Anglo American plc (OTCPK:AAUKY) Q2 2011 Earnings Call July 29, 2011 4:00 AM ET
Neville Nicolau - Member of Executive Committee and Chief Executive of Anglo Platinum - South Africa
Cynthia Carroll - Chief Executive Officer, Executive Director, Chairman of Management Committee, Chairman of Executive Committee and Member of Safety & Sustainable Development Committee
R. Medori - Finance Director, Executive Director, Chairman of Investment Committee, Member of Management Committee and Member of Executive Committee
John Mackenzie - Member of Executive Committee and Chief Executive Officer of Copper - Chile
Unknown Executive -
Seamus French - Member of Executive Committee and Chief Executive Officer of Metallurgical Coal - Australia
Des Kilalea - RBC Capital Markets, LLC
Jason Fairclough - BofA Merrill Lynch
Liam Fitzpatrick - Crédit Suisse AG
Good morning, ladies and gentlemen, and welcome. It's very good to see you all this morning, and thank you for coming.
I'll start by giving you the highlights of what has been a strong first half to the year despite escalating cost impacts. Then I'll demonstrate how we transformed and positioned ourselves over the last 4 years to face challenges no matter where we were in the cycle. And we'll also look at the operational performances of the business. Rene will take you through the financials, and I'll outline our growth profile and how our new production will improve further our cost positions. And finally, I'll say a few words about how we see the long-term picture.
So firstly, I'd like to remind you of the journey that we've been on with our strategy, embedding a culture that focuses on business excellence. We are investing in the commodities we believe have the most attractive fundamentals. We have a well-diversified portfolio of attractive commodities with exposure to the full cycle of the development of emerging countries. We now have a performance mindset in safety, productivity, cost containment and project delivery. Our focus has been on people and driving performance with everyone getting involved. So the highlights.
Our strong financial performance in the first half is reflective of the operational and business improvement foundations we have put in place. These have enabled us to capture the maximum benefit from increased commodity prices.
The terrible tragedy in Japan has shown the world the extraordinary resilience of the Japanese people, and this was also evident in our customers who recovered strongly following the disasters. Our close relationships with customers enabled us to redirect shipments at very short notice. And this ensured demand was satisfied at the right place and at the right time.
Total group operating profit is $6 billion, up 38%. Operating profit from our core businesses was up 45%. Our underlying earnings are $3.1 billion, with earnings per share at $2.58, a 40% increase. All our core business units recorded higher operating profits.
Asset optimization and supply chain programs have delivered a combined $1.3 billion of value in the first 6 months of the year. This is how we maximize margin, by capturing the full benefit of strong prices and minimizing the impact of those events beyond our control, be it weather, be it cost inflation or infrastructure constraints.
On the growth front. Our decision in 2009 to sustain investment on our big 4 projects will pay off as we generate substantial cash flows. So the successful delivery of Barro Alto is only just the start.
Our other major -- 3 major projects are coming along extremely well. We're now in a position to take full advantage of robust demand as we deliver some of the lowest capital intensity and operating cost volumes to attractive markets. And in addition, we have another $66 billion worth of growth projects awaiting approval.
It's a very strong picture. And I'm therefore pleased to announce we have raised our interim dividend by 12% to $0.28 per share.
Before we turn to the operating performance, I'd like to talk for a few minutes about safety. As you know, safety is an absolute priority for Anglo American and for me. Over the past 5 years, we have had sustained safety improvement, and I'm therefore extremely disappointed and deeply saddened to report that 10 of our employees lost their lives in work-related incidents in the first half of the year.
Having said this, it is important to note 93% of our operations had no fatalities, and a number of our individual mines have achieved exceptional performance, including the Modikwa mine in Platinum achieving -- recently achieving a South African industry record of 8 million fatality-free shifts. The new Kolomela mine in South Africa has recently achieved 13 million lost time injury free man hours.
And no matter what the record though, 10 deaths are 10 too many, and there's no ifs and there's no buts. Every man and woman working on our sites has a right to return home safely. So let me assure you we are relentless in driving towards 0 harm.
Looking at the first half of 2011. We see a story of 2 quarters: the first marked by severe weather and the second all about recovery. We acted fast as a an aligned group. We put in place recovery plans and we achieved a swift turnaround, and I expect this momentum to continue as we move through the second half of the year.
Turning to input costs. We are not immune to the pressures industry is facing. Prices for some key input commodities have escalated dramatically. As you can see from the chart, market sulfuric prices -- sulfuric acid prices are up 60%. Oil is up 27%. And this is in addition to the higher salary demand in Chile, in South Africa and Australia. And Rene will take you through how this has impacted our cost position, but we have mitigated some of the impacts through our supply chain and asset optimization programs.
Looking at our global supply chain. We are delivering real benefit to the bottom line. The rate of increase in the prices of our key inputs is much lower than wider market escalation. And whether its large off-road tires or dump trucks. Price, however, is only part of the picture.
Solid partnerships with critical suppliers ensure we can secure supply for existing operations and future projects. We're also working closely with our suppliers to identify the best ways of achieving greater tire longevity and fuel efficiency for our vehicles.
Asset optimization continues to exceed expectations. And having delivered on our 2011 target a year early, we believe that there is more value to be unlocked here. We are confident we have gained momentum in embedding operational excellence across the group. And this year, we intend to complete 7 operation reviews. Five reviews were completed last year, and we've identified up to $400 million of potential savings out of that.
At our Australian Coal business, for example, we are already leading the industry in open cut mine productivity. We apply the same approach to our underground mines. The Longwall 100 Program, launched less than a year ago, exceeded its target of 100 cutting hours in just 6 months, which led to a production record in the month of June.
Now let's look at the businesses. And I'm going to take you through Iron Ore, Nickel, Thermal Coal and Diamonds and ask John Mackenzie, Neville and Seamus to talk about their businesses.
Starting with Iron Ore and Manganese. Operating profit was $2.5 billion, up 54%. And despite heavy rains, Kumba delivered 22 million tons of product sales, and we expect Kumba to recover their production shortfall by the end of the year.
In Brazil, Amapa is a turnaround story. In the first half of last year, Amapa recorded a loss of $7 million. In the first half of this year, we've recorded a gain of $45 million.
As you all know, we have 2 major Iron Ore projects under construction. Kolomela is 94% complete. The plan has been handed over for coal commissioning. Hot commissioning is expected to start in the third quarter, with the first ore fed through the system this year. And as you are aware, the Minas Rio project faces many regulatory challenges. Nevertheless, we continue to make progress. Civil works for the beneficiation plant and the tailing dam have been underway since March.
A strong result also for Thermal Coal driven by higher export prices and stable production can be seen here. And as many of our other operations, Cerrejon had a big increase in rain stoppages. So it was great that we ended the half year with production down just 3%. We've made good progress on our projects. Zibulo is ramping up substantially, and the Cerrejon expansive project is set for shareholders' approval in the third quarter.
I'll now invite Seamus to come up and talk about Met Coal.
Thanks, Cynthia. Metallurgic Coal's operating profit of $491 million was an increase of 87% on the prior year and was an outstanding result given the challenges we faced early in the year with disastrous floods and one of the largest cyclones to hit Queensland on record. The first half profit was, in fact, a record H1 profit for the business.
On prices, our positive working relationship with customers, early engagement allowed the business to effectively manage the flood impact on our customers and to lead the market in settling quarterly pricing. The benchmark price of $330 a ton that we set in quarter 2 is in fact a record hard coking coal price.
Production was severely impacted by these flood events, particularly in quarter 1, and a production recovery plan was put into place. The actions allowed us to recover in quarter 2 at a faster rate than our competitors, allowing us to fully capitalize on the record prices that we had set.
As a result of this work, production is expected to increase in the second half of the year as operations return to normalized levels in June and this build on the momentum of the second quarter, which was itself a 77% production increase over the first quarter.
We are expecting a heavy wet season starting again in quarter 4. And to minimize future rain impacts, we put together a comprehensive program at our open cut sites that includes coating haulage road surfaces, drainage buns to reduce pit water ingress and doubling up pit pumping capacity.
Looking forward, near-term production will be driven by asset optimization initiatives over the next 3 years and of course, delivery of the first stage of the Grosvenor project from 2016. And we expect approval for that project in the next 12 months as we have said previously.
We should note, however, that the carbon prices scheme proposed by the Australian government does pose a risk to planned future investments in Australia. Mining projects in Australia will face the full impact of the carbon price from day one of production with no transitional assistance. And this will, of course -- will divert resources and funding that could otherwise be engaged in abatement technology.
We have been proactive in engaging with the government to modify the scheme, and we will continue to work with the government to put forward a better way of pricing carbon that won't impact on these planned investments in Australia. Cynthia?
Thank you, Cynthia. Platinum delivered an operating profit of $542 million which is a 30% increase. Refined platinum volume increased by 17% to 1.17 million ounces, allowing for increased sales year-on-year. Our refined platinum production and sales guidance of 2.6 million ounces remains unchanged as we expect a better performance in the second half of the year.
Reduction in the first half of the year was badly affected by extraordinary safety stoppages, breaks due to public holidays and long weekends and some operational issues. These production issues were mitigated with increases in production from Mogalakwena, Unki, our tail-ends retreatment, sweeping and sifted material. Mogalakwena, the open-pit mine, continues to perform strongly and provides Anglo American Platinum with a flexible production source.
As we improve production, our cost and efficiency will get back to the -- back on track in the second half of this year. Our unit cost will get back down to the ZAR 12,000 per ounce level. And similarly, our productivity will increase to the 7.3 square meters per person for the second half.
Our operating profit for Copper for the first half was $1.4 billion, which is an increase of 18% over the first half of last year. Whilst copper prices were somewhat volatile, on average, the copper price for the first half was a record.
Our copper production for the first half was down 8% on the prior year, primarily as a result of 2 key reasons: firstly, severe rain disruptions at Collahuasi is a result of rainfall that is 4 to 5x the annual average, which is -- came down in the first 3 months of the year; and then secondly, the anticipated grade decline at Los Bronces. Some of this was offset by a significant increase in throughput at Los Bronces following a series of initiatives to increase our throughput in the SAG mill, which is the bottleneck for our production process.
As you've heard from Cynthia, we're facing the same broad pressures in costs and also, a weaker U.S. dollar in Chile. Having said that, we do expect a stronger performance in the second half. There's a positive upside to our sales as inventory accumulated during the Patache port shiploader repairs are expected to be sold in the second half.
Production is also expected to be stronger. Collahuasi will have better grade and throughput despite a loss week of production during the recent snowstorm. Los Bronces production will also increase, particularly as the expansion project comes on stream in the fourth quarter, and this will be delivering new volumes at a low cash cost. This also leads to a significant step-up in our copper production for next year as the production -- as the project is up and running. At Collahuasi, all of our expansion projects are progressing well.
Turning to our Quellaveco project in Peru. The project approval has been delayed compared to the previous guidance, and we're now targeting approval during 2012. We're continuing to work on the project, consulting and working with all levels of government in order to achieve the water permits that we require. And then the dialogue process with the local communities is making very good progress. However, it is still going to take more time to successfully conclude this process.
Thank you, Seamus and Neville, John. Turning to Nickel. Nickel profit was up 37%. Sales from Codemin and Loma de Niquel were up 21% at a time of strong nickel pricing.
In this half year, we successfully delivered Barro Alto on time and on budget in local currency terms. This is a major milestone, and we believe this is one of the most successful greenfield nickel project delivered in recent times. There are a few nickel projects able to deliver product to specification.
Barro Alto has done that from the start. Barro Alto is ramping up well, and we expect to reach full production in the second half of next year. At full capacity, it will more than double our nickel production. And with a cash cost of around $4 per pound, Barro Alto will generate significant cash flows.
De Beers production totaled 15.5 million carats recovered, following strong growth in demand from the Middle East and China retail markets. De Beers sales during the first half were larger than the full year sales in 2009, contributing $450 million of operating profit to Anglo American.
So building on a strong financial performance in the first half, we fully expect an even stronger second half to this year. With that, I now hand over to Rene to take you through the financials.
Thank you, Cynthia, and good morning, everybody. Despite operational challenge in the first quarter, that Cynthia described, I'm very pleased to report a 41% increase in earnings. So level of earnings of $3.1 billion, that's after an effective tax rate of 31.8%, very much in line with the guidance that we gave you at the beginning of the year, and we are confirming a 32% tax rate for the full year.
CapEx of $2.3 billion, we are confirming our guidance for the full year of $6 billion as we are ramping up the project at Minas Rio. In the first 6 months, we spent $300 million at Minas Rio. We are projecting to spend $1.2 billion for the full year.
Net debt was down $600 million in the first 6 months, down to $6.8 billion. This number includes a net cash position in South Africa of $1.7 billion.
Over the next slide, I will go through price exchange, volume and cash balances. Let me highlight a couple of things on this slide.
Operating profit from Coal operation went up 45%. The level of CPI inflation on the weighted average for the group has picked up to 3.9% in the first 6 months of this year. For last year, the number of the same basis was 3.3%.
We also highlight on this slide the cash cost variance associated with the safety stoppage at Platinum as well as the rain disruptions that Cynthia described, $250 million negative impact.
Positive variance from associates must be due to the substantial increase in contribution from De Beers. De Beers contributed $450 million in the first 6 months on the back of 35% increase in rough diamonds.
Turning to traded commodities price variance. You see the increase in platinum price and an increase in the rand basket price just above ZAR 20,000 for the first half of this year, an increase of 16% due to the increase in platinum price but even more the increase in palladium price, which on average was at $775 an ounce in the first 6 months, an increase of 68% compared to the similar period last year.
Copper, on average, realized price of $4.22 compared to 308 in the previous period. At the end of this year -- end of June, sorry, we had 108,000 tons of copper partially [ph] Priced at $4.28. The volatility due to mark-to-market adjustment will increase following the commissioning of the Los Bronces expansion.
Turning to the bulks commodities and first, Iron Ore. Like the rest of the industry, we have moved to shorter-term prices. Cynthia mentioned the production decline in Kumba. Kumba, in same time, was able to maintain the same level of export sales in excess of 18 million tons in the first 6 months of this year. Kumba has also negotiated with AMSA an extension of the interim pricing agreement for another 12 months up to July 2012 at the branded [ph] Price of $65 a ton.
Turning to Coal. Similar situation as the one I've described for Iron Ore with a move to shorter-term prices. In fact, Met Coal was able to outperform the spot price in the second quarter and have also settled for the third quarter for hard coking coal at $315 a ton just like the lower available of the second quarter.
Thermal Coal. In 2010, we saw the expiration of a 5-year contract with EDF, the French utility, at $67 a ton, which means that now, we are fully exposed to short-term prices in thermal coal.
Exchange and volume variance. We -- like the rest of the industry, we are negatively impacted by the continued weakness of the U.S. dollar, a negative exchange variance of $519, all due to the South African rand and Australian dollar.
Limited volume variance of $124 million as especially Kumba and Platinum were able to mitigate the production decline by drawing down on the level finished goods inventory in Kumba and pipeline inventory in Platinum.
Turning to cost variance. Cynthia described the level of inflationary pressure that we are seeing them of input cost. For the first 6 months, we are reporting 7% above CPI inflation in increased cost. If that -- this number includes the impact of lower production. If you normalize the level of production in the first 6 months, this number is down to 5%, and that's what we are projecting for the full year. So 5% above CPI inflation for the full year.
We had a very strong operating cash flow of $5.2 billion for the first 6 months. That's despite the negative working capital movement of $800 million due to higher prices. You also see the proceed from divestment of $0.5 billion following the completion of the divestment of the 2 zinc assets at the beginning of the year, Black Mountain and Lisheen.
In terms of mining [ph] Divestment, we are going through the regulatory approval process for the -- John mentioned, between Tarmac and Lafarge in the U.K., and we are preparing the launch of the divestment of Scaw Metals in South Africa in the second half of this year.
This table updates $6.8 billion at end of June, exclude the debt in De Beers, which is down to $1.4 billion at end of June compared to $1.7 billion at the beginning of the year.
Cynthia mentioned the increase in the interim dividend at 12%. In terms of capital management, the priorities are first, to fund our organic growth program, and we are expecting the level of CapEx to remain above $6 billion for the next few years. We will continue to evaluate bolt-on acquisition, and any excess cash will be returned to our shareholders. Thank you.
So far, you've heard about the solid foundation we have built. We've delivered on our promises to lift productivity, and we're moving down the cost curve. We have the skills and the structure to successfully execute large scale, very complex projects.
Our big 4 projects are all on track. Barro Alto is in production. Los Bronces is close behind. Kolomela is being commissioned, and Minas Rio is also on track. I've said it before, and I'll say it again. Our growth profile sets us apart, both in terms of being well spread across our suite of core commodities and across the different time horizons. This is not distant growth. This is growth now.
Our long-life, low-cost projects are coming onstream in time to benefit from the robust demand and pricing environment. At the current copper price of around $4.40 per pound and nickel of around $11 per pound, we are set to generate very substantial cash flows.
We have the potential to double production over the next decade with the delivery of an $85 billion pipeline covering more than 100 projects. And this is up from $70 billion I mentioned previously. This reflects the progress we have been making in moving our projects through the pipeline. And you can see the potential for growth from our world-class project pipeline that spans the breadth of commodities attracting the greatest value.
We invest in those commodities with the strongest fundamentals, the most attractive risk return profiles and that deliver long-term returns through the cycle for our shareholders. We can claim ownership of the most diversified project pipeline in mining, and we're positioned to take full advantage of development in emerging economies, which I'll talk about in a few minutes.
I will explain later on the challenges the industry faces from which we are not immune. Notwithstanding, in the past 6 months, significant progress has been made. As you can see, 14 projects have progressed through the next approval stage, and many more have progressed through earlier phases of studies. But there's more to come. In 2011, our spending on exploration and earthly [ph] studies will more than double.
You've heard us talk about first half performance, the challenges we've faced with the solid -- and the solid foundation for growth. Our focus on constantly improving on our cost position is relentless, and the delivery of our big 4 projects will further enhance those positions.
Since 2005, our resource base has underground -- undergone explosive growth as a result of many exploration successes and acquisitions. We are restocking our pipeline continuously to sustain growth for the long term.
Take Nickel, for example. We have increased our resource base by more than 9x, and this doesn't include the world-class discovery, Morro Sem Bone, in Brazil. For Iron Ore, our resource base has grown by almost 4x, not least as we have to fund further the resource at Minas Rio, taking it from 1.2 billion tons at the time of acquisition to 5.3 billion tons today.
We have resources, the infrastructure and the people to deliver, and this places us in a very competitive position.
Now let me say a few words on the macro environment. In the short term, demand for commodities is likely to be volatile. The sovereign debt crisis in the U.S. and Europe have cast some shadows over the outlook for the demand in the next few years. In addition, growth in the major emerging economies is slowing as policymakers seek to restrain inflation. Still, the longer-term fundamentals for commodity demand remain strong.
The urbanization of China and the emerging economies will ensure demand for the commodities we produce remains strong for the long term. At present, some 20 million people, almost the population of Australia, are moving to China's cities each year. In China's current 5-year plan, more than 36 million social housing units will be constructed, 10 million this year alone. Urbanization will require significant steel and other raw materials over the next 2 decades.
China's industrialization and urbanization will provide additional long-term growth and demand for raw materials required for construction of roads and rail to light cities, ports, power transmission networks and heavy industry. And let's not forget, this is not only about China. India and the other emerging economies are following a similar sort of development cycle.
As development continues in China and emerging economies, the demand growth for the commodities we produce will shift in parallel to the increasing sophistication of these economies. And there's no doubt in my mind we will benefit from this shift.
Demand growth in emerging economies, however, is only half the price picture. The other half is the inability of supply to keep up with demand growth, and this is caused by a wide variety of factors, such as skill, labor shortages, regulatory delays and infrastructure constraints.
We see in Australia, for example, permitting times, which 5 years ago, on average, would have taken about 12 months for a project. Now it can take up to about 3 years. And a similar story occurs with poor capacity in Queensland or rail capacity in South Africa or political uncertainty in many resource-rich countries. And coupled with grades declines in existing ore bodies, a picture emerges of supply consistently under delivering against market expectations, and this is unlikely to improve in the short term.
So to sum up, we have been on a journey to transform Anglo American. We have delivered on commitments made along the way. Today, we've reported on progress on those commitments. You've heard this morning a substantial rise in operating profits, the benefits of asset optimization and supply chain programs and our actions to mitigate cost pressures and move down the cost curve. Above all, you've heard about where we are going as a company. The foundations we have laid to get us there and the delivery of our very substantial production growth.
We have delivered Barro Alto, a large complex project. Another 3 major projects are on schedule to be delivered into this highly supportive demand environment. An $85 billion, 100-project diversified pipeline will allow us to double or more than double production over the next decade. And this is why I am confident in saying our real growth is still to come, and our eyes remain focused firmly on becoming the leading global mining company.
So with that, everyone, thank you very much for your attention. And I'd like to take questions, first, from London, a couple of questions and then from South Africa and then on the phone line. Jason?
Jason Fairclough - BofA Merrill Lynch
Jason Fairclough from Bank of America Merrill Lynch. Just 2 questions, I guess, both on a similar sort of bent. First, just on Quellaveco, just interested that the project approval's been delayed. And I'm just wondering if that's tied in at all to the changing government we've had. And second just...
Sorry, Jason. Changes in...
Jason Fairclough - BofA Merrill Lynch
In the government.
Jason Fairclough - BofA Merrill Lynch
So second just on South Africa. As impressive as all this stuff is in the international assets, there's no getting away from the fact that almost half of Anglo is still in South Africa, and we've got elements of the ruling party there that seem very focused on pushing a nationalization debate. Could you talk about how you hope to manage the fallout from that?
Okay. Well, let's start first with Peru. First of all, our plans for projects in Peru have not changed. We congratulate President Humala on his electoral victory, and we look forward to working with him. And we remain committed to those 2 copper projects, Quellaveco and Michiquillay. The feasibility study for Quellaveco has been completed, and as John said, we are awaiting approval of critical water permits. What I would also say to you is we did elect -- as a result of some of the events this year, in particular, with respect to other mining projects, we decided to engage in a dialogue table with the local community, with NGOs and with the regional president in the Quellaveco area. As a result of that, as John mentioned, it has caused a delay. On the other hand, we are unique in terms of what it is that we have done and having that dialogue table, and we've also been engaging with the new Minister and others at the central government level. So the answer to your question is I think we're going about this the right way. I think we have done something very different from what has been done in the past. The regional president is with us all along the way, very committed, and we are also getting the same sort of feedback from the newly elected official. So the outlook, I think, is positive. As I said, we continue to be committed, but we do expect the confirmation on the project to be next year. On the question of South Africa. We have been very clear about our position. Nationalization, first of all, is not the policy of the South African government. Nationalization does not work. Mining makes a massive contribution to the economies of resource-producing countries. And certainly, in the case of South Africa, we constitute -- the industry constitutes 8.6% of South Africa GDP. Anglo American alone is 2.5%. And actually, the largest beneficiaries of South African mining are the employees of the South African government and the suppliers to the mining industry. So Jason, again, we have made ourselves clear on where we are on this. We have gotten consistent readings from the government and expression of an absolute position on this, whether it's from the Minister or the President or the Deputy President, and we continue to believe in South Africa. Now if you turn to our project pipeline, going forward, we are looking at, I mentioned, $85 billion. I've mentioned before $16 billion of near-term projects to be approved. About 50% of that are -- will be in South America. And so, we are very, very diverse in terms of our geographic footprint, and we'll continue to invest heavily, not just in South Africa but in South America. Other questions? Yes.
Liam Fitzpatrick - Crédit Suisse AG
It's Liam Fitzpatrick from Credit Suisse. Two questions, firstly on strategy and then on Platinum. Just on the strategy side, if we look forward 6 months, I think 3 of your major growth projects will be in production. So is the strategy just to continue to fill your CapEx pipeline like your peer group? Or can Anglo also be a free cash flow story with higher dividends to run alongside your higher production base? And then secondly, on Platinum. I know you're talking about higher production in the second half, but do you really think that's enough to offset the cost inflation that we're seeing in the region at the moment?
Okay. First question on our strategy, looking forward and whether it's all about projects I think is what you're asking and whether the cash flows will be going directly in the projects or feeding back into the market. I think that we -- as I've said, we've got a massive project pipeline. Thank heavens we didn't stop the spend a few years ago with many of our peers did stop the spend. We will continue to invest going forward. We're reaping the benefits from those 4 projects. We're going to be seeing in the EBITDA, a contribution, over the next few years, at today's prices of more than $6 billion. Next year, we're looking at a CapEx -- this year, as Rene said, it's about $6 billion. Next year, it will be about $6.5 billion, the year after, similar sort of run rate. And as we go forward and as we look at the dynamics of the markets and how we're positioned, how we're performing operationally, how those projects are coming onstream, we will make a determination as to how much -- to what extent we will increase those dividends. So we have a progressive dividend policy that is either to maintain or increase, and it's really on that basis. It's on that basis as to whether we are going to -- which options we're going to pursue, and actually, we can pursue many of them at the same time. The second question is about Platinum. Will higher production offset the cost inflation? Clearly, cost inflation has been a big, big challenge in South Africa. You're aware that labor rates have -- labor costs have increased by about 9% this year. Electricity is up by about 26%, in line with the last couple of years. I think Neville and the group in Platinum have actually done a phenomenal job in containing cost in nominal terms over the last 3 years. I mean, we've done that 2008, 2009, 2010 between ZAR 11,000, ZAR 12,000, and our target is to get it to ZAR 12,000 per ounce for the rest of the year. We know that is a challenge. So higher production will help, but that's not all that's needed. We need to also increase productivities. We need to capture more out of procurements. We need to think even more about the structure of the organization. Neville's done a phenomenal job of restructuring and driving efficiencies, but there's still more that we can do, as for the optimization last year plus procurement yielded about $700 million of value. And he's got even more plans to do greater amounts of that going forward. So it's really across the business. Neville, you want to just comment anymore. Okay. Neville is happy with that. All right. I'll take just one question from you and then we'll go to South Africa. And then -- and I'll try to share these questions with my colleagues who are in this room, because you got a great group here.
Des Kilalea - RBC Capital Markets, LLC
Des Kilalea from RBC. Minas Rio, could you tell us what the time-critical items are in the development now? And what sort of the CapEx is still left? You did tell us what you're going to spend in the second half, but maybe what the budget is left.
Okay. In terms of where we are, at present, there are no particular bottlenecks that we don't believe that we believe that we can't overcome. And as I said earlier, we have started on the civil works at the beneficiation plant and the tailings dam. There are a number of licenses and permits that we still need. We've gotten secured, since we started, 38 critical licenses. We have 11 yet to secure. In terms of the land assets, we have 87% of the land access along the pipeline now secured. We have -- on Spread 3, which is all in the state of Rio, we have about 99% there virtually complete, 87% on Spread 2 and 65% on Spread 1, so I would say making very, very good progress. I'd be happy to sit with you and kind of give you the details. I have a lot of details on this. I can also say that we are -- I mean, you have everybody in this executive team is right behind Ministry on trying to do everything to support. We continue to drill the resource. I've stated -- I notified you that we identified or confirmed 5.3 billion tons. It's going to be quite a bit more than that, and I'll come back and give you an update at the year end performance. In terms of CapEx, it's still $5 billion. So we haven't changed that, and we spent $1.9 billion to date. So again, does, anybody else, would be happy, we have lots and lots and lots of detail. The port is actually ahead of schedule by about 1.5 months, and port construction is scheduled to be completed in the fourth quarter of 2012. And we've got -- as I said, civil works, about 15% of that has been now completed. So that's not too bad. On the earthwork side around the beneficiation plant, about 73% is complete. So a lot of bits, a lot of pieces to this story. But I think that, certainly, we are pretty confident that this is going to be a great cash generator. We believe that the cash cost will be on the very low end of the cost curve. We think the quality of this resource is very, very high. It is absolutely a Tier 1 resource. You've heard us talk about the tariff that we've locked in for the long term at about $5.15 per ton. I mean, that's phenomenal in today's environment. So I think it's looking pretty good, but that's not to say we don't have our challenges. And I've said to you all before, I cannot guarantee anything. I mean, a lot of this is out of our control, but we got hundreds of people on the ground working day in, day out to access the permits and the licenses. Thank you very much. Good question. Okay. I need to go to South Africa. So South Africa?
Okay. Cynthia, we have some questions here. The gentleman in the front.
It's Tim Clark here from Deutsche Bank. Three questions, if I may, please. First of all, just on dividend policy, this is the first time since the dividend came back in July last year that we've seen a sort of a progression to that dividend. And I wonder if you could speak through the board's thinking on the dividend policy going forward. Would you, like some of the diversified majors, grow that with production growth? Or how do you think about that dividend policy from here forward? And secondly, I wonder if we could speak a little bit about project hurdles. And with this extensive and significant growth profile that you have, I wonder if we could speak about a project such as, for example, New Largo, how you think about New Largo, which we see is up for approval late in 2012. And clearly going as a captive mine to Eskom, we wonder if we could just think about how Anglo thinks about that in relation to returns. And then my last and third question, please. I noticed that, clearly, Catalao, Copebras and Peace River have reappeared as core operations. And I just wonder if you could speak about whether those are going to be integrated into the big -- into the divisions, where they'd be integrated. I noticed that Catalao is on the growth profile. It's on the project pipeline, which I think, if I look back quite a long time, I haven't seen Catalao as a growth project at Anglo for a long time. And I wonder if you could speak through the strategy and plan there and what you're seeing and why they're suddenly important to Anglo again.
Okay, Tim. We'll be here all afternoon. All right. Let's go back. I'll try to knock out this dividend policy question. Again, as I've said a little bit early of the progressive dividend policy, we -- and that means that we -- it's either maintained -- our dividends are either maintained off of a base or increased through the cycle. And you would be aware that obviously we made an increase at the tail end of last year with the base annual dividend per share of $0.65 per share that we reestablished in 2010. So perhaps I'll leave it at that. In terms of the project hurdles, I'm not sure that New Largo is exactly the one that we want to pick out. I would just say, generally -- and then Norman, maybe I'll ask you to comment on some of the challenges maybe in South Africa, because you've got -- you've actually brought onstream Mafube, that is adding a really good value, fully operational. You're right in the process of bringing on Zibulo. Maybe you could talk a little bit about that. But clearly, on the projects execution and delivery side, there are hurdles, starting first with labor shortages and starting first in Australia. I mean, we're-- you would be very well aware of those challenges there. Now what are we doing about it? We are not waiting for those projects to even be confirmed. We are preparing for those projects now. So in the case of Grosvenor macro project in Australia, again, we don't expect confirmation until the first quarter of next year. On the other hand, we're looking at our needs from a critical resource standpoint and capacity standpoint, from a young talent standpoint, from a particular functional standpoint. So whether we're looking for engineers or geologists or miners, we are preparing and understanding, person-by-person, man-by-man, what our needs are for the next number of years, for the next 5 years. And it's an extremely helpful process. It is multifaceted, multilayered. And Seamus and the team are going to places like Canada, Germany, the United States to start recruiting for those projects for years to come. So that's one answer to how we're dealing with some of this. Now Norman, I'd like you to stand up and just comment on the question about how you bring projects online in South Africa, because I think you've got some very, very good examples.
Thank you, Cynthia. As I said, projects in South Africa that were brought online -- we brought Mafube online, which is fully operational now and is very well into the first quarter of the cost curve. We are ramping up Zibulo at the moment. It's produced 1.3 million tons in this first half. And we expect another 2.2 million tons in the second half and will be fully ramped up next years, and we're purchasing over 6 million tons of coal. So our delivery in South Africa has been quite good in spite of the things that we see, like project managers scarcity and the inflationary pressures that Cynthia has been talking about. In spite of that, we've been able to bring them online. We are still in negotiation with the Eskom on New Largo. That's why we don't speak too much about it. But we are on track with the feasibility study for completion in quarter 1 of next year. Those of you who have really long memories will remember that whenever we built mines purely for Eskom, we always discuss how we're going to find that. So all those discussions are still in progress right now. Thank you.
Thank you very much, Norman. Okay. Your question about Copebras, Catalao and Peace River coal, maybe I can just touch on Peace River coal for a minute. So why did we retain this? We -- Seamus and the team from Australia have spent quite a bit of time on the ground. We think that it's all metallurgical coal. We're only producing about 1 million tons, not even that, this year, but we think there is more potential. And it's about sharing expertise. It's about applying best practices and doing things differently. So we think this resource does have the potential to increase production substantially. We haven't yet defined exactly to what extent, but I will say substantially. And so that is now part of Seamus' group. In terms of Copebras and Catalao, these businesses will be managed as core businesses within Anglo American, and we're just now determining exactly under which individual. But we believe that their quality -- they're assets, in the case of Copebras, given where the phosphate business is today, the margins that we're reaping, we are looking at and assessing how this business is likely to evolve. So that's really where it is. Catalao, we've identified a lot more resources and niobium in Brazil there, substantially more. And we're looking at seeing how we can actually expand that operation. Okay, one more question. That was about 5 questions. So one more quick question. And Mr. Vendor, [ph] where are you, my friend?
Carroll, you've done extremely well. The only problem is, the shareholders -- I mean, we're losing money, and we can't really talk of an income. For some time, we didn't even get a dividend. Can't you grow much lower and give us a bit of a bigger bite to -- in the chili.
Okay. We'll leave it at that. I'm going to turn to the phone line, everybody, and ask -- we have no one on the phone. Okay. All right. So I'm looking back. All right. Let's take a couple of other questions from the room here in London.
Heath Jensen here from Citigroup. Just 2 questions, one on asset optimization. You said that you've identified $400 million worth of gains last year. I was just wondering how long is that going to take to flow through. And also, you gave sort of a percentage of the operations that you reviewed in terms of a number. I'm just wondering whether you can also give us a percentage in terms of earnings. Then secondly -- second question, just you said that you expect more of a volatile demand outlook. I guess that meant down. So I'm just wondering whether you've actually seen any impact on consumption at all for your commodities across the board and whether you've actually lowered any of your growth expectations.
Yes. I appreciate the second question a lot. First question, I'm not going to answer, only to say that, as I said, $400 million just from those 5 operation reviews. We're doing 7 this year, and already, we've identified substantial amount of value that we yet to deliver out of some of those operations. So I -- we're working on how that's going to flow through to the bottom line and when. We haven't yet taken a decision on how we're going to share that with the market, and we'll probably do that either at the year end results. In terms of the question on outlook, Heath, we actually have increased the prices on all the long-term prices for our commodities. So with every single one, we've made those increases. And we think, actually, for every one of our commodities, the growth actually looks very, very strong. I mean, we've got average growth on the Platinum side of 3% to 4%. We think that the market is pretty much in balance right now. Copper, obviously -- it has a -- we expect a significant deficit this year of around 500,000 tons at least. We -- and longer-term demand in the neighborhood of about 3% to 4%. China representing, in the near term, about 7%. I think in terms of Iron Ore and Met Coal, Met Coal has come up by 8% year-on-year thus far. And the outlook is -- continues to be very, very strong. We're seeing steel production, obviously, come up significantly in -- starting first in China but across the world, including Europe and the U.S. So I would say, overall, we are -- despite that volatility and despite that nervousness, we think that the consumption of our commodities, all of our commodities, will be very strong, both in the near, medium and the long term. And obviously, I did also mention, on the Platinum side, we think that there's a lot of upside given that at the Platinum, we'll be coming on even more strongly out into the future. So growth there -- I mean, we saw a growth this year, thus far, of the market in Platinum of about 7%. On the autocatalyst side, it was up by over 50%. I mean, it's just fantastic. And again, we'll come back and talk to you more about a Platinum outlook. I know Neville will, but we think there's a lot of upside in the market there. Thank you, Heath. Okay, everybody, we need to wrap it up. But David, you have a quick question, a burning question.
So it's 2, one which you'll probably be quite bored with. The -- which is that -- I've noticed a significant increase in clients in the first half of this year, are of the belief that there would be a big uplift in the market value of Anglo American if you were to unbundle Anglo Platinum. I wondered if you'd notice such trend and whether that was being addressed more so at the board now than before. And then the second question, which is a bit more technical. There's also market speculation that you've made a very big and significant find or discovery of a poly-metallic deposit in Finland. I'm just wondering if you could comment on that as well.
Okay. Okay, first question. Yes, I have to say I am a little tired of the question, but I'm not surprised that you continue to ask the question. So with respect to Platinum, let me just back up a little bit and then put it in perspective from where we sit. Our #1 objective is to deliver shareholder value across all of our businesses. That -- let's be clear about that. And this means that we continuously review the entire Anglo American portfolio of businesses and our positions in that portfolio. This includes the ownership of Anglo American Platinum. However, our strategy remains clear, and we focus on commodities that we believe will deliver the best return through the economic cycle. And with those commodities, we focus on Tier 1 assets that have large scale, long life, have low cost profiles and offer clear expansion potential. And we remain committed to maximizing the value of these synergies while reviewing the portfolio structure. We believe PGMs are highly attractive, and they have fantastic long-term fundamentals. PGMs provide material exposure to late cycle development of the emerging countries and a shift towards carbon reduction technology. And our Platinum assets represent one, if not the best Tier 1 resource position in the world. I think in terms of the -- our intervention and our involvement in the Platinum business, I don't think there can be a question about that. We have made significant impact and improvements over the years with Neville and the team to achieve best practice to Anglo American standard and applying expertise both within the Platinum business but also from Anglo American. We've improved the safety performance. Fatalitites are down by almost 70% since 2007. Headcount has been reduced by about 30,000. We've had flat cost for 3 years running. We've got another challenge this year. Productivity has increased hugely, and we are benefiting from the Platinum business as they are benefiting from us. I think the group structure is highly effective with -- the businesses are benefiting from the synergies of Anglo American's global scale and broader financial and technical resources. And I think this clearly demonstrates -- it has been demonstrated through the economic benefits delivered year-to-date through asset optimizations, as an example, of about $300 million or procurement of $100 million. And let me put this into context. Platinum's assets are the equivalent of the cover of the Pilbara of Iron Ore, but they're not carved up or co-owned by Rio Tinto or BHP or FMG. And in the Bowen Basin of Met Coal, BHB Billiton has 50% of BMA. So we think that these are great assets. We think that we're adding substantial value. We think that they're adding value to us. And given the market outlook of Platinum and PGMs in general, we think that the returns of this business will be that much more attractive and add that much more to Anglo American going forward. Okay, with that, everybody -- oh, sorry, David. Question about Finland. We do have a lot of work going on in Northern Finland. I can't share it with you as much as I would like to today, but we will come back at the year end results, we believe -- Brian, where are you -- when we have confirmed the resource and the makeup of that resource and give you the specifics around it.
So with that everybody, I thank you again for your attention. I thank you for yours in South Africa and for those on the phone. We certainly appreciate your support. We appreciate your interest. We appreciate the time that you've spent with us today. Thank you very much.
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