Anglo American Management Discusses Q4 2012 Results - Earnings Call Transcript

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Anglo American (OTCPK:AAUKY) 2012 Earnings Call February 15, 2013 4:00 AM ET


John Parker - Non Executive Chairman, Chairman of Nomination Committee and Member of Safety & Sustainable Development Committee

Cynthia Blum Carroll - Chief Executive Officer, Executive Director and Member of Safety & Sustainable Development Committee

René Médori - Finance Director, Executive Director and Chairman of Investment Committee

Christopher Ivan Griffith - Chief Executive Officer of Anglo American Platinum Limited

Khanyisile Thandiwe Kweyama - Executive Head of Human Resources for Platinum Business and Executive Director of Anglo American South Africa

Seamus French - Chief Executive Officer of Metallurgical Coal


Myles Allsop - UBS Investment Bank, Research Division

Jason Fairclough - BofA Merrill Lynch, Research Division

Grant Sporre - Deutsche Bank AG, Research Division

Menno Sanderse - Morgan Stanley, Research Division

J. Timothy Clark - Deutsche Bank AG, Research Division

Anna Mulholland - Deutsche Bank AG, Research Division

Raphael Veverka - Exane BNP Paribas, Research Division

Ian Rossouw - Barclays Capital, Research Division

John Parker

Well, good morning, everyone, and a warm welcome to you, all. Cynthia and René will be in charge of presenting our 2012 results shortly. As Chairman, I simply wish to provide some background to the presentation and on board changes, given this is Cynthia's last Anglo American results presentation.

2012 was indeed a tough year for the mining industry as a whole, and we certainly did not escape unscathed. Our results were significantly impacted by a macro environment climate, that you all know too well. Operationally, our businesses delivered credible output growth over 2011, and projects like Kolomela and Los Bronces ramped up very well. Disappointingly, we had setbacks in existing Copper operations, but recovery plans are now in place.

The outcome of our detailed risk assessed review of Minas-Rio with third-party input to the board was transparently communicated to the market. And regrettably, we had to write this down by some $4 billion based on the full potential from Phase 1 only. So in a year, where our operating cash flow was inevitably impacted, the board, nevertheless, have recommended a final dividend of USD 0.53, about a 15% increase making a total for the year of $0.85. This reflects our confidence in the underlying business going forward. And it completes the rebuilding of our dividend from 0 in 2009 to a new base level competitive with our diversified peer group.

After all my years in business, I believe a strong board is a critical bill work for shareholders against value destruction. And in the 3.5 years I've been Chairman, I sought to refresh and strengthen the board by appointing new members with a range of skill sets and a relevant experience that can add value to our business and maintain capital discipline. It is in that light that Anne Stevens was appointed in May last year, and Anne has extensive business experience operating in Southern American countries.

Recently, we have proposed that Doctor Byron Grote has long experience in the resource sector be elected as a Non-Executive Director of the forthcoming AGM. And he will take over as Chairman of our Audit Committee from David Challen. I wish to take this opportunity to thank Doctor Mamphela Ramphele from South Africa, who stepped down in July; and Peter Woicke, who will be standing down from the board of the forthcoming AGM after serving for some 7.5 years. He will be succeeded as chair of our Safety and Sustainability Committee by Jack Thompson, our lifelong mining engineer and a former mining company CEO.

In terms of board composition, the biggest change, of course, was Cynthia's decision to step down as Chief Executive with the agreement of the board, but remain in post until her successor was appointed. Mark Cutifani would join us with effect from the 3rd of April, and Cynthia will remain with us to the end of April. During her tenure, Cynthia's developed a very clear strategy, which she will touch on later, and she has created a streamlined organization and a unified culture. Her legacy includes, amongst many other things, a step change improvement in safety, sustainability and in the quality of our dialogue with governments, stakeholders and communities globally. And as a board, we not only thank her for that, but also for remaining imposed to allow an orderly recruitment and transition process. We also wish her all success and good wishes in the years ahead, as I'm sure you all do. Thank you, all, for your continued support, your wisdom, insight and advice. We gratefully value all of that.

And with that, I will now hand over to Cynthia. Thank you, all, very much.

Cynthia Blum Carroll

Good morning, everybody. And thank you for joining us this morning, and thank you, John, for those kind words. I'll start by giving you the highlights of what has been a tough year for the mining industry, and the global economy as a whole. I will also review our operational performance, which was by and large, a solid performance, but with some challenges that we are addressing. And René will take you through the financials, and then I'll say a few words to wrap up.

You will have heard me talk about the journey we started 6 years ago to transform Anglo American into a focused, performance-oriented business. Today, we are all driving performance. Value-creating initiatives, including asset optimization and supply chain, are making a difference. We took the hard decision to early on to restructure our organization and to become aligned as one Anglo. And we have completed our divestment program generating over $4 billion in proceeds, leaving us with a well balanced and diversified portfolio, focused on the right commodities.

In 2012, the external trending environment was under pressure. Prices were significantly lower. René will show you that price alone reduced operating profit by $3.9 billion. As a result, underlying operating profit was down by 44% to $6.2 billion, and underlying earnings were down 54% to $2.8 billion. We are, of course, disappointed to have to report a number of special items, which René will cover, resulting in a loss attributable to shareholders of $1.5 billion.

Our drive for strong operational performance and a ramp-up of projects led to record volumes of Met Coal, Iron Ore, export Thermal Coal, Phosphates and Nickel, as well as increased Copper production. Our decision to invest through this cycle, however, positioned us well to continue delivering volume growth at attractive margins. This went some way towards offsetting the operational challenges we were tackling in Copper and the strikes in South Africa.

In 2012, our new mining operations and expansions contributed $1.2 billion in operating profit. Beyond organic growth, we completed our acquisition of the additional 40% of De Beers. I will take you through the details of our operating performance shortly, but before doing that, I remind you that every decision we have taken has a single objective of maximizing value over the long term. We are achieving this through a disciplined approach to managing our business and allocating capital. Our aim is to maintain a strong investment grade rating and to protect our base dividend before carefully prioritizing investment to the lowest risk and most value-accretive options. We are, therefore, pleased to declare a final dividend of $0.53 per share, an increase of 15%, giving a rebased hurdle for the year of $0.85, also a 15% increase.

I would like to start our operational review with safety, our first priority. We have made significant progress since the start of our journey towards 0 harm 6 years ago. Injury severity rates have fallen. There's been a 17% reduction in fatality numbers over that period. We have shown 0 harm is achievable in all parts of the organization, and we have many examples of world-class safety performance across the group. Around 93% of our operations are fatality free. The Kolomela project and mine achieved 29 million man hours without a loss-time injury. Minas-Rio achieved more than 40 million man hours loss-time injury free. In 2012, however, 13 of our colleagues lost their lives, which I'm sure you would agree is unacceptable. There is absolutely no room for complacency on safety. Every single life is precious.

In terms of the environment, we continue to make a positive difference by saving water, reducing our energy usage and cutting carbon emissions. Just to give you some idea, our water management programs have delivered a savings of 17 million cubic feet -- cubic meters in the last year alone. And that's equivalent of recouping an Olympic swimming pool of water every 2 hours every single day. Today, we recycle or reuse 72% of our total water requirements, and that's up from 67% in 2011.

Our strong year-on-year production increases helped offset some of the challenges we have faced: declining ore grades, increase waste stripping and the illegal industrial action in South Africa. The Met Coal business, for example, achieved benchmark equipment performance levels, resulting in record production and sales of export Met Coal. In Thermal Coal, both the Colombian and South African export operation achieved record production and sales, helped by the ramp-up of Zibulo, which contributed 5 million tonnes of export in domestic Thermal Coal. And I've already mentioned the important contributions from 2 of our now completed major projects: Kolomela in South Africa and the Los Bronces expansion in Chile, helping to increase our Iron Ore and Copper production by 4% and 10%, respectively. Barro Alto is ramping up and contributed 22,000 tonnes of Nickel in 2012.

The industrial action in South Africa in the second half of the year had a significant impact on our financial performance. $0.5 billion of underlying operating profit and $0.20 on earnings per share is a stark reminder of the damage done. Our Platinum, 306,000 ounces of production was lost in the business that was already under severe economic pressure. All Platinum's operations are now back at normal capacity after a strong ramp-up period. At Kumba Sishen mine, the strike caused a loss of 5 million tonnes of production. Fortunately, through Kolomela's outstanding performance, we were able to limit losses on sales to 1 million tonnes.

Turning now to the operational performance of each of our businesses, starting with Iron Ore and Manganese. Following record profit in 2011, Iron Ore continued to deliver strong performance, with record production from Kumba of more than 43 million tonnes. A 23% weaker iron ore price and the impact of the strike action on unit costs more than offset the operational gains. As I've said it before, Kolomela is a world-class Iron Ore operation. It's ramped up ahead of expectations, produced 8.5 million tonnes in 2012 and will reach full capacity of 9 million tonnes this year. Kolomela showcases Anglo American's and South African's ability to deliver large mining projects, with the associated logistical infrastructure needed on time and on budget.

To our major growth project at Minas-Rio, we will today announce the sizable conversion of 1.45 billion tonnes of the 5.7 billion tonne resource to reserves. And we believe that further resource potential exists through our ongoing infill drilling program.

As we announced last month, we have completed the detailed review of Minas-Rio and are working towards achieving first ore on ship at the end of 2014. And despite the well-known challenges, Minas-Rio is a Tier 1 Iron Ore resource that will be highly competitive and will generate significant free cash flow for many decades to come.

Turning to Met Coal. All export, open-cut operations achieved record production pushing Met Coal production up 24% year-on-year. We are particularly pleased with the production recovery that followed the resolution of the Moranbah roof collapse. Met Coal is a good example of sustained benefits derived from our asset optimization initiatives. A number of productivity improvements across the open cut and underground operations drove this achievement in both Australia and at Peace River Coal in Canada, where production increased 47%. Today, with our discipline on costs and proactive actions to shut down high-cost mines, unit cash costs fell more than 20% for the first half to the second half of 2012. The 5 million tonne Grosvenor project secured its mining license in the first half, and construction is now underway.

Thermal Coal continuing to perform strongly despite weaker prices. Export production hit a record 28.7 million tonnes, despite the planned closure of some high-cost sections in South Africa to protect the margin. We made adjustments to increase lower calorific, higher-yielding products at Zibulo and Goedehoop, in line with demand. And we have achieved major productivity gains in South Africa, up 22% at the open-cast operations and 14% at the underground. In Columbia, Cerrejón delivered another record year of production, up 7% to 11.5 million tonnes, again, due to operational efficiencies.

Turning to Copper. As I said earlier, the Los Bronces expansion has ramped up well and reached full capacity in August. This more than offset the declining grades and higher waste stripping at the preexisting operation, resulting in a 10% increase in production. Action plans are in place to improve [indiscernible] flexibility at Los Bronces. We have stepped up our rate of waste stripping, which will increase a number of operating phases in the mine and allow us to sustainably ramp up production over the next 3 years.

Cash costs in 2012 were up 22%, as a result of the increase in waste stripping, declining grades and the high levels of labor cost inflation across the industry. At Collahuasi, the joint venture partners put in place an improvement plan, which we suspended the growth and suspended the growth projects until the operational efficiency is restored.

A new CEO was appointed at the end of last year, and we're seeing early signs of improvement. Fourth quarter production was up 17% on the third quarter. Plant reliability increased from 79% in September, to 93% in December, and recovery increased by 11% from quarter 3 to quarter 4. You will also have seen the recent confirmation of a 19% increase in the mineral resources at Collahuasi, an increase of 1.4 billion tonnes to more than 9 billion tonnes at an average grade of 0.81% copper and 0.02% molybdenum, a world-class copper deposit.

In Peru, we successfully completed the Quellaveco community dialogue table. We have reached agreement on water usage. Our closure plan, as well as social and environmental contributions to be made as part of our project. In the fourth quarter of 2012, Quellaveco received 3 critical permits, and this allows us to target submission of the project to the board for consideration later this year.

Nickel performance was significantly affected by a 23% decline in the average LME price and export ban in Venezuela and subsequent closure of our operation in that country. As a whole, the Nickel business delivered record production, up 35% to 39,000 tonnes. Although Barro Alto faced some challenges, it is ramping up to achieve nominal designed capacity during 2013.

In Platinum, we have consistently stated that a number of our mines have been under considerable economic pressure and making losses. Economic uncertainty in Europe continues to have a negative impact on demand, resulting in lower sales and lower realized prices. Escalating costs and capital intensity, coupled with lower grades and greater mine depths have eroded profitability over time. And the illegal industrial action in the second half piled on further pressure. We lost more than 300,000 ounces of production with the inevitable impact on unit cost.

As a result, Platinum reported an underlying operating loss of $120 million, and we spent almost 1 year looking at every aspect of the business to address the structural challenges. We could not have been more comprehensive. Our focus was to create a business that is sustainable, competitive and profitable for the very long term for all of our stakeholders. We announced our proposals in mid-January. We're working through these in close consultation with the government and organized labor in South Africa. And we will keep you updated on our progress, but we must take action to protect the 45,000 jobs that would remain post-restructuring to ensure a viable and competitive business. This is a business we believe in, and we still expect to invest between ZAR 6 billion and ZAR 7 billion per year over the next 3 years.

And finally, Diamonds. De Beers delivered $0.5 billion of operating profit in 2012. René will take you through the accounting impact of consolidating De Beers. 2012 saw a difficult trading condition for the business, driven by weaker demand and changing site holder requirements. As a result, polished and rough diamond prices decreased, particularly in the third quarter. The end of the year saw some modest price improvement, and the early signs from the holiday season are more promising. De Beers continues to align production with demand and to focus on waste stripping and maintenance at its operations. The slope failure at Jwaneng at the end of June adversely impacted production and waste stripping in the third quarter, but I'm confident that the recovery plan, which is in execution will get us back on track shortly.

Looking at the future, the infrastructure for Debswana Jwaneng Cut-8 extension project is now complete. And I'm pleased to announce that De Beers have received the final regulatory clearance to commence work on the brownfield underground project at Venetia in South Africa. This is a $2.1 billion investment, which will extend the life of Venetia mine to 2042.

On the outlook, De Beers expects moderate growth in diamond jewelry demand in 2013. Further out, the fundamentals are very attractive, particularly, in China and India. We are well positioned with our uniquely diversified portfolio to take advantage of this late-cycle development.

Thank you, and I'll now turn it over to René.

René Médori

Thank you, Cynthia, and good morning, everybody. We are reporting an operating profit of $6.2 billion, down 44%. The main driver was lower prices, $3.9 billion. A mix of the operating performance that was mentioned by Cynthia, a very satisfying ramp-up at Kolomela and Los Bronces, very strong positive improvement at Metallurgical Coal, while some disappointment in terms of the ramp-up at Barro Alto, as well as existing operation at Los Bronces and Collahuasi.

Effective tax rate, 29%. We had the benefit in 2012 as in 2011 of the reversal of the second category tax in Chile, following the settlement with Codelco around Los Bronces. For the current year, our guidance is tax rate of 31%. EPS of $2.26, that include obviously, the impact of the strike in South Africa, $0.20, $0.18 for other plants and $0.02 for Kumba. CapEx, $5.7 billion for 2012, very much in line with the guidance we gave you at the half-year result, if you adjust for the consolidation of DeBeers since August. Net debt of $8.6 billion, the key driver beyond the increases in net debt is the accretion of DeBeers $6.4 billion impact equity and the consolidation of the debt within De Beers.

Turning to the operating profit reconciliation. Again, a key driver was some price variance, $3.9 billion, $2.1 billion in the second half, $1.8 billion in the first half with the recovery in a number of area, especially Iron Ore towards the end of the year. You see the benefit of the lower Rand 8 21 on average for 2012 compared to 7 26 in 2011. As a rule of thumb, a movement of 1 Rand has an impact, a positive impact or a negative impact of $1 billion at the operating profit level. And as you know the current spot rate is 8 80. I will go in more details to our -- the sales volume cost variance over the next few slides and you see the impact of the strike in South Africa drove that profit level $0.5 billion. The decline of contribution from the associates, $300 million or due to lower prices at Cerrejon and Cameco.

Turning to the price variance and first, focusing on Iron Ore and Coal. Iron Ore average price of $122 a tonne compared to $156 the prior year, 69% of the export from Kumba were to China and predominantly on either spot or current period prices.

Met Coal, $191 a tonne compared to $265 a tonne the prior year, that's average price for half coking coal 1 and half coking coal 2, so excluding PCI. You remember that the beginning of 2011, we had the price benefit of the flooding in Brisbane.

We have settled the first quarter of 2013 at $165 a tonne with all our customers, excluding our Indian customers, and that compares to $170 a tonne for the first quarter of 2012.

Turning to Platinum and Copper. On average, relatively stable basket price in Rand. The average basket price for 2012 was 19,764. Although the last few weeks, following the Platinum announcement in terms of the restructuring plan and the decline of the Rand, the basket price has been around 23,000 Rand.

Copper, relatively also stable realized price, $3.64 on average for the year. In 2012, we had a positive marked-to-market adjustment of $47 million. While in 2011, we had a negative marked-to-market adjustment of $278 million. At the end of the year, we had 118,000 tonnes of Copper, which were originally priced at $3.59.

In terms of sales volume and these numbers exclude the impact of the South African strike, the 306,000 ounces that Cynthia mentioned for Platinum and [indiscernible] for Kumba. Platinum, so excluding the South African strike, down 5% in the fourth quarter of 2012. Platinum prioritized its shipments to satisfy its contractual commitments. We believe that it's probably withheld around 100,000 ounces in terms of safety stock ahead of the announcement on the restructuring in January.

Kumba reported a record level of export sales, 39.7 million tonnes by drawing down its level of inventories, so more than offsetting its projection shortfall of 5 million tonnes.

Record export also for Metallurgical Coal at 26% with substantial increase in production in -- at the underground operation, plus 30%, and at the other gas operation plus 22%, all driven by productivity improvement, as Cynthia explained.

Mining inflation has moderated around 2%, so in line with the guidance we gave you at the beginning of the year. Regarding the benefit of lower escalation price increase for electricity, both in Chile and in South Africa, stable oil prices, lower input costs for steel and rubber. And we also got the benefit of the headcount reduction in Australia by Metallurgical Coal. For the current year, we anticipate a good CPI inflation between 1% and 2%.

Turning to CapEx and net debt. Total CapEx of $5.7 billion for the full year. Our guidance for 2013 is a CapEx between $7.5 billion and $8 billion. As we'll be ramping up the progress on Minas-Rio, we plan to spend $2.9 billion on Minas-Rio in 2013. We also are ramping up at Grosvenor. We plan to spend $700 million. We expect SIB CapEx to be flat at $2.7 billion.

Beyond 2013, we expect CapEx for 2014 to be between $6.5 billion and $7 billion and then start to moderate in 2015 with the completion of Minas-Rio. In terms of net debt, the key driver beyond the increase was, as I mentioned earlier, the acquisition of De Beers with a net debt now at $8.6 billion. We are maintaining a level of liquidity and total add on at the end of the year was $18.6 billion, half in cash and half in undrawn committed facilities. The split in terms of South Africa and the rest of the world of the $18.6 billion was $12.4 million outside South Africa.

On the next slide, we explained the change in accounting treatment for De Beers. So up until August, De Beers was treated as an associate; and from the 16th of August, De Beers was treated as the subsidiary. And we also highlight the accounting treatment for Debswana where we consolidate a 9.2% of GDP for taxes and royalties.

We also recorded in 2012, $5 billion of impairment and other charges. The 3 key items that we have already covered with you, so the Minas-Rio impairment, $4 billion on an after-tax basis. We also worked out $600 million of Platinum projects, which will no longer be progressed. And then you have impact of the nonrenewal of our mining license in Venezuela. Thank you.

Cynthia Blum Carroll

Thank you very much, René. Without a doubt, 2012 was one of the industries in Anglo American's toughest years. We faced a weak global economy, strikes in South Africa and continued input cost inflation.

Commodity prices fell across the board. The strikes that started in Impala in January reemerged at Lonmin in the third quarter spreading across almost all of the platinum and gold industries within unprecedented level of violence. Platinum and Kumba bore the brunt of the impact, with a $500 million hit to our operating profit. We also experienced, as René highlighted, mining inflation of 3% above CPI. That includes the effects of the strikes. On average, across all our operations, removing $300 million from operating profit. In the face of these headwinds, we acted quickly and decisively. We reduced capital expenditure from $7 billion to $5.7 billion, while continuing to invest in our strategic projects.

We reduced steady costs by $200 million. As René outlined, our Metallurgical Coal business reduced its workforce by 1,200 people, bringing down costs by 22% in the second half of the year. We announced a bold restructure of the Platinum business, following a comprehensive review. Our objective is to move 80% of the Platinum assets into the lower half of the cost curve within the next 10 years, compared to about 50% of the assets today. This will take time, and it will not be easy. There is a clear process for working through the issues, and we are engaging constructively with the South African government and the trade unions.

When I said before you from my first results presentation back in July 2007, Anglo American was a very different company. Today, we are a focused, diversified miner, with a clear strategy and ambition to be world class in everything we do. Since 2007, we have simplified the portfolio by focusing on mining assets in the most structurally attractive commodities, generating more than $11 billion in proceeds to the disposal of our former zinc, gold, steel making, sugar, aluminum, Tarmac and paper businesses. And we reinvested those proceeds by increasing our positions in commodities with the strongest fundamentals and the most attractive risk-return profiles: Iron Ore, Copper, Met Coal, Platinum and Diamonds. We restructured the group, making it leaner, more agile and more productive and with the performance-oriented culture.

Today, Anglo American is benefiting from the strategic decisions made and a group-wide programs and initiatives we deployed. We have seen a 70% decrease in fatality since 2006, but we have further to go to achieve 0 harm. And we will persevere, and we will get there.

3 of our 4 major strategic growth projects were delivered in 2011: Los Bronces, Kolomela and Barro Alto. Our new mining operations and expansions generated $1.2 billion, almost 20% of total operating profit in 2012. We are also progressing high-quality projects for the next phase of growth, including Minas-Rio, Grosvenor and Quellaveco. Our project pipeline offers us optionality with the most balanced and diversified portfolio with exposure across the entire economic development cycle, including unique late-cycle exposure.

Beyond organic growth, we completed our acquisition of the additional 40% ownership of De Beers, the world diamond leader. We delivered more than $2 billion in shareholder value through the resolution of the dispute with Codelco. And we generated over $4 billion in proceeds from our divestment program.

On the operational side, we implemented asset optimization and supply chain initiatives that delivered benefits of $3.2 billion up until the end of 2011 against a target of $2 billion. In 2011, we reset the baseline and delivered significant value in 2012 associated with those initiatives. And last year, we established a commercial operating model with a new marketing hub based in Singapore, which has already started to deliver substantial benefits. I have no doubt that this will deliver value to shareholders going forward.

As we pursued our strategy, we face strong macroeconomic headwinds and specific operating challenges. On each occasion, we took the hard decisions in the interest of securing long-term shareholder value. During the 2008 economic downturn, we continue to invest. Those projects are now enabling us to return a competitive and sustainable dividend to shareholders. And Minas-Rio is, fundamentally, a story of short-term pain, especially for me for long-term gain as we progress towards developing one of the greatest undeveloped Iron Ore resources in the world.

The actions we have taken to deliver on our strategy place us in a strong position to take advantage of the structural changes taking place in our largest markets: China and India. And I visited both those countries last month and came away with particular observations. The next phase of China's urbanization will continue to drive demand for bulk commodities and copper as cities become more connected and smarter with improved transport and communications infrastructure. Just over 50% of China's population now live in urban centers. Getting to an urbanization rate of just over 60% will increase demand for steel to around 1 billion tonnes per annum. And I believe China will get there within the next 10 years. The Chinese government plans to increase car ownership and more than double underground cabling, which will help drive demand for copper and for platinum group metals.

India is forecast to have the largest middle-class population within the next 10 to 15 years. The size of the jewelry market is expected to grow by between 20% and 30% each year for the next 5 years. Jewelry sales per capita in India is 3x greater than in China, placing us in a strong position with respect to diamonds and platinum. Another structural shift is that India is no longer capable of meeting its own demand for coal and iron ore. Indian steel production is forecast to double by 2020. Annual imports of metallurgical coal are expected to increase by 60% from around 50 million tonnes to around 80 million tonnes over the next 5 years. India plans to add 67 gigawatts of new power over the next 5 years, of which at least 15 gigawatts will be near the coast and designed around imported coal. The long-term fundamentals for our commodities remains strong, and we are well positioned to take advantage of demand growth as we deliver our strategic projects.

In closing, I want to emphasize a few points. Mining is becoming more challenging as resources become harder to find. At the same time, governments and communities seek a greater share of the benefits. More alignment is required between what miners know to be the reality on the ground and the expectations of governments, communities and investors. Stakeholder engagement is critical to our ability to generate returns, and we need to continuously communicate what is happening. Every country poses a degree of risk in the form of taxes, access to infrastructure, bureaucracy, politics, access to people, to name some. And when we talk about South African risk, therefore, we need to put that into a broad perspective.

Mining is long term and cyclical in nature. Our decisions on capital expenditure are always about maximizing shareholder value. There needs to be a balance between proactive allocation of capital for the long term and investors demand for returns in the short term.

As you all know, this is my last results presentation as Chief Executive of Anglo American. And I'd like to publicly express my gratitude to the Chairman, to the board, to the senior management team, who I think is -- are wonderful, and all our employees throughout the world for the support they have given me over the years and from the outset. I also wish to thank you, the analyst community, who've been following our journey so closely. This company has come through 2 severe economic downturns, and we had 2 years of record operating profit, in 2008 and 2011. We put in place an organization that is fit for purpose, and we surpassed market expectations in terms of what we divested and the benefits achieved through asset optimization and supply chain initiatives. When I first visited our operations in 2007, what impressed me most was the quality of the people in this organization. So I feel privileged to have worked with such talented people across the group.

In chatting with my one of my friends on the Executive Committee recently, we talked about what has been achieved, and he pointed out to me that what we have achieved is that we have built throughout this organization, a performance-oriented culture. And we believe across its organization that we can fundamentally be the best in everything we do.

We've come a long way. The company has been transformed. We've made mistakes along the way, but we continue to learn from those mistakes. And we strive to always improve. I have no doubt the future of this great company is in good hands. We have achieved much together, and I firmly believe the company's best days lie ahead.

So that brings me to the end of the presentation. I'm happy to take your questions. We've got the entire Ex Co membership here in the room. So I will direct questions to them, I will happily direct questions to them. So first, from the venue in London and then South Africa and then on the phone. So if we can start with London.

Question-and-Answer Session

Myles Allsop - UBS Investment Bank, Research Division

Myles Allsop at UBS. Maybe Cynthia, a question for you. I mean, as you look forward over the next 2 years, what do you think the biggest challenges for Anglo will be, and what would your unsolicited advice for Mark be?

Cynthia Blum Carroll

We don't have all day. I think we have to first get through the next little while. We've got to deliver Minas-Rio, and I'm very confident that we will do that. I think that this industry, as I said earlier, is absolutely in a process of changing. We will have -- I will repeat what I said 1 minute ago. We will have greater challenges in terms of those expectations of those around us. And so we'll need a different set of skills at the operations or people managing our interests in every country around the world. We'll have to be reaching out to governments to start with and other stakeholders much more proactively than probably this industry has done in the past. I think that we will continue to drive our strategic portfolio hard. And we have to be marked, and the team will have to be that much more selective about where we're going to spend our money, because I think the shareholders have spoken. It's clear that they're looking at the very short term, and we've got to hit the right balance. And I don't know exactly what that is. There's got to be much more give and take, and there's got to be more communication between us. Because I don't think in many cases, the understanding is there, of the challenges. And furthermore, I think that we're always thinking about the long term because we fundamentally, are in that industry to think about the long term and build for decades to come. Jason?

Jason Fairclough - BofA Merrill Lynch, Research Division

Jason Fairclough of Bank of America Merrill Lynch. Cynthia, you mentioned learning from your mistakes, maybe if you're willing, would you talk a little bit about what you've learned from the Minas-Rio journey? And perhaps, how do you institutionalize those learnings? How do you build those into Anglo, so you don't make mistakes like that in the future?

Cynthia Blum Carroll

Well, Jason, you know that every company, every mining company around the world has had projects with setbacks. There's not a single one that has delivered on time, on budget consistently one after another. I think what we have is a major project that is complex in terms of the scope of the project and the numbers of people that we impact. So in the case of Minas-Rio, many of you probably don't know this, but we are cutting across 31 municipalities -- with Paulo. 31 municipalities, we're impacting. We estimate about 350,000 people. And so the scope of the project from building the port to the pipeline to the beneficiation plant and developing the mine is really massive. Now, one person said to me the other day, "Well, maybe we should only go to projects where we have the permits in place." At the time, that really wasn't possible. I mean we inherited, we bought into something that was already there. So reflecting on that, and I've had conversation -- Paulo and I were down in Brasilia, late last year, having conversation with the Secretary of the Environment. And I asked him this question. I said I think about this all the time, what should we have done differently? And where did we go wrong, and where did we miscalculate? And the answer that he gave me was, "Cynthia, there is no way that you could have done that because Brazil is a developing country." And the regulatory framework and the policies are developing, changing every single day. And so the position of the public ministry is an example, or the public prosecutor is becoming clearer now, but becoming as well, more involved in decisions going forward. And I think we've all learned from that. The governor of Minas Gerais, who we met last fall as well, said exactly the same thing. I mean I said to him, "I don't know where we could have -- how we could have anticipated some of this." And he said, "Cynthia, I have to deal with the public ministry, and I'm having projects being shut down all the time." And so it's not us, there's like probably 225, I think, projects that are on hold in some way. I mean -- and masses amount of capital that are sitting there. I think looking back, Jason, it's very hard to say. I think that having the right team from the outset would have helped us, but we've had an evolutionary process of getting more experience into the group, but we were -- we had a partner. And we inherited a lot of those people. So I think reflecting on that, I think trying to understand how that regulatory environment is likely to change as much as we can, and this is exactly what we're doing in Quellaveco, is what we're doing in Pebble, is you get the permits and the licenses upfront. But in many cases, and in some cases, you just can't do it. So setting up the people, having the process in place, that's what you got to do.

Grant Sporre - Deutsche Bank AG, Research Division

It's Grant Sporre from Deutsche Bank. Could you give us an update on your discussions with the South African government on Anglo Platinum? Probably a question for Chris. I think you gave indicative guidelines of you'd like to have the discussions finished by April. That seems to be pushed back a little bit. Are there any updates on the timeframe?

Cynthia Blum Carroll

Yes. Let me just -- I'm going to ask you to answer, Chris, but let me just make a couple of comments upfront. First of all, for those who know us, and all of you know us well, I mean we are always working to engage and to have the conversations. And we certainly have been having the conversations about the challenges around the Platinum industry, and specifically, around our situation and the loss-making operations. And that we were really pressed to the wall and couldn't continue to support those. So this is not new news, this has been going for a long time. And as you know, we have done what we believe is the right thing now. I do believe that the government, they did react in different ways. We got -- we heard different voices from around the government ranks, but I think they have understood now that we're all in this together. And the only way to overcome the situation, get through it, make sure that anybody who is impacted by the restructuring, has a place to go. And that's our commitment. And then ultimately, what we're trying to do is protect those 45,000 jobs for the very long term. So Chris, maybe we've had a lot of -- and Khanyisile as well, between the 2 of them, and other members of Chris' team, we've been engaging on a continuous basis now with the government. Maybe you could talk about that engagement, and how it's gone, Chris? And Khanyisile, I'm going to turn to you to comment as well.

Christopher Ivan Griffith

Thanks, Cynthia. Yes, look I think it's important to state right at the outset that we said that we thought this would take between 3 and 4 months at best to implement. So what we heard now is that we've got a 60-day consultation process with the government. And after that 60-day consultation process, of which the DMR are a part, then they will -- if at the end of that period, which is highly likely, we then need to go to the section 189, which is the retrenchment process, that's another 60 days. So that's a 4-month process. And as we said right upfront, that's in a very best scenario, that's the kind of time it will take. In the public domain, there might be a bit of repackaging of the timeframe. The timeframe, as it stands now, is actually still the timeframe that we mention right upfront. So I think that's important to note. We're not unhappy with the process that we have at the moment. At the moment, we -- the consultations with the DMR, in all likelihood, would have taken place after the 189 process, which is a labor relations, a labor, a Department of Labor process. So having some of the discussions with our regulator upfront is actually, we think, we're in a good space to do that. Because after the 4-month process is what we normally call a Section 52, and that's the process in the MPRD. This is all very technical, but what -- the reality is that actually, it gives us a little bit of time that what would have happened at the back end, we can now do in parallel. So we're not unhappy with the process that we see now. We are in a very intensive consultation process as we speak. The last 3 days have been in-depth presentations of all of our information made to the Department of Mineral Resources and all of our labor unions. My feedback, or the feedback has been that those have been intense, that those have been constructive. Look, at the end of the day, at the end of the 2-month process, I don't -- we're going to be back where we stood rather than at the beginning. And that is that there's not going to be a lot of support -- we're not going to have government we don't anticipate standing next to us saying, "Well, we think this is a very good idea that we restructure the business, and we have to make the business smaller." But we would have gone through a very extensive consultation process. So I think, in summary, we're not in a different space than we had anticipated right upfront. And actually, we may be in a slightly better position. We are, as Cynthia said, we have a number of engagement fronts with the regulator, with our unions, with other ministries. We had some of those contrary to what you heard in the media. There was extensive consultation process that took place before the announcement. So I think, all in all, Cynthia, I think we're actually in the same space that we announced right upfront, and the consultation process underway. A very difficult process. I think it will be a lot of noise at the end of both the 60 days and at the end of the 120-day process. And don't expect to hear the unions and government saying, we think this is a good idea, but there will be, at least, a process that people would have felt they're being consulted.

Cynthia Blum Carroll

Thank you, Chris. Would you mind handing the microphone to Khanyisile? Khanyisile, maybe you can talk about the water engagement that we're having on behalf of Anglo American?

Khanyisile Thandiwe Kweyama

Thank you, Cynthia. I think Chris has covered most of it, but maybe just to add that there is quite, as Chris says, a lot of consultation, not only at Anglo American, but on an industry level as well. So that the government understands that this is not just an Anglo American problem. It's a broader industry problem. I think at the end of its government, we'll have a better understanding of the position we're in. And maybe some of the initial reactions have to do with the lack of understanding. And once government understands, there will be a closer alignment in terms of coming forward with solutions. I think we've already seen Chris spoke about the multiple interaction with different government departments and ministries, so that when the solution does eventually emerge in terms of the 14,000 or so people that would be affected, a number of government departments, such as Treasury, DTI and all those would come together to be part of the solution.

Cynthia Blum Carroll

Okay. I'm now going -- okay, one more question because we -- and then I've got a -- I'm going to go to South Africa for questions. We're running out of time, everybody.

Menno Sanderse - Morgan Stanley, Research Division

It's Menno Sanderse, Morgan Stanley. Quick question on Mozambique and coal and the platinum steel. On Mozambique coal, you clearly paid a much lower price than your colleagues down the road, which is good news. Is there anything in their statements that makes you rethink that, that investment will make you think that things are slightly different than you thought when you bought into Mozambique? And secondly on Platinum, is the company worried that the government will take a close look at the very high returns made in Thermal Coal and Iron Ore, if you're going to restructure the Platinum business?

Cynthia Blum Carroll

Okay. First question is about the Revuboè in Mozambique. Just to remind everybody, this is about a 1.4 billion tonne resource, principally of metallurgical coal. When it is up and operating, it will be in the lower half of the cost curve. And it will produce between say, 6 million tonnes and 8 million tonnes. The answer to the question is, we are in discussions with the government, and we really can't say anything more in talking about the conditions. Your second question was about -- sorry?

Menno Sanderse - Morgan Stanley, Research Division

You're worried that the government in South Africa is going to take a closer look at the returns made in iron ore and thermal coal, now that you have announced that you're going to restructure Platinum, where you make low returns by extra taxes on those assets or any...

Cynthia Blum Carroll

Oh, no, we're not doing anything further with that.

Menno Sanderse - Morgan Stanley, Research Division

But you don't think the government is going to focus on a stronger [indiscernible].

Cynthia Blum Carroll

Look, it comes back to the conversation that we have with government on a regular basis. We need to -- if they're going to have the growth going forward of the economy, they need the likes of Anglo American to continue to invest. And we need to be competitive and we need to -- in order to support the investment that we make, we need decent returns, and that's the bottom line. Okay. Let's go to South Africa. Questions from you in South Africa?

J. Timothy Clark - Deutsche Bank AG, Research Division

It's Tim Clark from Deutsche Bank. May I ask 2 questions, please? First of all, just on your dividend, did you give consideration to moving to dividend cover basis, away from a sort of progressive policy basis, given a desire to return more cash to shareholders and be stable through time? And then secondly, just I wonder if Seamus could give us a bit more detail on this fantastic cost result in met coal, and perhaps, just a bit more detail on how that came through? What level will cutting hours look like? And maybe take one step further and just sort of give us an idea if that's the end of the road on some of those cost savings on met coal, or if he's got some better news for 2013?

Cynthia Blum Carroll

Okay. Well, I know Seamus will be very happy. No hold on, Seamus -- René, could you -- and I'm going to say something before he stands up. René, would you mind just covering the first question on the dividend covered?

René Médori

Thank you, Tim. The board confirms the group dividend policy, which is to either maintain or increase the dividend through the cycle.

Cynthia Blum Carroll

Thank you very much for that, René. I mean really want to recognize -- where's Rod Elliott? Is he here in the room, back in the room? You all should take advantage of Rod sitting back there. He runs our marketing and sales group for Met Coal, and we would suggest that we've outperformed everybody in the industry for quite some time now under Rod and Seamus' leadership. It's really fantastic. And I would also commend Seamus for his leadership in driving performance. I mean we had our problems late last year and into the beginning of the year with Moranbah roof collapse. And these guys weren't going to let them get back them down. I mean they came back driving for even better performance. And as I said earlier, I mean, record output in Met Coal, and some of you in this room at the midyear results presentation were giving Seamus a hard time about the costs. And he said, "Don't worry, we're going to get it down, and we're going to get it down around $95 per tonne," that's exactly what they did. So Seamus, why don't you stand up and talk about how you've done it?

Seamus French

Just the starting point was in quarter 1, we were doing 2 things: We had the rain recovery from the floods of 2011, and we have a lot of excess capacity in the business in the second half of 2011. We've sort of been winding that as prices came off in the second half of 2011 to 2012. We started unwinding that capacity that was happening progressively in quarter 1. The second issue was the Moranbah drift collapse in quarter 4 and the recovery from that, the startup of Moranbah was in quarter 1. Those are things that are happening at the same time. The quarter 1 cost that was set at the time of the interims was an abnormal cost, $129 a tonne. If Moranbah had been operating at normal rates, the quarter 1 cost would have been $108. So $108 was probably our real starting point for the quarterly cost reduction. From quarter 2 then, we started taking out capacity. We took out the higher cost there and marginal capacity in the open cuts, particularly, contract the fleets, higher fleets, the contractor labor, et cetera. That happened progressively in quarters 2 and quarter 3. The second thing we did then was we stripped back to the fixed cost base, the second thing we did then, was stripped back the fixed-cost base itself. And we took out 1,200 people from quarter 1 to quarter 4. And the last thing we did then was ramp up the productivity. The open costs are all operated at record productivity in second half of the year and all achieved record run, salable in sales tonnage second half of the year. Moranbah, in the meantime, was ramping up progressively through the year but quarter 4, just answering Tim's questions about the normal hours. Moranbah averaged 80 hours in quarter 4, but at a higher cutting rate in budgets, so about 10% extra cutting rate. So what we call, normalized cutting hours, including both rate and cutting hours, was in fact about 90 hours in quarter 4. And out of 12 weeks, you did 5 weeks over 90 hours a week. And that's continued into quarter 1 of this year. I think the first 6 weeks of the year, about 4 weeks are at above 90 for the first 6 weeks. So Moranbah really took off in quarter 4, and then underpinned the productivity increases of the unit cost reduction. So we saw quarterly, from a 129 in quarter 1, 97 in quarter 2, 95 in quarter 3, down to about 80 in quarter 4, a progressive dropoff in cost. In terms of this year, we were looking to stay sub $95 this year. We have been knocked about by the rain, not so much the mines themselves. We had record rain intensity similar to 2011 levels on Australia Day, January 26. The mines themselves weren't too bad, but we had 2 issues: One was at the Capcoal plant. We had a stockpile slump which damaged stacker and reclaimer, which took us out for 1 week. The most significant issue was Dawson, the rail line from Dawson to the Port of Gladstone was taken out and is still out and is in forecast to be brought back into operation until the last week of February. So we've lost about 1 month's sales. And because we're then stock bound at the port, which had an impact on sale of our production, we've had 1 month's impact at the Dawson operation. So we're still evaluating that. We were targeting, as I say, probably sub $95 for this year versus $98 a tonne last year. But I'll come back and let you know more about that once we are back in operation at Dawson, and fully understand the impact for 2013.

Cynthia Blum Carroll

Seamus, and maybe you can just comment on where this places us relative to the rest of the industry in terms of best practice?

Seamus French

Yes, I think on the open cuts, we benchmarked all the open cuts versus our competitors globally. I think the 80% of the open-cut equipment was operating in the top quintile of open cut performance based on benchmarking, so end up sort of top segment of benchmark performance. On the undergrounds, we -- as we said before, the 100 hours a week has always been a target, 100 cutting hours. So the Moranbah quarter 4 performance and what we've seen now into quarter 1 of this year, if we can continue that performance, and we always said the target was to beat the 80 cutting hours at the end of 2012, moving up to 90 cutting hours at the end of 2013. If we can sustain that performance, that would put us in the top bracket in terms of the underground performance as well. So across both the open cuts and the undergrounds, up there and probably, the top quintile of performance right now.

Cynthia Blum Carroll

Okay. Thank you very much. Okay, another question from South Africa? No? Okay. Any questions from the phone?


We have a question from Anna Mulholland of Deutsche Bank.

Anna Mulholland - Deutsche Bank AG, Research Division

Can I please ask, if you cannot implement the Amplats restructuring plan in the full way that you intend, what do you see is your other option?

Cynthia Blum Carroll

Okay. Do you want to talk about this a little bit? I mean, I guess what I will say upfront is, look, we have considered a range of scenarios and options through the year. We believe that the approach that we have taken is the right one. And we think that there is an understanding, both within the union ranks as well as the government ranks that this is necessary. And that we, at the same time, are working to do the right thing. And this is about Anglo American Platinum, it's not about everybody else. But we also know, at the same time, that the industry is in a bad way. So I'm not going to -- I mean, Chris, I don't know whether you have anything else to add. I'm not going to talk or speculate about what could happen if this were to happen or that were to happen. I think we're in a good way, and I think that, that's our approach going forward as we've outlined it publicly to everybody. Chris said the consultation process is taking place. We're engaging on a daily basis now with a team representing the union as well as the government. And I think it's a good debate, because there's a much greater understanding of what exactly we've been faced with, and what we need to do. I think that, lastly, I would just say the challenge really is around the social plan. And we've got to get that right. We've got to make sure that all ministries affected or who can help are involved: the ministry of higher education, the ministry of labor, the ministry of mines, the ministry of finance. I mean everybody needs to be together on this, and that's what we're looking for.

Christopher Ivan Griffith

Yes. I think it's important that we all sort of look through also what's been said in the public domain. It really isn't all that important if we deliver the Platinum in exactly the way that we have said it. What we want to do is we want to improve the profitability of our operations. And the second thing is we need to do something about the oversupplied nature of the Platinum industry. And whether we say there are 14,000 people affected or 8,000 people are retrenched, that may actually be exactly the same message. So as we go through -- it's not so much around the messaging. And of course, we will look for -- as we go through this process, we will look for space for other people to get some sort of benefit and to save face in this process. So don't be too worried about if it's not absolutely exactly the way we have said it. I mean there may be other opportunities to take volume out of the market. We see very recently, one of -- another platinum company have also made some announcements about taking volume out the market. So overall, it's about taking volume out the market, sorting out the oversupplied nature of the business and doing something about the profitability of the company. And if you see the messaging change slightly towards the end of this process, try look through some of those messaging and see actually, what it is that we're going to do something about. I think that's important to know.

Cynthia Blum Carroll

Thank you very much. And just to be clear about that, when Chris says taking volume out of the market, actually, volume that we can't continue to support because it is just simply not profitable. So this is all about Anglo American Platinum. If that is our focus and that is what we're working to do, and we're pretty confident that we will get there. But as Chris said, it may not be necessarily in the form that we have communicated publicly in detail. So we're working at it, and we're only engaged now with the government and we'll continue to be going forward for some time. Okay. Other questions?


We have a question from Raphael Veverka of Exane.

Raphael Veverka - Exane BNP Paribas, Research Division

I had 1 inside question on costs. So you talked about [indiscernible] -- met coal, sorry, I was wondering if you could give us a little bit of color on your expectations regarding [indiscernible] and other commodities?

Cynthia Blum Carroll

Okay. The question is about other commodity costs? You want to just touch on that, is that what the question is?

Raphael Veverka - Exane BNP Paribas, Research Division


Cynthia Blum Carroll

Okay. In terms of production costs, maybe I can just say upfront, I mean we have -- through our asset optimization, through supply chain, we're continuing to drive down the cost curve. And the majority of our operations are in the first half of the cost curve. I mean, iron ore -- where's my friend Norman -- I mean it's all down at the lower end. Our Nickel is in the first half with the ramp-up of Barro Alto now. Copper is -- we've had Collahuasi moving into the third quartile, but we think over time, it's going to get us back down into the second quartile. What am I missing? And we've taken out a lot of high-cost operations over time in De Beers. So the bulk of the De Beers operation are in the first half of the cost curve. So that's really all I would say on that. If you want to get specific, you can get back to [indiscernible] or Renè. But I think we -- I mean this is what we have fundamentally been working to do is drive the operational performance and drive our cost position. And I think everybody, Thermal Coal has protected or enhanced their cost position significantly over the last number of years and sits all at the low end of the cost curve for export thermal. So I think -- I mean across our group, we're quite proud of this cost position. And as I've said earlier, the ambition is that 80% of our assets or production will be in the lower half of the cost curve within Platinum over the next 10 years or sooner. Okay. One more question from the floor in the U.K., and then we'll have to wrap it up, everybody. Yes?

Ian Rossouw - Barclays Capital, Research Division

It's Ian Rossouw from Barclays. I just had a sort of follow-up question on the dividends. Your 15% increase gives a pretty strong message about prioritizing shareholder returns. But just in the context of your statement in the release saying that CapEx will be higher over the next 2 years and your CapEx guidance of $7.5 billion to $8 billion, it sort of appears to me that you'll -- you'll sort of be living outside your means for the next couple of years. I mean what's your thoughts on capital allocation in that regard? And if you could perhaps, just give us some indicative figure of what you expect the CapEx to fall to in 2014?

Cynthia Blum Carroll

Maybe René, you can answer that question. We have said that the CapEx for next year will be about -- between $7.5 billion and $8 billion. Post that 2014, we're looking at about $6.5 billion to $7 billion. We're very sensitive to what needs to be done and what needs to be protected. And our aim is to ensure that we have a strong investment grade rating, that we have a robust balance sheet and that we continue to sustain those rebased dividends and return any excess cash to shareholders if it's available. That's the bottom line. René, maybe you could talk for a minute about the headroom that we have.

René Médori

First, I think the key point is we wanted to rebase the dividend at a more competitive level. So that's what's behind the 15% increase and showing the priority in term of capital allocation. Over the next 2 years, the priority will be to deliver 2 key projects, which are Grosvenor in Australia and Minas-Rio in Brazil. So we are expecting CapEx increase, $5.7 billion in 2012, going up to the numbers that I mentioned earlier, $7.5 billion to $8 billion in 2013; $6.5 billion to $7 billion in 2014, and then starting to decline as we have completed the Minas-Rio. So what does it mean in terms of cash regeneration? If you use the current level of commodity prices that we will see the level of debt increase over the next 2013 and '14, if price stay at this level. That means probably limited scope for significant dividend increase. But we are comfortable with the balance sheet that we have, with the liquidity that we have in terms of key credit rating ratio that we can go through the next 2 to 3 years.

Cynthia Blum Carroll

Thank you very much. Okay. With that, everybody, we'd like to thank you again for joining us, for your attention and for your support. Thank you very, very much. Thank you.

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