South32 : Hermosa Project Update

17 January 2022	South32 Limited
(Incorporated in Australia under the Corporations Act 2001 (Cth))
	(ACN 093 732 597)
	ASX / LSE / JSE Share Code: S32 ADR: SOUHY
	ISIN: AU000000S320
	south32.net
	HERMOSA PROJECT UPDATE

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

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

The PFS results support Taylor's potential to be the first development of a multi-decade operation, establishing Hermosa as a globally significant producer of metals critical to a low carbon future, delivering attractive returns over multiple stages. An initial development case demonstrates a sustainable, highly productive zinc-lead-silver underground mine and conventional process plant, in the first quartile of the industry cost curve1.

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

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

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

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

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

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

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

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

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

1. The references to the scoping study in respect of the Clark Deposit are to be read in conjunction with the cautionary statement in footnote 2 on page 18 of this announcement.
2. The references to the Exploration Target for the Hermosa project (including Peake) are to be read in conjunction with the cautionary statement in footnote 3 on page 18 of this announcement.

Registered Office Level 35 108 St Georges Terrace Perth WA 6000 Australia

ABN 84 093 732 597 Registered in Australia

Conference call

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

Conference ID

Please pre-register for this call at link.

Website

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

HERMOSA PROJECT

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

We have completed a PFS for the Taylor Deposit, our first development option at Hermosa. The Taylor Deposit is a large, carbonate replacement massive sulphide deposit which extends to a depth of approximately 1,200m over an approximate strike length of 2,500m and width of 1,900m. The Mineral Resource estimate for the Taylor Deposit is 138Mt, averaging 3.82% zinc, 4.25% lead and 81 g/t silver4. The deposit remains open at depth and laterally, offering further exploration potential.

The preferred mine design applied to the PFS is a dual shaft access mine which prioritises higher grade mineralisation early in the mine's life. The mining method is longhole open stoping, with the geometry of the orebody enabling the operation of multiple concurrent mining areas. This supports our assumption of an initial 22 year resource life5 with high mining productivity. Ramp up to nameplate capacity(c) of up to 4.3 million tonnes per annum (Mtpa)7 is expected to be achieved in a single stage. The process design applies a conventional sulphide ore flotation circuit producing separate zinc and lead concentrates with substantial silver credits.

In addition to the current Mineral Resource estimate for Taylor, we have defined an Exploration Target ranging from 10 to 95Mt3 indicating the potential for further exploration upside. The exploration opportunity at Taylor includes depth and extensional opportunities as well as new prospects in proximity to the deposit. We have identified an Exploration Target at depth to the Taylor Deposit known as Peake, with initial drilling results returning copper and polymetallic mineralisation. Further drilling at Peake is planned in CY22.

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

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

Our third focus at Hermosa remains on unlocking value through exploration of our regional scale land package. Through the completion of surface geophysics, soil sampling, mapping and interpretation of recently acquired data, we have identified a highly prospective corridor which will be prioritised for future drilling. Within this corridor, we plan to drill the Flux prospect following receipt of required permits, anticipated in the second half of CY22. The Flux prospect is located down-dip of a historic mining area that has the potential for carbonate hosted, Taylor-like mineralisation8.

STRATEGIC ALIGNMENT

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

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

HERMOSA PROJECT UPDATE

SUSTAINABLE DEVELOPMENT

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

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

CAPITAL MANAGEMENT FRAMEWORK

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

PFS HIGHLIGHTS

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

• Our initial development scenario outlines the potential for a large scale, highly productive underground mine
• • Dual shaft access which prioritises higher grade ore in early years
  • Proposed mining method is low technical risk, employing longhole open stoping with paste backfill
  • Single stage ramp-up to nameplate production of up to 4.3Mtpa
  • Conventional sulphide ore flotation circuit
• Potential to be a globally significant producer of metals for a low carbon future
• • PFS estimates annual average production ~111kt zinc, ~138kt lead and ~7.3Moz silver (~280kt zinc equivalent (ZnEq)9, with output ~20% higher across the years of steady state production10
  • Zinc is used in renewable energy infrastructure such as solar and wind for energy conversion and to protect against corrosion; silver is a key element used in solar panels; while lead demand is expected to be supported by its use in renewable energy storage systems
• Potential for a low cost operation in the industry's first quartile
• • Average Operating unit costs ~US$81/t ore milled (all-in sustaining cost (AISC)11 ~US$(0.05)/lb ZnEq) benefitting from high underground productivity
• Directs capital to establish a multi-decade base metals operation and platform for growth at Hermosa
• • Project capital of ~US$1,230M (direct) and ~US$470M (indirect) to establish the first development option
  • Low sustaining capital ~US$40M per annum
  • Potential to realise capital efficiencies through an integrated development of Taylor and Clark
• A large Mineral Resource with substantial exploration potential
• • Taylor Deposit supports an initial resource life of ~22 years, and remains open at depth and laterally
  • 10 to 95Mt Exploration Target identified, indicating the potential for further exploration upside
  • Copper-lead-zinc-silvermineralisation intercepted at the proximal Peake prospect
• Pursues the sustainable development of critical metals
• • We are investing in local programs and partnerships that reflect the priorities of our communities
  • We are committed to working with Native American tribes to protect cultural resources
  • We have completed key biodiversity, ecosystem and water studies
  • We are pursuing a pathway to net zero carbon emissions with identified options for renewable energy

HERMOSA PROJECT UPDATE

FURTHER OPPORTUNITIES TO UNLOCK VALUE

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

• Extend the resource life, which is underpinned by the current Taylor Mineral Resource estimate and does not include the further potential identified in our Exploration Target.
• Reduce operating costs through:
• • Further optimisation of the mining schedule, power consumption and comminution circuit;
  • Supplying smelters in the Americas to realise a material reduction in transport costs; and
  • Adopting emerging technologies and further automation opportunities, targeting enhanced productivity.
• Reduce capital costs through further optimisation of the shaft design, construction and procurement.
• Achieve a carbon neutral operation through access to 100% renewable energy from local suppliers.
• Integrate the underground development with the Clark Deposit.

NEXT STEPS

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

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

PFS SUMMARY RESULTS

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

Table 1: Key PFS outcomes

	Nameplate production capacity	Mtpa	~4.3
	Resource life	Years	~22
	Head grades (average)	%, g/t	4.1% Zn, 4.5% Pb, 82 g/t Ag
Production	Annual payable zinc production (average / steady state10)	kt	~111 / ~130
	Annual payable lead production (average / steady state)	kt	~138 / ~166
	Annual payable silver production (average / steady state)	Moz	~7.3 / ~8.7
	Annual payable ZnEq production9 (average / steady state)	kt	~280 / ~340
Operating	Operating unit costs (per tonne ore milled)	US$/t	~81
costs	Operating unit costs (per lb ZnEq)	US$/lb ZnEq	~(0.71)
	Direct growth capital	US$M	~1,230
Capital	Indirect growth capital	US$M	~470
expenditure
	Sustaining capital (annual average)	US$M	~40

HERMOSA PROJECT UPDATE

TAYLOR DEPOSIT PFS

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

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

Mineral Resource estimate

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

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

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

Figure 1: Taylor Mineral Resource

NSR cut-off (US$/t)

NSR 15 - 80

NSR 80 - 100

NSR 100 - 130

NSR 130 - 200

NSR > 200

Proposed

shaft

locations

0 0.5 km

HERMOSA PROJECT UPDATE