Alumina Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: Alumina Limited (AWCMF)

Alumina (AWC) 2012 Earnings Call February 20, 2013 6:00 PM ET

Executives

John Andrew Bevan - Chief Executive Officer and Executive Director

Chris Thiris - Chief Financial Officer

Analysts

Paul Young - Deutsche Bank AG, Research Division

Lyndon Fagan - JP Morgan Chase & Co, Research Division

Brendan Fitzpatrick - Morgan Stanley, Research Division

Clarke Wilkins - Citigroup Inc, Research Division

Stephen Gorenstein - BofA Merrill Lynch, Research Division

Ian Preston - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Matthew Hope - Crédit Suisse AG, Research Division

Glyn Lawcock - UBS Investment Bank, Research Division

Phillip Chippindale - CIMB Research

Operator

Thank you for standing by, and welcome to the Alumina Full Year Results Briefing 2012. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand over the conference to your first speaker today, Mr. John Bevan, CEO. Please go ahead, Mr. Bevan.

John Andrew Bevan

Thank you. Good morning, and welcome to Alumina Limited's Full Year Results. I will cover the highlights. Then Chris Thiris, Alumina Limited's Chief Financial Officer, will cover the results in more detail. I will then return to cover progress in our strategic objectives, market conditions and also outlook.

Firstly though, I'd like you to note the following disclaimer regarding forward-looking statements that may be in the presentation. Can I also remind you that we are presenting our results in U.S. dollars. So all financial amounts refer to U.S. dollars unless otherwise indicated.

So let's turn to the results in summary. 2012 has been a very tough year for the industry, and this is reflected in an overall loss for Alumina Limited. We reported a net loss after tax of $62.1 million. On an underlying basis, the loss was $52.5 million for the year.

The second half performance was similar to the first half, with cash margins only marginally lower. The operating environment for the AWAC joint venture of weak aluminum and alumina prices has been the key determinant of the results.

Notwithstanding the difficult market, AWAC remains cash positive and was largely able to meet sustaining CapEx needs. This has been achieved through strong operational management of production levels, productivity and cash management. As a result of the overall loss, the Alumina board has not declared a final dividend for 2012.

Looking forward, AWAC is the largest global bauxite and alumina producer. On average, the portfolio of production facilities are around the 30th percentile of the cash cost curve. It has remained cash positive throughout a very difficult period for the industry.

At the 30th percentile of the cash cost curve, during 2012, AWAC generated just $31 of EBITDA per tonne, its second lowest ever. This reflects the very poor prices experienced in 2012 and would have been worse if not for a very sound operational performance. The joint venture has averaged at least double this level over the past 10 years.

The joint venture is implementing plans to bring the portfolio down to the 23rd percentile by 2015. This, along with the ongoing transition of sales contracts to be priced on spot or index pricing, will allow cash margins to improve, not only from improving market conditions as we are experiencing now, but also structurally within the business.

Turning to AWC. In recent days, Alumina Limited has made a private placement to CITIC for 15% of the issued capital. CITIC will be a long-term, strategically aligned and financially strong shareholder to assist Alumina Limited through the commodity cycle. We know them well, having been a partner in the Portland joint venture in AWAC since 1986. And with the proceeds from the placement, it will help strengthen the balance sheet.

I'll now hand over to Chris to take you through the detail of the results.

Chris Thiris

Thanks, John. I'll start with AWAC. Total revenue of $5.8 billion was down 13%, and EBITDA was $336 million, down $738 million compared to 2011, both mainly reflecting the decline in realized prices for alumina and aluminum. The cost of goods sold and operating expenses were marginally lower than 2011, reflecting the benefit of productivity initiatives despite cost pressure from production inputs such as caustic soda and fuel oil. Cost of goods sold includes the $85 million for the Alba civil settlement.

Cash from operations was down by $448 million to $242 million, also principally impacted by lower realized prices. AWAC will focus in 2013 on maximizing its cash position, such as reducing its days working capital. We expect AWAC will also focus on realizing idle assets to meet business needs.

Cash CapEx was marginally lower. The bulk of it incurred in Australia for the Huntly mine crusher move and residue storage areas for the refineries. It excludes equity contributions to the mine and refineries.

Revenue declined by $852 million, mainly reflecting the lower realized prices for alumina and aluminum. Realized alumina prices fell 13%, negatively impacted by global macroeconomic sentiment and market conditions. Pricing of LME linked shipments significantly underperformed compared to spot and alumina index. The LME aluminum price was on average approximately 15% lower than 2011. The shift from LME-linked contracts to alumina price indices continued to gain acceptance with over 1/3 of third-party smelter grade alumina shipments priced on the alumina index or spot during 2012.

For 2013, it is expected that on average 48% of third-party sales will be on alumina index or spot pricing. The fall in realized prices for the smelters was marginally offset by an increase in regional premiums and lower alumina input costs. Cost of goods sold, general admin, selling and other expenses improved by $200 million, reflecting productivity including continued efficiencies at Juruti, which operates above capacity. These productivity improvements more than offset the increases in input costs and other expenses.

The cash cost of alumina production increased by approximately 1% over 2011, mainly as a result of caustic soda, while the other costs were lower. With the pickup in economic activity, caustic prices have been declining since the latter part of 2012, and this is expected to be evident in the 2013 cost reduction. Whilst cost pressure is expected in relation to energy and also mining as the splitting of the crushers in Western Australia gets underway. The average cash cost of alumina production also benefits from the curtailment of production in the Atlantic region and the production creep of the lower cost refineries in Australia. Productivity initiatives to further drive down costs are expected to continue in 2013.

Total alumina production was 15.6 million tonnes. This was down approximately 150,000 tonnes in 2011 as a result of the announced curtailments affecting the refineries in the Atlantic region. The curtailments were partially offset by higher production at the Pinjarra and Kwinana refineries in Australia. The Australian refineries operated near or above capacity, gaining efficiency from production creep whilst the Brazil refinery continued to perform well and is running at near nameplate capacity.

Shipments of alumina to the Ma’aden smelter from existing refineries commenced during the fourth quarter and will continue until the Ma'aden refinery is commissioned in 2014. As of 31st of December, Alumina Limited contributed $103 million of the expected pro rata $140 million of equity capital and expects to contribute the balance during 2013.

The majority of AWAC's total sustaining capital expenditure was spent in Australia and at the time of a high Australian dollar. The Australian expenditure includes residue storage areas, production creep and the relocation of the crusher facilities at the Huntly mine. For 2013, sustaining CapEx is expected to be at similar levels, approximately $350 million.

The 2012 growth CapEx, relates mainly to further works at Juruti in Brazil and is expected to be approximately $50 million during 2013. As noted earlier, the balance of Alumina Limited's equity contributions to Ma’aden being approximately $37 million is expected to be made during 2013.

Turning to Alumina Limited. The company reported a net loss after tax of $62 million, primarily affected by AWAC's lower realized prices, higher input and other costs and the Alba civil settlement. This was partly offset by net productivity gains. On an underlying basis, after adjusting the retirement benefit obligations and embedded derivatives, the company made a loss of $53 million.

During the year, Alumina Limited received dividends and distributions from AWAC of $95 million, significantly down on last year, reflecting the challenging operating environment of 2012. After corporate and finance costs, the company had cash from operations of $49 million. A total of $171 million was invested into AWAC entities, including growth CapEx for Juruti and Ma’aden. In a challenging market, Alumina Limited also contributed to working capital for AWAC entities.

As of 31st of December, Alumina Limited had net debt of $664 million, which equates to a gearing ratio of 20%. Most of the increase in net debt arises from the $171 million contributed to AWAC.

During 2012, the company added $200 million in new bank facilities and rolled $107 million, giving a committed and undrawn bank facilities of $255 million as of 31st of December. On the 14th of February 2013, Alumina Limited announced the placement of approximately 366 million shares with CITIC entities raising approximately AUD 452 million. The proceeds will primarily be used to repay drawn debt. The company's current net debt position is approximately $216 million.

Looking back on 2012, it was very challenging, particularly in the third quarter when LME was well below $2,000 per tonne and a significant proportion of smelter grade alumina sales were and still are based on LME. There's no doubt in those circumstances about the significant contribution of cost control and transition of alumina sales to spot index during 2012. Today, prices for both LME and alumina indices have improved over the last 2 quarters, but we still remain cautious on the market and the productivity initiatives are expected to continue.

I would now like to hand you back to John. Thank you.

John Andrew Bevan

Thank you, Chris. Now let's focus on the AWAC and where it is going with its internal strategy. AWAC has 2 strategic initiatives to improve its financial results. Firstly, to be successful, the market pricing mechanism used by AWAC to sell its alumina needs to reflect the fundamentals of the alumina industry, not the smelting industry. As a low-cost producer, this change will enable AWAC margins to reflect its market position in the medium term. This initiative started in 2011.

Secondly, AWAC must ensure that every part of its portfolio of assets is competitive and contributes to the business. So let's look at these individually. In 2011, AWAC started to convert its third-party smelter grade alumina contracts to be priced on a spot or index basis that reflected the physical supply and demand dynamics and other alumina fundamentals. This conversion is for all new contracts. In 2013, this will be 48% of shipments made on average for the year.

Legacy contracts that have generally priced with linkage to LME aluminum prices are rolling off at a rate of around 20% per annum. When that expire, the new contracts will be converted to a spot or index basis. This is a significant structural change and essential to the future investment and confidence in the industry.

The second critical portfolio issue is to strive to lower the cost base across all facilities. There is no silver bullet here, but a series of critical actions are required. Across all facilities, a structured productivity program is underway. In the alumina business, it has delivered approximately $390 million since 2010 and $190 million in 2012 alone. Optimizing production to meet demand through curtailments of high-cost facilities and driving creep at the lower cost refineries all adds to this.

Over the next few years, the key initiative is to change the energy source of some of the Atlantic refineries. In 2013, we will convert San Ciprian from oil to gas. Several of the other Atlantic refineries have planned as well to convert away from oil as the energy source by 2015. We believe this will be achieved with limited capital for a significant impact on operating costs.

Largely -- lastly, the new Ma'aden refinery will come on in the second half of 2014. This project will enable a new, very low cash cost refinery to join the portfolio. All of these actions should enable AWAC's average cash cost to be in the first quartile by 2015.

Now let's turn our attention to the current market dynamics. Let's start with aluminum demand. Global demand continues to grow strongly. We believe that in 2013, it will grow from between 5% and 8%, depending on the economic conditions. Growth will be driven by infrastructure investment in emerging economies. China is the largest consumer of the lightweight material. It is almost exclusively used internally in China, for infrastructure and industry development. Its demand is expected to grow by 12%.

In the developed world, light weighting of vehicles and the developing recovery in housing in the United States are key drivers of growth.

Overall, supply and demand for aluminum was largely balanced to type in the Western world. LME pricing is not on its own reflecting this underlying balance. The current LME pricing of aluminum does not truly reflect the clearing price of metal today, and regional premiums have grown to reflect the disparity between LME prices and the true clearing price in local markets.

In China, new capacity continues to grow in the Western provinces, based on stranded coal deposits. China now represents 48% of the global capacity.

Now let's turn our attention to alumina. As the first chart shows, non-Chinese demand has started to grow again after a period of contraction, while supply growth outside of China has largely ended. The rest of the world supply and demand has moved into balance, supported by significant imports into China. During this period, prices have remained low with about 55% of Chinese production below cash breakeven, largely in Shandong and Henan provinces. Curtailments in Shandong have been significant. This period of low global prices have led to increased imports of alumina into China as a substitute for local production, which has been curtailed.

The chart illustrated here illustrates the price arbitrage between China and outside of China supply. Outside of China, for most of 2012, the alumina market was in surplus as new capacity ramped up and smelter growth slowed. This led to low pricing for alumina and yet encouraged the imports into China. Imports for the year were up 166%.

Ongoing growth in China, rising bauxite costs and uncertainty and a more balanced Western world market in 2013 are supporting improving spot prices outside of China. Looking forward, there is relatively little new alumina capacity coming on or planned for 2013 outside of China, beyond the increases in Australia in 2012. This new capacity is now close to design, and the market has absorbed the new output. Pressure will now be on Western world pricing, as aluminum demand continues to grow and pull through of alumina requirements.

All of this has led to the pricing of alumina improving. This is reflected in the Platts spot index price, which is currently at $350 per tonne, the highest level since 2011. It has been rising steadily since the middle of 2012. The spot index for alumina is outperforming the LME for aluminum pricing. As I've mentioned before, the LME has become more an indicator of general economic sentiment rather than industry fundamentals. The alumina index is an indicator of industry fundamentals for the alumina sector.

Now let's talk about seaborne bauxite, which is critical to the future pricing in the industry. The last 6 to 12 months have seen stockpiling of bauxite by Chinese refineries. This is the result of uncertainty as Indonesia, a major seaborne bauxite supplier to China has regulated and taxed as exports. In recent months, exports have recommenced after a period of export ban. The export price includes a new tax. Chinese coastal refineries are again stockpiling while looking for alternatives to Indonesia. The chart shows small volumes now being drawn from other geographies, and this is likely to grow as China demand grows and as it seeks to reduce its reliance on Indonesia. The final position on Indonesian bauxite regulation and taxation remains uncertain. What is certain is that Chinese refiners' determination to reduce the risk.

At the same time as Indonesia's position is uncertain, Chinese domestic supply and quality of bauxite cannot keep pace with demand from both the alumina and the refractory markets. This has led to rising domestic bauxite prices and a rapid growth in demand for seaborne bauxite.

How this bauxite supply will eventually unfold is uncertain. We have done some theoretical analysis to show you the cost and potential margin opportunity for bauxite from the major centers around the globe. This includes CM's Group estimate of current FOB prices from each geography. Should producers in these other geographies seek to expand capacity which will require significant investments in infrastructure and time, there appears an opportunity to grow our margins. The evolution of supply of seaborne bauxite and the rising cost of domestic Chinese production will drive higher cost in China and should lead to higher prices of alumina globally.

And so in summary, 2012 has been a very difficult year for the industry, and this is reflected in Alumina Limited's results. As we move into 2013, Alumina Limited strengthened its balance sheet, both at equity and debt levels. The industry sees improved pricing, stable currency and a more favorable macroeconomic outlook. These factors, coupled with AWAC's improvement in its key strategic initiatives should see an improved 2013 result.

Thank you. And now, let's turn it over to questions.

Question-and-Answer Session

Operator

Your first question comes from Paul Young of Deutsche Bank.

Paul Young - Deutsche Bank AG, Research Division

A question on, firstly, on CapEx. I just wanted to know of the increases in sustaining CapEx and continuing CapEx in Brazil, how much of that is good CapEx? What I mean by that is a CapEx which either reduces your operating costs or increases your production? And then just on CapEx, John, you mentioned that the improvement initiatives that San Ciprian -- you obviously know what's going on there with the government funding the gas pipeline, but can you explain at Jamaica, how your conversion of thermal or pushing the thermal -- ahead with thermal energy there will result in -- what that conversion will be -- why hasn't any CapEx attached? And then lastly, just a comment on back on the CITIC investment. You've got a point there about your work with them to enhance the value of Alumina's interest in AWAC. Can you just explain how they enhance the value and what that term means?

John Andrew Bevan

Okay. Paul, a few questions there. Regarding the CapEx, the reason for the $350 million rather than probably what we had earlier expected are more around $300 million relates to the ongoing movement of the crusher in Western Australia. In Australian dollars, it's still within budget but with a higher exchange rate that we experienced since that has been approved. It's actually ended up costing more in U.S. dollars. The CapEx in Brazil is very much about ensuring that it drives to its optimal production level. It's currently operating around 4 million tonnes against its original design of 2.6 and some of this CapEx will go towards optimizing the output from that particular mine. The rest of the sustaining CapEx, I think, we've indicated for this year for things like mud lakes, et cetera, will probably continue to be around $100 million for the year. So that's probably a good underlying number. We still believe from a longer-term perspective $300 million is the right sort of level sustaining CapEx and is currently elevated simply by the fact that 80% of what we're actually spending at the moment is being spent in Australia. Second issue comes back to San Ciprian. San Ciprian is relatively little capital and a 1-year payback project for converting from oil to gas. That project is in the middle of being constructed and there is some money in this year's budget for the completion of that. The opportunity in Jamaica comes from the island actually being short of electricity supply generally. And it is -- what we believe will happen will be there'll be a coal-fired power station built. And we will, because we're a net steam user, take surplus heat from our processing into the power plant and takes steam off the power plants will actually lead to a reduction in the cost of electricity for Jamaica. And in doing so, someone else will, in fact, provide the capital and we will take an overcapacity supply. So that's why we believe capital conversion for us is relatively modest because it's limited to conversion of burners from oil to gas. And we believe that has potentially up to $50 a tonne reduction in operating costs per tonne. The comment about CITIC. CITIC is a -- has very good insight into where -- into China and China is about 50% of the industry capacity. And unless we have a really good understanding of how that's going to evolve and how we should interact with China, AWAC won't have as good an insight as it's had up to date. And we believe that CITIC will provide that to the board within Alumina Limited but also contribute to the thinking within AWAC as to where it should go.

Paul Young - Deutsche Bank AG, Research Division

Just further to that, just rounding off on the Brazilian CapEx, are we going to expect more expenditure in Juruti next year and beyond?

John Andrew Bevan

We expect Juruti to continue to expand to cover opportunities which lie within the Atlantic Basin.

Operator

The next question comes from Lyndon Fagan of JPMorgan.

Lyndon Fagan - JP Morgan Chase & Co, Research Division

A couple of questions. The first one is just on the AWAC cash flow statement. It's the second year running, where the capital contribution exceeds the capital expenditure. And it looks as though that's related to working capital. I'm just wondering whether you can provide a bit of color on that and whether we should be expecting that situation to keep occurring or at least for the next year or so. The next question I had was on the debt within AWAC and the guaranteed dividend for 2013. Now that you've raised equity, does that have any relationship to that arrangement with Alcoa? And I guess what I'm getting at is, should we be thinking about a situation where the debt within AWAC gets paid down prior to any distribution to the joint venture partners.

John Andrew Bevan

Okay. The contributions to working capital was largely into Spain. So once you look at the total amount for Ma'aden, which I think was around $80 million and what went into Brazil, which I think was around $38 million or something like that, much of the balance was working capital into Spain, which included a small amount that is being used for the gas conversion. So Spain was cash negative for the year. And that's the reason working capital is going in there. Clearly we've got better pricing now than we had for all of this year. It has been a very tough year, and we would expect that to not be there in 2013. The recapitalization has no impact on the agreement we have with Alcoa regarding the $800 million dividend for next year. It's not related. There will be no -- and that will be funded by debt inside of AWAC.

Lyndon Fagan - JP Morgan Chase & Co, Research Division

I guess what's the maturity on the facility within AWAC?

John Andrew Bevan

Look, that's an internal agreement between us and Alcoa. We don't actually ever release that sort of information.

Lyndon Fagan - JP Morgan Chase & Co, Research Division

All right. And just one follow-up, if I may. What -- I guess now that you've got this equity in the door, what's the attitude of AWC on potential acquisitions within AWAC in terms of -- is that something we should be thinking about or something you wouldn't want to participate in? Obviously, you'd have to assess it at the time, but is that coming into the thinking of AWAC at the moment, given BHP, Rio, any number of larger companies have got disposals that they're looking at?

John Andrew Bevan

The $452 million, we've been very clear about is about paying down debt. And having a gearing of around 7%, which is now is a much more comfortable position than we were in before. We don't anticipate using those funds to make any acquisitions.

Operator

The next question comes from Brendan Fitzpatrick of Morgan Stanley.

Brendan Fitzpatrick - Morgan Stanley, Research Division

There was a comment early on from Chris in the presentation, something about realizing idle assets, when we were talking about the cash flow statement. Was that something to do with asset divestiture or somehow realizing value out of the assets, or was just a reference to operational activities? And then the next one I wanted to ask in the release, there was a comment about the 2 aluminum smelters in Australia running at a loss. I was curious to know if we could get a comment on the relative loss between each of them, and carrying on, the Point Henry asset was subject to review mid-2012, is it going to continue running to 2014. Just confirming, there's no ongoing review process, but whether or not there is a potential for that asset will be loss making right through 2014 time line based on current market commodity prices.

John Andrew Bevan

2 questions there. The comment from Chris really relates to none of the major assets, but really looking at the nonoperating or non-core assets within the portfolio. Non-core meaning not a refinery or smelter but other assets that we have within the portfolio, realizing cash by the sale of those. So there would be a reasonably large number of relatively small projects that could lead to a reasonable cash generation for AWAC. And the second question about the smelters is that the smelters lost money in 2012. And the review that was done in the middle of 2012 was that Point Henry would continue to operate through -- to mid 2014, when it will be reviewed again. That's when the current electricity contract of Point Henry expires. So that was the commitment that was made in the middle of this year, and that's where we are today. No further review of that has be done. I have to say that aluminum prices have improved since that review was completed. And so -- and the Australian dollar has remained fairly static and, therefore, conditions have improved a little bit from where it is but it's still not contributing significantly to the company.

Operator

The next question comes from Clarke Wilkins from Citi.

Clarke Wilkins - Citigroup Inc, Research Division

John, just a question sort on the cost side. You sort of alluded to comments where caustic was coming down this year but energy and other costs and essentially mining going up. So on balance, does that mean a sort of relatively flat cost sort of year-on-year for AWAC or is it a constant currency or is the caustic enough to offset those other cost impacts?

John Andrew Bevan

Our expectations are we're not going to have much movement at all in our cost reduction this year in terms of driven by anything within the noncontrollable costs, if you what I mean, the caustic soda and energy and so forth. So we will continue to drive productivity with the aim of more than offsetting any increases out of it. So looking at a fairly constant production cost, it's probably a reasonable assumption.

Operator

The next question comes from Stephen Gorenstein of Merrill Lynch.

Stephen Gorenstein - BofA Merrill Lynch, Research Division

Just a couple of questions. Firstly, just on to San Ciprian. When you do move to gas, what sort of cost improvement would you have? And given the improvement we've seen in spot prices earlier this year, how many of your refineries are still not making money this year and how many are now profitable?

John Andrew Bevan

The -- we expect around $25 a tonne improvement as a result of the gas coming on. Certainly, gas and oil are constantly moving around a little bit in terms of pricing, but that's what's our expectation is when it comes on. And that current pricing, if they're all being sold on spot account, I believe that everything would probably be contributing.

Operator

The next question comes from Ian Preston of Goldman Sachs.

Ian Preston - Goldman Sachs & Partners Australia Pty Ltd, Research Division

John, what level of debt are you comfortable with or gearing in alumina to reconsider the dividend going forward?

John Andrew Bevan

The dividend, Ian, is really a function of the level of cash generation inside of AWAC and its ability to pay dividends. So clearly...

Ian Preston - Goldman Sachs & Partners Australia Pty Ltd, Research Division

You have $100 million sort of income minimum guaranteed this year?

John Andrew Bevan

Sure. And we've got some commitments in terms of growth CapEx from Ma'arden and to a lesser extent into Brazil. So much of that will be dealt with in that sense in the balance. So we're fairly comfortable with the level of debt that we have now and are not looking after the very difficult year that we've had, not going up to the level of that we have previously.

Ian Preston - Goldman Sachs & Partners Australia Pty Ltd, Research Division

So would we be right in thinking if we look at the commitments that you would have this year in terms of growth capital and obviously corporate costs, et cetera, that anything leftover might be possible for a dividend, but you wouldn't add any debt into the balance sheet in order to pay a dividend?

John Andrew Bevan

I think that's a reasonable summary. Clearly, as the market improves, you'll see greater cash generation inside of AWAC and that might lead to considerable...

Ian Preston - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Great. A better payment from that.

John Andrew Bevan

Better dividend flows and the guaranteed $100 million, yes.

Operator

The next question comes from Matthew Hope of Crédit Suisse.

Matthew Hope - Crédit Suisse AG, Research Division

John, I just wanted to confirm again that the margin in Brazil growth CapEx 2013. I think you made out that together they're $87 million. And also just looking at potential black swans on the Alba settlement. If there was a judgment by the Department of Justice or SEC and it came out as a fine to Alcoa, would that division of costs include the fine?

John Andrew Bevan

What we said in October was we had come to an agreement with them that they effectively the split in cost would be 65% to Alcoa and 35% to AWAC. And that if there was a fine, that would be covered by that agreement.

Operator

The next question comes from Glyn Lawcock of UBS.

Glyn Lawcock - UBS Investment Bank, Research Division

I'm just wondering, I know you talked a little bit about cost, but just wondering if you could actually quantify -- do you actually think you will get some productivity gains this year? $190 million in '12 was good to see. Could you actually expect something or are you actually thinking no? How do you -- how should I think about it?

John Andrew Bevan

Look, I would expect that we'll get considerable productivity floating through in 2013. My caution in my earlier comment, Glyn, was I don't know where oil would go or I don't know caustic is going to go. Caustic is continuing to come down because of the chlorine demand in the U.S. is going up as housing improves. So I would say it's considerable improvement in caustic soda. But I don't know where oil will go for the year, and that's probably the thing that would concern me. That's why we're very keen to get away from oil in those Atlantic refineries.

Glyn Lawcock - UBS Investment Bank, Research Division

That's fine. I mean, we'll make our own call on the oil price then. But all else being equal, what sort of product gains -- productivity gains could I expect? Another $190 million or is that too optimistic?

John Andrew Bevan

I think we would be -- we would have an expectation of doing that again, but whether we can deliver that or not, we'll to have to wait and see.

Glyn Lawcock - UBS Investment Bank, Research Division

Okay. All right and just a final...

John Andrew Bevan

What I can say is that our cost in the second half was -- our cash cost was reflective of an improvement in the second half, and that's why if you look at the underlying margin that's come through out of AWAC in the second half, it's basically dealt with the reduced pricing so it is significant.

Glyn Lawcock - UBS Investment Bank, Research Division

Yes, sure. Okay and then just a final question, not trying to be annoying about but if you're only getting consulting advice from CITIC, couldn't we have just paid for a consulting advice rather than having to issue diluted equity?

John Andrew Bevan

Glyn, I think when we look at all of the -- the needs of all shareholders, we felt this was the better mechanism to come through. We believe they are a very supportive shareholder and will, in fact, provide but not only consulting advice but real opportunities that might -- as they might come through.

Glyn Lawcock - UBS Investment Bank, Research Division

But I guess -- by your own admissions, you don't have a lot of control of the AWAC joint venture, so I sort of struggle to understand how CITIC helps when you don't really control AWAC anyway?

John Andrew Bevan

Well, I think a number of people might have that view, Glyn. We're actually reasonably confident that they will make a difference to the joint venture.

Glyn Lawcock - UBS Investment Bank, Research Division

Okay. I guess time will tell.

Operator

The next question comes from Phillip Chippindale of CIMB.

Phillip Chippindale - CIMB Research

A couple of questions from me. Firstly, John, earlier, you made a comment saying that post the equity raising that your were in, I think, you said a much more comfortable position with your gearing now down to 7% or thereabouts. But previously, you had spoken very confidently about your ability to refinance debt and to extend those existing facilities. I'm just wondering, just the way that you describe that as being a much more comfortable position. Did you have a change in view prior to that equity raising? That's my first question.

Second question is just what sort of production creep can we expect from the Australian operation this year? I note that your full year guidance is flattish at 15.6 million tonnes. I'm just wondering how much more we can expect out of the Aussie operation.

John Andrew Bevan

Okay. First of all, on the financing position, we are under -- prior to raising the -- making a placement, we are under no pressure from banks. We have no issues with refinancing. Any of that debt and you would have seen evidence of that when we rolled over in November the facility that was due -- to fall due in November of 2013. So we weren't under any pressure from that. I have to say that the -- and let me but finish what I'm saying, the overall joint venture was continuing to generate cash and we could see the improvement in pricing that would lead to improved cash generation. And so, we weren't under a particular pressure to do it. But our debt was getting up towards a level that was uncomfortable. And while this year will probably not prove to go much higher, the reality is in an uncertain world, it might not go much lower, either. So I'm certainly more comfortable now than I was when it was at the higher level, but there was no desperate need to raise at that timing. It was simply that we came to agreement with CITIC. The approvals come through and we took the opportunity around that particular time. And you can see from the results we've delivered today, there's nothing in the results that drives us to have done that at this time. The second issue was around creep. And the Australian operations generally can creep a couple of percent per annum. Our production level that we've advised you of is essentially continuing to optimize between higher-cost Atlantic refineries and lower-cost refineries in both Brazil and in Australia. We've had good creep out of both Brazil and Australia in this last 12 months, and that has helped to bring down the average cash cost production.

Operator

The next question comes from Clarke Wilkins from Citi.

Clarke Wilkins - Citigroup Inc, Research Division

Sorry. John, just to follow up. With the talk about the conversion of gas, et cetera, can you just remind me, when did the gas contract in WA expire? And what sort of impact on cost can we expect then when those sort of contracts do roll off and obviously we entered into a significantly higher rate from what those historical contracts were?

John Andrew Bevan

Well, Clarke, the contract actually -- 85% of their volume tied up until 2020, and that's been the situation for a long period of time. So we have about 15% that are done on shorter-term contracts. So the degree to which the market moves at any time, that is already reflected in the current cost that we have. The 85% of our volume will run out in, basically, 2020. And I don't know what the gas price is going to be in 2020. Clearly, we've been doing some work which we talked about before about both investing in new production fields in Western Australia and also ensuring that the state government reserves, 15% reservation for domestic use of gas in Western Australia. Prices will definitely be higher than where they are now, but Clarke, I couldn't tell you what the price will be in 2020 at this time. Clearly, there's enormous amount of gas coming on both in the East Coast and West Coast through coal seam methane and shale gas.

Clarke Wilkins - Citigroup Inc, Research Division

So is it -- maybe I'll ask another way, what percentage of cost for the WA refineries is sort of energy at the moment? I think, overall, it's 15%. Is that typical for WA or is that a bit lower than the other sort of average.

John Andrew Bevan

Sorry, what was 15%...

Clarke Wilkins - Citigroup Inc, Research Division

What percentage of the refinery's cost is actually driven by sort of energy cost rather than what the impact, I suppose, from the gas switch?

John Andrew Bevan

We've only got 15% exposed to -- other than the long-term contracts, which is not necessarily driven by current gas price. So the 15% is exposure to current market prices.

Operator

Thank you. There are no further questions at this time, Mr. Bevan.

John Andrew Bevan

All right. Well, thank you, everyone, for listening in and I'll no doubt talk to a number of you through the day. Thank you very much.

Operator

This does conclude our conference for today. Thank you for participating. You may all disconnect.

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