South32 Limited ($S32)

Thank you. Good morning, everyone. Thank you for joining us today for an update on our Hermosa project in Arizona, following this morning's announcement on progress at Taylor. With me on the call today is our Chief Financial Officer, Sandy Sibenaler; and our President of the Hermosa project, Pat Risner. In February, we advised that an assessment of Taylor's project milestones and capital expenditure would be completed during this half. I'll go through today's update before handing back to the operator for questions. Hermosa is a regional scale critical minerals project in Arizona, a Tier 1 mining jurisdiction in the United States, approved for development in February 2024. Taylor is the first stage of what we anticipate will be multiple phases of growth and production at Hermosa. It was the first mining project added to the United States Fast 1 program and remains on track to have all federal permits by the end of this calendar year. Before I unpack the details of the update, I'll outline why I believe Taylor will be an important contributor to the South32 portfolio for decades to come. Designed as a modern, large-scale operation, it is expected to deliver returns over multiple decades from its low-cost production of zinc, silver and lead. Once in execution, Taylor will almost double our silver production and produce sizable volumes of zinc into a structurally short market. We see zinc as a structurally attractive commodity with the equivalent of 3 Taylor sized projects required to be developed each year to meet projected demand over the next decade. As a long-life development, which today stands at 33 years, Taylor is underpinned by a large ore body, which has continued to grow and remains open in several directions, providing further upside potential before considering further growth from our Peake copper deposit and the highly prospective regional land package. Moving on to today's update. With the change in scope to include additional decline access, revised shaft construction costs and impact of inflation, industry-wide increases in key input costs and tariffs on recently priced packages, we have today announced an updated estimate in capital costs for Taylor. As a result, we have increased our growth capital estimate by approximately $1.1 billion when compared to our final investment approval to approximately $3.3 billion. With this, and as I've touched on, additional decline access has added approximately $100 million, revised shaft construction costs have added approximately $450 million and a further $500 million due to higher-than-expected inflation, together with industry-wide cost increases for key inputs and tariffs. I'll now unpack each of these components. In the December 2025 quarter, we completed the exploration decline of the co-located Clark deposit on schedule and budget. Decline construction benefit from better-than-expected ground conditions and water flow rates, highlighting the potential to utilize Clark's decline for additional Taylor ore body access. Subsequent study work has confirmed this opportunity, which is expected to unlock value across the life of the mine by enabling first production ahead of star sinking, improving operational flexibility and increasing ore handling capacity to approximately 25%. This additional ore handling capacity, together with service infrastructure debottlenecking has the potential to enable higher metal production. First ore mined at Taylor will now come from the Clark decline in mid-FY '28 with production expected in the second half of FY '28 and nameplate capacity by FY '31. This reflects our expectation of delayed completion of the shafts due to contractor underperformance and productivity challenges. Targeted measures have been implemented to improve shaft construction productivity, which have delivered improved shaft sinking rates. However, our latest assessment has determined that these measures will only partially mitigate the impact of contractor underperformance, and we are moving to a more gradual ramp-up to nameplate capacity. Since we sanctioned Taylor in 2024, there has been major inflationary shocks and supply chain challenges, the war in Ukraine, U.S. tariffs and recent Middle East conflict. These external pressures have recently intensified. Compared to our estimated pricing and our final investment approval, installed steel prices are up by more than 2.5x, installed piping prices are up by over 2x and concrete prices are up by around 2x. Looking ahead, with over 80% of capital spent contracted or finally priced, the capital risk profile from here is significantly lower with the remaining shaft development being delivered under unit rate contracts and detailed engineering further advanced. While today's update is not the outcome we had anticipated, Taylor is still expected to deliver returns for decades to come as a high-margin, large-scale operation with steady-state EBITDA of $650 million per annum. In addition, demonstrating significant leverage to prices. At spot, steady-state EBITDA becomes about $800 million per annum. This is before the substantial upside from the Taylor deposit, which remains open, the Peake copper deposit and Hermosa's highly prospective regional land package. Stepping back, we have transformed our portfolio, establishing a platform for base metals growth, and Hermosa remains an important contributor to achieving this. It builds on the work already completed in bringing copper production through Sierra Gorda and our pipeline of growth options. Beyond Hermosa, we're working to grow our production of base and precious metals by extending the life of Cannington, progressing a low-risk copper expansion at Sierra Gorda and advancing our Ambler Metals project in Alaska. Looking ahead, with a strong balance sheet, we remain well placed and focused on executing Taylor and successfully delivering first production. Thank you. I'll now hand back to the operator for questions.

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

Graham, you obviously disappointing update. I'm trying to think about the right place to start here. Maybe can we just dig into the CapEx, just the increase, and I know you stepped through all those, the breakdown of inflation and what's come through. But I guess you're only 1/3 of the way through the spend. And I know you've locked down the work packages and I know you state in there around you factored in contract underperformance and unit rates are locked in on that on the shaft. But what I'd like to know is within the revised budget, what have you factored in for ongoing escalation contingency, owners costs, et cetera, those sort of components that are still sort of unforeseen?

Yes. Thanks, Paul. And look, I appreciate the question. Look, maybe if I start with the broad, if you like, perspective of how we sort of talk about this and maybe go through the 3 major changes that are sort of driving the increase in the capital spend. One is clearly, if you think about the interrelation of the shafts here and the Clark decline and the growing ore body, all 3 have a role to play. One of the things we have seen at Taylor is the ore body continues to grow predominantly through infill drilling to date. That infill drilling has allowed us to actually access ore that is closer to the shaft system and requires less lateral development. So while there have been some challenges that we have spoken about for a while around productivity performance by the contractor on the shafts, that growing ore body has offset that. At the same time, Pat and his team have been very active in actually putting in a number of different measures, if you like, to sort of continue to improve the performance of the shaft sink -- to be clear, we are not seeing major geotechnical issues, and we are not seeing major water issues. This is about engineering delays. This is about productivity performance, not technical challenges. We've got to the point now that we believe that the rates that the contractor has talked about are not achievable, and we have adjusted those rates. But keep in mind, the vent shaft, for example, we're probably going to be finished at somewhere around July to continue where the schedule is. And we're passed, if you like, for both shafts, the major first mining level of development and making good progress on that side now. I think the advantage of Clark is that Clark allows you to derisk the shafts of the critical path. It allows you to continue on some of the good work we've seen in that Clark decline where we've delivered ahead of schedule and budget and the water issues have been far less than what we expected, which allows us the flexibility to now think about tailoring the context of you have 2 shafts in there, a main shaft and a service shaft and you now have the access to drive down, if you like, the decline, which allows you to access ore quicker to commission the plant compared to what you would do with other shafts. But over time, it will allow us to increase our ore handling capacity by roughly about 25%. And if you think back to somewhere like Cannington, Paul, which started out as a concentrator where you're probably talking about 1.5 million tonnes and has got well over in excess of 3. We believe that 24% ore handling capacity over time can serve the basis to do the work over the next 12 months to debottleneck the process plant and achieve more throughput, which is where the money will actually be made. But if we go specifically to those capital increase, the increase in the actual scope around the Clark decline is about $100 million worth of CapEx. If we sort of go then to what's happening, if you like, on the actual process plant, that's where we've really seen some movement, if you like, in some of the key input costs. To be clear today, we already have -- and I was actually at Hermosa last week, we already have a large piece of the equipment on the ground in terms of consumables and spares now to sort of build the facility. It is actually the construction of the process plant and surface infrastructure is tracking to plan. In terms of capital costs, it is that real spike that we've probably seen over the last couple of months that had a big impact. The surface infrastructure is made up of 3 packages. The first 3 and the most recent, which was finalized in February -- sorry, I'll come back. There's actually 4 packages for the surface infrastructure. The first 3, the most recent, which was finalized in February have all been in line, if not slightly below the fit estimate -- what we're seeing with the fourth one, admittedly the last package is we've seen a real shift in pricing. And if you look at the number of the index in the U.S., that's sort of reflected by the jump you've seen in the last 3 months. To give you a sense of how much these external pressures have intensified and if you compare that back to our estimated pricing and our final investment approval, we've seen installed steel prices up by more than 2.5x, installed piping prices up by over 2x and concrete prices are up by around 2x. So when it actually comes, if you like, to the processing facility and surface infrastructure, that is all driven by pricing of external events, nothing to do with timing or change of scope. The shafts themselves, as I mentioned, sort of just unpack that a little bit more. There has been a lot of work we've done around mitigating actions, contractor leadership, specialist consultants, changing some of the scope to bring it in-house to sort of reduce the risk. And while we're seeing some positive results, and we talked about the growth in the ore body and the advantages of the decline we get out of Park, we're just not seeing the rates that we want to see sort of to complete the shafts, which is why we've adjusted the CapEx on there. Does that help, Paul?

No, it does. I'm sure we get some more questions on CapEx, Graham. Can I just talk about actually the mining rates that you're targeting? I mean you've come out with the revised CapEx today, OpEx today, we can digest that and interpret that and factor in what we want. But can I just ask a question around the confidence around the mining rates actually of 4.3 million tonnes. I know the haulage shaft can do or thereabouts 1500 tonnes a day. I think Pat from -- if I recollect from the site visit, the decline will probably do 800,000 tonnes a million and maybe you can push through more through the processing plant. But just wanted to dig into the mine design and your confidence around that 4.3 you're actually doing more than that gram. I know you've based the stope design and all the long and stoping sort of design of Cannington. And I think the stope sizes are actually still pretty big. I think you've got 17% dilution in there and around the edges of the stopes, which could come back into -- actually could come back into reserve, which could be a nice little kicker. You said geotech is you confident about that. But just can you step through just your confidence around actually being able to achieve 4.3 from the main mine? I know you've got the ore at the top, which is decline access. But just overall, what comments you can provide us around the modeling around the ability to achieve 4.3 or higher?

Yes, Paul, look, I think a good question. And maybe I'll give you 2 responses and one, while we're going to focus on the underground with your question, it'd be remiss to sort of not talk about why do we have confidence in completing the shaft, the process plant. I mean if you look at the work we've got left to go, we're about 85% engineered. It's a class testament of 1 to 2. Procurement of large items is virtually complete. We've got contingency about $232 million, and we've done a P80 for contingency ranging. So that sort of gives you a sense of the capital left to spend some confidence. When it comes to the underground, I always start with the reserve resource. What you have seen between this development is obviously. And when we originally approved the FID is a large increase, if you like, in our knowledge of the ore body and see more confidence in particular in the reserve reflected by infill drilling and more understanding of geotechnical conditions. But also as we've spoken about previously, we've seen a significant shift if you like, in the water required to be moved and to be managed on an ongoing basis. So those things like resource quality, geotech issues and water, we're much more confident they've all moved towards our favor. The other thing I'll talk about, if you recall, one of the advantages of Taylor is when you have the shafts up and running, you are really mining from 4 independent mining areas. So unlike where we are at Cannington today, we're quite boxing with limiting flexibility. Here, we have large-scale untapped areas where we can actually effectively run 4 separate kind of mines underground and use some of that shared infrastructure, the ability to add the decline allows you to have all the benefits, if you like, of at least a 25% increase in ore handling capacity coming out of the underground. So you can do a math of 4.3 to 5.3 and probably some more upside on that side, understanding we need to do the work on debottlenecking the process plant, which will take about 12 months to understand that. But certainly, I see a lot more upside coming out of the mine versus potential downside. The stope design is an interesting one. I mean, look, I would say at the moment, there's probably upside on the stope design as we get in there and do more work. But let's get the team to do more work as we understand the resource. But the growth in the reserve and resource that we've actually seen, which is significant between the fit and today is purely based on infill drilling. We're yet to actually continue to push out, do bit drilling. Once we get the federal permit, we'll be able to do more, if you like, on the size of Taylor. And I think that will continue to grow. So I think on that space, we have a lot of, if you like, optionality underground today, and that's going to be increased by the client decline. There's still the other benefits of potentially changing how we think about workshops underground. The decline will give you the ability to actually move equipment up and down for major rebuilds, et cetera. That's all stuff that the team is still working through at the moment. I think what we will have a look at, obviously, as we get closer as you think about things like the crusher bottlenecks underground, we'll do a bit of work around that. But generally speaking, we're confident in having the multiple mining areas open. Does that help, Paul?

Yes, it does, Graham.

Your next question comes from Rahul Anand with Morgan Stanley.

Look, I just wanted to do, firstly, a quick follow-up to Paul's question. In terms of the potential to lift production above current design rates that you've talked about in terms of surface infrastructure, debottlenecking, additional ore handling capacity. Just wanted to understand, I mean, how much of that work do you think is already reflected in the $3.3 billion CapEx that we have today? And I mean, is there an easy way for you to define that upside perhaps with clarity in terms of production/throughput? I know you've answered part of that already with Paul, but if there's any more color, I'd appreciate that.

Yes. Look, I mean, let's break this into components. When you think about the ore handling spend in terms of the shafts and the decline, we're pretty comfortable that the capital we're spending today is giving you that optionality. Hence, we talked about the 25% increase. The plant itself, obviously, when we build a plant and you commission a plant, if you look at the history of these kind of facilities, and there's a lot of them across the globe, they will have natural creep that exists in that business as we work through that. And we build a facility, which actually has obviously, some safety factor built into it, which allows us to actually work through an increase naturally in the plant throughput. There will probably be some small amounts of capital that the team will have to work through around debottlenecking. I don't see that as significant yet. But in fairness, we've got about 12 months' worth of work to work our way through that. If you were to do a sensitivity, and again, we took about 25% increase out of the ore handling facility from the underground, and we think it's more than that because we said greater than. If you could add 1 million tonnes to the facility, it's probably worth about $1 billion NPV if you can keep topping up the resource. We will do that work over the next 12 or so months. Obviously, our focus at the moment is getting to where we need to finalize, which we have done, completing the construction, getting our approval in the first half of this year. And then as we do that, we'll kick off a separate team over the next 12 months, which we have to do the work around that debottlenecking. But Cannington started at about a 1.5 million tonnes operation, low CapEx spend in the plant, debottlenecking got you to over 3 million.

Yes. No, absolutely. And that sensitivity is very helpful. Look, for the second question, just a general one around the reserve. Obviously, you've increased that in size. I noted that there was no change in terms of the NSR cutoff as well, which is good, I guess. But I wanted to understand what's driving those grades lower then? I mean, have you had more dilution assumptions going into that reserve? Or is the additions into that reserve basically the key culprit for the reduced grade profile and also the reduced grade in the reserve?

So the NSR did actually slightly move up, and that's really a reflection, if you like, of what our operating cost is. And the major increase in the operating cost to be clear, is rebasing and the other one is around electricity that comes off the grid. And it's a regulated power supply that comes out of Arizona, which basically sort of drives that increase in the price that you see. Look, the reality is the movement in grade is actually very gradual. It's not a huge move that we've actually seen. You've added significantly about 5 years' worth of mine life purely based on infill drilling. You've got a lot more confidence about what the reserve looks like in terms of that. And as I mentioned earlier, we think Taylor is still open in multiple directions before you even consider Peake where we've seen a 33% roughly or 32% increase in that actual -- the growth in Peake over the last 6 months, and we continue to drill holes there because that's open in multiple directions as well. So I don't think grade and tonnage is going to be a challenge for us over time. It's going to continue to grow. I'd expect to see as we get our federal permitting approval, we'll do more work on Taylor to understand the pure size. The challenge for the team is even pre-Peake you continue to push where you get to a 40-ish year mine life and then things like Peake on top of it. And that sets the business up for many decades to come with a very strong cash flow generating asset in a Tier 1 jurisdiction and fully permitted in the U.S.

Your next question comes from Kate McCutcheon with Bank of America.

So steady-state zinc production is down 7% or so because we've got the lower grades. I get that we've added the 5 years to mine life, but usually, you want to frontload that metal for a better NAV where you can in the mine plan. Can you just talk me through what is driving the lower long grades? I didn't quite catch that answer before. Is it more drilling of that increased portion of M&I and reserves? Or is it mine sequencing driven? And net-net, did that longer mine life give you better cash flows?

Yes. Look, really good question, Kate. So if you think about how the mine set up, as I mentioned, there's multiple mining areas that sort of make up production, if you like, that will come out of Taylor over time to give flexibility. There's 4 high-grade areas that are actually very close to where the shaft is going to be. When it comes to Clark, we're going to access [indiscernible] going to extend that into an ore body, that is actually slightly lower grade and lower value, if you like, than the other 4 areas that are closer to Taylor. That's actually not a bad place to actually be because Paul is on the call, will also remember his time at Cannington in the early years, as you sort of commission one of these plants, there's always going to be some uncertainties that you want to understand if you don't put your best material first through where you're actually commissioning the plant. So effectively, through Clark, we access a different zone called J, which has an NSR or has less grade, if you like, than some of those high-grade areas. That's a big driver of what the average looks like in the early years. Again, I would expect the resource to continue to grow over time, more optionality even before we consider Peake.

Okay. Cool. That's clear. And then just on the shaft delay, Graham. So in January, execution was described as tracking to plan. You've got visibility over sink rates. Can you talk us through what specifically changed after that point that's driven the circa 18-month delay to this time.

Yes. Look, I'm pretty -- look, we've been pretty consistent on how we've talked about it. We've talked about the shafts are actually progressing. We haven't seen geotechnical issues that have been concerning. We haven't seen water issues. Water has been less than we expected to be. What we've actually been saying probably for about 9 months is contractor performance has been more challenging than we expected. And certainly, the productivity of what we're getting from the contractor is not what we're actually hoping for when we signed the original agreement. I think the counter for that along the journey has been, like I mentioned earlier that you've actually seen -- the resource continued to grow as we've done infill drilling closer to the actual, if you like, shafts, which has meant the capital spend that you might have to spend more on the shaft is more than offset by a reduction in lateral development you need to do. So that's why we weren't concerned about where the capital or what the schedule looks like. I think it's probably been more as we've come out of the first mining level, we've done all these interventions, and this is recently. We've put in some more of the infrastructure to manage water as we've gone deeper we haven't seen the contractor still deliver the rates that we would expect. At the same time, you've got the interplay of the decline was finished towards the back end of last calendar year for Clark. Ground has been really good there. Progress by the contractor, which is a different contractor has been really strong. It just made sense for us to continue the Clark decline, around derisking the shafts of the critical path, but also the ability to actually access ore earlier, but that ore handling capacity of a 25% greater increase over time just makes perfect sense before you even consider the potential benefits of workshop design, underground, et cetera. So look, it's sort of a tale of 2 cities, if you like. Contractor performance on the shaft has actually been disappointing, but contractor performance on the decline has been really strong.

Your next question comes from Rob Stein with Macquarie.

Can you just perhaps give us a bit of a deeper understanding about contractor productivity. We want to know essentially how much of the expected scope remaining is still at risk, whether there's other productivity issues that we can expect to drive capital estimates higher from here and what effectively fixed from a quote point of view? And I've got a follow-up question around depreciation.

Yes. I'll put note Sandy on depreciation question. Look, if you think about -- let's start with the shaft, it's probably the most important place to start with. If you actually talk about the ventilation shaft, that's about 75% complete at 618 meters as of the end of April. Assuming actual achieved rates to date, that means you're probably going to finish that around July. So there's not a lot of risk left, if you like, in the component of the shaft. The production shaft itself or the main shaft has performed actually stronger than the actual bench shaft. It was always planned to be started later. But a lot of the lessons we learned out of the bench shaft have been easily transferred across to the main shaft. The main shaft itself is about 53% complete at 478 meters, and we have actually seen them come out of the first mining level as well. So now we're into contract unit rates as we continue to progress down to the bottom. Again, geotechnical water issues, we haven't actually seen of any significance or materiality. It has been around productivity performance, and it's certainly something Pat and the team are on every single day. What we have done to derisk some of that is to basically also take out some of the scope on the surface and manage that through the owners team, which is progressing well. If you think about where we're up to with the process plant and the surface infrastructure, far more comfortable around that because majority of the engineering has been done. Large amount of the lead time items are basically in terms of big places like [indiscernible], et cetera. They're all on site or on the staging area, so not far away. And certainly, if you look at the -- how we're tracking on the process plant, that's tracking exactly to plan. What we haven't got to yet, obviously, is the underground lateral development, and we haven't got to the mining excavation for the underground workshops. That is obviously another piece that's been hit by inflation, as we mentioned in the announcement today. That work is in with the team and currently being evaluated, and we've got pretty firm pricing on that. But as the market has sort of been reflected in the U.S. with the timing of work between the fit to the Clark work to where we are today, we've certainly seen a shift, if you like, in the lateral development rates and also seen a shift, if you like, in some of the underground excavation. But that is built into our estimate reflected about where we are if you like, in terms of the engineering work done, but also the contingency we're carrying, if you like, in the latest estimate.

And on depreciation, is there -- I mean, with the impact of tariffs and the like, is there extra concessions available? Can you get some accelerated depreciation? What's the -- is there any clawback in terms of what we're seeing in terms of project...

No. Sorry, the answer to that is no. I mean we've sort of talked about tariffs for a while, and I think we've been estimating the range of $70 million to $90 million from day 1. And that's probably the range we're sort of sitting at the lower end of the range at the moment. The good thing because of other issues -- it's less of a moving piece at the moment, but obviously, we watch every day. We do have less exposure. For example, mobile equipment is ordered most of the surface equipment for the -- is already ordered. The big piece of the kit. So we don't think we have as much exposure going forward on the tariffs. I think what you would have heard me talk about the last 6 or so months is when we've talked about that tariff exposure, I've always been more worried about what does it actually mean for inflation in the U.S. And it's things like concrete, steel, piping, which is a function of steel, electrical items, that's always been my worry. And that's where we really see -- if you look at the indices since probably about December, November last year, we have seen a significant spike in those quantities. And that's reflected again back to my earlier comment where we see there's 4 surface packages of work that need to be completed. The first 3 of which the last one was actually finalized in February, they are rather smack on the bid estimate or slightly below. It's that last one where we've seen a real jump in steel prices, piping prices, concrete prices, and it's just sort of come back in that last estimate of a real big shift. And again, to be clear on that, that's not about quantities, that's price. So to give you a sense, our steel that we're inputting will probably be about 30% down on an engineered basis. This is all driven by price, price, price. And that's reflective at the moment, if you look at what's happening to steel prices in the U.S., but also the timing and availability. And even now -- even with the tariffs, you've got people thinking about is it easier and cheaper to actually import steel.

And sorry, just on the contract -- back on the contractors, I mean, is that price? Or is that tool time or hours utilized to do a task?

So again, let's just focus that on the shaft because that's where we're seeing the challenges. And if I take a step back and maybe have a couple of broad comments first and then get into some of our specifics. I think what I would say as an industry, if you think about coming out of COVID, the one thing you've seen across major engineering firms and major service providers is a real loss of actual capability in terms of the experience great guys. And I think we have had productivity things around implementing the engineering on time and as a consequence, what does procurement look like. But then there's also been challenges around leadership. It's something Pat and his team are on, on a constant basis. We've had leadership changes from the contractor. We've also had interventions on a regular basis. There has been milestone points about the first precinct versus the first mining development and then where are we now? And clearly, now we're in that unit rate piece, so they carry the risk, if you like, on delivery. But we just haven't seen the productivity we would have liked to actually see. I think the flip side to that is our experience on the Clark decline, a function of less water, a function of better geotechnical conditions. That's been a positive for us. And I think the contractor on that side, different type of work has actually performed really strongly.

Your next question comes from Kaan Peker with RBC.

Two from me. Graham, you mentioned that there isn't any issues with the shaft or structural issues of the shaft, but the scope change suggests there's a parallel access to the system. Obviously, this suggests that the shaft is riskier than initially anticipated. And we're getting a scope change so late in the project. So is the decline a mitigation for shaft risk? And how do we get confident that there won't be any further schedule slippage.

Yes. So that first question, I think, is a good one and a good one for us to clarify. If you think about when we started the Clark decline, we were just starting the dewatering at Taylor. And you would have heard us talk on a regular basis that the dewatering has been significantly lower than we actually expected. So not only have we had good progress, if you like, from the productivity of the contract to do in the Clark decline, we've encountered less water. We've continued to dewater the mine and have a better understanding of where we are. The geotpec risks on that side have been better. So when it comes to the decline, it is opportunistic. And it's information we clearly didn't have at the time we started the shafts. It's opportunistic in the way that it also allows you to add, like I said, more than 25% ore handling capacity out of the underground. It allows you to obviously derisk if there was something wrong with the shafts because you can still access ore at an earlier time from different directions. And over time, I think it's just going to give the team flexibility underground, including how we design our workshops. To be clear, we have not seen issues in the shafts that basically actually have geotech issues or water issues, it's productivity performance. We benchmarked that at the time of actually doing the shaft, so we're comfortable around that. And clearly, you've got the added benefit. Historically, the bench shaft used to be the critical path item to provide ventilation for underground work. The decline actually allows you to actually remove that as well from the critical path. So the decline is all about opportunistic. It's all about you can increase over time. It's all driven by much better information than we had versus 12 months ago. And this is the thing with Taylor. This is not a static ore body as we continue to do more work and we've only done infill drilling. We understand more about the geologies. We've dewatered it. We know that the water is not probably as bad as we initially thought it was going to be. As a consequence, we're not running the water treatment plant up to its full capacity. We don't expect to potentially be ding underground now as we go forward as well. So I think there are lots of positives coming out of the ore body that check and water. The shaft is about productivity performance. Now in saying that I've been in the industry long enough to see that I'm never going to be completely comfortable to that shaft completed at the bottom. But I do think the rates that we've got in there, the way we have slowed the ramp-up reflects what we've seen in past performance to be clear. It's not ambitious. It's not targeting.

Sure. And then just continuing on the shaft, I sort of understand the shaft sinking unit rate contracts. But I mean, what fundamentally will change contractor productivity? And again, how do we get confidence that this performance will change? And is there any point of escalation.

If you think we haven't been using escalation over the last 12 to 18 months, you don't know Pat and the team. So they're all over this. I think what I would say is, again, the shaft is made up of 3 different parts of the work. We are now, if you like, past the first mining level of straight shaft escalation. What we're using to predict performance going forward is actually past performance that we've seen over the last couple of months. So there's no hero assumptions. They're confident they can still higher productivity rates than what we've put in the plan. We're just making sure we've got a plan that we think is achievable. Now there has been a lot of work to be clear here in taking some scope off of them to reduce the risk. There has been some -- a lot of work done on cycle times. We have installed some ability to handle it. There was more water ahead. So there's some more water infrastructure on the actual [ galloways ] et cetera. So there's been a lot of actions taken. We're just looking at their productivity rates that we've actually seen be delivered, and we're using those going forward rather than forecast.

Your next question comes from Lyndon Fagan with JPMorgan.

So Graham, what protections have you got in place for any further underperformance from the contractor? I guess to what extent can you sort of assure the market that this is the last CapEx blowout that we'll see?

Look, again, I would sort of say, if you start with the processing plant facility, you've got a processing plant facility where you've largely engineered all the work. You've got large pieces of actually the equipment already on site or in the actual laydown area offsite ready to be transported. And they're tracking on exactly planned for basically the schedule, engineering, et cetera, and it's about 85-ish percent engineered. So I think you're in good shape on the processing facility. The underground decline that we've added the additional scope from Clark is actually an extension of the current decline, and it's the same contractor who's already set up there ready to go. They haven't left site since it's going to keep punching down. I think when you think about the actual contracting approach with the actual service provider for the shaft, again, we're using actual rates, not what they're forecasting for rates. So obviously, we're looking at what we've achieved and using that as a basis. At the same time, we have a team that's engaged every single shift on ship with our contract actual provider there to make sure they deliver. We've got regular engagement with the senior leadership. Obviously, if it's a unit rate contract, it's now at their risk as well in terms of money they're actually exposed to. And in the estimate, we carry a contingency of about $232 million.

And I guess the other question I had was just on the Peake copper deposit. So I mean, what's the latest thinking around bringing that into the mine plan? And when would that make sense?

Yes. Look, it's a good question. I mean, obviously, when you look at the design of the underground, it's always going to be about the NSRs, and that's going to be a little bit in terms of the value, that's going to be a big dynamic. If you look at silver price today and if you look at the 4 high-grade zones that are near the shafts when you get them up and running, that's always probably going to be the most attractive material on site if the silver price stays where it is now. I think what is good to see, if you think about Peak, it continues to actually grow. We announced today a 32% increase in the mineral resource to about 33 million tonnes at 1.78% copper equivalent. It is still open in multiple directions. We still think there's a fair bit more work to be done there in drilling. We are limited today about how much work we can drill from the actual, if you like, the state leases or the patent leases. Once we get that federal approval, we'll be able to increase what we do in Peak. My expectation though is the silver prices actually stay roughly where they are today, you're probably more likely to see Peake come in somewhere around year 8 to 10. But the silver price has shifted and as we do more drilling, if there's higher grade copper and prices move, we'll shift that. So it will be dynamic. I think the positive is and while we've got more work to do, if we think about the ability to add a copper circuit to the processing facility where we allow space to do that, that estimate is still low. It's in that range of $50 million to $60 million, and we've done a lot more work to get a greater understanding and engineering of cost there. So you're really talking about a low capital cost option driven by pricing. The resource today will continue to grow and grow. I think the other thing that we don't talk too much about is Taylor is still open in multiple directions. But even we did the original ore body for Taylor, there are a large number of stopes that we didn't bring into the current mine plan that are copper rich because we did have copper circuit. If you add that to Peake and you add that to what you've got at Taylor, I think that's going to allow you to continue to extend the mine life out. And again, it might change your economics. I think the challenge with Pat and the team as we build this is to have a mine model over time that allows you to actually within constraints of development to get out to the ore bodies to actually evaluate on a real-time basis, what does it look like the silver price versus copper price because what you have in this mine compared to what we have in other parts of that business today is large amounts of optionality.

Your next question comes from Lachlan Shaw with UBS.

I just wanted to again come back to total material movement out of the mine. So notwithstanding potential for higher material movement out of the mine overall, given you're now talking to the Clark decline complementing shaft capacity, you have left planned mining rate unchanged and trimmed payable metal production. So I'm just wondering how do I align these up consistently? Are you just being conservative? Or is there an implicit downgrade on shaft capacity here? And second thing is just OpEx. So you have increased OpEx. Does that factor in the OpEx of the Clark decline or just lifting costs from the shafts? And I'll come back to the question.

Let's answer a couple of components. One is we are not declining -- putting a downgrade on the ability of the shafts to move materials. While you do see that grade in the early years is actually down, that's more driven again by the decline in accessing some lower-grade material for a period of time. Once the shafts are up and running, it's actually accessing high-grade material, particularly over the first 10 years to be very clear. I think why we're sort of focusing, if you like, on still work to be done. We've just completed all this work around the Clark extension, what does it look like? How does it fit into the ore body. We know the ore handling capacity is going to be greater than the 4.3 million tonnes. It's greater than 25%. To give you a sense of that sensitivity, again, if you can add 1 million tonnes, it's probably about $1 billion. If you can continue in NPV, if you can continue to add up on the resource. What we haven't done yet is the debottlenecking work at the plant. We all know that -- if you look at history of this, it's the common thing where you actually move through the debottlenecking. That will probably take us about 12 months' worth of study to be focused to sort of be completed to understand how you actually do that what the focus of the team at the moment is obviously completing the construction, getting the actual approvals where we're going through the federal approval now, and we expect that by the end of this half of the -- sorry, the end of this calendar year. And at the same time, in the background, we'll start the work, which will take about 12 months to understand what we can get out of the process plant. But certainly, I think there's upside in that space. Again, once we get that federal approval, we'll also be doing some more work on understanding, a, how big Peake could be. We're continuing to drill at Peake, but I think the step-out drilling will come from when you get federal land. And likewise, when we get the federal land, we can -- and we get all underground access, we can start drilling more at Taylor to understand how big that could be. So look, when it comes to the reserve resource grade for both Taylor and Peake, there's more upside than downside, and we're excited about that. Shafts are absolutely going to deliver on what we said. I think Clark with the work we've done on the [ geotech and award ] the progress to date by the contractor is an absolute no-brainer.

Right. That's helpful. And then just a second question. So yes, just curious, you've spoken to some in-housing, taking some scope of the contractor with the shaft, for example. Just more of a general question. How do you feel about your internal capability, your technical capability in terms of, I suppose, a, monitoring, but also b, having the capability and capacity to sort of win and deliver some of these parts of these projects?

Yes. Look, I think great question. If you think about where we are as a project today, there's probably another project in the U.S. that will get a federal approval in the time frame that we've done. If you look at the support we've got from some communities and First Nations, if you like, in our area compared to many of our peers, I think we're at the top tier of that. If you look at the performance around the decline, it has been great. If you look at the ore body knowledge and growth, I think that continues to improve in a really positive trend. I think as we mentioned for the process plant, we've got most of the major equipment either on site or in the laydown area offsite and the engineering and the building of that is progressing exactly to plan. It's been more external issues around inflation that has sort of driven that increase. I think the challenge for us has actually been around the actual shaft. The shaft is a very one-off specialty task. That is an area that we've actually had some challenges, obviously, with the contractor around productivity improvement. But if you look around the quality of people we have on the team, I think we are one of the few projects that's actually progressing in the U.S. So attracting people from our peers has actually not been a challenge. So we've added plenty of capability over the journey. And as we get into the piece of commissioning and operating the underground, we're confident not only we will attract good people, but we'll also be able to use some of the expertise that we've built over time at Cannington similar product from a processing perspective, similar mining method. We're always doing some work on that around the exchange of information and lessons learned. And Tucson is a pretty good place to live.

Your next question comes from Mitch Ryan with Jefferies.

Just Graham, what's the scope for financial remedy with the contractor given the productivity and performance to date from them?

Yes. Look, it's an interesting question. I mean there are probably -- the challenge now, I guess, if you're into that unit rate of the contract is while it will hurt us potentially on time, it hurts them on exposures for the direct costs more than it probably hurts us from a few dollar perspective in terms of money flowing out the door immediately. So there's obviously a strong incentive for them to continue to actually finish that work. I think some of the early works around the precinct because of the uncertainty of the precinct, and this is probably like all shaft contracts, that's more a reimbursable basis. There will be some things, obviously, we continue to engage them on around some claims. But I think there's not a huge amount of scope on that space. It's about how do we focus on productivity improvements going forward, understanding that we've been in the unit rate period now for a while. So they sort of bear the cost on that in terms of direct cost.

Perfect. And then just can you help remind me, do the existing and the pending approvals allow you to increase the mill capacity materially? Or are there any constraints on how high that could go without a new approvals process?

So we're going through the federal -- keep in mind, we have all the state permits today, which allow you to basically build, tailor and operate for the first 8 years. The advent roughly depending on tailings and the rate. What we actually have in the federal approval process, the benefit is it allows us to do more drilling on the ore body. It allows us to do the last 7 kilometers, which connects a power line into the actual operation for cheaper power and allows you the next tailings facility. Look, we're going through that federal approval process at the moment. It's a rigorous process. On that, you've actually got to put in, obviously, what you plan to produce and all the associated things like water, air emissions. That's what we're going through working through the federal government now. We expect and we're on track to get approval by the end of the calendar year. If you look at every other operation out there in the U.S., they change over time. It means you put in an updated mine plan of operations. You don't only do that after you've done the work, and that's the work we'll do over the next 12 months to understand the debottlenecking the implications, and we'll go through that process. It's not like a normal process to be clear. It is a normal piece of business, but we still need to do that work and then file that adjustment to the updated mine plan of operations.

[Operator Instructions] Your next question comes from [ Alex Sue with MLT. ] We might just move along. He was the last question in the queue. There are no further questions at this time. I'll now hand back to Mr. Kerr for closing remarks.

Thank you. Look, I want to thank everyone for taking the time today on such short notice to actually talk through this. What I would start by saying, well, look, this is not the result we expected today in terms of the movement in the capital number. Reiterate, there is a component around scope changes, Clark. There are some uncontrollables, obviously, around inflation we're seeing in the U.S. when it comes to the surface plant and some of the underground infrastructure. But the shafts have been the part that obviously we continue to focus on delivering. I think on the positive side, we continue to actually see an investment in a Tier 1 jurisdiction in a commodity that we find attractive in terms of zinc in an operation that over time will be absolutely in the first quartile on the cost curve. It's also a business when you look at it, it has life in terms of duration, it has the ability to actually grow not only Taylor through extending the drilling and infill drilling, but also Peake. And then on top of that, you've got the other 12 or so highly prospective pieces of land that we can access when we get that federal approval. So from that perspective, I think that positions South32 and its shareholders to benefit from those rewards over the many decades to come. I look forward to engaging you when we see you over the next couple of weeks on the road shows. So thank you, everyone.