AngloGold Ashanti (NYSE:AU)
Q1 2011 Earnings Call
May 11, 2011 9:00 am ET
Srinivasan Venkatakrishnan - Chief Financial Officer, Executive Director, Member of Risk & Information Integrity Committee, Member of Investment Committee and Member of Executive Committee
Stewart Bailey -
Robbie Lazare - Executive Vice President of South Africa and Member of Executive Committee
Mark Cutifani - Chief Executive Officer, Executive Director, Chairman of Executive Committee, Member of Safety, Health & Sustainable Development Committee, Member of Investment Committee, Member of Risk & Information Integrity Committee, Member of Party Political Donations Committee and Member of Transformation & Human Resources Development Committee
Allan Cooke - JP Morgan Chase & Co
Unknown Analyst -
Good afternoon, ladies and gentlemen, and welcome to our presentation of our quarterly results for the quarter ended 31st of March, 2011. Before we begin, I'd like to go through some very basic safety procedures. In the event of an emergency, a siren will sound, information will be broadcast over the building's public address system. Please move quickly, but in an orderly way out to the nearest exits and then gather in the open space on Miriam Makeba Street to the west of Turbine Hall, where our safety wardens will advise of additional procedures.
Turning to the presentation, the format will be as follows. Mark Cutifani will review the company's performance over the quarter before Venkat walks through the financials, Mark will wrap up and take questions.
We do have several members of our executive team present who will be available to answer questions either in the Q&A or after the presentation. It's also appropriate for me to acknowledge the presence of 2 of our nonexecutive directors, Mr. Frank Arisman and Mr. Bill Naim, who are present as well. And then one of the highlights I know for all of you at the presentation, I'm just going to go through our Safe Harbor statement.
Certain statements made in this communication including, without limitation, those concerning the economic outlook for the gold mining industry, expectations regarding gold prices, production, cash costs and other operating results, growth prospects and outlook of AngloGold Ashanti’s operations, individually or in the aggregate, including the completion and commencement of commercial operations of certain of AngloGold Ashanti’s exploration and production projects, and completion of announced mergers and acquisition transactions, AngloGold Ashanti’s liquidity, capital resources, and capital expenditure and the outcome and consequences of any litigation or regulatory proceedings and AngloGold Ashanti’s Project ONE performance targets, contain certain forward-looking statements regarding AngloGold Ashanti’s operations, economic performance and financial condition.
Although AngloGold Ashanti believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those set out in the forward-looking statements as a result of, amongst other factors, changes in the economic and market conditions, success of business and operating initiatives, changes in the regulatory environment and other government actions including environmental approvals and actions, fluctuations in gold prices and exchange rates, and business and operational risk management.
For a discussion of certain of these and other factors, refer to AngloGold Ashanti's annual report for the year ended 31st of December, 2010, distributed to shareholders on 29th of March, 2011. These factors are not necessarily all of the important factors that could cause AngloGold Ashanti's actual results to differ materially from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results.
The company’s annual report on Form 20-F was filed with the Securities and Exchange Commission in the United States on April 19, 2010, and amended on May 18, 2010. AngloGold Ashanti undertakes no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after today’s date or to reflect the occurrence of unanticipated events. All subsequent written or oral forward-looking statements attributable to AngloGold Ashanti or any person acting on its behalf are qualified by the cautionary statements herein.
This communication contains certain non-GAAP financial measures. AngloGold Ashanti utilizes certain non-GAAP performance measures and ratios in managing its business. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the reported operating results or cash flow from operations or any other measure of performance prepared in accordance with IFRS. In addition, the presentation of these measures may not be comparable to similarly titled measures other companies may use. AngloGold Ashanti posts information that is important to investors on the main page of its website at www.anglogoldashanti.com and under the Investors tab on the main page. The information is updated regularly. Investors should visit this website to obtain important information about AngloGold Ashanti.
And without any further ado, I'll hand over to Mark.
Thanks very much, Stewart. Ladies and gentlemen, thank you for joining us today. As you know, the first quarter is traditionally the weakest quarter for us as a business with our South African operations restaffing after the Christmas break. Still, we turned in a strong performance in what proved to be a challenging period with a year-on-year performance in South Africa considerably actually ahead of the signed period in 2010, as both the leadership work that Robbie and Mike have lead and despite torrential rainfall at Sunrise Dam in Australia, we also managed to hold our initial guidance of around 1.04 million ounces with a strong contribution coming from both our continental African and our Americas operations. Total cash costs for the period reflected the physical performance level on that. There were some adjustments due to fuel prices, with total cash costs around $706 an ounce.
Adjusted headline earnings of USD $203 million more than tripled from $61 million in the first quarter of 2010, showing strongly away from the removal of the hedge book and the continued rise in the gold price. You'll also notice that cash flow from operating activities which, at $515 million for the quarter, is certainly much more significant than last year's number of $179 million.
At the same time, I should also point out that not all the South African operations were affected by the slow restart after the break. Kopanang managed to grow output and reduce costs, which shows what can be achieved in a difficult environment. If you recall this time last year, we talked about Kopanang being one of those areas of key challenges for us, and it's very gratifying to seeing the improvements that are being achieved over the last few months. I'm very happy with the progress that's being made.
As I mentioned, our Continental Africa division came in ahead of expectation. Particularly gratifying was the strong showing from Iduapriem, where we're seeing project win gains some real welcome traction. The most important thing about Iduapriem is for those that watch our portfolio performance rating on a quarterly basis, you'll see that Iduapriem is now what we call a green asset, that is good team, a good plan, delivering against the plan and delivering good cash flows. So we believe Billy Mawasha and the team have done a great job in turning the asset to account and we're very pleased with the project progress that they've been making.
Our project teams have made good progress on all fronts with Córrego do Sítio and Tropicana both moving ahead according to plan. We've completed our feasibility study on Mongbwalu as per the target, and that's in the DIC [ph], and we're now looking at the project and going through the optimization phase of the feasibility work. Our exploration effort continues to forge ahead with exceptionally positive degrades delivered in Egypt at the Hodine prospect and our brownfield teams are doing exceptional work in Argentina and Australia. We'll talk to both of those issues in a few minutes.
So on safety. Tragically, we lost 2 of our colleagues during the quarter at separate incidents. One in South Africa and one in Ghana. The accident at Great Noligwa in February has blotted the copybook for the South African team that would've otherwise have worked a full 7 months without a workplace fatality. And from that perspective, we're encouraged by the improvement. Obviously one fatality is one too many, but certainly in terms of where we've been and where we are today, that improvement of better than 90 percent in terms of where we were in 2007, because I think very simple measure of the progress the team has made.
Our broader accident frequency rate, which is what we call our all accident frequency rate, is also now better than the 50% improvement in terms of where we were in 2007. I think that also speaks volumes for the nature of the Coco Tranche [ph] that we've been driving across the business and I think both of those metrics demonstrate the good work that's being done, but at the same time our only target is 0, and the team is fully committed to working towards that and creating what we call a 0-harm workplace.
We also recognize that it's been a tough time for the industry. And as part of the industry and whilst we've had an exceptionally good run, we believe we're partners with all our colleagues in the industry and we will all work together to try and improve safety across the industry. Anything we can do to contribute to that change and we also listen to the good work that our colleagues have done, so we're all part of that game and very important that we will focus and try and help continue improving the industry performance.
On the operations side, Ron Largent and his team in the Americas worked well to show a 4% increase in production over the quarter to get to 203,000 ounces. Total cash costs were $480 an ounce for the period, with the escalation contained to 3% despite the plants low staff at Cripple Creek and the difficult inflationary environment, particularly in Argentina.
While Cripple Creek shared a big bump in production from Q4, we expect that to improve -- that to continue to increase appreciably over the balance of the year. While the higher volumes contributed to the 11% improvement in cost, we're working hard to mitigate the impact of higher diesel prices going forward both here and across the rest of the open pit portfolio.
Cerro Vanguardia's production was in line with plan at 10% lower than last quarter at 45,000 ounces, due mainly to a planned drop in the grade and 2 maintenance shutdowns in the plant. While you notice a jump in costs in Argentina to $435 an ounce, largely as a result of the jump in fuel prices and payroll costs, this performance is actually ahead of budget as we saw encouraging efficiencies across the operation and a welcome boost from the silver market that was clearly been in full cry.
Nonetheless, we will continue to see pressures on the costs in Argentina this year as the macroenvironment remains a difficult one to operate, with obvious price escalation and continued tightness in the skilled labor market, a real issue in Argentina. But if you do recall, we're coming off an $800 an ounce performance about 2.5 years ago, so the site has made tremendous progress. And now they're dealing with most daily or monthly operating issues, and they're making good progress against those challenges as well. So we're very encouraged and believe the team will continue to go forward very strongly.
At Serra Grande in Brazil, production dropped according to the mine plan with improvements on cost and output anticipated over the balance of the year. Brasil Mineracao kept production steady during the quarter, with great improvements offsetting some lower tonnages caused by geotechnical problems in a couple of the operating staffed within Cueva. It was a 3% improvement in the cost line, however, courtesy of strong byproduct credits from an improved sulfuric acid market, which has recovered well since the beginning of the year. If you remember about a year ago, we were bemoaning the fact that the sulfur market had taken about 10% of their cost reductions. Well, we're starting to get some of that back, so that's encouraging.
Production from Continental Africa fell 3% to 363,000 ounces, with cost escalation well controlled at 4%. So I'm very pleased with the work Richard and the team have done in managing the costs and now making very good progress on some of their turnaround projects, although you won't fully see those benefits until the second half.
As I mentioned earlier, the team in Iduapriem has taken the bit between its teeth on Project ONE and put record tonnage through the mill. That helped offset a planned reduction in grade and help deliver 56,000 ounces of $714 an ounce, well ahead of the plan. Also of immense importance is we managed in record time to complete the construction of the new tailings facility at the site in little over a year. This is an enormous achievement and a great stride towards insuring that Billy Mawasha and his team are building a solid, sustainable operation in Ghana.
On the negative side of the ledger at Obuasi, we were still dealing with some of the continued outcomes from the slower development rates that we saw in the second half of last year, and we expect those issues to be progressively resolved over the next 3 or 4 months. We are on track, however, to present to yourselves our strategy and our development plan going forward midyear.
In the meantime, we have seen some encouragement across a number of fronts. We've seen some very good work on the environmental front, some good work in the community area and working on the relocation of the village, and we've seen mills reports up 6% due to some of the integrity work we've been doing in the mill, which helped increase our production to 70,000 ounces. The cost line was influenced by rising diesel prices, as we saw that across the portfolio and Power Terrace [ph], as well as a one-off inventory charge of $54 an ounce. Our plan calls for similar production at a lower cost in the current quarter, and then we'll start to see a stronger second half, as the work of the task team starts to take hold. Our task force is also continuing at pace with its work on planning for the immediate recovery at Obuasi, working on addressing sustainability issues and designing a long-term future for the 30 million ounce ore body and as I said, midyear we'll give you a full update on where we are and our progressions on going forward.
Elsewhere in the region, Sadiola was another strong performer with great improvements complemented by higher tonnages giving better reliability from the plant. This is an encouraging trend that we have to hold and build on steadily as the year progresses. It was somewhat ironic, as Sunrise Dam and other hub operations in 2 of our driest areas across the globe were both victim to historically high rainfalls. For example, at Sunrise Dam, we had more than a 100-year flood event across that part of Western Australia. And at Navachab, we also had significantly higher rainfalls hampering access to higher-grade areas of the pit leading to lower tonnages and recovered grades.
At Geita, the uptick in grade from Nyankanga and also Geita Hill started to materialize during the quarter, supporting a 4% improvement in production despite lower tonnages with some unplanned maintenance undertaken in the sag mill. Now what we have been doing across the portfolio has been doing very detailed integrity reports of all of the mills. We have seen some deterioration in some of the structures or the end caps on the sag mill that will require work in the second quarter. So we are budgeting for some lower production in the second quarter as a consequence of finding the deterioration in the ball mill. So the good news is we found it, we've got the plans in place to do the correction works in June and we are expecting to see a very strong second half consistent with the plan to actually progress the mines through the pit.
What we've shown on this section here is how the pit will progress through these high-grade zones during the course of the year. So you see -- and this is a busy overhead but if you see quarter 1, the slice that we take through the area through those high-grade areas, the pink and the reds and the oranges are meant to show high-intensity mineralization in the high-grade zones. And as you go to quarter 3 and quarter 4, you'll see the increase in access to the high-grade zones, which actually drives the back-end performance improvement at Geita. And again, for those that are both geologically and mining literate, I think that's a pretty clear picture. For those that aren't, trust me.
Australia was perhaps the most important feature in this quarter. Gold production at Sunrise Dam was 72,000 ounces, 29% lower than last quarter. There was a commensurate impact on costs taking us to $1,083 an ounce. As I said, February 2011 was the wettest month on record for the Laverton area, with the highest rainfall in a single day.
At Sunrise Dam 50 kilometers to the south, the rainfall was 30% higher, exceeding a 1 in 100-year floor event. In fact, we had almost the annual average rainfall occur in only a few hours of the operation and of the 2 days, massive changes. The problem with the rain in somewhere like that country is the area in the ground is so hard and compacted that when we have rainfall of that type, the ground doesn't absorb the water, it literally runs off the surface. And so while we have plans in place for major events, those plans worked, our evacuation processes all worked, so everybody was secure and safe and we're able to recover the business very quickly, both from an open pit and an underground perspective. But certainly, it's had a significant impact and will, obviously, impact the balance of the year, given we had a small seep failure on this wall as well, but I would say the team handled a very difficult situation very well. And if you look at how quickly the team is pulling the operation back on compared to others in Western Australia and in particular, in Queensland, where they've had very similar events, the team had done a pretty good job, but it certainly will have an impact on the year but again, a very good work for the team in holding that together.
It's also important to note that the focus of this operation is substantially shifting to the underground, with opencast originally expected to capture only about a third of this year's production. Looking at their underground, there's some exceptionally good news on Sunrise Dam's long-term future. If you recall a couple of years ago, we were talking about a 3- to 5-year life of Sunrise Dam, but we were very excited by the exploration potential. Well, the recent results have certainly delivered and we have found what we called Vogel [ph] Body that looks like it could be somewhere around 3 million to 5 million ounces beneath the existing non-ore body. So I'll talk to that in more detail in our exploration section. I'm very excited by what we've seen.
In South Africa, as expected, we delivered seasonally lower production of 401,000 ounces and a strong cash cost performance coming in at around $637 an ounce. If you remember the big changes we've seen in the foreign exchange, the underlying cost performance is a very solid one. While the quarter-on-quarter comparison shows the obvious drop from Q4, usually the strongest production period for the operation in Q1, usually the weakest, the year-on-year figure showed quite a different story. In fact, compared with the first quarter of 2010, the team in South Africa turned in a top performance, increasing production by almost 5% and keeping costs largely flat despite the sale of Tao Lekoa out of the business in that period.
So not only have they made up for the loss of Tao Lekoa, they've also delivered a further improvement and they're holding costs in what is our weakest period. So we're very pleased with the work the guys in South Africa have done. And we're very optimistic in terms of going from strength to strength here in the course of the year, and obviously barring major risks, the team has positioned the business very well. The other piece of good news is uranium production was also a standout, up 17% year-on-year to 365,000 pounds, so great effort across the board.
Our view, this is largely a testament to the improved focus on scheduling and planning linked to the implementation of the project work done, and it's never as simple as that. But again, we believe Robbie, Mike and the rest of the team have done some very, very good work both from the leadership perspective and on the implementation of the process as we talked many people in this room through over the last couple of years. And that question that we were asked at that time, this might be good for Geita or these other operations that you've turned around in Argentina or in Brazil and the U.S. and in Australia and in Africa, Obuasi being the one that is still lagging, we believe that it is as appropriate for the South African operation as it is for any other operation, as I think Robbie and team are proving that to be the case. So we're very happy with the progress they've made.
The achievement in terms of the numbers is also more remarkable, given the industry-wide clampdown on safety by the state mining inspectors, which severely hampered production across both operating years. Now at the end of the day, given the deterioration in performance across the industry, we're certainly not criticizing the mines department in terms of the actions they believe they need to take, but we would point out that the AngloGold Ashanti operations is actually performing 80% better in the last 8 months than it did on a full-year basis in 2010. So we are continuing to improve. We still have risks within the business that we have to manage, but certainly the progress and the delivery of performance over the last 7 months has been quite exceptional, and we're very proud of what the team has achieved.
At the same time, we also had to adjust the operations for a significant seismic event at TauTona, which impacted shaft operations. A decision was made to stop mining the VCR shaft pillar for safety reasons, which will impact this year's production in the order of some 30,000 ounces. The actual full impact is about 45,000, but by changing our processing strategies, processing more service operations, we'll mitigate that down to 30,000 ounces, but we believe it's the right thing to do and absolutely consistent with our strategy of looking at firstly making sure we're mining safely and we're mining productively and making sure that we keep the business competitive.
Next is Kopanang, lower than anticipated growth in the eastern portion of the mine, limited production and caused us to swing the weight of our efforts to the higher-grade areas in the west, and this is a balancing issue. This is some obvious constraints in terms of underground firming. We're working to resolve these issues through scheduling and the implementation of the Project ONE area in that part of the business. In addition, while our below 120 VCR Project is moving ahead according to plan, there has been an unanticipated impact on our cooling capacity for the mine. We're currently beefing up our refrigeration and cooling infrastructure, which will be completed by the end of next quarter. The Vaal River region delivered a strong performance with Kopanang backing the trend of lower reduction following the Christmas break and following some high-quality sweepings and the 13% improvement in mining broken grades.
At Malrok, we saw a cost improvement despite lower volumes as we focused on generating more material from higher-grade panels. This resulted in a 10% increase in yield. The cost run was also helped by the improved byproduct credit from the sell of uranium at spot prices, rather than at contract prices that we saw during quarter 4.
Ore pass hang-ups at Great Noligwa hampered output as to the safety related stoppages which affected continuity. Notwithstanding the slew of changes -- or challenges we dealt with during the quarter, the South African business did their job in contributing strong operating free cash flow to the business in the range of $214 million, which was an exceptional result. I'll now hand over to Venkat to look at the financials.
Thank you, Mark. Good morning, ladies and gentlemen. I'll be covering the following 3 areas in today's presentation: first quarter's financial results, free cash flow and balance sheet and outlook for the second quarter.
Adjusted headline earnings of $203 million represents a record first calendar quarter earnings for AngloGold Ashanti. This comes on the back of full exposure to spot price, production of 1.04 million ounces in line with guidance and reasonably well managed costs, the latter, however, being adversely impacted by local currency strength, higher fuel prices and royalties on the back of an improved spot price.
Adjusted headline earnings per share amounted to USD $0.53 or ZAR 3.67 for the quarter. The first calendar quarter is always the company's weakest seasonal quarter, given the slowest startup in South Africa. This was further compounded by the floods at Sunrise dam. This quarter-on-quarter drop in volume of some 100,000 ounces and higher effective tax rates were primary reasons for adjusted headline earnings being $91 million lower than the fourth quarter of 2010. The total unit cash cost of $706 an ounce which includes a deferred stripping accounting charge of $20 an ounce although represents a 5% increase quarter-on-quarter should be contextualized with a 9.5% drop in units of production over the same period. As Mark mentioned, the South African region deserves a special mention both in terms of production and notably in cost in containing total cash cost at ZAR 143,256 a kilogram, which is only 5% higher than the previous quarter despite a 16% drop in production quarter-on-quarter. Notably, there's a ZAR 7,900 a kilogram or 5% lower when compared to the total cash costs incurred during the first quarter of 2010.
Looking at margins, the group's margins for the first quarter on a cash cost basis were 49.2% and on a full cost basis, i.e., including capital expenditure were 33.5%, helping the group continue to deliver on its targeted returns on capital of north of 15% per annum.
Turning to free cash flow and balance sheet. The group's cash generation was strong during the first quarter. Cash inflow from operating activities after tax but before capital expenditure and finance charges was $513 million and the CFO measure, the free cash flow, which is after all outflows other than dividends, amounted to $229 million for the quarter. And as you can see from the slide, this is the first quarter in a long while where we have generated positive cash flow and a large chunk of it is an account of the operational improvements, highest port price and not having the hedge book. The healthy cash generation helped the group reduce net debt quarter-on-quarter by 15% from USD $1.3 billion to USD $1.1 billion.
Now turning to the outlook for the second quarter, we're estimating second-quarter production to be around 1.09 million ounces. Given stronger volatile currencies and fuel prices, we are guiding second-quarter costs at $760 an ounce and that's assume a stronger rand exchange rate as compared to the first quarter at ZAR 6.75 to the U.S. dollar and Brent crude around $15 higher than the first quarter at $120 a barrel and equal with Australian dollar and Brazilian real rates. The quarter-on-quarter increase of $54 an ounce is influenced by stronger local currencies, higher fuel prices and electricity costs. And for those analysts in the room, the breakdown of that is $16 an ounce in terms of stronger local currencies, $10 an ounce in terms of direct fuel impact, $17 an ounce in terms of power, that's on the back of higher fuel, and the South African winter tariff of one month and the annual electricity increases coming in effective in April and other factors of around $11 an ounce.
The above numbers include accounting deferred stripping charges estimated at $14 an ounce. As in previous years, on the production front we are expecting a stronger second half of this year with increases from South Africa, Geita and Cripple Creek & Victor. Please note that our second quarter's earnings will be adversely impacted by an $8 million noncash accounting charge for the BEE restructuring transaction assuming it is approved by the shareholders at the extraordinary general meeting with the balance of $4 million spread equally in the third and fourth quarters. I will now hand you over to Mark.
Thanks, Venkat. And as usual, before I move straight into the exploration and before I leave the operations performance, I should point out that we have Richard Duffy, head of Continental Africa here, and Robbie Lazare.
With the strong improvements we've seen in the South Africa over the last 3 quarters and the tremendous improvements, Richard had to buy Robbie a couple of Bs at the end of each quarter, as we obviously target delivering on our commitments, and I think it's nice to say that Robbie has actually had to buy Richard a B in the last quarter, given the TauTona incident and I must acknowledge the Continental Africa team actually hitting their targets for the first time, and they've done some hard work and whilst lots of challenges still ahead of us. So we've got to acknowledge some bloody hard work and some good efforts, and we're very pleased with the progress they're making, albeit we're not where we want to be, but by the second half, I think you'll really start to see some performance coming through that I expect we're all going to be very proud of.
With the review of the financial and operating aspects of the quarter caveat, I'll take you through the work underway by our project and exploration teams to secure the long-term future for this business. This map is just a reminder of the extent of our global exploration footprint, the territories we control and the new fronts we're exploring. We are talking about exploration, we're not talking about political control, obviously.
On Greenfields exploration, our greenfields team this quarter were also constrained by heavy rainfall in Australia. So the drilling wasn't as much as we'd like, so we do expect to see strong results over the next couple of quarters as the teams get into full swing, and very excited by what we've seen and so Tropicana continues to deliver in terms of gold, and we're expecting to see continuing good results as we go into the year.
We're also starting to see an indication of our joint venture decision to focus on Middle East, North Africa, efforts in Egypt where we believe there is a significant gold mineralization around the historical Hutite mine. This view is backed up by abundant visible gold in several of the intercepts from our initial 5-kilometer drilling campaign. The first 3 holes contained some encouraging intercepts, most notably a hit of 3.6 grams over 12 meters and very high grade of 15.7 grams over a narrow with the one meter. The most important thing is the thinner of the material we found and where we've got high grades. So that is always very encouraging when you're in the early phases of exploration.
We're bringing another rig into accelerate our efforts, given that the structure we're seeing is open at depth at a long strike. Elsewhere in the region, we're locking down some very prospective ground in Saudi Arabia, Eritrea and Ethiopia to gain a strong foothold in what we believe is one of the most promising new frontiers for the gold sector.
Further to the west in Guinea. Results from the accelerated greenfield work are looking very good indeed and certainly confirms our early views of expanded potential for the Siguiri region. We'll provide more detail on exactly what we're seeing a little later, but suffice to say we're committing additional resources to ramp up work on Blocks 2 and 4.
I'll deal with the work underway in La Colosa in the brownfields exploration discussion but elsewhere in Colombia, the teams have been busy in several areas with the specific focus on Kwidrinona [ph]. The Kwidrinona prospect about 80 kilometers north of Colosa. The initial drilling and sampling campaign is supporting -- supported to that hypothesis that this area hosts copper gold progress. We'll continue to update on progress on this work as that work advances beyond its initial phases. The benefit of this type of far reaching in well-resourced exploration is often overlooked, but this slide should put it all into stack relief -- I should say perspective, I think. If I could just point you to the chart, what you're seeing is the project description on the left shows Tropicana, Mongbwalu, Gramalote, La Colosa, just 4 key areas of work, and if you look at the ounces that we've found or purchased as part of the process, we're at about 20 million ounces. The total expenditure to get those ounces into the portfolio about $176 million and the discovery costs on average about $15.52 an ounce. Don't forget, we're putting those ounces into the portfolio against some that are buying between 500 to 1,000 an ounce in terms of acquisitions. For us, exploration is the most significant value contributor in our gold industry and has been over many years.
If you look at then on the right-hand side, we're using $100, $200 and $300 an ounce as a way of looking at the replacement costs if we had to go and buy those ounces. And if you look down at the bottom right-hand side using the $300 an ounce metric which is about par for the course, based on some of what you think is quite low compared to some of the prices being paid recently, that would argue an indicative value of some $5.9 billion if someone were bidding for those aspects or those prospects in the average market. Now some might argue that's a little bit cheeky. But all we're trying to demonstrate is exploration does create value. And whilst there's a time in terms of realization of that value, that value is there and if you look at our portfolio, the ground positions and the gold that we've already found and the potential we see beyond that is very significant and certainly very much about our value proposition in the market.
On the brownfield front, there is also cause for anticipation in the results being generated in 3 years of our portfolio. In Argentina, drilling has shown that our vein structures at Cerro Vanguardia continue far deeper than the 200 meters we previously thought to be the limit. What has us particularly excited is a hit from a step out hole where we drilled down 400 meters below the current open pit. Now, albeit at narrow width, we hit gold grades of more than 9 grams a ton and Bonanza silver grades of more than 3 kilograms a ton. We'll continue to work on improving our understanding of the capability of this ore body and what it means for the broader underground mining potential of Cerro Vanguardia. Don't forget, we had from conception to development, we had an underground mine stack within the space of 12 months and Jorge and the team have done a great job, and we're currently mining about 15,000 ton a quarter -- a month, sorry, from the operation, so they're doing very, very well. We'll continue to work on our understanding, but what we do know is that the area does contain significant potential and we're following up on that potential. At the La Colosa project in Colombia, where we now have 4 rigs working on the project there, a series of gold drill results continue to confirm our confidence in the ore body. We are gaining increased confidence in the Hornfield [ph] star mineralization that forms a high-grade cap over part of the body with the latest results of 2.07 grams per ton out of more than 100 meters again confirming the size, scope and improving what we believe an average grade to be now around 1.1 gram, which is already up 10% before we -- from where we were before we started this drilling program.
At Córrego do Sítio in Brazil, brownfields exploration work continues to validate our decision just under 3 years ago to buy the deposit and the remarkably well kept plan from El Dorado for $18 million. For us, the transaction was principally about owning a superb plant to bring forward production and lower the capital development costs for our Córrego do Sítio project. At best, we'd initially hoped to bring 1.5 million ounces of sulfur and ore into inventory. As things currently stand, only about 18 months after the process in terms of drilling, we continue to add also on ounces which are pure bonus. All tailed, our Córrego do Sítio portion of the deposit has 2.9 million ounces of reserve, and Sao Bento has about 0.9 million ounces. Each of those areas, however, has 3 million ounces of resource taking the potential endowment to almost 10 million ounces for the deposit. And so at $80 million with a 10 million ounce potential at $8 an ounce, again compare that to the $500 and the $1,000 an ounce being paid in some areas, and this is in the jurisdiction that has a good mining culture. We're already there, we've just won mining company of the year award for some of our environmental work. So it's a great place to be and very pleased with this sort of work, and that's what real value creation is about.
As I mentioned earlier, we've now done the first of what we have -- will be several new structures at Sunrise Dam. Drilling has confirmed that the new ore body, which we've called Vogue, extends below the dolly NGQ areas of the current mine and demonstrate the repetition of depth of the Sunrise Dam mineralized system. The pink portion of the ore body in this graphic shows the extent of Vogue as both pink and Vogue go together, which we believe contains more than 3 million to 5 million ounces. We'll undertake a conceptual study this year to define the implications of this discovery and the opportunity we believe this presents to us for the operation.
We've done limited drilling beneath the other 9 paths of the Sunrise Dam ore body and this provides encouragement that the phenomenon continues across the entire extent of the ore body. So we haven't defined the base of the ore body is just a clear message. This secures an exciting long-term future for us in Australia and ensures that along with Tropicana, will remain a significant producer in the country for several years to come.
We continue to make good headwind with our project developments, which is really one of our clear competitive advantages in this space. We continue to weigh in at our 5.4 to 5.6 million-ounce target by 2014. What remains a relatively competitive capital cost in the sector, tackling large very expensive projects.
Again at Córrego do Sítio, we remain on track for startup into September this year. The major plant refurbishments were completed at the end of April and all civil works were also done. Mining is also going according to plan, already achieving a rate of 475 tons a day in March. In fact, our team has already achieved around 5.5 kilometers of underground development, which is tracking the plan in the feasibility study. This slide shows the very rapid progress already made on one of the ramps to the underground, as well as the quality of the mill we will see for the $80 million purchase price.
At Tropicana, we continue to track our project timetable, notwithstanding the weather issues in the region during the first quarter. The contract for the 220-kilometer road site has been awarded, permits approved and the construction has begun. The UPC in contract for the plan has been executed with Lycopodium detailed engineering design of the plant and other infrastructure has begun and will continue in parallel with road construction. Plant construction will start early next year when completion of the open pit contract is imminent. At Boston Shaker, we continue feasibility work and expect to update the reserve and resource figures around midyear. If you remember, we are looking to add to and improve the quality of the resource that we're developing, and we expect those numbers to improve the economics of the project.
During the quarter, we conducted metallurgical testing, resource modeling and also pit optimization and design. In addition, the joint venture partners moved a 2 year pre-feasibility study on the Havana Deeps project and drilling to support that program is already done and what we've said is it's very important to get a head start on potential underground operations, as we believe the facility can actually support a combined open cap and underground operation to increase our production and again to give us a much more extended life as we get underground, drill more targets to try and again improve the size of the economics and the life of the projects. So we're very excited with the progress that's been made.
At Kibali, you will see from recent releases by our partner, Randgold, the predevelopment work is proceeding at pace with the relocation plan for local community progressing well and gathering good support from the local community. Randgold has also provided a milestone schedule mapping the route to project approval in the first quarter of next year. We continue to work closely with our partners on detailed technical aspects of the final project design. The crucial post of mining -- post of mining study managers has been filled, which paves the way for coordinated reworking of the design and the schedule for the underground mine. So that's an optimization process.
The 10 million-ounce reserve at Kibali continues to increase and we remain on track for our first full-year of production in 2014. This remains an incredible project that is already providing direct employment for 820 Congolese with several more being actively engaged in auxiliary activities providing materials for the project.
At Mongbwalu, our feasibility study has been presented to the government as per our agreement and is now undergoing an optimization process. It is expected to go to the board for approval in the second half of the year, at which time we'll talk to the various metrics in more detail. We've appointed a project manager to oversee the refurbishment and upgrade of the hydropower station which will not only produce power for the project, but provide reliable green power for the surrounding communities.
Our technical lead team in January reviewed the feasibility study on the Sadiola Deeps projects submitted by our joint venture partner, Iamgold. This study will be markedly improved by the addition of 500,000 new ounces of resource from last year's drilling program, which will be introduced in the updated resource model in April. This will form the basis for the optimization we're currently underway, and we anticipate the project going to the board for approval in the second half of this year. So the board's going to be very busy this year processing projects that we have on the books which will drive our production expansion targets to 2014.
So at long last, our first quarter without the hedge book is a milestone for all of us and in particular, the gentleman on my left. First of all, it's clear to see the impact of that on our earnings and obviously in terms of our free cash flow. The other very encouraging thing is the thing we see with the strength of the gold price and for those that recall we made a -- or took a view that we thought gold price would trade somewhere between $1,300 and $1,500 in the first quarter or during the course of the year. And we actually said that we thought the risk would be to the upside depending on what happens in the financial markets. And certainly, whilst we're unhappy to see the turmoil in the markets, we are pleased to see the continuing impact on the gold price, which we believe is reasonably priced. And for those wanting to hear what we think in terms of the future, we still see risk to the upside, but reflecting the fundamentals in the market and the uncertainty in financial markets.
Most importantly for us it's all about cash flow. The total real story speaks to the underlying health of the business. On a year-on-year basis, which accounts for the seasonal impact of the slide last quarter, you can see the leverage we're enjoying with cash flow almost tripling on an absolute basis to $513 million with a ramp up in production expected in consecutive quarters during the year and improvements on 3 operating metrics expected in the second half in particular, it looks as though we're certainly on track to at least meet the $2 billion operating cash flow target we set when we took out the hedge book last year. In our weakest quarter, we were already tracking on a quarter-on-quarter basis ahead of those targets, which is very pleasing.
With those absolute -- while those absolute numbers are important, we do look carefully at the per-share metrics which show a similarly impressive picture year-on-year, despite the financing we're required to get rid of the hedge book last year. Maintaining a tight rein on capital and driving value on a per share basis will continue to be the focus for the team.
So despite some difficult challenges during the quarter, particularly in Australia and those in South Africa as well, we managed to hit our guidance. Looking forward, we're focused on delivering a strong second half in particular as some of those new projects start to bite and the improvement projects that we've been working on continue to add value over that period. Our balance sheet is in excellent shape. We're generating free cash, and we're starting to see our opportunity profile emerge into this enormously positive gold market. Both in the project pipeline and then in our exploration portfolio, we're increasingly enthusiastic about the future for AngloGold Ashanti, and we're very pleased to present how we've done over the last year to our shareholders at the Annual General Meeting that will be following this meeting. So thank you very much.
All right, and with that, we'll take questions. Normal drill, your name and institution that you are from. We'll start off with Allan and go from there.
Allan Cooke - JP Morgan Chase & Co
It's Allan Cooke from JPMorgan. A few questions, if I may. Any contingent liability or any indication on the quantum of plane silicosis following the high court really recently, will you be making any contingent claim disclosure, or is there anything you can say on that matter at this point? And then in the mobile, we've seen some use flow on indigenization or empowered Legislation that's in the pipeline and what will the impact be for you there at Navachab? And then just lastly on your guidance for 2011, is there any change in expectation for costs and for production given the loss of TauTona, Geita in the second quarter with the mill shutdown and the impact of the rainfall at Sunrise Dam? Have you changed your expectations for 2011, given that you're going to have quite a slow first half of the calendar?
Sure. First question on disclosure on contingent liability, if you look at Page 23, we have included the disclosure there. And Mark will go through the rest of the questions.
Allan, just looking at potential exposure, I just take you back, the most important thing to recognize in the constitutional court ruling, there were 2 or 3 points to acknowledge. Firstly that the constitutional court confirmed the right of an individual to be able to launch a claim, even though they've had compensation payments. So the most -- there are 2 most important aspects of the ruling: One, acknowledging the right of an individual to lodge a claim; and secondly, they made the observation that they felt the de moire [ph] compensation system was not as effective as the general compensation system being called [ph]. They made those 2 clear observations. The actual merits of the case have not actually been heard. So there is still a lengthy complex and involved legal process that actually addresses the merits of the specific claims. Now I think they are the key points that came out of the judgment. So I think we still have a long way to go in those conversations. We're obviously doing homework based on those judgments to look at those sorts of issues and so there's still a lot more work to be done. But at this stage, it's a relatively small step in a very long process that is quite technically involved from a legal point of view. So for us, we think it's too early to call, and so we are working with our industry colleagues and with the government on addressing the second point that was raised in that decision, which is the nature of the compensation system. So for us, it's really an industry conversation around the things that were highlighted in the constitutional court ruling. The actual merits of the case were a separate conversation that still has a long way to work through and as I said, we're still analyzing some aspects of the case. And so we've made the statement and as we take a view, we'll update. But that's where we are at the moment, okay? Secondly, on the Navachab indigenization, we noted the comments from the government. But we've got a good relationship with the government. We certainly had no approaches that the rules are going to change. The agreements we've been operating are pretty robust. We're very happy with the relationship. And so we wouldn't expect any changes, but we'll engage as required, but we certainly have not had any approaches from the government with respect to our working arrangements. And you will be aware that we have a very hard component of Namibian work is in our side. The feedback from the government has been very good. So we've got a good relationship and certainly we've not seen anything so far that would worry us, but that's not to say we do have to clip in the dog, so at this stage, nothing more than that. On production guidance, yes we've taken a few bumps in the first quarter that you wouldn't normally anticipate. I would point out that normally, our second half tracks are about 4% to 5% better than our first half. We're going to do need to do a little bit better than that to make sure we get to our guidance numbers. We believe that Geita, South Africa, Obuasi never have as well actually, Sunrise Dam and with the addition of Córrego do Sítio, we've got the right things happening to deliver on that outcome. So we don't believe there is a need to adjust the guidance, but there's something we'll watch carefully and will update obviously at the next quarterly. But certainly all the key things are in place to deliver, but it's obviously a bit tighter given that. And on the cost front, did you want to say something?
A little on the cost front, as you know, we issued the guidance at the start of year based on a rand exchange rate of ZAR 7.11 for the year average, and also fuel at around $95 a barrel. The exchange rates and fuel have been extremely volatile. We do put out sensitivities in our disclosure for every 1% swing in the local currencies, assuming all of them move in tandem. It's on $5 an ounce to cash cost and for every $10 movement in the price of fuel per barrel, it's around $6 an ounce in terms of cash cost. So you can actually modify it accordingly.
Unknown Analyst -
As you put it, the future for gold looks great, and it's gone blasting through 15,000 ounce, but over the last few weeks, you've seen gold equities come off pretty much across the board. Do you have explanation for that as to why that's happening?
Brendan, It's an interesting phenomenon. Obviously we pay very close attention to it. My personal view would be that -- and we've made this observation 3 years ago that we felt that more and more people would focus on underlying value creation and the performance management teams in creating value in the gold business, hence our focus on hedge or restructuring, the operations restructuring. The fact that we're now delivering a return on capital employed around 20% would be the key differentiators in the market. So we think we're still seeing that change to some degree in the nature of the market. However, what we think the most recent trend is more about is thinking is people aren't quite sure whether the gold price is actually going to stick at these levels. I think that's more the issue in that short-term period would be our sense. But that's a personal view. I think that's more the view at the moment than necessarily the first point. I think we've seen the trend for some time. But our view is there's a real question whether people believe the current strength in the gold price is based on fundamentals. We think it is, certainly at the $1,300 to $1,500 range, we think that's backed by the fundamentals. Anything above $1,500 at the moment is more about a view on the financial markets. So I think there's still a bit of time to be played out on that, but certainly we think the pressure points in the year, inflation in the U.S -- we think all the pressure points are there on the financial side, but I think there are just generally different views on whether that will come to bear in terms of gold prices up to $1,500. I think that's the debate at the moment. That would be my best guess.
Unknown Analyst -
Asking about what Eritrea, what exactly are you expecting to get there? Why have you gone in there if [indiscernible] because the lead have been, what, 10 years ago. So you're a bit of a Johnny-come-lately. What is it that you think you're still going to get there? Are you likely to stick to your organic express work or are you thinking of maybe taking a stake and somebody's already gone in there ahead of you?
So I'll give you a statement of the obvious. Lots of gold. So that's what we're looking to follow. But to be more serious, I think we have Robbie in the audience. I might ask Robbie if he could wax lyrical for one minute on the targets. But it is an organic strategy, so it's not an acquisition strategy. It's an organic view of the potential for gold in those regions, but to put proper shape around that, I'll hand across to Robbie.
About 2 years ago, we've been watching what's been going on there for a long time, probably 4 or 5 years. There's a lot of ground available that we rank as priority ground, and we've picked ground in our own right, 3,000 or 4,000 square kilometers, and have other applications currently in and a lot of the projects that are currently there don't fit our criteria and we believe that there's considerable scope on underexplored parts verified to make new discoveries.
On major structural trends.
Yes, on major structural trends.
So there's lots of gold [indiscernible] there's lots of smoke in terms of gold.
There's smoke on a number of -- on 2 of the tenements that we're working on. And as you're aware -- and we're primarily focusing on the origin of gold, but as you're aware, some of the discoveries that have been made here at Charles is volcanogenic massive sulfide ones which are polymetallic and in some cases black gold rich. So we'll see what value propositions those present to the tenements and decide how to treat those. I hope that answers your question.
So it's the environment looks very attractive. We don't let Robbie say too much, because we don't want to give too much away to our competitors. But we believe that the structures and the environment is conducive to gold mineralization, and we think it's generally been underexplored probably for a whole range of social and other reasons and we think now is the time to get in early, as we did with Colombia.
Unknown Analyst -
[indiscernible] the political aspect of working in that area. As I understand it, there's a little bit of uncertainty at the moment as to what's going on between [indiscernible] and the Eritrean government over the valuation of the stake that the government is to take in Eritrea, in the new -- in the fissure mine. What's your view on the political and practical side of operating in that country?
It's a good question. And if I could -- I'm not privy to the conversation between the government and NAVSA [ph], so we'll put that aside. But we're aware of the nature of the agreement, and I'll leave it at that. In our case the reason we've gone with the Thani family as a joint venture partner, is they have intimate knowledge of the politics and the people in these key regions and the most important dialogue we have with our joint venture partner is to understand the desires of the people in the country, the nature of the agreements that need to be put in place for them to be successful and when there have been issues, what are the lessons that can be learned to help restructure the contract and I make a very important point. Many of these contracts have been developed in countries where petrochemical, petro oil structures have been the model for how deals should be structured and the difference between oil and hot rock exploration is in oil, it's risk all up front. But once you've drilled a hole and you put a hole through an oil deposit, the operating costs are minuscule compared to the revenues that you generate. And so constructing deals that take a big proportion of the production is doable in that environment and this is the mistake the Australian government made when they put their tax together. They we're thinking about a petro type structure when in our industry, the grades are quite variable. The margins are certainly much slimmer on an operating base. So the nature of the contract that you put together with government needs to reflect the very different structure. The Thani family got that when we described it to them, putting the joint venture together. So together, we believe we can talk to and develop relationships and agreements that are far more appropriate for the environments in which we're working in. That's why we went as a joint venture partner, for someone that really knows the politics, the relationships and the nature of the commercial issues that need to be addressed to come up with the right answers for both parties. I hope that answers them.
Unknown Analyst -
I've got 3 questions. I'm just wondering one, you're Q2 production figures, those seem pretty flat, I'm just wondering why that's the case. Just to come back to the gold price, you say $1,300 to $1,500 you see supported by fundamentals, but you're saying above that's kind of debate among the financial markets. I'm just wondering where you see the gold price going, say, for the rest of this year or next year and why? And then I just wanted to come back to what you were saying earlier about the constitutional court case and compensation. I'm just wondering, in terms of the issues surrounding silicosis and possible lawsuits going forward, I mean do you see this as a very long and sort of protracted legal process? Or do you think it could be wrapped up relatively quickly?
So let me have a crack. Firstly, on the Q2 forecast, as we access the pit at Geita, we weren't actually getting to the really high-grade zones until the second of the year. In fact, we've made a very conscious decision to try and do that major work on the mill while we're in lower -- while we're in a period where we've got the lower grades. So we said if we can get that done in the second quarter, what it really does is gives us a big lift second quarter and in going into 2012. So for us, it's about when's the right time to do it, lower grades and picking up the momentum through the second half of the year as we go into 2012. So a very conscious decision to get that integrity working out of the way as quickly as we could which wasn't -- it was planned to be a much smaller program 6 months ago but in doing the work and doing the detailed integrity work, we found more problems, so we're going to fix them and make sure we get a strong lift in the second half. So that was very conscious. Robbie and his team have still been appropriately conservative after the first quarter in making sure that we've got all the key issues balanced, and don't forget that we'll have another 3 months under there built in terms of the Project ONE implementations and the work Robbie's doing in opening accesses up and he gets the refrigeration stuff sorted out in opening. So that's a very important piece of work in South Africa over the next 3 months. In Obuasi, the work of the task force starts to impact in the second half. We're working on a new leach pad at Cripple Creek, so we're just starting to see the early kickoff from the new leach pad. It takes about 3 months for those flows to really come through, so again those flows are a consequence of the MLE 2-pad expansion. In fact, that's about 12 months early. So again it's a back-ended result and we start to bring Córrego do Sítio ounces into the mix in the second half as well. So it's a confluence of issues. It's unfortunate we had a similar issue last year. We did do much better in the second half. I would expect next year probably to be more balanced, but you're going to see a little bit of this as we grow. Quite often some of the new growth will come in the second half as we progressively start to move towards the 2014 5.5 target, so there'll be a little bit of that in the [indiscernible] over the next 2 or 3 years as we move up there. So it's a matter of where the operations are. A second thing, on the gold price, what we did is we said to produce at cost in that, we did a pretty extensive review of the industry. We looked at all the data. To produce the costs announced today with everything thrown in, exploration, production, development costs, the costs are north of $1,000 an ounce. Because of increasing debt on average across the industry, the 1.5% average decline in grades, the spiraling input costs, particularly oil, energy, LIBOR and those factors impacting us right across the industry, the fact that more of the deposits are being develop away from the established infrastructure where it increases your operating costs and the fact that we're finding half the amount of gold from more than double the exploration costs that's across the industry, we're seeing cost pressures, structural cost pressures in our industry of somewhere between 10% and 15% a year. So the cost base is moving at that level and in fact, there's average 15% over the last 5 years. So if you took out fundamental view of somewhere between $1,300 and $1,500 an ounce and added only 10% inflation, costs are driving up around $150 an ounce. If you go back 50 years, the margin in the gold industry is surprisingly consistent and on that basis, we believe the price will track that up on fundamentals. So if we said we thought it might average $1,400 an ounce this year, we'd be saying next year somewhere in the range of $1,550 and continuing on over the 5-year period, because that's what we've seen over the last 5 or 6 years at least. So there's a lot -- we've done a lot of work and a lot of thinking on the gold price and I'm saying the caveat to that on an annual average basis would be the nature of the financial markets and people's view of inflation in their market. The Indians are buying gold like there's no tomorrow and whilst we'll see a little bit of a pullback because we're off the bank seasons, the message we got very strongly was very strong demand for gold in India, because they can see inflation. And Venkat's mother, who is our most important advisor in terms of the gold price, has called it right for the 3 years I've been in this business and whether it's intuitive or not, she's got a sense of, and I've got a sense of what's happening in the market and we've had a lot of people confirm her view. So that's probably more detail than I should go into in the gold market, but it's very strong and we've done a lot of work on fundamentals.
Unknown Analyst -
Just a follow-up. So I think what you're saying, though, is that next year you'll seen an average of $1,550 an ounce, is that correct?
I won't give you a hard number, because there's so much volatility in the market, you'll come back and say, "But Cutifani, you said." But what I'm saying is the fundamentals are right and the ranges are all right and I think certainly the circumstances could support that sort of cost level, but we always watch the market fairly carefully and we try not to lock ourselves into the range, because there's so many factors that contribute. But the fundamentals are strong is the main point. On the third question, as I said to Allan, the clear thing we believe is for the industry to work together now, because this issue is one that we have to work on for the industry based on the constitutional court feedback in terms of the compensation system. So that's where the focus will be. There's been no real change to any of the other factors. This is still likely to be a long and protracted process and judging what the impacts would be, there's still more work to be done but again, we have to go through and work with our colleagues in the industry. And I think from an industry perspective, if I could put my chamber of minds hats on, or hat on, the quicker we work together with the government to find the right remedy so that South Africa has the right compensation system for this type of thing as identified by the constitutional court, the better effect everybody and I think that's an important issue for us and the government to work through and by the way, for the unions as well. So I think we're all committed to making sure that gets repaired and that will be, I think, where you'll see the key focus and I would hope that it's months, not longer than that, because I think that needs to be resolved quickly so that everybody can move forward.
All right. I think that's more or less it. We've run over just by a bit. We will be outside and available for any questions should you need to ask them. Thank you very much for coming, and we'll see you all again in 3 months.
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