AngloGold Ashanti (NYSE:AU)
Q4 2012 Earnings Call
February 20, 2013 3:00 am ET
Mark Cutifani - Chief Executive, Executive Director, Member of Safety, Health & Sustainable Development Committee, Member of Investment Committee, Member of Transformation & Human Resources Development Committee, Member of Risk & Information Integrity Committee and Member of Party Political Donations Committee
Srinivasan Venkatakrishnan - Chief Financial Officer, Director, Member of Investment Committee and Member of Risk & Information Integrity Committee
A. M. O'Neill - Executive Vice President of Business & Technical Development
Derryn Maade - Renaissance Capital, Research Division
Adrian Hammond - BNP Paribas, Research Division
Good morning. Good morning, everyone, and welcome to our presentation of the fourth quarter and full year 2012 financial results. Good to see a nice turnout here and I'd like to make special mention of our Chairman, Mr. Tito Mboweni; Mr. Frank Arisman, one of our non-Executive Directors; and then several members of our Executive team who are scattered throughout the room and on the stage. And as usual, just to lead off with an announcement on safety. In the unlikely event that there is any threat to your safety, basically move to the nearest exits which are behind me and we'll assemble in the open carpark behind the building and then safety wardens will take on from there. Unfortunately, I don't know this by heart yet, but I'll just run through our Safe Harbor Statement.
Certain statements made in this communication, other than statements of historical fact, including without limitation, those concerning the economic outlook for the gold mining industry, expectations regarding gold prices, production, cash costs and other operating results, growth prospects and outlook of AngloGold Ashanti's operations, individually or in the aggregate, including the achievement of project milestones, the completion and commencement of commercial operations of certain of AngloGold Ashanti's exploration and production project and the completion of acquisitions and dispositions, AngloGold Ashanti's liquidity and capital resources and capital expenditure and the outcome and consequence of any potential or pending litigation or regulatory proceedings or environmental issues are forward-looking statements regarding AngloGold Ashanti's operations, economic performance and financial conditions. These forward-looking statements or forecasts involve known and unknown risks, uncertainties and other factors that may cause AngloGold Ashanti's actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed or implied in these forward-looking statements or forecast. Although AngloGold Ashanti believes that the expectations reflected in such forward-looking statements or forecast are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those set out in the forward-looking statements as a result of, among other factors, changes in economic, social, political and market conditions, success of business factors, changes in economic, social -- sorry, success of business and operating initiatives, changes in the regulatory environment and other government actions, including environmental approvals, fluctuations in gold prices and exchange rates and business and operational risk management. For a discussion of certain of these and other factors, refer to AngloGold Ashanti's annual report for the year ended 31st of December 2011, distributed to shareholders on the 4th of April 2012, the company's 2011 report on Form 20-F filed with the SEC in the United States on the 23rd of April 2012, and the prospectus supplement to the company's prospectus dated July 17, 2012, filed with the SEC on July 25. Those factors are not necessarily all of the important factors that could cause AngloGold Ashanti's actual results to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also have material adverse effect on future results. Consequently, stakeholders are cautioned not to place undue reliance in forward-looking statements. AngloGold Ashanti undertakes no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after today's date or the occurrence of unanticipated events, except to the extent required by law. All subsequent written or oral forward-looking statements attributable to AngloGold Ashanti or any person acting on its behalf are qualified by the cautionary statements herein.
The communication may contain certain non-GAAP financial measures. AngloGold Ashanti uses these measures -- these performance measures and ratios in managing its business. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for reported operating results or cash flow from operations or any other measure of performance prepared in accordance with the IFRS. In addition, the presentation of these measures may not be comparable to similarly titled measures other companies may use.
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Just before we get started, as you will no doubt be aware that our Chief Executive, Mark Cutifani is today is his last official and public act at AngloGold. He will be leading off the presentation as usual. He will pass over to Venkat, who is to his immediate left, who, from today will take on the first of joint interim Chief Executive Officer and to his left is Tony O'Neill, currently our Executive Vice President of business in technical development who today will be appointed to the board as an Executive Director and will be the other joint interim Chief Executive Officer. Mark, over to you.
Thanks very much, Stewart. Ladies and gentlemen, again, it is both a pleasure and I guess as it has been for the last 5.5 years of privilege to be standing in front of you today presenting our results. A little disappointing that it has been a tough quarter or should I say it's been a very tough quarter in South Africa so disappointing in respect of having to share with you how tough that quarter was but certainly from our point of view, we've started the new year in a good way and I hope that points to a start to a good year. But again, little disappointed obviously with where we ended up in Q4. But I think in terms of the underlying business, the trends are right. A lot of opportunities, a lot of things will happen this year and I think we've set the company up in terms of performing in the future and I certainly believe the company has a great future and certainly compared to where it's come from against its peers, it's outperformed virtually all of its peers on a number of very important metrics which we'll reflect on for a couple of minutes today. But I think it's more important to focus on where to from here and Tony and Venkat will more than capably handle those conversations.
As a starting point, just a quick update on the succession planning process in terms of myself. The global search process is underway. In the meantime, we have 2 very capable individuals sharing the duties of Chief Executive Officer. I think it's a natural split in responsibilities and both Venkat and Tony have been absolutely instrumental and key in terms of the strategic positioning of the company. And through their efforts, I think great credit along with their executive committee colleagues and the rest of our colleagues in the organization get the credit to how we position the business. The process is both an internal and external process. We have internal candidates and we have external candidates and the board will, as appropriate, update the market as things develop on that front. Most importantly, we have a deep bench of executive and senior management talent. And for those that understood and tracked the major changes we've made or we made in that first 18 months as we rebuilt the foundations of the company and did some recruitment, did some internal development, the good news is since we made those early changes and reconstructed the organization, the turnover in the top 120 role-plays have been less than 2.9% a year, and I think that stands up against any company in terms of retaining its talent. And certainly, from my point of view, very proud to be associated with the team and to be given the opportunity to work with a great board and a great executive team. And so for that, I'm very thankful and if I can say right upfront that I think the guys and I mean that, ladies and gentlemen, for their efforts and their great support and it's really been a privileged to lead a great group of people and I'm talking about the 65,000 colleagues that we have in the business.
In terms of the fourth quarter, again, a tough quarter. I guess the highlights for me; best-ever all injury frequency rate. Tragically, still 4 fatalities. I think we're doing the right things in terms of the next step of improvement on the safety front but still more work to be done. Obviously, that news has been dominated by the loss of working time in South Africa, with the strikes. I think there have been some very positive development since those issues in December, including a joint process that we've been going through with the minister, other industry colleagues, the Chamber of Mines that we went through yesterday. And I'm hopeful that those processes will continue to yield the right sort of results. I think Mike O'Hare and his team deserves special mention up front for managing a tough situation with great sensitivity and extremely carefully and I think it's a credit to Mike and his team and his leadership in terms of no serious safety -- or no serious issues of violence. We had a couple of things towards the end of the process that I think we dealt with in an appropriate way and the signing of an accord with all of their unions that included new unions, I think was a milestone that the industry has followed in subsequent engagements and certainly was part of the conversation that we had yesterday with all the key players.
The other important thing, I think, from the quarter that many people don't focus on but I think was a significant milestone and again, a reflection on the executive team and, in particular, Venkat and the finance team. The fact that we're the only South African corporate to be able to defend its investment grade ratings as they stand today was a reflection on I think, one, the quality of the team and what was put forward. It was the strategy and our demonstration of execution against that strategy and the fact that we've been outperforming our peers in terms of returns, earnings growth and a number of the key financial objectives was the real milestone, I think, for the company and if you like, a measure of the maturity that we've achieved in the relatively short period of time in terms of the way that we're running the business and I mean that as the way we're running a business.
In terms of full year overview, just showing the earnings performance. Obviously, going from 2011 around $3 billion EBITDA to 2012, strike had impacted. Gold price, a little bit off in terms of where sales were landing. But for us, obviously, all of Sydney [ph] industry experiencing the inflation. We've done a little bit better than our industry averages and certainly, the South African impact was significant and we also have the safety stoppages if you remember earlier in the year. So those 2 issues were the main issue where we underperformed against 2011. But again, I think, we got the platform right as we go forward.
In looking at safety, the performance again frustrated that we haven't been able to take that next step in terms of fatalities and serious injuries. I think the work on major hazard standards that Tony and Michael Parker and the rest of the team are leading with our executive regional heads and -- the executive will make a difference. And so I am very hopeful that we'll see another step improvement during the course of the year because the last 18 months, the foundation work that's been put at each of the operations, I think provides the basis to that next step change in performance. And I think that's supported when you look at the all injury frequency rate, which is more a measure of the cultural change that you're putting in place in the organization because it measures every reported accident, and we've continued to improve -- we've improved by 70% since we started the new processes and introduced the new operating models. And for me, that's a leading indicator in terms of the major hazards. So we hope that those indicators turn into results in the major risk areas and certainly, if I could say that my observation is the work has been done and I think the team is focused on the right issues. And we remain open to other ideas and approaches and we are also involved with the Chamber, elimination of fatalities task teamwork. As President of the Chamber, I'm leading that work and we've seen some very good ideas and suggestions from other businesses that we'll be looking at to apply as well as others taken some of the stuff that we've done into their operations. And for us, as an industry, it's all about looking after every employee and we don't -- there are no secrets when it comes to safety. And again, I think South Africa generally is starting to take some very serious and positive steps forward on that front.
From an operations point of view, if I start with Continental Africa. One thing we don't have on those charts is the fact that we've got a very advance project at Kibali. Tony will pick up the project. So just you know, there are a few more dots on that map, very important dots as a matter of fact. In terms of the operating results for the quarter, production was down, Continental Africa. We had a couple of challenges as we actually implemented the change from contract to honor operation on mine development. We think that's a key step. It is a significant step in that the arrangements that had been in place, have been in place for some 85 years and the thing that we learned as we introduced these new operating models have been very difficult to introduce those operating models through practices that have been in place for 85 years. Hence, the change. So we think the right moves had been done. The execution was flawless in terms of the change. So to Richard and Peter and the rest of the team, I think they did a good job. It doesn't mean that we still don't have lots of challenges but I thought -- I think that transition was well-handled and the relationship with the governor [ph] and all key stakeholders was managed exceptionally well. Lots of good things happening in Continental Africa. Geita, Siguiri, the work or the challenges in Mali have been very well dealt with and I think very good operations and opportunities in Africa to come. And I think Richard and the team have done some good work but still there's a lot more to be done.
In terms of Geita. Geita was the first site that we introduced our new operating model 2, middle of 2008. It took us a little bit of time to find our fleet in the first 12 months but you can see we went from a 260,000-ounce operation to hitting our 500,000-ounce target. In real terms, people can remember we have the target of 500-500. That was 500,000 ounces of less than $500 operating cost in 2008, dollars we've blown through those targets and you can see the EBITDA contribution over that time and the margins that have been delivered have been exceptional. And I would say that half of that result is being driven by the implementation of the operating model of the new approaches. The other half, a natural consequence of the higher grade areas is that we access in the bottom of the pit. So if you just step back and said, okay, there's something like a $500 million turnaround just through the operating models, north of $250 million is significant and that's a sort of potential we see right across the business and very excited in terms of where to next on the operating model.
In the Americas. It's been a very successful year. The guys have done very well, plus we've made an acquisition. Tony, I understand Tony's here, I'll let him talk about the acquisition but very happy with where the team's [ph] come from. Good focus on both production and physical performance and very good work on the cost front. And South America or places like Argentina are experiencing quite significant internal inflation. And the guys have done a magnificent job in managing those inflation pressures and when one looks at the business, and I say this, sort of values that are applied to companies like Yumana and I look at our America's operation in their own right, I think it's a business that's worth more than $10 billion. And that's our market, our combined market cap is a little bit north of that at the moment. I'd see that value in the Americas alone, particularly when you look at our progress against our peers. And if you look at the portfolio of opportunities that Ron and his team have built, it's a magnificent operation, I think they've done a great job and particularly under Rons's leadership it's been a credit to everyone involved and the fact that I think Charles has done some great work up in Colombia, positioning the organization and very pleased with the progress that we're now seeing in Colombia as well.
In terms of Australia. Five years ago we thought that we had an operation called Sunrise Dam that maybe had 5 years' life. Well, today, the potential is 15 to 20. And the guys are making great progress in understanding the potential and still long way to go but certainly the underground potential is great and obviously, we have Tropicana. In implementing an operating model in a place like Australia is always a challenge. Those Aussies think they know everything and so it took a little bit longer to get traction compared to working with our Tanzanian colleagues. But if you look at the performance in the next chart, as we've swung from a high-grade highly profitable open cut operation, we've had to deal with the loss of 600,000-ounce open cut operation. We've transitioned to an underground operation which is only [ph] just starting to find its fleet. But if you look at that production improvement from around 3,500 tonne a day to 6,500, pushing 7,000-tonne a day, I do believe Graham Ehm is in the audience here, I think Graham's leadership has been inspirational in helping identify the new opportunities leading in terms of the implementation of that operating model and he does know I'm joking about the Aussies, and I think the changes that they've delivered and continuing to see improvements is a credit. And I think this chart shows you the depth of change that they've been able to introduced and the excitement that they're all sharing now with Tropicana starting to move to a very exciting phase and again, I'll leave that for Tony.
In South Africa, absolutely toughest quarter that I've experienced in my time here. Those that know me well know that I am an optimist in terms of South Africa. It has been hard. We've had tough news over a 2-year period and I will talk about share price performance a little bit later. I do believe we are starting to get to the heart of some of those issues and hopefully we can turn those news trend around during the course of 2013. And certainly, I hope to remain a positive and constructive advocate for South Africa beyond the time I spent in AngloGold Ashanti. But I will say that as a company we've always been a strong promoter of South Africa, a strong promoter of the future of South Africa and a strong promoter of transformation in terms of what we do in the business. And I'm particularly proud of what Mike O'Hare and his team have been able to achieve over the last 5 years, improvements in safety. Environmental performances has been magnificent in those. You don't usually see those figures in the headline, but the improvements there have been great. And the work on the operations and the technology side in my view set the organization up for a great future. And as I said, I don't want to reflect on a single poor quarter. We know what happened with the strike. But when you look at the last 5 years, we may have -- or in fact in the last 9 years I think it is, we may have halved production, but our earnings from the operations is actually up 500%. Cash flow, I think 2011 was around $700 million. If we haven't had the strike, we would have been around $600 million. Good by any standards so the guys have done a great job. I still believe they're running the best business -- best gold business in South Africa. And certainly with the new technologies, I expect them to stay there for the next 50 years. In terms of that production decline, as I said, over the last 5 years, the important thing for us has been that EBITDA performance and those cash flows. And as we recover and get our footing back, I think you'll see the guys continue to improve the operation and the good news is, we've had a good startup in January, the guys are on budget so very pleased. And again, pleased that's it's been done the right way. We're talking to people. We're in a dialogue and hopefully if we continue to have the right conversations, we'll set the organization up the right way for when we go into the negotiations midyear and certainly I think great credit to Mike and the team for managing through a tough situation. But coming at the right and with no serious injuries post- the strike -- or during the strike process. So great credit and I'm very excited in terms of the potential. More specifically on South Africa. In terms of the strategy, we are continuing to invest in Penang and Moab Khotsong. At the same time, we continue to focus on quality. And as I said in the last 8 years, we've halved our production, yet our earnings and cash flow have multiplied by a factor 5. Our uranium business continues to grow and with the addition of Mine Waste Solutions, we'll go further. Again, Tony will pick that up. And on the technology front, we believe we're on the cusp of probably the most significant change in the application of mining technologies that have been -- that we have seen for 100 years. And if that works, and I'm becoming more and more confident that we will, to the extent that we took the board down to see the new technologies, took them underground a couple of weeks ago and I think they were quite excited by what they saw because it's so simple. And the work on [indiscernible] backfill [ph] has been absolutely critical. So very enthusiastic, very optimistic about the future of South Africa or in for mine, I wish everybody well. It is in some respect, given depth and the technical challenges, the toughest game in town but I think we've got the best people leading and demonstrating that anything is possible. I'm very optimistic about the future for the operations.
In terms of the business, I've talked about briefly about what we've done. Safety and sustainability, major improvements. As we said, bottom line fatalities halved, accidents down 70%, environmental incidents down 70%. From an operations point of view, we've implemented a fully -- we've implemented the industry's first fully integrated operating model and I've seen examples of parts of models being implemented across the industry but nothing as complete and is comprehensive. And in terms of sustainability of performance, I think our ongoing benefits tracking is over $1 billion. And again, I expect the guys to continue to open those margins up as they implement the changes that both the Tony and Venkat are leading with the team as we speak today, and very impressed with the way they've grab those issues and looking into it to capitalize on the benefits that we've seen and the foundations that are being built.
Again financial. The removal of the hedge book stopped an ever widening discount to the gold price. And if you simply look at where we would have delivered our gold since we did the hedge book and on the forward-looking projections against current gold prices, we're at least $4.5 billion on the right side of that transaction. So for us, we see so many companies suffering under poor strategic decisions, major acquisitions or projects that have gone wrong. There's not one that you can point to in any 1 of those 3 areas that you could hit as with. Have we achieved everything we wanted to achieve? No, Obuasi is taking much longer, but if you look at the rest of the portfolio and the major strategic issues that we've dealt with, we've generally been on the right side of the ledger and certainly, it is a different company today.
In terms of capital, we've maintained and when people -- we're talking about increasing production and talking about a whole range of things, if you can remember my first presentations to this audience, I said gold business has have to create a real operating model. You have to focus on capital discipline. Stupid acquisitions destroy companies so from September 2007, we've been on the same track. It is interesting to note that the AngloGold Ashanti vision in terms of the way it runs the business has now become conventional wisdom across the industry. And for that, I think, the team has demonstrated farsighted thinking. And as a consequence, we've led the industry in terms of returns. And I think, they will take the team much further than we've been able to achieve of those foundations.
In reflecting personally on when somebody says what do you think was the most important thing, the most important positive. It was the opportunity to work with a great team, putting together and working with a great team. So for me, if you try to sum up the good things that I've been involved in, and I'd like to think that I've had some part in developing the team. And so for us, when we say people of the business, we really do mean that when we live that value. And again, whilst we've got a lot of things, we can do better in terms of safety and environment and the performance of the business, the fact is, I think, the team is in place. You've got great leadership. It is a transition process but I think we've got the right people. The board is focused on the right issues. I think the team is focused on the right issues and you will see AngloGold Ashanti continue to go from strength to strength. It's been proud -- I've been proud -- I am proud to have been involved and I wish everyone well. I will say a couple of words at the end of the presentation. But for me, that says it all.
Thank you, Mark. Good morning, ladies and gentlemen. I'd like to cover the following 4 areas in today's presentation. To start off with the fourth quarter and full year 2012 financial results, then touch upon the cash flow for the fourth quarter and full year 2012, then as always, touch on the balance sheet and then look at other financial and accounting matters which had an impact both in the current quarter and likely to have an impact going into next year.
Kicking off with the fourth quarter and full year 2012 financial results. As flagged during our third quarter results call, the fourth quarter 2012 financial results took the brunt of the unprotected strike in South Africa. And what people need to understand is whenever there's a strike, it's not just the margin on the ounces that get lost. You get close to a double whammy. You lose your production and you also incur quite a lot of standing costs. And the adverse financial impact of the mine development contract that changes and other charges at Obuasi. Our adjusted headline earnings were, therefore, down at $7 million or USD 0.02 per share. This level of adjusted headline earnings was after taking into account the impact of the 2 events which were mentioned above. The impact of the strike in South Africa which eroded post-tax $208 million of adjusted headline earnings and the changeover of mine development contractor, Obuasi, and other specific one-off cost at Obuasi that had an impact of around $44 million.
For the full year, our adjusted headline earnings were $924 million or USD 2.39. In addition to the impact of the strike and contract changer, Obuasi, the full year's earnings were also impacted if you recall by the high incidence of safety stoppages in South Africa during the first half of the year, particularly in the first quarter. If one were to exclude the impact of just the S.A. strike, our adjusted headline earnings on a pro forma basis will have been around $1.13 billion or USD 2.94. For the full year, our returns on net capital employed and equity were 14% and 17%, respectively, lower than our expectations of 16% and 20% due primarily to the strike.
As flagged previously, gold production for the fourth quarter was lower at 859,000 ounces at a higher total cash cost of $1,009 an ounce, reflecting the impact of the strike. The pro forma total cash cost without the strike impact will have been around $852 an ounce and $14 an ounce, lower than the third quarter cash cost of $866 an ounce by basically putting in the production we would have had and stripping out the standard -- the standing cost which were otherwise wasted.
For the full year, total cash cost of $862 an ounce reflect a lower production of 3.94 million ounces. The pro forma total cash cost for the year without the strike impact will have been around $829 an ounce.
Turning now to cash flow for the fourth quarter and full year 2012. Our cash flow metrics for the quarter were as follows: EBITDA, $333 million and it would have been $642 million without the strike impact. Cash flow from operating activities, inflow of $454 million, $662 million without the strike impact; and free cash flow, an outflow of $447 million or an outflow of $239 million with the strike impact due to the higher capital expenditure on key growth projects. For the full year, cash flow metrics were lower as compared to 2011 due to lower production, impact of the South African strike and in the case of free cash flow which is after project capital due to significant investment in our key growth projects. EBITDA was around $2.4 billion. Cash inflow from operating activities around $1.8 million and the free cash outflow was $666 million.
Net debt level as of 31st December 2012 was in line with our guidance at around $2.06 billion but $1.4 billion higher than the level of $610 million at the start of the year as we are building projects. The principal 3 key factors that accounted for the increase in the net debt level were project capital of $1.1 billion, of which, Tropicana, Kibali and the DRC, CC&V and Mponeng accounted to close to 80% of that spend. Consideration paid in cash for Serra Grande and Mine Waste acquisitions $555 million and they are generating cash from the day of acquisition. And lost earnings as a consequence of the S.A .strike around $208 million. As guided during our last earnings call, our 2012 capital expenditure was cut by $150 million to finish the year at around $2.15 billion. Tony O'Neill will walk you through shortly on further cuts and rationalization that have been affected in the plant expenditure for 2013.
Turning to the balance sheet, which is principally why the Finance Director gets paid is to manage the balance sheet risk. As a result of the protracted strike at our South African mines during the fourth quarter, we raised ZAR 1 billion under our domestic medium-term note program in South Africa. ZAR 700 million of this debt matures in January '14 whilst the balance of ZAR 300 million matures in April 2013 but can be rolled in the local bond markets. And at any time, we sit on around roughly ZAR 750 million worth of working capital, float in South Africa.
The group's principal U.S. dollar and Australian dollar debt facilities include the following: Fully rated bonds aggregating $1.75 billion that mature in 2020, 2022, 2040. Long-term debt, a $1 billion revolving credit facility that matures in July 2017 that is currently not drawn and is held as a standby facility to meet any project capital needs that cannot be serviced from cash on hand or operating cash flows. We typically treat the revolving credit facility as a standby facility or as a reservoir for any cash needs of the business. A $600 million Australian credit facility dedicated for the construction of the Tropicana project that matures in December 2015, of which, $260 million was drawn as of the year end. The rest of it was funded from self-generated cash flows. And a $733 million convertible bond that matures in May 2014. And I'd like to spend the moment on the convertible bond.
Although none of the above dollar-denominated facilities mature within a 12-month period, as always, we have been proactive after our experience in 2008 when we have the Global Financial Crisis few months before the bond mature in removing any imminent refinancing risk which is facing or could be interpreted as facing AngloGold Ashanti. With this in mind, we have obtained the term facility potentially for up to 27 months from a syndicate of 3 banks for $750 million for the sole purpose -- I repeat, for the sole purpose of backstopping the redemption of the $733 million convertible when it matures in 2014 should we ever need it. The facility provides us with the cost effective insurance and full flexibility to refinance the $733 million convertible on timings, structures and terms that are most suited to us. The terms of this facility are similar to our revolving credit facility up until drawdown date, May 2014. And once the facility is drawn in May 2014, it resembles that of any bridge facility. This proactive and prudent move on our part addresses any potential refinancing concerns that the market or the rating agencies could have had or are likely to have over the next few months around the 2014 convert falling due for repayment. One of the questions that propped up this morning was whether this increases our gross debt or net debt. It doesn't make any difference. All it does is it replaces one debt for another, should we decide to draw it. You will recall that in September 2010, the group issued $789 million of mandatory convertible bonds that fall due for conversion into equity in September 2013 and that is disclosed as short-term borrowings on our balance sheet. When this conversion occurs in the third quarter at current share prices, 18.14 million shares will be issued as consideration for the bonds converting into equity. The total shares and issue including E-ordinary shares at that point, assuming all other things remaining equal, will increase to around 403 million shares from the current 385 million shares and the 6% interest coupon on this bond will cease to be paid.
Turning now to other financial and accounting matters. At the time of releasing our third quarter results in November last year, we flagged that our fourth quarter results will be impacted by a number of year-end accounting adjustments such as reassessment of useful life of assets, et cetera. During the fourth quarter, following a reassessment of useful life of certain mine development assets, we booked a noncash accounting charge to net profits of around hundred $248 million net of tax due to the de-recognition and abandonment of certain assets. These relate primarily to Obuasi and to a lesser extent Great Noligwa, Kopanang and Siguiri and all of these amounts do not account for adjusted headline earnings or headline earnings being of a capital nature. With the effect from 1st January 2013, AngloGold Ashanti will be adopting IFRIC 20 relation to capitalization of qualified deferred stripping cost and amortizing the same with adequate componentization. IFRIC 20 provides for a transition adjustment in respect of certain brought forward balances and such balances will be written off against reserves and will be disclosed in our first quarter numbers. Included within the capital expenditure guidance for 2013 of $2.1 billion, which Tony will elaborate on, is $118 million of qualified deferred stripping costs. So the true extent of capital expenditure rationalization has been higher. We are currently working with other member companies within the World Gold Council to streamline the method of reporting all in sustaining an all-in cost. Once this project is completed by the World Gold Council and adopted by all member companies, AngloGold Ashanti will adopt the industry's approach to reporting such costs. Absent that guidance being made public, the numbers which we disclosed to the analysts are: group total cash costs for 2012 were $862 an ounce, including the strike impact, notional cash expenditures were just -- including sustaining capital only was around $1,115 an ounce and it was $1,390 per ounce if we were to include all project capital expenditure and new investment in projects, which we don't agree with, but nevertheless the market asks for us for that number including new projects and we have disclosed it.
Finally, before handing over the microphone to Tony, if I can make some observations about 2012. Our fourth quarter earnings and consequently the full year's metrics were hit by the S.A. strike and to a lesser extent, by events at Obuasi. However, the rest of the portfolio taken as a whole performed broadly in line with expectations and we shouldn't forget that. Cash generated by the business during 2012 before project capital despite the strike impact was around $440 million. Of this cash generation, we returned $236 million to our shareholders in dividends and invested the balance in projects. Had we not have the strike impact in South Africa, this cash generation would have been $200 million better. During the year, we self-funded 2 cash generative acquisitions without diluting our shareholders, kept our balance sheet flexibility to fund the project capital at our key anchor projects and successfully defended our investment-grade credit ratings. Finally, if I can deviate from the script, a personal attribute to Mark Cutifani with whom I presented, I calculated this morning, close to 50 quarterly calls given that we do one in the morning, one in the afternoon. He's been a great inspirational leader to all of us, a very good CEO and an excellent friend and adviser. And importantly, most approachable and one to whom we can speak our minds. Certainly, we all have and me, in particular, have learnt a lot over the last 5 years. We'll miss you, Mark, but we certainly look forward to making this transition arrangement an excellent success with the whole team. With that note, I pass you over to Tony.
A. M. O'Neill
Going forward now, Venkat's got me. Good morning, ladies and gentlemen. I'm Tony O'Neill, the other half of the acting CEOs. I'd like to start firstly on talking about some of our acquisitions. In July last year, we brought Mine Waste Solutions. We've done a lot of work on Mine Waste Solutions over the years running numbers over it. So it's a subject that we think we knew very well. Mike O'Hare with his group had basically done all the work. So by the time we bought it, we had a very good idea of exactly what we needed to do with it. With an allocation, I think, of very capable people, combined with our business process, we've already seen a 20% improvement in volume running through Mine Waste Solutions and a significant reduction in costs. Now I think if you look at the chart particularly on the right-hand side, you can see that a large degree of variation in an operation has been cut out. It's very early days but certainly the signs are already on Mine Waste Solutions are very promising that we've made a good acquisition.
Moving into the Americas, Serra Grande in Brazil. We also finalized purchase of that last year. Our purchase was really based around a geological concept that was untested that we think will add significant value and upside. A good way to destroy value of any geological concept is to actually drill a hole but we're actually in the process -- we've got a very active exploration program underway and certainly the early signs to date are promising and hopefully, we have results so we can start reporting from the next quarter.
If you look at our overall, people may argue that we haven't been particularly active in the acquisition scene. Reality is over the years, we've never missed identifying in an early stage any of the major industry opportunities. But we've walked away from them because we couldn't make the numbers work. If you look at our performance to date, has been essentially for those that we've actually manage ourselves less than $2,000 per annual production ounce comparing against the industry that runs anything between $5,500 and $12,000 per annual production ounce. We will maintain that approach. That where we see significant value, then we will certainly do whatever we can to see whether we can participate.
In terms of the actual projects that we have and construction at the moment. In Australia, Tropicana is getting towards the end of its process. We're scheduling it to start production in the last quarter of this year. At this point in time, it remains on budget and on time within the board-allocated funding. As we've taken this project forward, we've had significant exploration success and we've had some future growth opportunities from around the project. So at this point in time, it looks to be unscheduled, on time and with some upside beyond what we originally expected.
In the DRC, Kibali, all major contracts are underway. Of particular note, the mill, we're hoping that we get production this year although in our numbers we have not allowed for any. We've allowed from quarter 1 next year. The open pit is going well and the underground has commenced. From our point of view, a key driver of value at Kibali is the underground mine. So it's critical the performance from hereon in remains to target because we see that, as I said, as the key -- a key driver.
In the Americas, construction -- preconstruction work for -- at Cripple Creek is well underway. The work there is very season-based where you can construct basically in summer. We're preparing for that and when there's no negatives that we're aware of and we are expecting production from very late in 2014.
Last I'll talk project. I'll just -- we'll finish on another major project. Our ERP implementation has gone live in South Africa. It went live 2 weeks ago. It's early days. We have normal gremlins, but at this point in time, we're very happy with this implementation. I would note that it has been implemented to date on time and on budget.
The outlook for this quarter and traditionally quarter 1, particularly in the South African mines is a slower quarter but we're predicting between 910,000 and 950,000 ounces. Apart from the slow ramp in South Africa, we are replacing the mill at Geita that is underway currently and we're expecting that to be back online sometime around the end February. But at the moment, that looks like to be progressing pretty well. Obuasi, the ramp up on the mining side is also a key focus. Annually, we are looking at between 4.1 million and 4.4 million ounces. We see that as being very achievable and on top, overlay that since we are looking for opportunities to improve both ounces and margins but there are the numbers that we will live with at this point in time.
Outlook for 2013. CapEx, we've really started to take the knife to -- from an initial ask of around $2.5 billion, we've pulled it back to $2.1 billion. We're focusing on the major projects that we see as key to the future of the company and taken away a lot of the optional growth projects that were nice to have but will have to wait for a later date.
On the corporate side, we are undertaking a review of all our activities. We classified corporate as everything away from the mine, so we are looking at our structure to ensure that it's both efficient and able to deliver the requirements of the business. At this point, we've taken $50 million out of corporate as a starting point in that exercise. Expense exploration and studies, it looks like a large number and a sort of always focused on the board. I would draw your attention to $200 million of that is Colombia which we see is very important to the future of the company. It includes technology in South Africa. There's $40 million of that and we see that as a key to the long-term growth and efficiency of the country. And to unlock the -- our knowledge of Siguiri and Geita. So we've funded it. In some ways, we're indicating the important growth areas for the company going forward. We have not diluted the expenditure on those key projects. We've got a very targeted process. As Venkat said, depreciation and amortization. We are starting to see Tropicana, some numbers starting to appear in that for deferred stripping.
Finally, if I look at the 6 things that I figure absolutely critical is firstly is safety. It's -- we need to take another step forward in safety. It's also interlocked with efficiency and costs. So it's unavoidable. And that remains our key focus going forward. But beyond safety is delivery of our key projects. We have Tropicana, Kibali, Cripple Creek, imminent, and they must be delivered on time and on budget.
Portfolio, we're doing a detailed review of our portfolio. We are looking at some parts of the business more keenly than others but nothing is sacrosanct and will be looked at. And so we currently have another -- up the sale. It may be the only asset up for sale but I think time will tell.
Sustainable cost base. We are actively looking at that. We're looking to take out plus $100 an ounce over the next 18 months ahead of our sustainable cost base. We're not talking margin here, we're talking costs. That exercise is well underway and we're particularly focused on procurement and some of the operational practices. And finally, the final point is South Africa. Mike O'Hare, I think, has done a fantastic job over the difficult last year. It's important to us that we have stable, safe production performance and push the technology that we're absolutely convinced is the future of the business in South Africa to have that running in the not-too-distant future. I'll hand over back to Mark.
I'm not sure if you can hear me. Should I keep talking? Okay, you can't hear it. Okay. One last overhead. I guess if somebody had said to me 5 years ago, would you take a 70% improvement in safety? Would you take a 70% improvement in environmental performance? Would you take a new set of relationships built in terms of our communities? Would you take the most significant improvement in earnings across the industry in terms of tripling of your EBITDA numbers and would you take industry-leading returns? You would have said, yes, because against the $30 or $40 starting price, we should be trading at $60 or $70 a share. So I would have taken the first part of conversation expecting that the share price would have reacted rather differently to what we've seen today. In the period 2008 through to the end of 2010, early 2011, we were the best-performing stock in the gold industry by a fair margin. And again, I think that performance reflected the physicals and the earnings improvements that we delivered through that restructures of the business. We've continued to lead the industry in returns and earnings performance against where we started and at the same time, we're introducing the lowest most efficient new ounces in the industry by some factor of 50%, as Tony alluded to. And that's where our future performance will be driven, will come from. Our margins will be better than everyone else's because we're bringing the cheapest industry ounces on to the market in the next 3 or 4 years which will, again, provide the basis of the next step up in performance across the industry. The great frustration is the share price and for our shareholders, it's important for you to know that it is our most important conversation in every one of the meetings we have with the board and as an executive and we look at every opportunity, every idea to try and unlock value. Yes, South Africa has been tough over the last couple of years and there are 4 specific items of bad news that we saw that knocked the share price something in the range of 10% to 15% each time. That frustration is shared with our fellow South African-based companies in Harmony and Garfield. We've all performed about the same. We've all sort of outperforming or underperformed our industry peers. We believe the negative sentiment on South Africa has been significantly overblown. But quite simply, we are our own worst enemies as both a country in terms of the messages we send. The good news is that I believe the right things are being done. We are in the right dialogues and I'm still immensely confident and optimistic about the future of South Africa and even from the point of view of the Minister engaging and taking the leadership when she saw an issue 2 days ago and at a platinum operation and leading an industry conversation to bring 2 unions together. That's the sort of leadership we need to see, the world needs to see, that we are a good place to invest and that we do have a great future. And from our point of view, we are -- we see ourselves as a company important to that future. But at the same time, the board and the executive are involved in the right conversations of how we can certainly manage those issues and unlock value. At the same time, we've seen some moves of our colleagues in the industry doing various things. It's interesting to note that we've actually outperformed them since they actually made their changes. So I'm not sure those sort of things are the right things but there are things that we all need to consider and think about in terms of unlocking value. The one point I want to leave you with, the foundations are there, team is in place, the board and the executive are committed to unlock that last key point that we need to deliver in terms of shareholders being happy with the company that they own. I believe the right people are in place, the foundations have been built and the future does look good for AngloGold Ashanti. Thank you.
All right. We'll take some questions. If you could just mentioned the name of your institution. We'll start with Derryn from Ren Cap.
Derryn Maade - Renaissance Capital, Research Division
It's Derryn Maade from Renaissance Capital. I guess, it's a question to the panel and I guess as well as kind of the elephants in the room with regards to what the strategic intent is towards the South African operations in the light of what's been in the press recently from some of your major shareholders. Could you just comment on whether the unbundling scenario is being considered as a viable option or whether you guys have discounted it at the stage?
Derryn, I'll just take that one in terms of where we are today. The guys will be in a number of conversations as we go forward. One key point to observe from the Paulson conversation that I'm assuming you're referring to is one of those conversations. I think the key point to focus on in the Paulson conversation was his belief that we're 68% undervalued. I think he's lying. I think it's actually more than that. And our delivery against our objectives has been the best in the industry over the last 5 years so that's the first point. So how do you unlock that value? All options are being looked at, have been looked that and we're in the process of understanding what we could do to release value. The one observation I would make from those where we've seen a physical structural change at this stage that doesn't appear to be a compelling cash [ph] . I'm not saying it's not one of the options you would consider but certainly, at the moment, you would hardly endorse that as being something that has diluted massive value. But it remains open. All options remain open and that's the position we've taken. That hasn't changed. I don't know if my colleagues would like to add anything to that.
If I can pick one up, certainly that comment which has come out in the press, we listen to all shareholders, emphasize all. Paulson is one. We do listen to everyone. The key objective here is value unlock. You never say never. We look at all options and certainly what little we have seen base on the events since one of our competitors did the unbundling doesn't fill us with huge enthusiasm that there's a value unlock there to be had but this is something you watch. This is not one where someone has a first mover advantage. That might provide a benchmark for us to look at later.
Adrian Hammond - BNP Paribas, Research Division
Adrian Hammond, BNP. Mark, just reflecting back last few years and you've mentioned some milestones that have been achieved from the business. From your point of view, what do you think you brought to the business in that time in sort of one line? And what do you think are the key challenges that remained for -- or what key challenges now face your replacement?
Good looks. No, maybe not.
Adrian Hammond - BNP Paribas, Research Division
Yes, definitely not.
You still got 2 weeks before that [ph] with me. Look, I think you don't want to say I'm not sure I'm the objective observer what I may or may not have bought to the business. I think what we have done as a team is focused on what have turned out to be recognizes industry key issues. That focus on financial delivery, capital discipline and delivering returns. We've built a real business. It's a business that's generating cash. It's got a future. It's got a pipeline. This company could continue operating at its current production level for the next 15 to 20 years based on what it's got in front of it. And there are few businesses that have the potential. And the only debate about delivering returns in terms of the fundamental physicals in the business is do you want to go into growth or yield? And in fact, you move from one to the other over time in any case. There are very few gold companies in the world now that have those options. I'm quite unique and the fact that we've not blown ourselves up by doing a stupid acquisition, blowing up a major project or doing something fundamentally -- strategically the wrong call. In fact, all of those big decisions have been right from the hedge book, the selling of Boddington, the 5 acquisitions that we've tripled value in terms of shareholders. So we think we've made the right calls. So I think focus and getting the right basic strategies in place. Great frustration for me is the share price and that is the challenge for the board and the team going forward. From an operations point of view, Obuasi is taking too long. And I think couple of key learnings in that, you don't underestimate the complexity and make sure you keep your continuity. We lost period in there in the middle. I think the fundamental strategies are right but being patient and making sure those things are seen through is absolutely critical. And I think the guys have got the right things in place but nurturing that through, I think, is absolutely critical. So that --Obuasi, the continuation there bringing Colombia on and maintaining the discipline in the face of people who pop up from time today make silly observations. The strategy has delivered the physical outcomes. Sometimes, you run or you turn the boat into the tooth of a bit of a gale and people suggest some stupid things. So being able to sort out the good feedback from the silly ideas and keeping the team focused is always the biggest challenge, I think, for any CEO or any leadership team. And I think that will be a challenge whilst we navigate some of the rockier parts here. But the fundamentals are very strong and if I was going to say what gold company would you like to manage from this day forward, AngloGold Ashanti is so far ahead of the game. It's a shame that we're showing a share price that we're showing. That's the frustration.
Adrian Hammond - BNP Paribas, Research Division
And just the second question for me. You mentioned you signed an accord with the unions. I imagined you've embraced AMCU now, union you recognized. What is the AMCU representation in the mines now, and how do you think having AMCU in wage negotiations will have an impact?
Firstly, the thing we shared yesterday and Mike O'Hare, I think, articulated this best some time back. We had a Constitution that is the envy of the world. We have a regulatory framework that is world-class. We have an industrial framework that has worked for the country extremely well. Let's use all 3. And so we've recognized AMCU consistent with the requirements of the legislation and consistent with respecting the wishes of the employees that have asked to be represented by AMCU. And in doing that, I think we've built a good working relationship with the AMCU people. That's what we stress yesterday that they should be respected as long as they respect the rules and we all play by those rules. And that was the point that was reinforced yesterday on an industry basis. But at AngloGold Ashanti, we've actually signed an accord some 3 months ago. Mike, 2 months ago? Because we respect everybody and everybody that has -- is following the rules and working consistent with the Constitution and the other regulations apply, that will be a normal conversation. That's the conversation we had yesterday on an industry basis. It was very civil. It was appropriate. It was constructive. That will be the basis and that what's the minister and others that will be talking about today in terms of what does that look like on the ground.
A. M. O'Neill
And Adrian in terms of actual numbers. It's not a number we're going to give at the moment. It's a new union in the gold sector, an important union. There's obviously...
Process has to take place.
A. M. O'Neill
Process has to take place. So at another point, we think it's probably premature but they are an important union to be recognized as we do.
And they're 1 of 3 or 4 other small unions that are represented whether it's NUMSA, UASA, Solidarity, they're another industry player along with NUM.
Any more questions? All right. I think -- anyone? I think, if that's it. We'll thank you for your time and we'll see you in 3 months’ time back in the same place. Thank you very much.
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