Glencore Plc (GLCNF) CEO Ivan Glasenberg on Q2 2014 Results - Earnings Call Transcript

Aug.21.14 | About: Glencore Plc (GLCNF)

Glencore Plc (OTCPK:GLCNF) Q2 2014 Earnings Conference Call August 20, 2014 4:00 AM ET


Ivan Glasenberg - CEO

Steve Kalmin - CFO

Tor Peterson - Head of the Coal Marketing Division

Alex Beard - Head of the Oil Division

Peter Freyberg - Head of Coal Operations

Daniel Mate - Zinc Division

Kenny Ives - Nickel Division

Andrew Caplan - Aluminum

Telis Mistakidis - Head of the Copper Division.


Tim Huff - RBC Capital Markets

Ash Lazenby - HSBC

Heath Jansen - Citi

Dominic O'Kane - JP Morgan

Liam Fitzpatrick - Credit Suisse

Paul Smith

Well welcome to Glencore’s First Half Results 2014 and format for this morning will be a presentation by CEO, Ivan Glasenberg and CFO, Steve Kalmin that will be followed by Q&A session. Most, if not all I think of the divisional heads are here for any kind of Q&A we have. So, with that I'll handover to Ivan.

Ivan Glasenberg

Okay, good morning. Welcome to the first half results. Today, we got a big team here. We have Tor Peterson, the Head of the Coal Marketing Division; Alex Beard, the Head of the Oil Division; Peter Freyberg, the Head of Coal Operations; Daniel Mate, Zinc Division; Kenny Ives, the Nickel Division; Andrew Caplan, Aluminum; and Telis Mistakidis, the Head of the Copper Division. So, when we come to question-and-answers, they will be available to answer any of the questions.

Looking at 2014 and showing our confidence in the future. As you can see, we have a very strong marketing result. EBIT is up 27% year-on-year to $1,5 billion. Once again this shows the resilience of our Marketing division, I will talk a bit about it later but as we always say since the IPO, when we IPOed in 2011, we said the marketing is resilient business. This is a business that’s going to continue generating the returns and at the time we said we would lie within the range $2 billion to $3 billion, depending upon how markets, where stronger markets we move towards a 3 billion.

When we purchased Xstrata and Viterra, we said that range will move more towards (2,7 to 3,7) [ph] and once again we proved we are within that range and this is really a resilient business that’s ongoing and continues to perform. It gives a great return on equity and is a good part of business and I think that sets us aside against our competitors in the sector. Our industrial EBITDA is up 3%, Steve will take you through the figures later to show exactly where it occurs even with falling commodity prices how that increased. Net income up 8% to $2 billion, year-on-year and FFO up 15% to $4,9 billion. The balance sheet is robust and it is improving with improving outlook. As we've always said the balance sheet we want to keep it as BBB. We don’t want a lazy balance sheet and that’s what allows us to go ahead with the share buybacks and operate in the manner we do.

CapEx is declining and by end of 2015 we should only have sustaining CapEx that takes us down to figures of about $3,5 million. We don’t have big expansionary CapEx on the books right now and therefore that should ensure that this company continues to generate hard cash. The underlying commodity supply balance has continued to tighten especially in the commodities in which we are focused, we still believe demand is strong out there. The growth of the demand, it is a particular slide to show even though people say the super-cycle is over, we believe the demand is there. The super-cycle is only being hurt with increased supply but the actual demand the underlying, real demand, the amount of increase of demand in the commodities in which we produce has been increasing and continues to increase, it’s just a matter of how much does the industry oversupply that market.

We have numerous organic growth opportunities to pursue when appropriate. Most of our growth opportunities are brownfield expansions, we'll take you through details later on and those brownfield expansions are easy expansions against our existing operations and just add-on to our existing operations. So, the expansions as we always say, they don’t create high risk as Greenfield projects had. They are not these massive capital expansions in new areas of the world. The risks and the cost over which the industry has experienced over the past years, so they are simple, easy expansions and we'll go ahead with these expansions if we believe they give the right returns. Our objective, as we always said remains efficient deployment of capital to grow earnings, cash flow and dividends per share and important feature of ours, as we always said, is a capital return and will remain a key element of this.

We are a company that is run by shareholders of the company and therefore we will do what’s best for shareholders. We are totally aligned to our shareholders and we will run the company in a manner that if we don’t find the right brownfield expansion projects which gives us a right returns, if we don’t have M&A activities that give us the right returns, we will give back cash to the shareholders. And as we have just proven now, we have done this $1,7 billion share buyback, 639 in the form of the convertible bonds we bought back recently and we are going ahead with another $1 billion share buyback and we are increasing the dividend 11% which really is back to what we said when we did the Las Bambas sale that we will go to roundabout $6 billion, we will give back one-third, one-third, one-third.

One-third in M&A type activity which you know we did the Caracal acquisition recently, $2 billion in share buybacks and increased dividends which we have done now and $2 billion to repay debt. So, if you look at in 2014, we have returned capital $3,9 billion and an interesting feature is since the IPO, we have returned $7.9 billion back to shareholders and in fact that’s the same amount of money which we raised during the IPO, so within the short space of time over the three years we’ve returned all that cash back to the shareholders.

And the capital structure will consistently be reviewed and there is a slide we'll show how we’ll keep reviewing that and how we will deploy the cash which was the company generates as we move forward.

Sustainable development and governance there is a slide to show how we are improving in this area, we’ve rolled our safe work which is standing that was developed in our coal division over the years and we’ve rolled it out to the rest of the group and this is an area we are improving. We’ve got a lot of work to be done there. We still have 10 fatalities in the first half of 2014 but we are improving in that area and the LTI efforts as you can see is improving considerably.

What should be noted and we recently had a presentation to our investors is it is an area we don’t run, we’ve got the (legal) [ph] mines, we have underground mines in the various parts of the world that is more difficult to operate in Africa. And we do have these operations. We also have mines which we took over, which was ex-nationalized mines which we took over from governments the culture has to be changed, a lot of work has to be done in those areas to change the culture. And this is an ongoing improvement. They’re all mines, we are not selling them because we have these problems, these are mines that are there, we're going to improve them. We’re going to change the culture in those countries, in those regions and we believe we’re doing a lot of good and we are improving substantially in that area. And this is something that company is very much focused on.

We have become a member of ICMM this year in April 2014 and that was a full independent expert review and Glencore I am to say came out with flying colors and we understand what are the best reviews they’ve done. So this is an area that company continues to work on.

With that I hand over to Steve to take you through the financials. Thanks.

Steve Kalmin

Good morning everyone and for those that are dialing in and listening to this presentation on the webcast as well. This is really just to try and go through summary financials of the six to seven slides and then Ivan will come back and wrap things up in the more broader strategic views around running our balance sheet, the capital return structure and the commodity market environment as well.

So if we go through, some very high level numbers Ivan has touched on a few of these, this is half year 2014. I am pleased to be able to say finally we can put some actual numbers out there without pro forma numbers that’s been a fairly noisy set of reporting over the last couple of years as we joined with Xstrata effective 1 January, 2013 for reporting purposes that the transaction and it closed of course as you remember 2nd of May, 2013. So finally some real first half actuals.

First half 2013 was pro forma, and there is still a few I wouldn’t say change in that particular thing but while we’re going through the process the 2013 when we had first half 2013 numbers that was put together fairly close after the transaction closed and that was only closed in May last year we came out in August with our first presentation around pro forma’s which clearly had to include all the acquisition accounting that we did at that particular point in time. For the full year results 2013 there was really another six months on and some of the allocations in terms of overhead some of the work on tax rates which I’ll talk a little bit about that did get somewhat refined as we move towards the end of 2013. But we'll soon be out of the world of pro forma by the time we get to the end of this year and we’ll start being easier and easier.

Just to give some background to those numbers as well, as we’ve discussed in previous presentations and covered in the financial report itself, they are presented, there is some slight adjustments we do around our three important joint ventures that we have which for the statutory reporting get equity accounting but for our segment reporting and underlying earnings we proportionately count and that’s for Cerrejon, Antamina and Collahuasi which I think some of our peers do as well. What we have done this year as well if you look at page, I think it is 29 of the presentation which we hadn’t given before that does provide quite a clear bridge between the statutory and the pro forma around the adjustments that are made to EBITDA to EBIT to revenues to CapEx FFO to all those lines so you can see the building blocks a little bit more carefully there as well while we go through.

So in terms of EBTIDA up 8% as Ivan had mentioned, marketing is the big thrust of that so you can see across both EBITDA and EBIT up about 400 million or so in dollars between those two particular periods marketing itself was up 23% and 27% across EBITDA and EBIT respectively counting for some of the bigger movements there. But pleasingly the industrial business despite the weaker commodity price environment was also able to uptick a bit from first half 2013, 3% and the EBITDA will provide some slides later on and some of the variances and EBIT as well up 6% as well.

The net income you would normally expect that number to sort of follow similar to what EBIT level was already up 8% and that is a function of the effective tax rate that’s come through the periods as well. Again something worth spending, spending a minute or two on effective tax rate is now in the actual will so this does need to be looked at in the context of what we do expect, 27.2 was a bit higher than what we'd ordinarily expect for this particular period. It was influenced by some foreign exchange adjustments and a few permanent differences that affected some prior year adjustments to [indiscernible] as we put in the notes as well I think in the front section on the financial [Technical Difficulty]

Unidentified Company Representative

25% for the full year 2014 based on the current mix between marketing and industrial. I mean industrial have to kick up a gear as we would expect in the next two or three years given both commodity prices as well as well in that 20 to 25 may edge towards the higher part of that range, the more marketing contribution of the mix is going to head for more for the lower period of that range because the marketing tends to have an effective tax presence of 10%, the prior year that was very much pro forma because it wasn’t a natural capital structure that had come together so it was effectively a notional form of taking 25% from industrials, 10% on the marketing and just proportionally waiting that down which for the first half for the last year happened to be 17.5%.

The full year last year when we strike these numbers in the six months' time was close to about 20%, so you’re going to have the influences when we look at net income at the end of the year that rate's going to come down 17.5 is going to come up, which is going to improve sort of year-on-year movements as we do go forward as well. So 20% to 25% at least in accounting terms is where we’d expect the effective tax charge [Technical Difficulty].

Steve Kalmin

We do go forward as well. So 20% to 25% at least in accounting terms is where we’d expect the effective tax charge to run a future the FFO as well nicely up at 15% close to $5 billion as well that’s starting to reflect really some lower interest charges, given lower debt now coming through and we’ve got slide later on in terms of cost of debt or income of which is a function of refinancing, low interest rate environment, various other actions we’ve done more towards floating rate that was oppose to fix rate debt as well.

That number also going forward which may surprise going forward and you would need to go let into a numbers although we’ve got that is the effective tax rate from an accounting perspective the company is still doesn’t some would goes back to the IPO restructuring in Switzerland and various other jurisdictions. We still have about 2.5 billion of carry forward tax losses that we have in the books as well that’s the tax [indiscernible] that’s a real cash asset of the company that is going to shield us in terms of some of the tax payments that we’re going to be making over the next quarter two to five years or so as well.

So although we’ve got that number coming in the actual tax payments are going to be coming in low with the net in terms of percentage terms which is going to improve the funds from operation that takes in account actually increased pay to natural tax pay going forward. So that’s an area where I think people if you’ve known that you’re going to undershoot in terms of the cash generating of this business over the next three to five years so just to highlight that would uncover much an interim report but the full year report talks about where all the tax losses are their jurisdictions in U.S. and in Switzerland in particular and some other operations that we’ve as well as we go through.

The CapEx of course is a very important number as well in driving cash flow and driving returns in the business, you can see that’s been truckling back quite nicely as well that’s ex doing us Bamba switches which is a really big node in the overall underlying part of the business, we’ll talk about [indiscernible] that was 4 billion, a little bit in the marketing 3.7 billion and that was industrial part we’ll slide on that later on, that was down 29% and also later on we’ll show our guidance for the full year, which is pretty much unchanged from where we were three, four months ago and we’re standing up here as well.

So all of that is starting to mean sort of debt has effectively peaked and we’re now going to start entering periods of significant cash flow generation as we go forward. So very high level numbers on some debt as well, without Las Bambas and Caracal both transaction which closed in July so that have actually happened so net net we’ve made a 5 billion adjustment a 6.5 billion net on Las Bambas that closed 31st of July, Caracal closed the 8th of July 1.5 [indiscernible] $5 billion of transactions net has occurred in July as we stand as we were a couple of weeks ago that money is in the bank and that has boosted liquidity, has boosted and it has changed fundamentally the net debt profile of the business down there.

So I think it is relevant to be focusing probably more on those numbers than it would on those numbers but the actual report has clearly froze those numbers and was a slight increase as one would have expected during the first half of 2014 as we still have a slightly elevated CapEx numbers but we are funding Las Bambas as well. So that was sort of 4.8 billion or something including Las Bambas so we still -- I mean CapEx has come from levels of 13 billion annualized and has been coming down quite a lot as well.

FFO to net debt we got a few slides later on, on the capital structure and Ivan will talk towards the capital structure framework in terms of the overall balance sheet positioning and then how we look towards both investment share returns as well, that’s been improving and all the corresponding assets have been improving, if we then take that 5 billion off you can see quite a nice cushion starting to build in terms of those rates and again we’ll show a slide later on in this call. So very high level trajectory in terms of business. if we didn’t break it up a little bit into the marketing and industrial side the star performer at least relative to the base as would have expected was the AG side as we stood here 12 months ago it was a tough first half 2013 which we explained, Chris was here at the time, that was both in the base marketing business and Viterra also was, I wouldn’t say underperforming necessarily but it was still something that were in the midst of very complex restructuring integration. We have still warehouse businesses. We have bought the whole thing. We were selling businesses out to Richardson and Agrium. There was a lot of work to get the focus on that structure back in place. The actual fundamental business was sort of okay but particularly this year on the agri side, the Viterra part of the business, we have had record crops out of Canada which helps clearly our procurement both in a volume and a pricing sense. The South Australian crop where we had 95% market share down there that also came with Viterra had above average crops as well. So, again reasonable margins there and so that was a good period but notably 2013 as a base period was unusually weak for us as well.

So, there was the major jump in but that’s putting it where it should be I think even at the time we announced the Viterra transaction back in the beginning of 2012, we spoke about a 450 million or so annualized EBITDA level for the businesses that we would have been retaining with some synergies to come, so maybe push that more towards the 500, so half year would sort of normal would be 250 just on Viterra. Now, Viterra had a reasonable period clearly but then we have got our base legacy Glencore marketing business as well that’s also supporting that particular operations. Clearly the metals and minerals continues to be the engine of the marketing, has been well over 50% for at least the last three, four years and a 25% increase there. Generally favorable market conditions in many markets over there.

And the good thing about being a diversified operation is that it’s very seldom to see everything firing on all cylinders at any point in time. We did have that and energy clearly is historically both in the coal and the oil side, I mean that has been sort of up at those levels in sort of years going behind, at some point in time you would see that back at levels where we would see it being able to extract more out of the markets clearly as well. We have decent market positions. We have a decent structure clearly in both those coal particularly we are a very large player, oil, a significant business as well there. But lackluster market backdrop in terms of both volatility and weaker coal markets, clearly put some pressure on the agri side. But overall, a decent pick up and comfortably within that 2.7 billion to 3 billion range that we do talk about from an annualized perspective as well.

So, overall good performance on a marketing and it does show the strength of the diversification that we across those sectors and within those sectors there is multiple profit centers and multiple commodities as well. On the industrial side of the business, a slight tick up there and we will show a waterfall slide later on of just how we moved between 1.996 and 2.112. But again pleasing in what was a generally weaker commodity price environment, so overall up about 3%. Again, the metal side is the biggest part in the current environment both in operational scale and in growth trajectory. The energy side of the business is very big in coal but of course coal, numbers-wide is not contributing at its, what I would call a more neutral level and a growing oil business as well clearly in the West African upstream portfolio and will have a leg up going forward as we've taken over and look to integrate and control and run the Caracal business or the Chad business going forward as well.

Even a little ag side doesn’t really move the needle but at least starting to get some sort of return on some of the capital that we have allocated across crushing plants and various processing facilities that we have particularly in Europe, some in South America as well, so that’s good, 33% jump in processing well as well. So, doesn’t add much in there but at least starting to contribute meaningfully down in those numbers as well.

On the metals and mining side, of course lower prices except nickel, so your mainstays of copper, zinc and the precious metals, not that we produce them in a primary sense but they are significant byproduct contributors both in the copper and zinc operations but gold and silver down anywhere between 16% and 20% on the pricing.

Pleasing in this business as well which we do make slightly more of a meal of now because I think it’s been ignored historically within Glencore’s overall asset qualities that the EBITDA margin across the entire mining business actually improved from 29% to 32%, now that’s the weighted average across copper and zinc and ferroalloys and nickel et cetera.

Copper was being a bit higher, zinc is a bit higher as well but that weighted average mining margin if you look at the sort of portfolio that we do have, starts exposing the fact that the assets that we have in our portfolio in the commodity prices that exist during that period, are very good quality assets and Ivan will talk to the cost structures that we have and even the improving cost structures that we're looking to implement and similarly the EBITDA margin across the energy side was stable at 29% notwithstanding coal prices that fell anywhere between 15% and 20% and even higher on the coking coal side of things as well.

This slide which will be familiar to many of you as well, common feature of most presentations for the mining shows the waterfall bridge. This is just on the industrial side between 2013, 2014 for the first half. You can see the big hit clearly from pricing. A lot of it coming from the energy side in fact 657 of that 980, all of which was coal.

So, big headwind coming from coal prices they seems to have bottom stabilized, improved a little bit in recent period, so no doubt is there either in a Q&A sense if we want to talk coal markets and that was the important for us we’ve also got a few slides later on where we'll give our views on some supply-demand parameters across different -- at least in the current pricing environment, which shows favorable sort of market structures evolving over the next two-three years. We should see some pick up there and obviously be able to turn these negatives into positives in the coming years as well. So 980 on price and the metals was the 323 down. Of course we had lower prices in copper, zinc and the precious metals positive, from nickel coming in there with its average price, higher and we should even get more positive things because you still had at least in first quarter 2013 nickel prices within two band [ph] and then you had a dip and then it come up a bit.

We’ve tend to look at price and FX in the same breath as well, given their negative correlation that you tend to see lower prices and lower commodity producer currencies and whether it be Aussie dollar, Canadian, South African rand et cetera. So those two as well we got some relief clearly from the FX side and that was currencies like Australia clearly, rand Kazakhstan as well the Tango had about a 20% depreciation in Q1 as well. Canadian dollar of course also important for us in terms of their operations there. These things would tie in pretty well to the commodity price and exchange rate sensitivity slide that we gave into full year result where we showed what 10% price movement does in copper and coal and currencies. You’d be able to apply that and get pretty close to those sort of numbers as well.

So between those two clearly negative headwind there. We’ve been able to call back or mitigate the impact of that through our volume increases for the first half of 2013 of 420. That’s the only area where we put the ags as going willing [indiscernible] volume given the 33% increase in volumes that we did appreciate. So the full variance has gone into [ags] and the volume that was $74 million and contributing to volume would have been the standout volume performances half and half, which was oil where we saw some big increases both in Equatorial Guinea and Chad. So oil volume was about 83 million coal contributing 55 million on the volume side and then on the metals about 274 million and that was essentially all copper which had a 13% year-on-year increase in copper. We had some volume dips in --temporary volume dips I would say in zinc and in nickel reflecting previous closures in the comparable period. So that’s a dip over this period and should start reversing and showing positive volume momentum as particularly in zinc we’re going to get zinc Australia is the asset base that’s going to propel zinc forward now going forward. Again Daniel is here today. He can talk about that further in questions and nickel is clearly [indiscernible] as it ramps up. And there is a slide on that later on as well.

Cost reductions of 551, that is real cost savings inflation. We’ve separated the 262 that rips in so roughly 3.1% increase of cost our overall operating base which reflects some higher inflation environments and some lower inflation environment. Some of the higher ones would clearly be places like Argentina. So the hyperinflation there little bit coming through Kazakhstan because of the depreciation and currency there. There is some lower inflation environment South Africa is a bit higher as well. So 3.1 is the average. And then 551 represents about a 6.3% real cost reduction across the overall asset base as well. And that’s coming from coal and oil a bit which makes up the energy side which is 296 and the metal side was 255. Clearly, that captures some of the synergies from the Xstrata transaction. We’ve put 1.9 billion ex-marketing synergies. But of that 1.9 billion it wasn’t all operation. There was financing synergies. We’ve got a slide later on that was about 200 million.

Some of the operating synergies period on period wouldn’t be captured necessarily here because coal, particularly when we acquired Xstrata had a head start in terms of putting in there aggressive program around cost cutting. That didn’t start sort of June or July 2013. That very much started towards at the end of 2012 as we were getting ready to close on that particular transaction. So a lot of those costs already came through in coal in first half 2013. So there are a part of our number you won’t necessarily see that coming through in the period on period movement over there. And there is also in terms of cost movements which we’ll see those reverse as well. So that number would have even been a bit higher. But for a few operations when you do go through an expansion phase at some are operations as it staggers through, you will have to really scale up in terms of cost ahead when the expansion current account. So you’ll actually be maintaining certain costs which we’ve got and Katanga in McArthur River are probably two examples of that. We only then get the unit cost productions as you then start delivering the volumes and getting the economies of scale when it comes.

So you do have periods and we just seen that phase at the moment in a few operations where you’ve actually got some cost increases without getting the volume efficiencies that come with it and particularly McArthur River and Katanga would be two that would apply in that case. So the gross cost savings would have been a bit higher a few temporary extra costs as we expand the operations which come off as we deliver those tons, which we will be doing in the next -- during the second half and we will talk about that later on as well.

In terms of balance sheet, I think robust balance sheet would certainly [indiscernible] basin. I would focus more on those numbers now. Post Las Bambas, Caracal which is just pro forma for that 5 billion that came in. So some big improvements. Obviously you’ve now going to meet debt reduction of $3.2 billion and in a period going forward where debt had already peaked and is now starting to being sort of deleveraging cycle of FFO CapEx coming down adding volume growth and commodity prices that we see turning the corner as well. So, comfortable FFO net debt 33.8%, you’ll see these numbers on the next slide. I think it comes there as well.

Weighted average cost of funding has been coming down quite dramatically. That’s a function of two things, one of which of course interest rate environment has been low but we also enter into towards synergies that were going to come out of the financing side as Glencore and Xstrata came together where repositioning of the combined credit was in a better place BBB wise than where maybe Glencore was able to historically access funding both to the bank as well as the capital markets. We have seized on that. We have refinanced. You can see already there 2014 we issued some debt in dollars and Euros to refinance all of our revolving credit facilities for the banks 15.3 billion, and the margins coming through forget the base LIBOR, all these things, but just in margin alone we’re seeing cost of debt come down from the time that we already close to 3.5 which has dropped down to 3. That does start having fairly big differences as we look through and we would expect interest cost to come down as we move forward.

This was the slide I was talking to in terms of and it will make more sense also little bit shaping few slides that Ivan will talk to later on about the balance sheet being further strengthened and building in clearly more flexibility around where our overwriting target is around the strong BBB. This is -- we haven’t sort of put absolute lines across, because this is never an exact science but we feel that’s the sort of the range where the BBB minus and BBB plus fits in terms of where our target range is.

Now as you’re seeing the operating cash flow decline in CapEx, Las Bambas proceeds are clearly improving and segmenting and firming up our balance sheet structure. The strong BBB is believed to be optimal structure and the way the overriding financial policy and commitments and planning around these structures.

It’s the post marketing activities clearly. It’s mostly positively differentiates us against some marketing peers, some of which are private, some of which may have low ratings and enables us to efficiently grow cash flow earnings dividend per share. That’s a key feature of some of the comments that Ivan will be talking to and feeds into our announcements around the buyback and also trying to tendering and looking to buying back some of our convertible bond, while at the same time these rating categories are clearly provided abundant access to capital markets be it banks as well bank markets at a pricing that wouldn’t justify necessarily wanting to be up there some way. So we think the trade-off being up there somewhere against somewhere there just doesn’t make sense in terms of the balance between your equity and your credit and your credit [units]. Mr. Chris Mahoney has just showed in. Morning, Chris.

We can get questions on the agricultural side as well. And what we trying to say on this particular side, you would have seen us historically say in terms of net debt EBITDA, maybe more of a Moody’s thing, where we had target and said we would one of the maximum of three. So, that’s a number that we’ve always said less than three. Somewhere between two and three is sort of a BBB range. You’ve seen we were higher. Then of course you had low -- that’s when the CapEx kicked in, almost the acquisition of Xstrata to virtually [ph] from a Glencore perspective actually sent some of the ratios south given marketing business and their debt and their CapEx. Las Bambas has come through a turning the corners and now we’re heading back up there in terms of 2.41 at about the two level, if you triangulate that with Moody’s which is more around 3.5 to 2.5, because the ratios are somewhat different than calculated by about that sort of level you’re starting to have a great pressure in our view. But now that we’ve [indiscernible], you're now much more comfortable clearly within the BBB space and gives us capacity to think about having surplus cash flow and what we do with that either in terms of investment for growth and some of the share buybacks return special dividends whatever may propose. Similarly FFO net debt something that S&P more looks like, we’ve always said minimum we need to be about 25. These were levels that we were watching. We have turned the corner nicely about there, 25% to 40% is roughly what translates into S&Ps low 20’s and greater than 30% the sort of the numbers that they talk about getting back in that space. So the Company will naturally in the absence of doing other things is going to start clearly heading up towards that level in terms of balance sheet as well.

Just to finish up on my side and the slide on the -- the industrial CapEx has been coming down dramatically as one would expect. That’s the metals and minerals between both the sustaining and the expansionary, energy and the total. This is just the industrial total because there is some -- a bit of capitalized interest on just an accounting thing. We have capitalize some interest based on project construction and is always a bit of marketing CapEx that comes in from time to time but the total was 3.79 billion [ph] for the first six months of the year, 32% down in total, 1.77 billion was the amount. Even the sustaining CapEx has been coming down 14%. That’s part of the integration as well, where we've taken a much closer look at how that’s done, whether there's any wastage, whether there is sort of overcapitalization, whether there is any inefficiencies and that 1,673, the annualized debt does come more closer to the 3.5 billion sort of the 4 range that we fashioned. I think 12 months ago we stood up here and said probably 4 billion, now we are more to 3.5 billion to 4 billion in terms of sustaining for the first half of 2014. That certainly supports that number, I mean coming at 1,673 on the industrial.

So full year-wise we're still talking about 8.7 billion guidance, unchanged from where we were three months ago. That clearly hints towards a bit of a catch up in the second half, maybe then a bit conservative there but that’s still a number that seems to be sort of bottom up, coming from the sites themselves. So we are going to hold that number there. That $8.7 billion does represent a fact that there has been one or two ups and downs. Koniambo, which is a slide later on, Kenny can talk about that. There is some additional CapEx as the ramp up is slower than what one might ordinarily have seen. So a bit of extra CapEx there but that’s being picked up through lower CapEx that we found, annual savings, that we've been able to achieve across some of the operations notably in coal and some of their expansions are going pretty well and coming in less than original budgets as well.

The only thing which we would have to come back and say, three months the Investor Day we have here in December 10th it is, is just to update on Caracal itself. It's an acquisition we have just closed on. There will be a combination of exploration drilling that we're working out what the right program is there. There will be a combination development of wells that we have as well. This was clearly pre- Caracal. It included the initial 15% we had at the various assets but now we have taken over to 85%. That will be something that we would come back and provide some firm figures and guidance towards the end of year and what we see as our CapEx program there. Why we are doing it? Why it’s value additive? What the production profile could look like over the next sort of three, four years there? And what we see as our strategy there? Hopefully there is even lease for 2014. Hopefully there is some cushion even in that 8.7 billion to absorb the extra CapEx for Caracal just for ‘14.

But as we go into ‘15, ‘16, it will then be a program and if some of you have been following Caracal separately as a public company, they had quite an aggressive program, particularly on the exploration side to identify what they had. There was a certain period in which you had to explore and decide what’s you are going to keep and what was going to be handed back to the government. So that’s work in progress. As I said we have only been in there about sort of five or six weeks. It’s intensive work being done between ourselves and the technical team. We are already in good shape and I think the time to come back and update the market is December 10th. So, I think from my perspective that’s it and Ivan will come back and talk about the way forward.

Ivan Glasenberg

Okay, just going through some of the other details over here. We have the confidence in the future. What have we done in this company? Our asset portfolio has been optimized. We think our assets are well run now. They efficiently run and we are in the right category, in the right areas. We think we got the right assets in the right places. Balance sheet as Steve has said, is repositioned, much stronger where we are now at BBB -- do we have a growth projects? Now we do have a strong pipeline of growth projects, I will point you to them later. They once again are the brownfield projects we talked about. They are not the difficult, massive capital Greenfield projects. They are simple add-on brownfield projects which we know we can execute. We know they're going to give the right returns and we will go ahead with them once we are certain they give us the right returns.

The earning power of the marketing business has been rebased. As I said earlier we are now between the 2,7 to 3,7 and once again we proved this is a very sustainable long-term business and continues to grow and we even expect it to grow further with the further brownfield project, so we get the advantages on the marketing and the blending and all the other benefits we get by owning the assets than the add-on in the marketing side which work we can do within whether they are smelters, whether they are mines et cetera.

We believe we are in the right commodities. There is a slide on that where we see the growth, we see demand is there. As I said most commodities, the demand is there. What we see in the market is just a matter of where the mining companies are increasing supply and therefore causing those prices to fall. So we believe we are in the right commodities where we don’t see new big supply coming into the market, we don’t see big new mines coming into the market. And in fact some of the commodities in which we are based, you have reductions in production such as zinc, you have a lot of closures coming forward.

So, even though you get the growth in demand, you're not even keeping constant supply. Supplies going downwards bodes well for those type of commodities. So, we like the commodities in which we are in. As always said, we are an owner-orientated management. We own the business. So we are aligned with our shareholders and we are going to do things which make sense to shareholders. We are not a Company that’s going to sit here and say we replaced depleting assets because you can’t have your business growing smaller. We will do what is right for shareholders. If we can get the right returns in the business, we will go ahead whether it’s M&A, whether it’s brownfield expansions we’ll do it but it has to give us the right returns. If it doesn’t give us the right returns we will return cash to shareholders as we’ve proved with these results over year. So we believe with this outlook the way we’ve got our commodities here we will have sustainability to return cash to shareholders to keep growing the business if it gives us the right returns in the right areas.

The asset portfolio has been optimized. What we’ve done since the acquisition of Xstrata, the synergies at the industrial there is the one from $9 billion of synergies. These have been achieved. The efficiencies across the operations, we’ve developed them. We put the Glencore culture across operations. The Glencore entrepreneurial skill has been put across operations all across the board in the various assets. So we’ve really got these assets handling the way we’d like them.

We also as we said, if we can fund acquisitions, which make sense and give us the right returns, we will do them and as proven we did $2.5 billion of acquisitions, we believe which meet the hurdle rates we’ve got in the company. We did do the Caracal acquisition. We expanded our shareholding in Mutanda. We bought up the partner and we also did opportunistic when we were selling the claim on cold assets together with a partner we bought that which gives us great returns.

We’ve moved as much -- a lot -- most of our assets our first quarter. We’ve managed them well they’re all big assets, some of them are big long life assets. And as you look at the real key, most of our assets are all sitting in first quarter. [Indiscernible] always been there. Thermal coal is one of that and much lower quarter and gives the biggest margins out of other coal companies which are out there. Zinc we move in towards first quarter with the McArthur River expansion and George Fisher [indiscernible] copper with all the copper operations now in the Congo kicking in where we one of the lowest cost producers there because of the high grades of copper being produced in that area and nickel eventually when Koniambo kicks in will move towards that area. So we really believe we’ve got the assets, good assets and in the right places.

The other thing if you look at disposals at time we’ll do disposals and as we did, we did the Koniambo disposal. The tailored part of the Viterra acquisition has assets we didn’t want to keep. They didn’t help us in our marketing part of the business. So we disposed of those and we did some more small disposals in our nickel assets in Indonesia in fact quite right at the right time.

So now we move onto the marketing business. I think I’ve spoken enough about this but this slide sort of gives you an idea. It is a real business. It’s an ongoing business. Since 2008 we’ve always said pre- Viterra $2 billion to $3 billion post-Viterra Xstrata 2.7 and 3.7 we’re falling within that range. When markets are higher we’ll go more towards the top end and hopefully with higher commodity prices we’ll move more towards the $3.7 billion on the marketing business. But it is a business. We’ve been around 35 years. We have relationships all around the world. We have long term contracts. We have different opportunities with our smelters et cetera, the blending opportunities everything we spoken about at the time of the IPO. People thought this is the black box it is speculative trading we once again proven it’s not it’s a real business an ongoing business.

What it also gives us, which is very important in the marketing business and we always speak about it how important it is, it bring us a lot of opportunities. We have market intelligence about what happens around the world. We know demand supply around the world. We have relationship with third party suppliers and therefore it gives us a lot of corporate activities and a lot of the acquisitions we make is due to the relationships we have with these parties around the world. Once again the marketing business is resilient it is a high return on equity. And as you can see we had a good increase of 27% this year but it is a great return on equity and it’s a good part of the business which sets us aside against our competitors.

This one other I need to hop about [ph] it proves the commodities that we’ve been talking about, the ones we're in. Demand is there on all commodities. There is a slide towards the back which shows demand is there. We talk about the super cycle, has the super cycle ended, demand is big and it still is strong even though China mainly grows at 7.6% everyone talks about what is now 14% but we offer much higher base. The actual real actual demand for volume of commodities is higher than it per year is high the growth because for bigger base of 7.6% of the bigger base is higher than it’s been. So the demand is there.

If you look at the demand slide there is one towards there on all the commodities demand is there. The ones where the problem is, where we’ve killed the super cycle because we oversupplied into the market and production has gone up. We know the commodities iron ore is towards the bottom end. Why because I think 25% of the world’s iron ore -- new iron ore production is coming 25% over the next four years. So are oversupplying the market and that’s what's killing the super cycle.

But the fact that the super cycle is dead, it is not dead. It is there, the demand is there, it’s a matter of what people are going to do about supply. So we believe in the commodities which we are -- there is no new big supply. And as I said earlier in a commodity such as zinc, it’s not a matter of increased supply, it’s a matter of decreased supply, even though you’ve got the increase in demand occurring in those commodities.

We’ll talk about China and we talk about China. Well, China has got problems. You read the recent reports about the rent, the rent and property in China but if you look at the figures that really affect us in China, we’re still looking strong. GDP growth 7.6%. You’ve got the industrial production growth of 9%, you’ve got the fixed asset investment growth of around 18%, 19%. So figures coming out of China are still pretty strong for the areas in which we operate. So we are not that concerned in that part. If you look at our growth pipeline as I said, no Greenfields, easy brownfield expansion some are commissioning the ones which we see in 2014 which we spoken about 2015, we got the Nkana Synclinorium; we've got the DRC Power where we’re going to ensure that we get the power, we got the expansion in Chad which we’ll talk about SEC’s towards the end of the year showing exactly what we’re doing in Chad but the Krim Expansion, those are there; those are going to add more growth.

Mopani Deeps happening in 2016, more growth as we said we’re going ahead with the small iron ore project in Mauritania 7 million tons which is a brownfield expansion because we’re using the rail line and the port of SNIM, the existing producer, the government producer it’s an easy expansion very low risk there, not a high capital cost run about $800 million to $900 million.

We didn’t have the 2016 expansion we can look at if it gives us the right returns, if it makes sense at the time where we see commodity prices going forward and these are easy expansions, The Mutanda sulfides in the Congo, very easy expansions. The Coroccohuyaco in Peru is just the expansion of the existing Antapaccay mine where you can feed it into the old concentrator by just expand the existing Antapaccay mine. Those are operations we can do very easily and expanding coal, we’ve an expansions and as I said in oil, easy brownfield expansions are on Chad, the development of their in the Diego block in Equatorial Guinea.

So these are expansions which the company can do and depending upon what returns we’ll only go ahead with them.

So turning to the next slide, this is what Glencore is really about. As I said, this company’s management own a big part of this business, we’re not going to grow for the sake of growth we’re not going to keep the cash in the company because we want to keep it there for us to look for M&A acquisitions or as to look for growing bigger projects, we going to look all the time as Steve said, we don’t want a lazy balance sheet, we want to keep BBB that’s where the balance sheet is going to be.

Now this slide really tells how we’re going to operate. If we can see M&A opportunities, which give us a right return, we’ll go ahead and do them as we proved earlier with Caracal and the ones we mentioned. If we don’t get them and we’ve got a high hurdle rate, we just don’t do that. All we’re going to do into Greenfield project, our feeling about that, brownfield when we go ahead with them, if they make economic sense. If they don’t, we don’t need to do replace the depleting asset.

I’ve heard this story in the mining industry you have to replace a depleting asset; otherwise, your business gets smaller. We don’t mind if the asset deplete and we don’t get the right return in replacing it, no need to expand it. Your business gets smaller, what will you do kick out cash back to the shareholders. So, we’re focused on that unless we can get the right return on the business we run we’ll kick out cash back to the shareholders, we’re not the shareholders but we’re very aligned to the shareholders and we’ll do what makes sense for shareholders. We’re not going to do just growth for growth side. So it’s very key criteria of this company and that’s how we got to take this company forward.

That’s what we proved, we walk the walk, we do what we say we’re going to do and that is well proven and I have spoken about these numbers what we’ve proven now, we did get the $6 million back from the Las Bambas sale, we all generating cash, we see the generation of the cash going forward, we see the CapEx cut coming down as Steve said the sustaining CapEx down to $3.5 million to $4 billion, we don’t have big expansionary CapEx projects post 2015.

So if we generating a vast amount of EBITDA, we only have the $3 billion to $4 billion of sustaining CapEx, we should be generating a lot of cash. Back to the previous slide, if we don’t see projects we’ll be doing these buybacks we will continue doing buybacks and as we proved over here $1.7 billion of buyback with both the shares and the convertible buyback rebasing the dividend, giving us close to $2 billion cash kick-out this year and once again the slide show since the IPO what we’ve done the funds which we’ve took in during the IPO. The $7.9 billion on the slide in the right displays how the cash has been repaid back by the way of dividends, convertible repurchase and the share buyback and this is something we’ll continue doing in the future.

So I think that basically is a rundown how they come is running, how we’re doing, how we see the future and it’s looking pretty good for the company right now and ready for questions.

Question-and-Answer Session

Paul Smith

A few hands there. Tim, would you like to ask the first question?

Tim Huff - RBC Capital Markets

Tim Huff from RBC. Just one quick question on capital management, which was -- you started out by talking about how give a third back -- well, third goes towards paying down debt, third towards capital returns the - split. That last slide that you showed, shows a shift in that, because you look where EBITDA is going and you look at your net debt to EBITDA target for BBB, it doesn’t look like you really want to get your net debt significantly below the 30 billion to 32 billion range eventually. Does that mean that you will eventually shift away from the debt pay down and look a little bit more in line with that last slide which is a 50-50 split towards shareholder returns and growth and how would you view, how a priority there? And then second thing was on coal, the coal EBIT was positive across all major sub segments, you mentioned the cost savings that went into that year-on-year. But also could you just give some background as to the specific measures that we have taken on the coal division and I would say particularly on met coal? That’s all right.

Steve Kalmin

Okay, I will take the first one. The third, third, third was more in the context of Las Bambas proceeds. There has been a lot of questions over the last six months, are you going to generate this, call it 6 billion number it is and how you may deploy those proceeds? There is obviously a big injection of cash and I mean there is three different ways you can obviously look at that you can either de-lever some of, you can return to shareholders and you can reinvest. And we will say it’s probably going to be a pie, we have three wedges there and in the absence of anything more specific on it and people said how should I think about that, we sort of continuously said well third, third, third is probably as good an assumption to make as any of that. And I think what Ivan has now hinted because the sale of Las Bambas has just accelerated where we would go to be in 2015 in terms of having surplus capital by virtue of what the business was going to do.

So, Las Bambas clearly gave us opportunity to look towards capital management now already in ‘14 compared to something that we would have, even if we kept Las Bambas and added fund through its CapEx and start to produce in 2015, it was probably 12 months delayed in terms of being able to say we have now got surplus capital. So, I think the third, third, third was something that was specific around Las Bambas, now we will get to a situation where our CapEx and I mean our cash flow growth should go up for a variety of reasons, volume prices and cost savings as continuation of all that. CapEx coming down, cash flow generation is going to be high, the base dividend is still very well managed around sort of 2.5 billion or whatever it comes to at the moment, so multiple times covered. And in that environment clearly you can then see the balance sheet getting very comfortable in terms of those metrics that we then do. And then it’s back to Ivan’s box where we say, on sort of page 21, to sort of say I mean 50-50, if you want to pick a number, pick a number it’s just another thing.

We are saying of course we are open to an alert to reinvestment in this business at least the CapEx side of this business is going to be organic growth which is still delivering volume growth about 6% till 2017. Volume growth in this company is going to invariably come from sensible disciplined M&A as well. Caracal will do that. Clermont has added some tons of low cost as well and we will continue to look at some of those. If there is sort of the more that gets allocated to that bucket by definition the less that’s then get allocated to how much can we return to shareholders in a particular year. But we feel that there is enough headline cash flow generation that some form of supplementary return to shareholders through buybacks or some other specials is sustainable as a concept. How much that money is going to be, is going to depend on what the opportunity set is in the M&A but that cash of this business is expected to throw off, there is going to be a lot there.

So, we would have to…

Ivan Glasenberg

There is not going to be a rule what the percentage will be as you said and as we say the net debt of $32 billion how you are going to repay that we may not. If $32 billion keeps your balance sheet at BBB and you don’t want to take it to a higher level and you don’t have M&A and you don’t have brownfield expansion, you may kick out 100% of the cash flow to the shareholder. As I said, you don’t look at that slide and say we are going to be BBB that’s where we want to be. The big wad of cash will be coming in because you don’t have big sustaining CapEx, the cash comes in now what do we do with it. We are not going to pay our debt because we don’t want to take A rated balance sheet. Steve, doesn’t want a lazy balance sheet. We want to work and the shareholders don’t want a lazy balance sheet. So, we want to take this cash that’s kicking so there is not M&A, there is no brownfield expansions that may give us the right returns for whatever reasons. We may kick out a 100%.

Steve Kalmin

But good M&A and good growth is going to drive the ability to clearly grow your dividends overtime as well, so you always try to find the balance there but it’s not the growth for growth sake because that’s where you can destroy capital as well and destroy your base business which has been clearly a crime in this industry over the last 10 years.

Tim Huff - RBC Capital Markets

And the question on coal?

Ivan Glasenberg

Met coal, Peter?

Peter Freyberg

Just on the coal side that’s talking generally about cost and Steve mentioned the fact that we have taken cost out since late 2012. If we compare against 2012 we have taken about $1.8 billion of cost out in U.S. dollar terms, a 1 billion of that comes from obviously the benefit of exchange rate. And we also have the headwinds of inflation which has cost us about $0.5 million. So, the real unit cost savings across the business over the two year period is about $1.3 billion and looking at ‘13 and ‘14 two thirds of that was in ‘13 where we have made all the major moves that we wanted to in terms of reduction of cost and about one-third is in this year. And in fact if we look half and half, H1 ‘14 against H1 ‘13, we are about $275 million better off on a unit cost basis, half and half real unit cost savings after inflation.

The question was also about met coal, what have we done. You will see our volumes are down. We have looked at each and every operation that we have and we have taken out coal that doesn’t pay when we had met coal prices around $300 plus a tonne. We pushed every asset as high as we could. We mined the higher ratio of pits. And if some of that incremental call plus the $200 a tonne and we’re still making $100 plus margin. While in the current markets has obviously not the case. So we've stopped pits like Wollombi at Newlands which were the high ratio of pit. We’ve changed roasters at some of our mines Oaky Creek in particular where we’ve taken out additional roasters that were expensive which has also allowed us to scale back on development. At Collinsville which has a mix of met pits and thermal pits we’ve actually stopped the metallurgical pistol -- most of metallurgical pistols over high ratio. So we’ve seen a massive stripping out of costs within the met coal friction as well.

Our performance in the first half of this year wasn’t where we wanted to be. We had some issues in terms of some structures that we had to mine through Oaky Creek we’re through those now we also in mines like Tahmoor in difficult mining areas where we have thin seams and low yields. The second half of this year we’re actually expected to be probably about 10% low in cost again in terms of first half for the met coal section.

Ash Lazenby - HSBC

Ash Lazenby from HSBC. Just couple of questions please, first of all just going back to the excess returns and the method of that. Just in terms of your thinking today how do you sort of rank in terms of growing that progressive dividend on a sustainable basis and you’re thinking around buybacks versus say special dividends and the various merits there. And then just the second question on the marketing side, any chance of a ballpark idea of what nickel might have been on the marketing side in terms of the earnings contribution for the first half? Thanks.

Ivan Glasenberg

I think the I mean if we talk about maybe buybacks against special dividends so I think our approach on the buyback for now also given the size it’s manageable as a buyback I mean the bigger you go these things is just not manageable to do through a buyback just share liquidity and have longer takes so at some point you got to have to use all the tools that you have and potentially giving some of that cash. But sort of 1 billion we felt is of a size of manageable through our market buybacks over six to nine month period based on feedback that we’ve generally received and I suspect if you had to pole investor preference so I would say this seems to be an overwhelming preference for the buyback concept and I think it maybe to do with the few different rationales one that’s potentially for them maybe not for Swiss shareholders but the broad institutional UK, U.S. shareholder likely to be more tax efficient in terms of their own return profile over time.

There is transaction cost in friction if they get cash and maybe want to reinvest it certainly is sort of a mechanism. They like the sort of for the long term institutional holders that are tends to be a good way of old jointly sharing in a long term growth in EPS and cash flow of the business rather than maybe some people come in for taking a sort of quick grab with some special dividend that might have come out of the company.

Having said all that fundamentally this should not be the two much of a difference between what you’re doing. I mean ultimately it’s a shrinking the equity base that’s there to sort of generate better return on equity over time for those that get the cash to pay down that want to reinvest in the business that can currently do that and the economics should in fairly sort of play out. So this is just sort of vagrancies of the capital markets as you guys know better than us clearly we’re just sort of simple people to on a run and sort of a commodity business. But around EPS and all that sort of stuff there is clearly certain preferences of how that works and how that grows, but I think it’s going to be a combination of all and it’s also sort of a buyback of a signal, it’s something that we want to -- I think there is a signal that it’s going to be a more sustainable durable ongoing part of the capital management of this business. Where maybe a specially sort of sometime seen as sort of a one-off and you move on.

So if you state institutional as that has something that supports actively done as a matter of managing our own capital structure to draw the best sort of return on equities as we clearly planned I mean the base dividend is also something there to make that sacrosanct I guess the names here as well so you want to sort of set that under sort of whatever the scenario that you may see going forward is always going to be reasonably well covered and fundable and is sort of clearly pretty locked in against what’s your volume and what to use and commodity prices are. So that will continue to grow and rebase and as the business potentially grows and rebase and we move away from this sort of CapEx news that was hanging around our neck from 13 billion down to 8, down to 6, and down to that sort of level there is clearly scope to rebase that a bit higher as well as we move forward.

Steve Kalmin

You that it in the metals market is…

Ash Lazenby - HSBC

It is healthier than last year.

Steve Kalmin

But I mean not sort of creating number in there that would sort of source [Multiple Speakers]

Ivan Glasenberg

It was a nice six months but nothing that’s…

Heath Jansen - Citi

Heath Jansen here from Citi, I am going to ask some just operational questions so firstly just on energy marketing we’re seeing energy has come down over the last couple of the years and margins get compressed. I think from year-on-year from 0.8% to 0.4%, I was wondering whether maybe Alex and Tor could give us a little bit more insight in terms of how much of that is cyclical versus structural and then, you have a plans I guess to grow earnings over the next couple of years, is that now just the function of your process particularly in total recovering, given you got the volumes now with coal from Xstrata and how you see that to play out maybe your question could tell us as well just on the ramp up now of Katanga and just the power as you’ve seen the DRC and it looks like you’ve put in some redundant capacity down power those sort of issues now sort of and one last one to Steve, just the rational between the buyback versus buying back the convertible as well. Obviously convertible is out of the money but I guess if it comes back in is that another form of capital management that we could see potential in the second half?

Steve Kalmin

I’ll take that first, last question yes it is another form I mean it’s something that relate to the ability to keep moving forward on that we started the program in June to board that 25% and we’re obviously sort of - whether there will be additional opportunities and even the buyback could being and ultimately it’s the same effect. It just depends on what other -- if its premium or some other elements that don’t make sense to do in the convertible and the good thing about the convertible bonds at time that you can get some good sort of size down within a short period of time whereas you wouldn’t be able to do that in the 300 million of convertible bonds if the market allows you to and that sort of equates to maybe 20 days where the buying back that you might otherwise be able to in the market. So, yes we’re alert to that as either, instead of, and/or in addition eventually. Yes.

Ivan Glasenberg

Alex and Tor?

Alex Beard

Yes, I’m going to go first. On the oil sides I’m just tempting to say that a lot of this is cyclical to be honest it’s been such a long cycle that I think you have to admit a large part of the marketing margin deterioration in oil and it’s certainly become structural. We’ve often talked about the key factors in terms of refining margin, market structure, fright rates, indicating a healthy oil trading market, but there is no doubt over the last six, seven years that the oil market is become extremely grounded in trading terms margins are under pressure.

I think moving forward, there isn’t a drag on the P&L in terms of what we’ve previously of legacy freight exposure and that’s broadly out of the book but a large number of the quantity, large number of specific products within your oil sector are extremely competitive, very challenging and I don’t see amount of returning on lot of this. What we are trying to address is, is to continually to work to reduce our working capital usage by more efficient sort of payable, receivable management, we’re integrating Chemoil into the marketing side of the business over the last few months and over the next six months and we think that work to be done there on cost reduction and again working capital management.

We are setting down businesses that we think really have no future with a higher overhead and we’re having a go at overheads generally. So, there is some bright spots out there, there is some products which I think have more of a future than others. There is a potential change in market structure on the crude side we’ve seen with substantial crude weakness over the last few weeks we’ve seen actually a flip-down into Katanga at least on the first two or three months and Katanga is just about the best market structure you can have from market profits.

So there are couple of bright spots out there but I would say broadly speaking it is more structural than cyclical on the oil side.

Tor Peterson

On the coal side you’re we’ve seen in that and we’ve repeated that time-to-time again over the last decade or even 15 years we’ve been pretty consistent on the marketing side. Our big advantages that we’re the globalization where we’ve the ability to look at each market coal’s highly segmented again with our equity ton base in Columbia, South Africa, Australia that gives us the ability to play arbitrate in the different from an origination from a coal segment and quality basis plus the freight I mean we’ve been relatively consistent in our trading over the last as I said decade and I see no reasons that to change moving forward also with the consolidation in the industry A, we have less players on the trading side to advantage for us. Our ability if we choose we’re not volume driven obviously the critical mass is key from a third party access of trading but our equity base also gives us the ability to leverage the trading with our equity base on tonnage. So we have been pretty consistent and we do have lower price volatility, we’ve been down now to ranges as we stated in our presentation, 35% of the world’s production is at a cost higher than the marketing - excuse me higher than where the market prices are today but that just also gives us other advantage for third party tonnage to trade.

Ivan Glasenberg

Alex, you just need some competitors to leave, that’s all.

Alex Beard


Ivan Glasenberg

Which at some point they may, because at some point --

Alex Beard

We see that happen in other commodities, other commodities starting people paying into the space and certainly have massive competition into 4, 5, 8 years they died and then the market opened up again.

Ivan Glasenberg

We headed in coal, when we started in coal there was a very competitive market.

Telis Mistakidis

We’ve had problems, the whole of Katanga head problems for this not for the year which has mostly been in terms of the instability of the grid. Power transmission problems rather than anything else. Now if you see this three major operations in Katanga, which is Tenke, Mutanda and KCC. Tenke and Mutanda haven’t been so much affected in terms of production because of the process itself. SXW no concentrator, no roasting. Katanga, it will be more affected because of the nature of the operation which is running the concentrator and the roaster. So, every time you have a trip and these trips have been coming and they will probably continue come, you are much affected in that operation. So, we have done is we are installing first 8 megawatts of the roaster so that when you shut down, you don’t get the thing just freezing then you have to manually, shut it down roaster. We are putting in the 8 megawatts there and we are doing the same and that’s coming in now, next month and we are doing the same thing at the electrolysis and also the concentrator purely standby. So, we are going to have about 24 megawatts just standby so that these things don’t happen. That was something that you said, you could say we should have done but we thought with the investment that we are doing in the transmission, the big program we wouldn’t need it but we are being affected by factors that are beyond our control.

So, if snail doesn’t pay, the Zambians, as Zambians turn off the line, so the power doesn’t come in from the Zambian side and that causes instability on the grid, sometimes we have had things like the contractors of snail instead of clearing the bush, cutting it down, they've been burning it. So, there goes the power line. You get all sorts of things like that, so as we learn more we are getting prepared, so we should minimize these or the effects of interruptions.

Dominic O'Kane - JP Morgan

Dominic O'Kane from JP Morgan, three quick questions. You are more actively involved in Russia than many of your competitors, I wonder if you can just comment on sort of recent sanctions and whether that’s impacting your existing business and I guess maybe more for future whether it’s impacting any of your assessment of risk opportunities in Russia for the future? And second question on agriculture trading in marketing, as you said Steve historically you talked about $450 million, $500 million as a sustainable EBIT rate for agriculture.

Steve Kalmin

That was just for Viterra that was a number at the time when we acquired.

Dominic O'Kane - JP Morgan

Okay, so if we look at the performance in H1, how should we think about H1 versus H2 weighting for agriculture? And should we view the performance in H1 as an exceptional year or do you think that’s going to be repeatable going forward? And thirdly, last question, if you maybe give an update on Koniambo, you said steady state production 2016, could you give a bit more clarity on the production profile and whether you are still happy with the most recent CapEx guidance?

Ivan Glasenberg

Okay, first question Russia, no, the sanctions have no effect on us with off take of commodities both aluminum, copper, oil et cetera, no effect, none of the sanctions have hit that. Pre-financing deals will be more difficult today because the banks aren’t allow you that sanction to anything more than 90 days, just for certain companies but the ones which we had with Rosneft have been done. They not hit under the sanctions, most of that is anyway being taken over by the bank. So, whatever is happening in Russia hasn’t affected us, some of the sanction have sort of created opportunities in Ukraine, some of the steel plants in Ukraine are having problems producing a coking coal and certain commodities that they import into Ukraine of those type of commodities which is occurring, so creating dislocations in the market which always we can take opportunities when those things occur. So, it has no effect on us. Viterra grain, Chris you want to talk about that?

Chris Mahoney

The first half was better obviously and Viterra was a part of that but it wasn’t all of that. Off the Viterra piece Canada was good primarily because of the large crop in Canada which was a crop record by about 25% larger than the previous crop but it wasn’t only Viterra, the oilseed crushing was better, soft seed crushing in Europe was better and soybean crushing in Argentina was better. And in fact the trading generally was better in the first half particularly the oilseed trading. I think that the Canadian situation probably is a little bit exceptional and I don’t think I can comment specifically on the second half but generally I am pretty optimistic. We still have good demand growth. I think the industry is becoming a little bit more disciplined. The crush margin situation looks okay, I would say looks good in South America. And so, I don’t know that the earnings will come in the same way that they came in the first half from the same bits of the division but without making a hard and fast prediction I would say it looks okay. And longer term, the outlook I think is pretty positive to the industry.

Ivan Glasenberg

I am not sure where we start with Koniambo but I think it’s fair to say that Koniambo has been very challenging and I prefer you to a slide, I think we have on page 24 if I may. And I think the question was twofold production profile and a CapEx update. When we said here basically in September last year we talked about the guidance so the charter had given and obviously that was revised I believe down and stand here now and obviously we’ve revised it down so we’ve revised the same down once again. All we have to be the same clearly not but I think it’s fair to say that with the additional data points we have, have been operated coming at both from September through present it’s quite clear that we couldn’t achieve the targets that Xstrata had laid out and we ourselves had laid out. That’s an earlier last year.

The biggest problem we probably face and it’s a problem that Telis just highlighted there in Congo is on the power side. And I think when Koniambo basically started up in the first quarter of last year, everybody expected Koniambo to start up on coal fired power from its two STGs. And I think it’s fair to say that we sat here basically in I would say the third quarter of 2014 and we still have material problems around our coal fired power. Koniambo itself a full capacity should draw 215 megawatts of power those two units alone generate 270 megawatts.

Today’s were in a situation where Koniambo itself -- so literally if you starting up if you’re starting up on industrial operation and you have call it 55 megawatts of headroom in terms of power generation without let’s say the CTGs and without the ENERCAL connection, and without basically generators we put in place you don’t have a power availability issue. I think it’s fair to say that when you look at our performance during basically the fourth quarter of last year and through let’s say the first half of this year, the biggest challenge for us as being plant uptime which has literally been impacted heavily by power availability.

Where do we stand in terms of power availability going forward well literally I mean look we’ve got new heat exchanger bundles being fabricated in India right now they should be on island later this year and they will be in basically installation in the first quarter of next year latest and thereafter literally we would hope to get basically STG 1 and STG 2 basically up to full capacity during the first half of 2015. In the meantime we’ve done some work around STG 1 and STG 2 in terms of debottlenecking basically those units to give us slightly more power. And the team and actual fact that done a phenomenal job in terms of bypassing the heat exchangers which failed to give us the rate of power from both STG 1 and STG 2. As it stands there we’ve given some guidance here. The STG 1 is currently generating 50 megs of power and actual fact that it stands right now we’re getting 70 to 80 megawatts of power from STG 1 and STG 2 basically that just being started up and we expect to have power from STG 2 basically in the first half of September.

Once we got basically the pad from those two sources along what else we have the power issues that have plagued just basically from the get go they should be behind us. Once we got the power availability issues behind us we don’t see a lot of risk around the full costs we’re now giving. In terms of your second question the CapEx let’s say impact of these changes the construction capital hasn’t really changed. The figure we sited basically last September at $5.5 billion literally construction is complete. If you look at project Koniambo and the project Koniambo teams those teams have been de-mobilized. Literally we have an operational workforce onsite right now. But clearly if 49,000 tonnes of production which we started guidance hasn’t being hit if let’s say the 33,000 tonnes of guidance that we’ve given so this year basically hasn’t been hit and we’re now looking at 10,000 to 18,000 tonnes this year at basically let’s say a three year ramp up rather than the two year ramp up clearly we’re capitalizing OpEx.

And in terms of guidance in respect to what the capital build will be for Koniambo I am not sure what color I can give around the same but I think it’s very fair to say that where we stand today we’re looking at Koniambo costing us in excess of US$7 billion versus the US$6.5 billion that we were guiding last year.

Steve Kalmin

So that’s what I said earlier on with that 8,7 and that’s to absorb sort of a couple 100 million clearly of extra Koniambo there that’s been neutralized by some CapEx reductions particularly in coal and a few other places as well for some of their expansions that are coming in ahead of budget and ahead of schedule.

Ivan Glasenberg

I think we have time for one more question.

Liam Fitzpatrick - Credit Suisse

Liam Fitzpatrick from Credit Suisse. Two questions one on coal and the second one on tax, I just don’t recall the outlook that you give that present section is fairly bullish in terms of supply and demand just wondering if you could talk and give an overview of how much swing or dormant capacity you think is sitting in Indonesia and the U.S. that could respond if prices to eventually go up? And secondly on sacks it looks like your blended rate has gone up from previous guidance. And I think in the past you said the industrial business should be around 25%, 27%, has they gone up to something now over 30%?

Ivan Glasenberg

Well, clearly that’s the swing of the as you can see from the bulk with 35% on the market being in production cost higher than the current market of that you probably have close to I’d say 206 million tonnes of the Indonesian and 425 million tonnes market that is currently producing it you can put that [indiscernible] currently producing at production cost higher than the current market. With Indonesia and again there is additional logistical capacity from the Indonesians if you look at this where we see the growth anywhere between 5.5%, 6% this year and we continue to see that growth, India is your big demand story. Demand is fairly robust going forward and we’re pretty confident in that over and above the likes of Vietnam, Malaysia, Thailand places that sometimes Korea don’t necessarily get mentioned in the same sentence. We’ve a fairly even relatively flat imported look for China which consistently is actually outperformed on the import side but India remains a real growth driver.

Your supply side again it’s not necessarily even people necessarily cutting back it’s simply not increasing. Indonesia over the last five years increase at an average of 14 and have 15% per annum. Now if we move up $10 I think that’s your question is, where does that come back in that is the question again? Market is highly segmented in terms of quality and different types of material. So, it’s not just the like-for-like increase on that side. We also think there have been high grading the mines, their cost have increased substantially for a lower quality material. So, not to put a number on a return of pin point or something I think still you’d see a market move anywhere between $13 to $15 higher, you’d still have some 25% of the market would be at a cost above the current - above that future forward price.

So, that’s one of the reason we’re optimistic from an outlet price perspective but even more or so in some of our -- our quality and in terms of diversification we like the quality and our product mix relative to other people. United States I think you really have to go up another $18 to even get to close to breakeven and there again you’ve a different higher sulphur material which is not necessarily even required or wanted in the international Seaborne market.

Steve Kalmin

I think it has been - I mean we previously would have said, it’s a weighted average of call it 25 on the industrial and sort of 10 on the marketing would be somewhat crept up from the 25 not quite 30, so it’s split the difference 27.5 or so is maybe a blend. As a function of few jurisdictions that have been another increasing tax rates, corporate tax rates Chile comes to mind that have been increasing rates there because we’ve operations down there Collahuasi and others and particularly Australia and South Africa being tightening up there I think capitalization rules around levels of sort of debt to equity that you can use in terms of those operations, both of them have moved to Australia went from 3 to 1 down to 2 or so and South Africa similarly has put in various things of course those are operations in countries in which we’re active. So there has been slight tick up there I mean that’s in accounting terms and sort of cash flow terms we’ve got quite a bit of shelter as I said for a while in terms of syntax losses that we still go through over the next sort of three to five years.

Paul Smith

Okay, we’re out of time. So thank you for joining us in physical form, and thank you for those who joined by telephone and webcast.

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