South32's Hermosa project costs jump 50% as portfolio reshaping continues

A US government equity stake that de-risked its Alaska Ambler Metals project and a Mozal aluminium smelter closure both pointed toward a cleaner, more valuable South32 portfolio, before a sharp cost blowout at its Hermosa project in Arizona tested that narrative.

6 Jul 2026 · 6 min read

South32 Ltd (ASX: S32) has spent the past year executing a genuine portfolio reshaping story, with two positive catalysts unlocking previously stranded value before a significant cost blowout at its flagship growth project tested investor patience. Wilson Asset Management detailed the first major positive development in October 2025: the US government took a 10% equity stake in Trilogy Metals, South32's joint venture partner in the Ambler Metals project in Alaska, while the White House also approved the access road that had been the key bottleneck in the project's development, a barrier the market had previously used to assign little value to the asset.

The executive order removes a major barrier to the development, increasing the likelihood of the project proceeding and the project valuations for South32. We took the opportunity to tactically reduce our position post the re-rate event.

Wilson Asset Management, Monthly Report, October 2025

A smelter closure could unlock a cleaner portfolio

The next major reshaping move came in December 2025. Pendal Group reported South32 would place its Mozal aluminium smelter into care and maintenance from March 2026, unable to secure a new power tariff, resulting in a $60 million one-off cost and $5 million in annual maintenance expenses. The fund noted this closure could facilitate a sale of South32's aluminium business, with total net operating assets valued at $3.36 billion against a group enterprise value of US$10 billion, and that a sale would leave a base-metals-focused portfolio potentially supporting a higher trading multiple.

A commodity price rally tests an underweight positioning

As several of South32's key commodities rallied through early 2026, at least one underweight holder felt the pain directly. Yarra Capital Management, maintaining an underweight position, reported the stock's strength in January 2026 was a source of underperformance for the fund, as silver rallied 57%, nickel 11%, and zinc 10% during the month, though the fund maintained its underweight given the portfolio's complexity and relatively high-cost assets in challenging jurisdictions, preferring better pure-play exposure elsewhere.

The Hermosa cost blowout

The most consequential development arrived in May 2026, when Pendal Group reported South32 provided an update on its Hermosa project in Arizona showing capex rising US$1.1 billion, or 50%, to US$3.3 billion, with first production pushed back to the second half of FY28 from the second half of FY27. While the revised timeline itself was not a huge surprise, the fund noted the capex increase was around double consensus expectations, with operating costs also tweaked higher and production slightly lowered. Pendal said the delay pushes the pivot to material free cash flow out to FY30/31, with little FCF in the interim despite record commodity prices, and that the potential spin-out of the aluminium/alumina business is now likely deferred given the need to retain cash flow to fund the higher spend.

There is no fundamental flaw with the project. It will still generate ~US$800m/year EBITDA at spot prices, or ~US$1.1bn post a potential debottlenecking.

Pendal Group, Newsletter, May 2026

Strong cash generation offsets weaker production

Despite the Hermosa setback, South32's core operations continued generating strong cash flow. Pendal Group reported in April 2026 that weaker third-quarter production, driven partly by a 6% cut to Gemco guidance from cyclone impacts and weather disruption at Sierra Gorda, Cannington and Worsley, was offset by better free cash flow, with net cash rising by US$121 million to US$96 million, equating to a 7.2% FCF yield that was expected to improve further in the fourth quarter. Equity Trustees Asset Management, holding an overweight position, listed South32 as a top-five contributor across multiple quarters, citing strong capital management initiatives and improved asset values at Cannington and Sierra Gorda alongside resource upside at Hermosa.

What managers are watching next

With the Mozal closure potentially clearing the way for an aluminium business sale, the Ambler Metals project de-risked by US government involvement, and Hermosa's economics still intact despite the cost increase, generating an estimated US$800 million a year in EBITDA at spot prices once operational, the catalysts fund managers are tracking are the progress of any Mozal-related aluminium sale process, the timing of Hermosa's delayed first production in FY28, and whether the deferred aluminium spin-out re-emerges once Hermosa's higher capital spend is funded.