certainly have a belief in where the things going.

That is all the time we have for questions today. I'll now hand back to Mr. Kerr for closing remarks.

Thank you. I want to thank everyone for the opportunity today to actually provide the update. As we've mentioned from day 1, when we did the acquisition of Hermosa from Arizona Minerals, it's always been about 3 pieces of value, Taylor, Clark and broader land package. Taylor provides a foundation because it was a piece of work that was most advanced. Taylor itself, while the dewatering has been disappointing, it is very clear to us that the resource still has considerable upside. There's opportunity still to look at how we bring Clark into this and how we get some of the synergies. But Clark in itself is far more positive than what probably Arizona recognized at the time. And today, you're seeing some glimpses of the resource potential when we talk about Peake. We've got flux. We've got another other opportunities on the property to actually explore. But I think more importantly, for South32, this has been a part of reshaping the journey or reshaping the portfolio journey that would have been on for a period of time. And as I mentioned at the start, the divestment of South Africa LNG coal, the exiting the manganese alloys business, the acquisition of the 45% stake in Sierra Gorda copper in Chile, what we've done on the aluminum side by getting more exposure in the green side, both to Mozal and also to Alumar in Brazil really sort of changes the portfolio from the date of the merger. We had a strong exposure to [ Box ] to an organization now that has a strong exposure to the base metals, which, if you like one, which are the metals of the future. Now the base business continues to run well despite the challenges we're seeing around the world -- around global around -- COVID globally. But I think the portfolio is in a good position. I think these are the right steps as we think about the future, and I want to thank everyone for their questions and support today, and thanks, Pat.

Thank you. That does conclude our conference for today.