Thras Moraitis – Executive General Manager Group Strategy
Trevor Reid – Chief Financial Officer
Ian Pearce – Chief Executive Xstrata Nickel
Peet Nienaber – Chief Executive Xstrata Alloys
Charlie Sartain – Chief Executive Xstrata Copper
Peter Freyberg – Chief Executive Xstrata Coal
Andrew Fikkers – Marketing Manager
Mark Eames – Chief Operating Officer Xstrata Iron Ore
Mick Davis – Chief Executive Officer
Rob Clifford - Deutsche Bank
Jason Fairclough - Bank of America Merrill Lynch
Myles Allsop – UBS
Rob Clifford – Deutsche Bank
Andrew Keen – HSBC
Nick Arch – RBS
Nick Pascalla – Hermes Fund Managers
Cam Gilles – Deutsche Bank
Unidentified Analyst – Barclays Capital
Xstrata Plc Adr (OTC:XSRAY) Xstrata Plc Investor Seminar London 2011 Conference Call December 6, 2011 6:00 AM ET
Ladies and Gentlemen, good morning. It’s wonderful to be amongst friends again to reflect on Xstrata’s year which has been prolific year for Xstrata in particular on the organic growth side. So I will be looking forward to sharing with you what’s been achieved over the last year.
Before we do that, I just want to run through the program quickly. The next person up after me is going to be Trevor Reid, our CFO. He is going to talk to you about obviously financial matters and how he set up the balance sheet in a way to deliver the organic strategy and then we are going to move into each of the business unit CEOs and they’ll talk about their businesses specifically and leave sometime for Q&A after each of their sessions. We will break for lunch at about quarter to one and then we’ll have a tea break at around quarter past three, and then we’ll conclude with Mick Davis, who will come in and give us some concluding remarks on Xstrata and how it moves forward.
Before we get Trevor Reid up here to talk to us about how we refinancing all of these interesting things that are going on in the business, I thought it would be appropriate given that we are now into our tenth anniversary as Xstrata under the current management team and under Mick Davis’ leadership. In fact, that occurred in October of this year. The tenth anniversary of Xstrata as a London listed company is in March next year. And it seems like an appropriate time to reflect upon what brought us here, what are the elements of that and how that feeds into where we are moving forward.
As many of you have known, Xstrata has grown over the last 10 years from a $500 million Market Cap company to around a $50 billion. Our EBITDA has grown from $400 million to $10 billion last year. Our revenues have grown 15 times over that period of time. And this growth was built really on a couple of convictions. The first of course, was the conviction around the secular change in demand for commodities which today seems like an obvious thing, but I can assure you 10 years or 11 years ago was not something that was commonly agreed on. Secondly, that the supply side which was underinvested in since about 1989 up to that period of time would struggle to meet that demand. And so that was one of the fundamental convictions around which Xstrata was built.
Interesting, as I stand here today 10 years later, we have the same conviction. In despite the fact that we are now 10 years into this massive industrialization and 10 years into significant investment by many of the mining companies, our conviction remains exactly the same.
The second aspect of our strategic conviction was that really we wanted to build a mining company, a major leading diversified mining company based on three pillars of a stool. The first was diversity. We believe strongly in diversification and the power of diversity to deliver more stable and de-risked cash flows. Secondly, on a belief in scale. We believe that scale is absolutely imperative in an industry where as we now beginning to see building multiple, multibillion dollar projects requires one to be sufficiently large not only to finance them, but also to resource them in terms of skills. And finally optionality. And this is something that is very much in the DNA of every Xstrata executive and employee which is constantly seeing optionality in everything we do and certainly in our early phase, we continue to seek optionality through the acquisitions that we were doing.
So this prolific growth really was based and is based on three elements of our strategic evolution. The first by definition and by necessity was M&A Lead. First of all five years. Prolific M&A, three major transforming transactions, the acquisition of NX which coincided with the IPO. The acquisition of MIM in Australia in 2003 and then finally the $20 billion acquisition of Falcon Bridge in 2006. In addition to those three, there being some 40 other transactions that are being done by Xstrata over the last 10 years. So the first phase by necessity was a phase driven by M&A. The second phase of our strategic evolution was operational excellence and this is something that is continuous and will never wane in Xstrata, and in every Xstrata person’s agenda. Every single day we seek to improve the value of our assets in a small way, in small increments and in large increments.
And the operational excellence phase I think is worth reflecting on because what that has done is taken some of the assets that we’ve acquired, we acquired many great assets, but we are also acquired along the way through the portfolios that we acquired a number of assets which perhaps were not Tier 1 assets. And our operating teams, I think it is fair to say – certainly I can say since I am not in the business units, have done a miraculous job of taking a series of assets and moving them down the cost curve, extending their lives, extending their resources, improving NPV on a year-by-year basis to the point where we now, all of our operating businesses are operating in the bottom half of their cost curves. Many Tier 1 assets in our portfolio, cost reduction which is structural in the sense that the fundamental change in the nature of these businesses.
So the new cost structures are baked into the operations moving forward. And in addition to that as you know we are the only major who has managed to reduce their cost in real terms successively every one of our last nine years of operations. In addition to that on the sustainability side which is absolutely central and crucial to our strategy, we’ve reduced safety incidences by 80% since the new management team took over under Mick Davis and we have won the Dow Jones amongst other awards, we’ve won the very prestigious Dow Jones award for Super Sector leader in sustainability for five of our short 10 years and this is something we are extremely proud of and very keen to sustain going forward.
So the second phase of our strategic evolution was and here is continuous to be operational excellence. Now, what we really going to talk to you about today is the third phase which is now well in its stride and that’s the organic growth phase. Through the acquisition of the assets that we made in the first five years, we acquired a series of organic growth options which are now beginning to bloom and our prolific and promise to deliver industry leading growth, 50% growth in volumes over 2009 on a Copper equivalent basis by the end of 2014. We are still on track to deliver that returns in excess of 20% of IOR, a reduction in real costs by around 20% and these are very important reductions in real cost because by bringing on lower cost operations, you are structurally reducing your costs. So reducing our cost even further from where we are today relative to our competitions. So our fundamental transformation of Xstrata’s portfolio yet again for the third time in a way that is sustainable and improves our relative competitive position.
And importantly, we’ve been focusing on putting the building blocks together to make sure that we can deliver against the strategy almost in an uninterrupted fashion irrespective of what happens in the macroeconomics or any other external environment and that includes making sure we have the financial strategy to deliver against that and the human asset strategy to deliver against that growth.
So I think in summary what I’d like to say is that the organic growth strategy is something you’ve heard about I guess repeatedly over the last three years. It is now upon us and by the second half of next year, we will start to see significant and sustained growth in volumes and this is something that is exciting to the Xstrata executive team significantly.
And with that I’d like to handover to Trevor. Thank you.
Thanks, Thras and good morning Ladies and Gentlemen. Yesterday I was in Switzerland presenting our budget and plan which is a budget for 2012 and then a plan for the following two years. And the key strategic thrusts of those plans was to develop a set of operating plans and financing plans that would ensure that we could deliver on our promise that we made to investors two years ago of delivering the 50% growth that Thras has spoken about. And secondly, to ensure that we had a financing plan that could achieve three things. One, finance the growth platform that we’ve spoken. Two, ensure that we can continue to meet our commitment to our shareholders in respect of progressive dividends and three, to do all of this in a way which manage the financial risks and ensure that we continue to operate within our strong investment grade ratings.
I am pleased to say that I think we developed a very credible plan and that our budget and forecast is well in place to achieve those two strategic objectives.
Before I get on to a snapshot of what our growth profile looks like and give some more color on our balance sheet, I just want to reiterate a point that I think we’ve made in the past, but I think is not yet fully appreciated by our shareholders and by the investment community. Although we have predominantly been seen as an M&A driven company and we had to be given that we started with very few assets. I think behind the glare the M&A spotlight, people have perhaps lost sight of the fact that we actually have got a very strong record of project delivery. And since the IPO 10 years ago, we’ve actually delivered 19 projects to the capital spend of $17 billion. Now looking at those you will soon realize that there are no major jumbo projects there like Koniambo. But if you do look at those projects you’ll see that there is a broad range of different types of projects, there are underground mines, there are open pit mines, there’s associated infrastructure and there are a number of complex processing plants.
And I think the other thing which we are particularly proud of is that with the exception of one of our coal projects in South Africa, the GGV project which had a time overrun because of extreme weather, all of those projects were delivered on time and on budget.
Now let’s look at the progress that we’ve in 2001. The progress has been significant. Firstly, we commissioned five projects. These include three major coal mines, the ATCOM mines in South Africa which is the second of our big open pit mega mine complexes, the Newlands underground and the Mangoola mine. And as of Mangoola a couple of weeks ago for the opening and is a truly incredible project, we are already running of [inaudible] 3:15 capacity well ahead of schedule and we are already planning expansions of that mine which can easily be expanded subject only to environmental approvals.
In Canada, we took another step forward with the optimization of our Raglan operation with the commissioning of the Kikialik underground mine and I am sure Ian Pearce, will give some color as to we are – the rate at which we are moving that Raglan forward to an optimization which could at some point reach 40,000 tons of nickel and we successful commissioned the restart of Falcondo.
We approved five new projects including the Cerrejon expansion to 40 million tons, Tweefontein in South Africa, this an optimization project which will complete the third of our mega mine complexes and will see us transitioning to a point where 90% of our coal in South Africa will be produced from three big open pit complexes. And we are commissioning the Lady Loretta mine in Australia which although it’s a small mine, it’s very high grade, it will the Mount Isa infrastructure and consequently it will lower our cash costs and provide very good returns.
I should also note that of the 21 projects that we now have approved, four are already in the process of commissioning and will start to add significant volume in the second half of next year.
Our pipeline remains long and deep and we have 11 projects which are now at the feasibility stage and we are expecting that those 11 projects will be brought forward to the board for approval in the near term.
Now, one of the features of our budget and plan is the dramatic acceleration that we start to see in volumes and revenues from the middle of next year as numerous projects start to commission. As I mentioned, we have four projects that are currently commissioning. The Antamina expansion, the Eland underground, Santiago’s Black Star Deeps project and Handlebar Hill project.
And then in next year, we start to see the delivery of our first real mega project with the Antapaccay project in Southern Peru, which is the first of our Southern Peru project and will largely replace the Tintaya output and then of course Koniambo.
And I was at Koniambo two weeks ago and I have to say you cannot help but be struck by the enthusiasm and excitement that is so evident in the workforce there. Productivity levels have improved dramatically, the mine is substantially complete, the conveyor system is being commissioned, we’ll start delivering ore from the Massif to the plant in early part of next year and I am entirely convinced that this project is going to live up to its potential and I am sure Ian will be giving you more details on that when he talks in.
So really, the message here is that we have been through a long period of sowing, but I can really feel that it’s time to start reaping and that in the beginning of next year we will start the harvest.
Another feature of this project pipeline is not only that it delivers growth, but it delivers growth at significantly lower costs. If I look at the cost savings included in our forecast, we are expecting significant cost savings in 2012, ’13 and ’14 as we start to deliver these increased volumes of low cost product. It’s largely a result of the fact that numerous of these projects are Brown Field projects which by their nature are lower in cost and also that the number of our Green Field projects start with significantly higher grades which will given immediate impact onto our cost structure of our Coal, Copper and Nickel divisions.
I also would like to point out that in our budget and plan and we are not talking about them today, we have a number of mega unapproved projects including the Wandoan project in Australia, which is a very substantial coal project and a number of Copper projects.
It is our policy to give guidance at this meeting as to the future capital spend and will be guiding the analysts to the capital budget of just under $20 billion over the next three years. The peak spending is in 2012. Big components of that spend will be the completion of Koniambo, the completion of Antapaccay and start of the high spend period at Las Bambas. The sustaining capital numbers is not included in this, sustaining capital is expected to run at somewhere between $2 billion and $2.5 billion, and I just want to now move on to how we are financing it.
Our net debt at the end of the year is expected to be around about $9 billion, giving us a gearing of 16%. This is below our sort of traditional target area but clearly with such a large capital spend coming down the pipe, it was absolutely imperative that we enter this period with a very conservatively finance balance sheet.
We are a very alive to the uncertainties in global markets at the moment and in particular the uncertainty in Europe could have a dramatic knock on the financial markets in that area and consequently we did not want to wait till the middle of the next year when our major revolver matures. And in October, we refinanced all our bank facilities and it was a very successful refinancing, I think it evidences the strong relationships we have with our core banking group and a number of them are here today and I really want to thank them for their ongoing support. We managed to secure a $6 billion revolver. It has a term of five years which we can extend at the end of the first year and second year by another year. So effectively its seven year money. The pricing was extremely competitive, it remains without any covenant and as is our policy, it remains undrawn at the – it will be undrawn at the end of this year.
We also took the opportunity to opportunistically tap the bond markets in November. We were looking for $2 billion of bonds and given the uncertainty in the market, our advisers were warning us on the day that we launched, that it might be difficult even to secure $1 billion. But nevertheless, we launched. We had a very strong reception, I think evidencing the fact that Xstrata is seen as a very good credit. Eventually the book billed to $10 billion and so we took $3 billion of bonds, they spread over maturity from three years to thirty years on a blended average maturity of 10 years at a blended rate of 4 ¼%. So I think again, a very successful result.
So with a balance sheet where we have $6 billion of undrawn bank headroom, we have gearing at 16%, we have an average maturity on all our facilities of eight years. We have no covenants on our bank debt; I think we have a very strong balance sheet with which to take on this capital program.
So with that as a backdrop and sort of a group overview of where we are going, its now time to look at the individual business units. First up is Zinc. Now when I first met Santiago Zaldumbide there, it was almost 10 years to the day ago, and he explained to as business at that time which at that point was a single stranded smelter in Spain, which it was a very low cost smelter, but it had none of its own feed because its mine was closing down and it was essentially stranded. If we look at the Zinc business now, we are looking at an integrated business almost a million tons of production. Santiago has relentlessly driven it down the cost curve to the point now where it is one of the most competitive integrated Zinc businesses in the world. He’s done that by the application of what I can only describe and it is unusual for a finance director to say this, but only describe as miserly amounts of capital and it’s just a fantastic story. So I hope you will enjoy hearing how he’s done it from the man himself and I welcome Santiago to come and talk to you.
Thank you, Trevor. So let me have another attempt of drawing your attention. I have failed most of the times but I am going to try again today. So I am going to first of all show you – well, we are going to cover market, we are going to cover the growth and I will conclude with our main goals.
We are established right now in seven countries as you can see there, in Europe, in Australia, South America, North America. Well, taking from what Trevor was saying, I want to spend a little bit of time on what has been the effort to get the vertical integration that we have achieved today. Many of you cover some other companies in the same sector. And you know very well that I know achieving a vertical integration is fundamental point number one, is difficult. There are different ways of trying to get that. If you want to do it very quickly, you will have to acquire assets and in many cases acquiring assets is expensive and doing that – well, gives you vertical integration but at a relatively high cost and then while you return some capital employed present from that.
Well, obviously in my opinion the best way to do it is to do it through organic growth, extending, expanding already existing operations. This normally gives you the same or better results but at a much lower cost. And this is what can allow you to have a return on capital employed which is good. We have done it both ways. We have done it as you can see in this slide partially through acquisition and partially through organic growth. But I want to say here as I did mention in September, well, when we acquire for instance MIM, we didn’t acquire MIM for the same assets for sure. They are saying assets were in a very poor condition, they were just about to be divested or closed. So is true that we got some assets through an acquisition, but believe me those assets were in very poor condition and had to be transformed completely. We did transform them and as we will see later.
So that was the start for the vertical integration but later, we – as Trevor will mentioned with relatively low investment, we have increased the production for instance in the case of Mount Isa a production significantly. With a very low investment cost, well, the explanation for the return on capital employed that I will show you later is mainly that, that we have increased a lot of the production through acquiring relatively low quality assets, transforming them and once that happens expanding them at a very low cost to tell you the truth.
So then -- we were in 2002 with the smelter in Spain now has been said and today we have seven mines, three Zinc smelters, three Lead smelters and five Greenfield projects. So it’s a quite a significant change.
If we talk about resources and reserves. Well, again as you can see in resources the increase has been of 295 million tons, very significant one. The same can be said about the reserves. This has – again, this has been done through two different ways. First one, obviously drilling and then spending some money on trying to get new reserves, but also reducing drastically the costs that as you know is what also allows to transform a lot of resources into reserves. So this is a combination of the two actions.
We were talking about cost savings. Well, we have as Mick has put it in a certain meetings with you; I think we have an unbroken record of reducing cost, not one year but many years. Because of that we have an accumulated number of $700 million of cost that we have saved. And that you know the final reflection of all that is the return on capital employed. I remember when I was responsible of this business some 10 years ago; the return on capital employed in the same business was about 3%, 4%. And then today, we have an average including the very difficult 2008, but an average of 24% return on capital employed which I think is a very decent one.
So talking about how this operation improvement some things like that have impacted in our scorecard, you can see revolution from 2006 until today. And you can also see how the evolution of our cast improvement compares with our competitors which I think in comparison is quite clear.
If we speak about the health and safety performance. You can also see in the graph that the performance in this year has been quite good.
Then I am going to call little bit my views on the market. And then – I think it has been some relatively a strange dichotomy between what, and influence has happened from a macroeconomic point of view, what is happening in the real world, with the real demand. Well, from the macroeconomic Eastern point obviously we have a problem in the European Union, we have heard and we still have problems in the United States, we also seem to have some issues in China in the sense of inflation, I am trying to have more tight monetary policy. Well, those kind of macroeconomic issues have really affected very much share price and along that.
My view on that microeconomic issues is that, well in the European union even though the situation is no doubt difficult, but in my opinion right steps are being taken especially usually now step by step, not doing funny things every week, but rather start trying to establish a well planned difficult and painful strategy that in my opinion will give rewards in due time. And with respect to the United steps, we have seen the growth that we hope or we were thinking it would happen has not been as good as we would have expected probably, but growth is happening there, I have a tremendous confidence in the United States as a country, as a country that is capable of doing very good things. Once the politicians they clear up their minds, I am very confidence that the United States also will continue in the path of growth.
In the case of China, we have also seen that the financial policy has gone back to normal; I mean they are relatively happy with inflation and I honestly don’t think they afford to really cut the growth significantly. You know it’s a question. So well – anyway, I am sure that most of you can develop these ideas in much better way than I can, but this is what I think on that.
So I am not pessimistic about the future, but well this is one factor that obviously all of us can have our own ideas, but if we have a view on the real demand, I can tell you that the demand for Zinc in the United States is strong and more surprising the demand for Zinc in Europe is strong, and not only in Germany that is it is, but also in Spain. We are consistently selling more than last year, but pretty used in last year and this is a fact.
So, then there seems to be some contradiction between the macroeconomic fear that I think they are justified, but the fact of the demand is what I am telling you in our experience in the United States, in Canada, in Germany and in Spain.
Well, it is also a fact that the steps have been reduced at the LME Shanghai and of course stocks in China we have to estimate, we believe also have decreased. So this is another point I think is important to take into account.
Then if we talk about future prospects, well then we believe that the growth is going to be led by China. I don’t need to tell you that the different issues, different projects, different needs that China has in building new roads, new houses, many things, urbanization, infrastructure and all that. So also I believe that the growth in other developing countries will also continue to demand grow and this is what we are showing in these graphs, in all of them.
If we talk about Lead. The situation is not very different. Most of the demand comes from China. We are seeing how different sectors for instance, just by sector is big consumer of Lead, has a growth of around 20% plan and the same thing can be said about other emerging economies. So the fundamental thing in the demand of Lead are very similar.
Then if we analyze the prospects of the Zinc Lead supply, it is through – well, we have a number of closures that – including our own closures of Brunswick for instance that are going to reduce the supply by 1.5 million plus another 0.5 million will happen because of the attrition of mines, including for instance Antamina. So we believe with the present projects, mines under construction and other expansions, the debottleneck and all that, around 1.8 million altogether will be there. So the situation from perspective is balanced, but what we see as you can see in the graph is that the evolution that we are thinking will happen in the little – medium and longer term is such that unless there is a lot of new projects, new developments, well there is a gap there that is very difficult to be filled. And not only for many important projects to be developed, the level of prices has to be the adequate one.
Well then, on the Zinc demand balance we know because there are some facts that we have been in Zinc – we have been in especially in the metal type, we have been in (inaudible) in constant we are already in deficit, but because of the numbers I have shown, I really believe that we are going to enter into deficit very quickly and that really unless a lot of new investment decisions are taken, that deficit is going to stay for some time. The same in Zinc and Lead. The same evolution we are expecting on the stocks to fall rapidly.
So this is the market. This is how we see the market. So in summary, I am optimistic about the Zinc market, I have to be. I think the fundamental sign is strong and clear and then I really believe that is a good business for the next years.
Well, on our situation, on organic growth and all that. Well, it is the fact that last week for Perseverance, the production of Zinc in Antamina and the end of certain states in Black Star are really coming down in several cases are coming to a close and others are reducing their production. And then if we hadn’t done anything, we would be in a rather complicated situation because really our position had been reduced. But we have done some things and we are doing some things. You can see the projects that are under construction. Those projects more or less compensate the reduction in products that we are having.
All those projects, all those mines that come to an end, all of them together amount to about $500,000 and projects in construction also amount to about $500,000. So that would leave us in the same level that we have today. But then we are not happy with that. We want to grow and so then what I am here describing some of these projects. Not big ones. In zinc we are not people that like to do frantic issues. No, we prefer to do many, very selective ones with very high yields, high returns. This is our policy and a lot of cost efficiencies.
So every business has its own strategy. This is our strategy. So we have this one of Black Star Deeps is 15 million tons, we will expand the production until 2015. Handlebar Hill is extending another two years, additional production of 40,000 tons of Zinc contain metal until 2013. Both of them are done. Bracemac-McLeod, this is a project in Canada. Again, this is to have extended life of the mine until 2017. The Perseverance mine will be working until third quarter of 2013 and then Bracemac-McLeod will be in place just before Perseverance come to an end. So I think is a good sequence here like which more or less the same production, the same mine in the same area is sustained until 2016.
Well, the George Fisher expansion is very important one. George Fisher is a great mine and then it had a limitation of having only one shaft, we are building a new one, we will be able to increase the production considerably by 1 million tons additional.
Lady Loretta, I think is a very interesting one, is relatively close to Mount Isa, is not a big mine, is only 10 million, but is very high grade as you can see. It got 16% Zinc, 5.6% is almost 22 but also a lot of Silver. This will be very important in improving the feeding of the Mount Isa because obviously adding 1 million tons with 16% of Zinc is going to improve the return there. So this is very interesting also project that is.
Then we have this one, I think is very interesting also. We are expanding Mc Arthur River; we are doubling the capacity more or less to 365,000 tons of Zinc metal. Because this a bulk concentrate, some we can sell but some we have to transform ourselves and then we are going to do that in Germany and Spain using our own process that was denominated, have in process and we have operate is not going anymore, because we have transformed that with our own technology. And then a plant producing 20,000 tons through this project has already been working in 2011 in Germany with very good results. We are very confident that these projects are very safe and will be developed properly. And with the rest of this that we get from the plants in Germany and in Spain, we will feed the Brunswick Lead smelter, avoiding the closure of that smelter that would happen after the closure of Brunswick mine. So we will still maintain this field.
Then Black Star South is another extension of Black Star, another 14 million. We have a very interesting one in Canada Hackett River, we have acquired big area with nine mining leases and 152 claims is 120,000 hectares, we have a further 107 claims. We have – we have made sure that at least we have 66 million tons of resources, but the potential for increasing that to over 100 million, we will obviously very high one. So we are expecting to have a production there of over 250,000 tons of Zinc metal that this more or less substituting what Brunswick produces today. So really that operation could really replace entirely what we are doing in Brunswick.
All the other small projects Errington, Vermillion not big ones but also big contributors in money because for instance, this one is only 10 million but with a lot of Copper, with a lot of Silver and some Gold.
In the case of Pallas Green Ireland, we completed acquisition of the 23% that was not in our hands, now we have 100% of that. We have now gone to a little bit of resources of 28 million that would justify a profitable mine, but we are still improving the situation. So we really believe that we have a pretty good project there in Ireland which obviously is very convenient for us from a location point of view because that would I mean the concentrate there will be use in the plants in Spain and Germany. So very close to Ireland.
So then this is our growth profile. You can see that we have in brown I say, the approved projects and implementation; we are going to implement those relatively quickly and then the future growth options that include basically Ireland and Canada. With that we are going to achieve a growth of approximately 68% on the situation that we would have in 2011, 2012. So I think this is an interesting growth story.
So in conclusion, as I was saying because of the market analysis I really believe that this is a business with a very attractive medium and long term. I also believe that we have achieved a significant growth in the past years as was said, we are the largest integrating project in the world, but to me what it matters the most is that we are the same producer with the highest return on capital employed. This is what really guides me, with big size but especially with a very profitable.
Then we have achieved a lot of cost reduction, this is part of the reason why we are where we are, we are in a very well placed in the cost curve, we will continue our cost improvements. And then as I have shown you, we have a portfolio that will facilitate our factor of money growth. So we are optimistic about the present and about the future. Thank you.
Here is a time for questions. (Inaudible).
Rob Clifford - Deutsche Bank
Thanks, Rob Clifford - Deutsche Bank. Just a question on the market and the market timing of your expansion. You talked about the highest return on capital employed. We are in a period where many miners are expanding. So capital pressure is on. You talked about the Zinc markets remaining in surplus for a number of years. So the prospect of zinc isn’t great. Is there not an argument that there is an opportunity to buy instead of build your growth at the moment and how do you think about the balance of those two in your growth plans?
First of all, I have explained that the super revenue now is mainly in the metal side. Not so much in the concentrated side is a little bit of deficit right now. So I mean you can see that on the thesis there are very low thesis. So in the mining side, I doubt that you could get any opportunity at the price that would justify. We have examples in the market, I prefer not to mention them of certain competitors of ours that they have taken that route which I respect obviously, but I haven’t seen any acquisition recently that has not been done at a relatively high price and then this is what it is normally unless circumstances are very strange and very difficult to have that situation.
Having organic growth, extending the personal operation is always much more profitable than acquiring. The thing is if you need as we had that situation, the thing is you need to really grow quickly from a relatively weak situation, where there you have to acquire and I am not saying acquiring is about the strategy, but in answering your question I don’t really believe that the situation is now one that would allow good price acquisitions. So bargains, I don’t think so and you can see the latest acquisitions that you know as I know and I haven’t seen any bargain at all.
Jason Fairclough - Bank of America Merrill Lynch
Jason Fairclough - Bank of America Merrill Lynch. Santiago, in the context of Xstrata, do you feel that you have to fight for capital or do you have all the capital that you want? Could you do more if Trevor gave you more to play with?
Well, I have been for years seeing how my money was invested at especially in other businesses. I really believe that is time now for us to spend our money a little bit more – this is a joke, I mean serious speaking, we have to compare projects with Zinc, with Copper, with Coal and to choose the ones that are best. And this is what we are doing. I really believe that the projects that we are presenting Zinc had very good ones and have been considered like that not by me, but by the executive committee and the boss. So I don’t think we will have any issues with that decision.
Myles Allsop – UBS
Yeah, it’s Myles Allsop from UBS. Just thinking about the kind of the next phase of growth, the projects in Ireland and Canada. Could you give us a sense as to when decisions will be made on those and what the kind of key issues are in terms of environmental permitting and another sort of concerns?
I think you have the different projects and where they are going to be commissioned or visa avis the study opportunity for approval. A number of them that I have presented in the first block, they have been approved, some of them are commissioned, some of them not. So the big ones – I mean the one I have presented in Hackett River plus Pallas Green, those are well advanced and I hope to present them for approval probably in the first quarter of 2015 or else. So those are the ones that are going to really represent a lot of growth, additional growth.
But if we talk about Mc Arthur River expansion, the integrated project that also I think is a very important one because represents doubling the production in Mc Arthur River plus increasing substantially the metal production in two countries, in two markets that are performing extremely very well and that we are very confident about it.
So and that also is going to be presented for approval next year. So those projects, the Canadian ones will go probably a little bit further probably instead of 2012, 2013. But as you have seen all of them should be in operation in 2013, in 2014, in 2015. Environmental issues that could condition that. I don’t see any substantial ones, we have agreed, we are very advanced in agreeing with the Northern territory in Australia for the environmental permission to go ahead with expansion, is not a very complex things because is really extending our already – it was tough to really get the permission to go from underground to an open pit, we have to divert rivers. It was really quit a thing. But now is much more simple thing.
In the smelters in Europe, you know this is the issue of residues that we have been handling in Germany and Spain and I think we have the issues under control. So I don’t really see any major environmental issues that could condition the investment program.
If there are no other questions I would like to thank Santiago very much for his presentation on Xstrata Zinc and invite Ian Pierce, CEO of Xstrata Nickel to join us.
Good morning. I would like now to turn your attention to our niche nickel business. I am going to cover off the nickel space and some of the four broad headings that you saw followed by Santiago. This global view shows our integrated nickel business. The present operations are depicted by the white boxes plus projects and execution are represented by the brown and green boxes resulting in a 2017 production forecast in the top right hand corner for both the integrated nickel operations and Ferronickel side of our business.
My presentation will cover off the content displayed in this slide. 2011 saw a continued focus on health, safety, environment in the communities which we operate achieving several best to date results.
Mine production and nickel production were up with several of our smaller capital projects within the operations such as Kikialik, being delivered on time and on budget. The integrated nickel operation side of the business had a cash cost of $2.14 per pound for the first half of 2011 despite a weaker dollar and inflation. And of course Falcondo startup ahead of schedule with production ahead of plan.
This year has seen the approval of four key projects that will grow the business in a value accretive way. Two involving leveraging, opposition and capabilities in Sudbury.
Last but not least, we secured a six year agreement with steel workers up as Raglan without an interruption to our business or supply to our customers.
We continue to transform our cost base while delivering record productions and increasing mine life with an emerging Tier 1 asset in Koniambo as the cornerstone for our Ferronickel business.
We are maximizing the potential of our assets through no or low capital investments improvements. We are sustaining performance with tools, processes and coaching the drive reliable and repeatable performance.
Our interest is focused on health and safety have resulted in the following: Zero loss time injuries across Xstrata nickel in May and June of this year. As of June 2011 Falcondo went 365 days without a loss time incidence. Koniambo achieved 2 million hours worked without a loss time incidence and 1 million hours have been worked without a recordable injury.
On corporate social involvement side, we have focused on investments and partnerships with long term benefits to stakeholders plus Xstrata nickel engages in building long term partnership with third party organizations, with global reach, technical expertise and of course solid reputations in sustainable practices.
Turning to the markets. Price advanced 15% to a peak of $29,030 per ton on the 21 February and has since declined to a low of $16,935 per ton on the 30 November. However, the year to date average price of $23,184 per ton is 7% higher than in 2010.
LME inventories peaked on the 17 January and fell to a low of 83,000 tons on the 9 November before recovering to its current level. This year the market is generally balanced with small deficits in the first two quarters being compensated by small surpluses in the final quarters of this year.
Stainless Steel has remained strong in China, India and Korea. Slower growth in China from the measures to curb inflation, type and credit and have reduced demand growth. The developed world’s unresolved problems adds uncertainty to the market creating the volatility you see. There is still demand in Korea which is more susceptible to the developed world challenges has slowed. For developed markets the European Stainless Steel sector remains flat with poor visibility and uncertain outlook on demand.
While the US had a slow recovery from the traditional summer slowdown, melt are picking up supported by industrial demand outside the housing and construction. The soften nickel price and ongoing sovereign crisis create uncertainty which is impacting on more order levels.
Japan has yet to rebound from the falling industrial production following its tsunami and the strong Yen is squeezing Stainless Steel exports.
The Non-Stainless Steel melt consumption for super alloys has been strong through this year with a solid order books well into 2012 for the producers. This is being driven by a strong consumption for aerospace, power generation and oil and gas.
Other multi application such as foundry production of niche costing of nickel alloys have also held up well. Plating demand has been solid for most of the year supported by improving automotive demand for applications such as decorative trim and as illustrated in the lower picture wheels which are plated with several metals including layer of nickel.
The robust growth in developing markets and most notably China and India has been moderated by slow growth in developed markets most notably Europe, Japan and the US. The top chart highlights the remarkable growth in quarterly Stainless Steel melt rate since the significant slowdown in 2009. As a result, the global melt rate this year is at a record level and at more than 35% on 2009.
Growth in Stainless Steel output continues this year with a major contribution from China and India evident. While Stainless Steel melt rates are also at a record level this year and primary nickel ratio is also higher than a year ago. As a result primary nickel consumption in Stainless Steel is also at a record level. Non- Stainless Steel consumption of nickel has also increased this year compared to 2010. This has been driven by the strength of multi applications to produce high nickel super alloys, use of nickel in batteries and consumption in plating applications.
The lower chart illustrates the recovery of nickel demand from the slump in 2009 and continue growth for 2011. As a result, nickel demand is approaching 1.6 million tons this year and is at a record level. The current nickel demand drivers which have been highlighted are expected to continue into 2012 with further growth expected as illustrated in these charts. This is despite the uncertain developed market outlook for 2012 particularly in Europe.
As the top chart illustrates, nickel supply continue to increase in 2011. Supply is essentially balanced with demand for the full year. Tightness during the first half did arise due to disruptions that existing producers and delays for new projects. Significant disruptions included a furnace melt run out at Vale’s Copper Cliff facility, damage to Pemco Ferronickel facility following the tsunami in Japan and plant maintenance of one of the lines at [inaudible] 7:49 Ferronickel plant.
Startup delays and slow than expected production ramp up, limited additional supply from new projects with considerable name plate capacity. The Tovivara [ph] by heap and the Vale New Caledonia Gorra HPAL operations continue to fail to meet targeted ramp up production. Production ramp up for Onça Puma and Barro Alto Ferronickel projects has been slower than planned. Commissioning and start up for the Ramu and ambatovy HPAL projects have been delayed. Despite startup problems for these new projects, they could increase nickel supply in 2012 and subsequently as the ramp up continues.
Nickel Pidgeon output increased considerably this year as shown in the lower chart and in response to tighter markets and higher nickel prices particularly during the first half. This remains a high cost source of nickel production. Nickel Pidgeon production responded to prevailing market conditions by adjusting monthly production rates and these rates are estimated to have ranged within 16,000 to 25,000 tons per month of nickel during the year. Nickel Pidgeon production is expected to continue to be responsive to market conditions in 2012 and consequently also to the level of nickel supply from conventional sources.
Urbanization and industrialization in developing markets boosts industrial production growth as the top chart illustrates for China and India. Growth in Stainless Steel production and in Non-Stainless Steel nickel consumption is strongly correlated to industrial production growth and for countries with large populations such as China and India translates into significant demand growth.
Accelerated industrial production growth is projected to continue for both China and India. This together with a stable osmotic and raising primary nickel ratio for Stainless Steel is expected to underpin future demand growth in Stainless Steel and the Non-Stainless Steel sectors.
Longer term, this demand growth will require additional nickel supply to what the current new wave of new projects will provide over the next several years. This incremental supply is expected to be heavily weighted to an increase share of production from left, right sources as illustrated in the lower chart. This shift to left, right base supply has key implications as a result of the resource characteristics and there are often remote location in under developed and difficult locations. Development of such resources requires significant investment and supporting infrastructure resulting in high capital intensity. This also drives large coal projects with significant incremental nickel output. The characteristics of the specific left right resources to be exploited also often dictate that complex both technically and operational risky hydrometallurgical processes be undertaken. Generally the track record for the development of such H power operations has been very poor, the evolution of nickel Pidgeon production may moderate the extent of the opportunity from future demand growth.
Dependence of import of wet, relatively low grade ore adds to costs and vulnerability to future supply. Indonesia declared a ban on left, right ore exports and it remains to be seen whether this will affectively be implemented.
Nickel Pidgeon is expected to remain a high cost source of supply but users are expected to see raising costs for key inputs including purchased ore, coke, power and labor and to be impacted by the strengthening RMB currency.
I’d like now to turn to organic growth. Here project pipeline is broken out into projects and execution and next phase projects. The projects and execution create for both the Ferronickel and integrated nickel operations, with Koniambo reaching 60,000 tons of nickel and Ferronickel in 2014. Fraser Morgan delivering 6,000 tons of nickel in concentrated in 2013 and Raglan achieving an additional 14,000 tons of nickel in concentrated by 2016.
The development of the next phase projects has Falcondo delivering 14,000 tons of nickel by 2016 and phase 1 of Kabanga delivering additional 10,000 tons of nickel in concentrate. The smelter project involves meeting specific environmental requirement. The team has used innovative process improvements to achieve the set objectives rather than M-pipe solutions and this has led to realizing a further processing capacity of 12,000 tons at our smelter. The refinery of course is ongoing in pursuit of no or low capital expansion through our S entitlement efforts.
We have established five strategic thrusts to deliver Koniambo and I will spend a little bit of time on the first thrust which is project delivery. Overall the project progress is 77% with the direct fuel construction at 58% complete. By the end of this year we will have passed the 60% complete with the construction and by the end of the first quarter, most of the work in the peripheral areas will be completed allowing us to concentrate on completing the metallurgical plant and the power plant facilities.
As we head for 2012, our focus goes to systems completion and less emphasis is placed on construction progress. So now we are more focusing on the sequencing for startup.
I have the following several slides that will show you the sequence, the progress and the timelines that we are using to achieve the startup by end of 2012.
To give certainty to startup, we have successfully secured 20 megawatts from the existing grid in New Caledonia. This in conjunction with combustion turbine generators pictured here secure 84 megawatts for the startup. The emergency generators are complete as I speak with a CTGs nearing completion. By doing this we have removed electrical supply to furnace one off the critical path.
On the much needed services in the sea water system, all -- the more sensitive offshore work in now complete. This area has unrestricted access, is 81% complete and we are well positioned for April.
Some are late with the demineralization and desalinization systems which are at 69% complete. These again are less complicated than sewerage system and on track for the April startup.
The gas plants are 56% complete and needed for the metallurgical operations and will be ready by the third quarter of 2012.
The oil preparation plant is 73% complete and will be ready for operation well ahead of the plant to deliver all to the stock pile in June of this year.
As can be seen by these pictures, the overland conveyor is 90% complete. With the conveyor being placed on the gallery using the permanent drive system. And therefore should meet the required date allowing the miners’ time to run the system well ahead of the feed requirement date.
The main fuel and diesel system is 74% complete and on track to receive fuel by the end of May ahead of the early start of date of June for the CTGs.
The coal preparation plant is 66% complete with a completion data ahead of the first coal arrival in the third quarter.
Now let’s talk about the last two important areas namely the metallurgical plant which is at 56% complete and the power plant at 44% complete. After the first quarter of 2012, we will see a much reduced area to manage allowing additional focus on these two areas. The procurement of the additional 20 megawatts has distressed this congested area and this has given us tremendous amount of flexibility. The critical path of course now goes to the metallurgical area with present completion date for the second half of this year. Both areas are on track and in fact we see the power plant a little ahead of its plan allowing us to allocate some Korean workforce to the refinery area and allocating resource freely across the mid plant and the power plant give us great flexibility.
Next I would like to cover off six existing parts of our business starting with Falcondo. The restart of Falcondo has an improved cost position and low capital expansion capacity has the potential to provide significant upside in high price environments as we’ll see in 2007. The team is focused on optimizing the 50% base case while putting in place an extra components to go to the 100% case which includes the Loma Miranda deposit.
Koniambo is using Falcondo as a training area giving future operators and maintenance staff real hands on experience plus we have identified a verical slice of capability from Falcondo to help with the Koniambo startup.
We continue to both side be on the successful startup of nickel rum. The additional phrase of Morgan project and the Fraser extension through the partnership with Vale lowers fixed cost associated with Fraser Copper and of course extends Fraser’s life of mine to 2025.
The Craig infrastructure lease eliminates care and maintenance costs and affords us an opportunity to develop access to the underpinning deposit with reduced fixed costs. Necessary actions to meet emissions that I talked earlier, emission targets has enabled us to extract growth through an innovative review of existing operations.
Our land position at Raglan has a strike length of 70 kilometers. We have only explored 30% of this land position which offers significant upside potential. Focused exploration has realized growth by sequencing the new all bodies differently and this has resulted in us being able to deliver an increase production by 2014 and 2016. This year and next year will see lower grades than we have typically seen extracted at Raglan and then we should see a reversal of this in 2013. Along with these projects we continue to seek other ways to reduce our costs of this very attractive polymetalic part of our business.
Exploration has and continues to be an enabling strategy with XNA. New discoveries in AM6, Odysseus, and now Odysseus North continues to supply feeds to our base business and has helped reduce fixed costs of our downstream smelter and refinery. The next phase will be developed at XNA sees us moving to treat more disseminate ores requiring innovative ways to offset hyper inflation in the Australian setting.
Nikkelverk continues to be a reliable supplier of high quality sort after nickel with ongoing initiatives to debottle the base plant with no or little capital. The integrated nature of the flow sheet requires coordination with the smelter exploring options to process own feeds an attractive complex custom feeds thereby allowing the smelter and refinery to operate at maximum levels across a street of metals.
There is another known New sulphide ore like Kabanga. So this growth opportunity will provide reliable long term feed for the INO part of our business. A two phase approach is being adopted with modest capital for the first phase to be use a high quality much sort after concentrate. Presently the project team is making sure the key elements that are needed for on time and on budget delivery are put in place ahead of making the decision.
And to top it off. Here are four further opportunities identified to create value for shareholders as can be seen all over in the early stage of development with our immediate focus on delivering the projects in execution to secure our future through to 2017.
So to conclude. We can clearly see we are able to maintain the transform base business that will be robust through the cycle, strongly cash generative with world class assets and low capital intensity going forward. Our immediate focus is on delivering Koniambo by 2012, thereby creating a highly competitive Ferronickel business. We will also add further value by delivering the Raglan 40,000 ton project by 2016; pursue focused growth in Sudbury to leverage our own infrastructure and capability with a focus on the next project Kabanga as an entry level project with solid economics, and then finally enhance our Ferronickel portfolio with the Falcondo at 100% case. We need to do all of this with the support of our communities, creating exciting careers for our people and in pursuit of zero harm.
Thanks very much and I will take questions now.
Jason Fairclough - Bank of America Merrill Lynch
It’s Jason Fairclough - Bank of America Merrill Lynch. Ian, you didn’t really talk that I saw about the budget at Koniambo. Is there any update from the update?
No change. We still are on budget as we published when we made the announcement around the cost increases. So no change to budget.
Jason Fairclough - Bank of America Merrill Lynch
Okay. And you are pretty comfortable that that is going to be added?
Jason Fairclough - Bank of America Merrill Lynch
Good afternoon everybody. Since the last time I have been up here we’ve witnessed the Arab Spring split across the Middle East North Africa which led to the collapse of a number of dictatorships in the region. We watched in shock as Japan East Coast was decimated by a ferocious tsunami and then watched Japanese rebuild their cities. And in the western world, we’ve seen indecision amongst leaders resulting in chaos in the financial markets. So it has indeed been a year of brutality and it also reminds us we need to be robust through this cycle and simply put get back to basics.
Taking you through the agenda, I will first give you a general overview of operations and recap on the business strategy, then I will give you an update on the markets, followed by an update on the project pipeline.
The South African operations, our chrome and PGM operations are straight across the Western and Eastern limbs of the South African Bushveld Igneous Complex as you know. The Bushveld is regarded as the world’s most valuable geological intrusion and host to the world’s largest chrome and PGM resources.
Our geographical position and diverse asset base across the Western and Eastern Limbs of the Bushveld complex give us a significant advantage in capturing opportunities as well as in leveraging key inputs such as skills, power and water, all of which are scarce in the mining sector at large.
Further Xstrata is the only fully integrated chrome and PGM producer enabling us to exploit the full value of its by-products arising from the mining of these commodities.
Our operational strategy in chrome is to maintain cost leadership through resource efficiency and flexibility. In PGMs we have leverage the expertise gained form chrome mining to develop best in the class mechanized board and pillar mines in both Mototolo and Eland.
Before we go further into our operational strategy, it is worth spending a few minutes on the issue occupying most mining chief executives agendas, that being the issue of the due political risk and safety and sustainability.
Across the globe, governments of most mining jurisdictions are shifting their focus towards extracting a bigger share of the economic rent for mining. Proposals vary from royalties to windfall taxes to nationalization. South Africa is often regarded as the poster child of due political risk, primarily because of the investment uncertainty from the nationalization debates and politics around black economic empowerment.
But if we take a step back, the mining charter is probably the most progressive piece of legislation for mining jurisdictions in emerging economies. It’s a balanced scorecard that looks at the needs of governments, communities, employees, local business and indigenous ownership.
If effectively implemented and administered, it could be an example for other mining jurisdictions to follow. Xstrata has embraced this charter since its implementation and the slide clearly illustrates that we are well on track and in most instances; we are already above the 2014 target.
The most important development in the past year has been the principle endorsement from the regulator that Xstrata has achieved the requisite 2014 ownership target across all its South African operations.
Our total recordable injury frequency rate statistics demonstrate our unwavering commitment to safety and zero harm to our employees. Unfortunately these statistics are marked with the loss of three lives in our operations during 2011. We’ve introduced virtual reality training and other programs called the Meerkat program at our operations which we believe will enable us to create a fatality free environment. Our focus on health of our employees is primary through the successful introduction of our wellness program which includes HIV testing and treatment.
Investments in community developments are largely in the areas of education and health and partnerships with local governments.
Lastly on environments and sustainability, we are focused on conservation of our water and engineer resources and have made remarkable achievements in this area.
Our operational strategy and environmental strategy are not mutually exclusive given our focus on the efficient use of our resources at our operations. On the Eastern limb, our growth and cost competitiveness is underpinned by our proprietary premise technology which consumes energy at some 50% less than conventional technologies. And the result is that as electricity prices increase in South African and in the rest of the world, Xstrata’s competitive position will be enhanced.
On the Western Limb, where UG2 from the platinum industry is abundant, we have secured UG2 supply from majority of the platinum players and matched our agglomeration capacity to be able to consume this on our furnaces and this is the effect of expanding the life of Xstrata’s reserves and resources countering the effect of mining inflation on mined ore as well as improving the energy efficiency of our furnaces in the Western Limb.
The combined effect of these initiatives is illustrated by the graph in the middle showing the forecast differential gap between our operations that of other South African operations in 2015 with a gap forecast to continue to increase significantly.
In 2011, saw us stay closer in our Western Limb to our chrome strategy. At Lion mine we successfully constructed and commissioned UG2 spiral plants to produce some 540,000 tons of UG2 chromide per annum and project
Tswelopele which will increase the palletizing capacity by about 600,000 tons per annum is on schedule for commissioning in 2012.
As the graph on the right show, we anticipate the increase pallet feed rate to lead to additional power are reduction and consumption savings.
The schematic on this slide illustrates the evolution of mining in the PGM industry. First and second generation shafts which targeted the marine scarif are now deplete. Mining of the marine scarif has now been evolved into third and fourth generation shafts which are much deeper, capital intensive and have very long lead times. As a result of detectiveness of the shallow UG2 reefs has improved considerably in recent times, and the mining of these reefs of course is too familiar to Xstrata as a chrome miner. Both Mototolo and Eland have adopted this practice mechanized board and pillar design based on the experience from our chrome operations.
At Eland, in addition to the best practice from our chrome mines, we’ve made some bold and innovative developments in our design of our underground mine which at a run off mine rate of 600 million tons per annum is said to be one of the biggest mines in the Bushveld. These innovations include the development and implementation of complete remote bolting to ensure that our human exposure to dangerous situation are minimized. Along with our mechanization drive, we also have a full range of custom built trackless vehicle simulators from the training of operators that is currently in use.
You learn to also make use of a surface rail-veyor which will be the first of its kind application in South Africa and we’ll see a 30% reduction in energy consumption.
The sterling dam designed at Eland is the first of its kind too and thanks to the greatly improved rehabilitation time, the designed was nominated for the Nedbank Green Awards.
Lastly, Eland will also make use of solar and wind power to help reduce the dependency on electricity from henceforth.
Unlike price metals and other bulks, the end market for both chromes and PGMs are less dependent on the industrialization of break economies. Instead chromes and PGMs are good to raising income levels of middle class consumers. While Stainless Steel end use markets are about 50% exposed to consumer spending, in the case of PGM is closer to 80%.
The graph on the left shows typical commodity intensity of used curve for different commodities and illustrates the significant opportunity for late cycle commodities as income levels rise in emerging economies.
Stainless Steel melt production has seen steady growth since the early ‘60s. It is expected to continue at a healthy 6, 3% growth between 2010 and 2015. While Chinese industrialization and urbanization has been largely responsible for Stainless Steel growth over the last decade. India’s contribution to Stainless Steel growth and consequently Ferrochrome consumption is expected to be significant as well.
Responding the growth in Chinese Stainless Steel production and Ferrochrome demand, domestic production of Chinese Ferrochrome has grown significantly and has potential to outstrip Chinese demand for Ferrochrome. While this reduces the opportunity for Ferrochrome imports, it is important to know that China has little to no reserves of chrome. This makes china dependant on chrome imports and South Africa with a dominant position and chrome reserve is key to the sustainability of Ferrochrome production in China.
South African Ferrochrome producers have responded by evolving from a supplier of Ferrochrome to a supplier of chrome units.
While the uncontrolled growth in Chinese domestic production is a clear concern in the short term. The medium and long term fundamentals for Ferrochrome are supported by the changing supply fundamentals across the globe. Access to power and cheap ore or the lack of are the key factors underpinning the changing supply fundamentals in Ferrochrome and in a nutshell, South Africa with some 70% of global reserves and 40% of global Ferrochrome production is getting deeper and moving into a nine month industry because of the winter shutdowns. Short to medium term expansions in South Africa is questionable without captive power.
Indian open cast resources are depending on underground mining and it remains largely uneconomical. India has become a net importer of chrome.
Growth options in Kazakhstan beyond the open cast resources will be more challenging and China will eventually adopt a more resource efficient growth plan and become increasingly reliant on imported Ferrochrome.
For PGMs, because dependence on consumer expenditure, the short term fundamentals are good to the economy, recovery of developed economies and in Western Europe in particular.
The wind full graph illustrates that PGM demand in 2011 is up some 6.5% on the 07 levels, but almost a million ouches of auto car demand is off from the 07 high. The drop off in the auto car demand is despite global light vehicle sales breaking record volumes. The reason for this is related to the top right end graph which shows global vehicle production shifting to emerging economies where tile pipe emissions legislation is not stringent and thus the PGM demand is still low.
Platinum trading via the EFT funds and the Shanghai Gold Exchange has both been by sensitive throughout 2011, but duly has ever remained a strong source of physical demand and as indeed provided a flow for platinum prices as trading activity increased during times of replaced prices.
As described in my introduction, 2011 has been an eventful year to say the least. Like equity markets, PGM prices and the rent dollar have been extremely volatile. This volatility has not only been conducive to investment and with the rent bourse trading at significant discounts incentive prices for new mine supply. Delays in investment decisions in 2011 only compounds the decision made during the global financial crisis. We expect that the industry will struggle to maintain production and it will be extremely challenging for any substantial growth to take place in response to a recovery in the demand. So medium to long term, despite the strong demand fundamentals we believe that this is in supply story.
With attractive fundamentals in both chrome and PGMs, let’s look at our ability to respond to this with our growth pipeline. The first part, Tswelopele. I mentioned this project earlier which delivers against our Western Limb chrome strategy. Project Tswelopele is a smaller project within the group and will add some 600,000 tons per annum of centrin and palletizing capacity to allow us to achieve the targeted UG2 consumption that we envisaged going forward.
The benefit of introducing pellets into the ore mix we are clearly seeing at our Vanoc operation with improvements in the both chrome consumption and electricity consumption. We are confident that these improvements will be duplicated in the rest of the corporations. The project is on schedule for commission in the second half of next year and is within budget.
Lion II is expected to increase our unemployed capacity by some 20%. And consulate Xstrata’s position in the bottom quartile of the industry’s cost curve. The balladry allocation for lion II as in electricity constraint environment is seen as a critical success factor and it gives Xstrata a first mover advantage. The project is on track for commissioning in the second half of 2013 with bulk earthworks and site establishments some 70% and 19% completed respectively.
On Eland, the open cast operations were downsized this year in response to challenging grades and economic conditions. The first production sections on the underground development of Eland mine have moved into the ore reserve development. Total underground production per month by the end of this year will be some 600,000 tons per month, building up to about 170,000 tons by the end of next year 2012.
Steady side production of 500,000 tons per month equivalent or some 300,000 ounces of platinum per annum is expected by 2016.
Project Lesedi. Project Lesedi contemplates two phase generation project to produce some 300 megawatts in power in each phase using coal from Xstrata coal. The bankable feasibility study on the project is complete and the team is in the process of securing funding, an independent power producer to take over the project.
So in conclusion, we have mitigated any due political risk in South Africa by embracing the miner charter and our commitment to our employees, communities and partners. The markets in the short term are expected to continue to be volatile, but both chrome and PGM are leveraged to a late cycle recovery underpinning strong medium and long term demand fundamentals.
Our $1, 3 billion project pipeline is still on schedule to deliver and the resource efficiency is a key theme in our cost leadership strategy. We’ve set ourselves apart from our competition by industry leading energy inefficiencies in an environment of escalating electricity costs in South Africa and globally.
Similarly, our improvement in chrome ore efficiency and increase UG2 contracts has extended the life of our mines.
Lastly, our future growth is skewed through captive power generation in Eastern and resources in excess of 30 years. Thank you.
Any questions now for platinum business?
Peet, good afternoon. With lion II coming on stream, is there any opportunity to cut back on some of the old technology furnaces?
Yes, sure. The initial plant investment will be the highest cost producer in the Xstrata group and lion II will be way below in terms of costs. So the swing producer in our operations will then obviously be the similar plant. But there’s a tremendous growth in Stainless Steel and we honestly believe that in the longer term, China cannot continue to produce or to continue to produce at the level that they do. So depending on the price, the rest of the plant will be producing or not.
One quick question. How quickly do you think the market can return to balance? Obviously you got sort of a strong view on – to sort of longer term fundamentals, but it is a very challenging market today. And how long will it take for the industry to grow out of the current oversupply?
Well at the moment the market is quite well balanced. The amount of production that we’ve got at the moment and the amount of consumption is well balanced. I think the chrome market in general is much more disciplined than it been some years, but when the market will change, I wish I could know.
Peet, Sorry. Could you please remind me who is in the project Lesedi, the independent power producer which you are the developing the project in conjunction or you are not disclosed it?
We haven’t got it yet. No, it’s still in negotiations.
Regarding the current market conditions. Could you please tell us what is your current utilization rate in the Ferrochrome business? I think it was slightly above 50% in Q3 and do you think you have the flexibility to reduce it further should the demand in the Stainless Steel industry not recover as quickly as we have seen in the past? Thank you.
Yes, I think we are fortunate in the chrome industry that we can very easily take production out. Most of the costs are costs that you accrue once you run. You pay for electricity; if you run you pay for raw materials if you run. So the only thing that you keep on paying is the salaries and the wages. So we can be very flexible and with all the projects that’s coming on stream we can utilize or reutilize the current workforce to go to work at Lion or work at Eland etcetera. So we are quite flexible in that regard.
Good afternoon everyone. It’s a pleasure being here this afternoon and really being a great pleasure to talk about the status of Xstrata Copper and our organic growth strategy over the next half an hour. So what I’ll do in the early slides is give an introduction of Xstrata Copper. Most of you are quite familiar with the organization and the business. Give you an update as to what we’ve been able to achieve in the last 12 months and then a quick market update before moving into the status of our projects that we’re progressing with and then some concluding remarks.
As you all know, we are a business unit which is quite geographically diverse. We operate in nine countries around the world and we have now around 20,000 people working for Xstrata Copper as employees and contractors. We operate mainly out of the South American region in terms of our operating businesses and growth projects operating out of Peru and Argentina and Chile, but we also have some significant operating assets in North Queensland in Australia and Canada.
One of the features of our businesses that we’ve had very stable sustained production at around 900,000 tons of copper over the last three years which has confirmed our position as a top five copper producer. We’re now progressing into quite a remarkable growth period as Xstrata copper and I’ll take you through that in subsequent slides. Among the achievements of the past year, we have continued to demonstrate some real leadership in sustainability sustainable development. I’ll talk to some of those points a little later, but it has been I think a real feature of our organization in recent years and 2011 was no exception to that.
In terms of transactions, 2011 saw two transactions which were significant in their own way for Xstrata Copper, one of which was the acquisition of a couple of projects and prospects in Northwest Queensland to support our North Queensland division and then the transaction which gave us an option to acquire the Agua Rica project in Northwest Argentina and I have a slide which covers that during the presentation as well.
Project execution really did move into gear in 2011. We saw in North Queensland the magnetite processing plant which was a key aspect of our growth in Ernest Henry being commissioned. We had two stages of that plant in quarter one and in quarter three. So that magnetite plant is now up and running at a nine plate capacity. We had just a few days ago the first production from the underground ore at Ernest Henry which was an important milestone in the Ernest Henry project and that coincided with the last of the open pit ore. So the open pit mine at Ernest Henry is now completed and we’re moving into production phase at Ernest Henry.
Also during the month we had commissioned the first stage of the Lomas 2 expansion which is the run of mine all stock power and processing facility. Again that was an important milestone for Lomas Bayas and leads into now the construction on the second phase of Lomas Bayas over the next 12 months.
In Antamina, in November and this month we’ve started the commissioning of the milling circuits of the ball mill and then a SAG mill milling circuits at Antamina on the major expansion there and we’ll see a ramp up of that production over the coming months. And the construction of other major projects is progressing to schedule as I’ll point out during the course of this presentation.
Among the other projects I guess we have in Antapaccay the news that in recent days we started mining activities at Antapaccay leading into the pre strip. So there’s a number of key milestones that we’re passing at the moment. In terms of total mineral resources, we’ve further increased our mineral resource base and I’ll talk to that in the next slide. But it’s an important increase in total contain copper and mineral resources during the course of the year and we’ve been able to maintain our C1 cash cost position and that’s been over the last three or four years. So remarkably stable cash costs considering all the pressures that we’re under at the moment, and that as you’ll see in one of the charts really has helped us in terms of position on the C1 and the cash cost curve.
We’ve continued to be an important contributor to the group. We’ve been delivering pretty consistently around 40% of the group’s earnings and that’s continued in this year and as I mentioned, our production performance has been relatively stable at around 900,000 tons of copper production as we prepare the organization for a pretty exciting growth period.
So referring to the mineral resources, we’ve seen quite a remarkable expansion of our mineral resources over the last six years. Back in 2005 we had less than 20 million tons of contained copper and mineral resources. With the upgrades that we’ve seen this year that’s now taken it to nearly 100 million tons of copper contained in resources. We’re in the unique position in the industry of having those resources spanning a number of countries, seven countries that we have those resources in both Brownfield projects and resources and Greenfield projects. So that gives us enormous flexibility in how we now utilize that to implement the organic growth strategy.
During the course of this year, we saw some further increases at Antamina. Antamina saw increases in reserves of 16%, but you might recall earlier in the year we had more than 40% resource uplift at Antamina that was announced. With the transaction involving Agua Rica, that’s added around 1.7 billion tons of resources close to Alumbrera.
The Coroccohuayco resource which we just announced today has been quite an important change there. We had a fairly high grade, small resource which has been now converted into a large open pit-able resource there, over 300 million tons of resources close to our Antapaccay complex.
In El Pachón, very substantial resource uplift of around 50% as a result of the feasibility study that we’ve been working on. In Las Bambas, ongoing increases in the resource base there. The resources in that district will continue to increase even though most of our focus has been on the pre construction and the beginning of the construction activities. We’re continuing to see an increase and an uplift in the resources there.
Collahuasi has had a further increase in its resource base. Its’ a massive copper resource there as you all know and that will continue to increase and will convert progressively those resources to reserves over the coming years. And Frieda River’s resources have increased beyond 2 billion tons as a result of the feasibility work as well. So quite a lot of activity on the resources front, which is providing a very strong foundation for us into the organic growth side of the business.
One of the other areas that we’ve been focusing on in recent years has been the NPV enhancement within our operations and projects and our management in the operations and divisions have been doing that year-on-year through the increase in our throughputs, our production increases and extensions to the mine lives, all of which have generated significant uplifts in value in our operations and also incorporating now a number of expansion projects, the Brownfields, but importantly Greenfields projects into our valuation.
So we’re seeing very substantial value uplifts and that’s now being reflected in the profiles that you’ll see over the next three years with the increase in copper production. We do see a schedule which has the investment over the next three or four years giving that uplift of more than 50% on projects which have been approved and are currently being constructed and will be progressively commissioned over the next three years.
Another area in terms of value enhancement which has been very important for us is a focus on looking at identifying and then extracting byproducts and improving the sales position of byproducts in our operations and that extends from molybdenum where we have moly credits. We’ve incorporated new assets like a molybdenum plant in Alumbrera. We’ve assisted with the improvements in moly recoveries in Antamina and in Collahuasi. We’ve incorporated the magnetite plant at Ernest Henry and partly for the significant credit uplift we can get as a result of that and gold recovery improvements, particularly at Tintaya and Alumbrera over recent years have helped the credit position there in terms of byproducts. And we continue to look at other initiatives for securing additional byproducts across our operations.
The cost performance has been impressive as I mentioned earlier where we are seeing pretty consistency on cash costs. What that’s done in a relative sense is its driven us down the cost curve when we see other companies suffering significant increases in the C1 cost. We’ve had relatively stable cost performance and we’re now sitting at between the 35th and 40th percentile on the cost curve. So quite solidly in the second quartile in cash costs and that’s been a result of a number of factors. The cost management and cost reduction exercises through the operations driven through efficiency improvement, driven through looking at renegotiating contracts, the regional approach to contract negotiation and procurement negotiations and converting where we can parts of our operations and maintenance activities across into an operator with the associated benefits of that and the byproduct initiatives I mentioned earlier. So that focus on cost reduction together with the increase in production that we’ll see over the next three or four years will help to drive further unit cost improvements over the coming years.
Underpinning all of that is our approach to sustainability and in 2011we continued with our strong performance in that space. Over the last three or four years we’ve been consistently recognized externally for the sustainability performance through awards, industry awards, government and third party awards generally and to us that’s a very good indicator that we’re not only achieving our targets internally and in generating some pride within the organization. But that’s been recognized by the external stakeholders.
The sustainability principles that we’ve been adhering to and driving in recent years is really paying dividends for us in entering new geographies and in progressing with project development. We enjoy the support of local communities and governments and other stakeholders, partly as a direct result of the commitment that we’ve been able to demonstrate to sustainability in the countries that we operate in.
In terms of environmental performance, we do manage very effectively I think environmental management system. I think one of the good examples of that is the one which we progressed with our environmental social impact assessments where we engage directly with the communities and with governments in the important processes of securing the statutory approvals and the social approvals for the projects and I think there’s no better examples of that than the achievements of the last 12 to 18 months where we received in record time in Peru, environmental social approvals for our Antapaccay project and our Las Bambas project in that country.
We’ve also been through quite a convoluted process that I think very rewarding process of public audiences in the Tampakan project in the mine area where we engaged with thousands of people in the directly impacted area in a successful process of community consultation and we’re progressing with the last stages of the environmental social impact assessment approval process in our hydro project in the south of Chile.
In terms of our safety performance, we continue to lead the group in our absolute numbers and our improvements, our lost time during frequency rates are now approaching zero for Xstrata Copper and our total recordables in disabling injuries have improved by 40% and 60% respectively. So I’m very pleased that we’re continuing to show good benchmarks in terms of safety performance and I think importantly it’s particularly creditable for our teams this year that we’ve seen an increase of around 30% in our total hours worked as a result of the projects that we’ve started and we’re seeing no deterioration in our training improvements in safety performance during that period.
Touching now on a few market analysis issues. As we all know that the last four months has seen some difficult times in the markets in terms of commodity pricing. Around four months ago we did suffer, along with other commodities, some sharp falls in copper prices. Interestingly, what we have also seen in the last month or so is prices stabilizing and apparently supported by what appeared to be pretty good fundamentals in the industry and I think the market is continuing to assess the tightness of the copper market when you consider that over the last couple of months we have seen exchange stocks reducing by around 100,000 tons.
So the ton that’s in the copper market has provided at least some floor I think to copper prices to date and gives us some confidence and if we look at the reasons for that in relation to the supply side of the market equation, as you all know recent years have seen an underperformance globally by the industry in terms of delivering against its projections for the full year. This year is no exception. I think we’ll see something in the order of or in excess of a million tons of copper deficit against what the industry was projecting at the beginning of this year.
As you know there has been a variety of reasons for that. Weather conditions, industrial actions, geo-technical issues at a number of the mines, all of which have added to quite a difficult situation on the supply side for the miners. And as you can see in the chart on the lower left, there’s been very anemic growth this year, supply growth this year. Almost zero growth in mine supply in 2011.
The chart on the right hand side and the graph on the right hand side does show the quarter on quarter performance of major copper producers. In the case of Xstrata Copper, we’ve been trying to maintain our position as I said around our annualized production that we’ve been able to deliver in the last three or four years. Our peer companies have been suffering somewhat in the last year or two and we have seen generally a decline in production rates from the existing operations in the mines and we do expect that the difficult conditions on the supply side will continue.
There are a number of challenges that the industry is confronting and I would say that the industry is confronting them relatively successfully, but there still are constraints I think on delivering and responding to the demand growth that we’re seeing in copper and there’s a variety of challenges there related to water issues, water and power issues, social license to operate, political issues which are preventing the smooth transition of projects from evaluation phase into execution phase and a range of other challenges there that need to be confronted.
Interestingly, it’s important to show that around a half of the growth that we expect, copper growth that we expect over the balance of this decade is in Latin American countries and a number of those countries are experiencing their own difficulties from a social-political level at the moment. So there is a degree of tightness still on the supply side.
The demand side of the picture is relatively positive. Obviously China continues to drive the demand growth where we are seeing the western continents is a recovery in demand and whilst we don’t expect to see spectacular growth in the regions of Europe and North America, nevertheless we have seen more recent evidence of flat or slightly positive growth in those regions.
So that together with the ongoing demand growth that we see in China and the developing Asian countries presents a pretty good story for copper, taking into account also the IP growth that we’re continuing to see in those developing countries. And our long run view of copper demand does remain intact. I think among the statistics that we’ve seen more recently, it’s fascinating to see the influence that China and the developing Asian countries will have over the copper market over the coming years.
We see for example that from now through to the end of this decade, of the 7 million tons of copper demand growth that we’re expecting to see globally, 90% of that will come from China and developing Asia and that will put both those regions at a level of over 60% of total demand, copper demand by the end of this decade. We do have confidence that that will continue. The ongoing urbanization and industrialization will continue to drive the trends that we’ve seen consistently over the last couple of decades.
Turning to an even more exciting part of the presentation now, our project development story and update and by the way this picture shows the quite advanced stage –structural stage of the Antapaccay project in the Altiplano region of Southern Peru where we’re advancing at a very good pace, but more about that later. We really are now entering a very exciting phase as an organization as we transition out of some of the older mines that are finishing their mine lives. So I mentioned Ernest Henry, but Tintaya itself is approaching the end of its mine life. The Alumbrera pit is on a stage of decline through to its conclusion.
So we’re going from these older mines through into a generation of mines which is totally transforming the picture and the landscape for us in our operations and our divisions. We do have an industry leading growth portfolio on projects which are approved and all under construction over the next three years and that will deliver the growth that you see in this chart through to 2015. One of the reasons that we’ve been able to simultaneously develop six projects is that we have taken some initiatives such as strategic alliances with EPCM Contractors and strategic alliances with suppliers, which is enabling us to feed into these projects, as well as identifying those parts of the world where we have very competent project development teams that can develop these projects in house.
So in addition to the growth that you can see here, we do have around 2 million tons per annum optionality beyond this that we’re considering in terms of evaluation and taking decisions and there’s a number of those projects that we’ll be in a position to take decisions on within the next 18 months which can give us the further growth beyond 2015. But it’s the next three years I really want to focus on and how we’re progressing with those.
The projects in execution include the Antapaccay project, which as most of you know is a large scale project consisting of a new open pit mine, a new large scale processing plant or copper concentrator and it was justified on the basis of an initial identified mineral resource of 800 million tons of 0.5% copper with some byproducts and with very substantial upside potential as well as the resource.
So the concentrator will be a single line concentrator, large SAG and two ball mills and floatation circuit. We’ll be producing in the early years, around the first five years of the project, about 160,000 tons of copper and a mine life over 20 years at a capital cost of $1.47 billion. The status of the project has been progressing very well, very good safety performance there. We’ve exceeded now 10 million hours without a loss time incident on the project and a very good safety culture that does exist there between our own owners team and employees and the vector organization that’s working on the EPCM side. It remains on schedule for the second half of 2012. It remains on budget. We’ve had 100% detailed engineering and the construction is now at 50% and progressing well.
So the overall project progress is 50%. It is in our view a real benchmark for cost control in a world where people have now been conditioned to see cost overruns in capital projects. We completed the definitive estimate for this project a few months ago which confirmed the capital cost on this project. We’ve committed around $1 billion to date on that, which gives us further confidence in the project and there’s a range of initiatives that we’ve taken there which have had tens of millions of dollars worth of cost savings or cost avoidance without compromising the quality of the project.
In the case of Ernest Henry, as I mentioned we’ve made some and passed some important milestones in the last month or so. The Ernest Henry underground project is a project which is converting the original concept of Ernest Henry from an open pit feeding to a concentrator to an underground mine feeding the same concentrator, with additional capacity then to take over from satellite feeds and we added the magnetite plant and regrind plant in there to provide some additional revenues to assist offsetting the higher cost of underground mining.
The approved capital for this is just over $540 million and it will extend the life for more than 12 years. As I mentioned the underground production mining has – all mining has started. We’ve also completed the pre-sink for the shaft at Ernest Henry and the shaft sink proper will commence at the beginning of January and is on schedule for completion and for commissioning of the hoisting circuit in the second half of 2013.
So the magnetite project is fully commissioned. The underground mining is well and truly underway, both with the decline which is nearing the base of the mine as we speak and the initial ore production. In the case of Lomas 2 in Chile, this is a project which requires an investment of just under $300 million. It had as its purpose to profitably extend the life of the Lomas Bayas operation which when we acquired it with the Falconbridge acquisition, had a very short life that’s been expanded and then extended and the project is progressing well.
We’ve commissioned the ROM as I’d mentioned earlier. We’re on track for the commissioning of the heap leach system, which is the crusher conveyor system adding to the production from the heap leach and we’re anticipating the full commissioning of that by the end of 2012.
Las Bambas is the first major Greenfield project in the pipeline. It’s a mineral resource base of 1.7 billion and growing. We have the concept here of a double line concentrator. It’s using what we would refer to as a standard concentrator concept, which is a duplicate really of what we’re installing in Antapaccay with two less ball mills and it will be producing over 400,000 tons of copper plus byproducts in its early years at an approved capital cost of $4.23 billion.
The project status is we’ve secured all of the environmental permits. We’ve had agreements during the course of this year with the community that was living around the mineral resource of Las Bambas, the main mineral resource. The construction of the new town site is well underway and the pre construction activities are also in progress and we anticipate moving into full construction mode in the first quarter of 2012.
We’ve had significant progress with our procurement and the commitments to the project and we’ll be completing a definitive estimate of Las Bambas when the engineering is at around 80% complete during the first quarter of next year, which will give us a very firm fix on the progress on the costing.
Antamina is a project in our joint venture portfolio which is as I said commissioning now. We’ll see a ramp up of the additional SAG and ball mill line during the first few months of next year and that will add to the profile the copper and middle profile of Antamina in the coming years. The project is on budget, detailed engineering complete and we are very much in full commissioning mode and the handover to operations over the next couple of months.
Collahuasi, expansion to 160,000 tons per day. The rationale behind this was to de-bottleneck the plant so that we could have a more stable throughput and production performance in the coming years from Collahuasi. It’s a project of around 200 – just over $200 million progressing through to its commissioning in the first half of 2013. So it’s an important project to stabilize production performances from Collahuasi prior to then moving into further major expansions in that major mining operation. So in addition to those projects under evaluation, examples of the projects that we are currently evaluating and certainly some of those in the much more advanced stage, El Pachón in Argentina and Agua Rica also in Argentina. I’ll refer to them in a little bit more detail in the subsequent slide, but they have emerged as the very major parts of our growth strategy just in the last 12 to 18 months.
The Tampakan project, we’ve completed the feasibility study and we’re working through a range of environmental, social approvals for that project and a variety of risk issues that we need to address prior to being in a position to take a decision on that project during the course of 2013.
The Frieda River feasibility study will be completed during 2012 and that’s a project that has progressed very well in its evaluation phase in the last year or so and an example of early stage projects, the West Wall project in Chile which is moving fairly rapidly now from a exploration stage into the concept study stage there to see if we can make sense of another large pofry [ph] system that we have our hands on in South America.
So just a little bit of detail about the two projects in Argentina. You know that we’ve been involved in Argentina for over 15 years from the commissioning of Alumbrera. So we’re quite familiar with the operating environment in that country. We have on our books now two pretty advanced projects, one of which is essentially a Brownfield expansion now of Alumbrera, being Agua Rica and the other one being a major Greenfield project. Agua Rica, which is located 35 kilometers from Alumbrera, consists of a large pofry system. We’re looking at a feasibility study which will link that project to the infrastructure at Alumbrera on a large, high velocity conveyor system.
So we’ll be transporting ore directly into the Alumbrera concentrator and we’ll also have the benefit of utilizing the truck fleet from Alumbrera as the mine near winds down and we transfer the trucks and indeed the workforce across into the Agua Rica mine. So it’s a perfect fit for us in terms of complementing the organizational resources and other synergies that we have in northwestern Argentina. We’re completing the feasibility study over the next 12 months or so at which time we’ll take a decision on the option exercise and in all likelihood move into the development of that pretty interesting project, which will extend the mine life effort at Alumbrera by around 25 years and increase the production there to around 250,000 tons of copper annually together with some important moly and gold credits.
El Pachón really has continued to grow in scale and quality over the last couple of years. We’re in the final stages of feasibility study now. We’ll be reviewing that over the next two or three months, the outcome of that feasibility work. What is clear to us is that this is a major Greenfield project on a similar scale to Las Bambas. It has resources which are now approaching 3 billion tons at around 0.5% copper. As you know, the size of the concentrated throughput, we’re talking about something which will have a larger throughput than Las Bambas at 160,000 tons per day. In fact, it’s a larger plant than the existing Collahuasi plant to give you an idea of scale.
It will be the third project that we’ll be developing under the standard concentrator philosophy which gives us huge advantages obviously in cost estimation in transferring the project teams, both the owners team and the EPCM team from Antapaccay directly across into this project and a variety of other enhancements. So we’ll be able to see as a result of applying that approach.
The production – initial production will be in excess of 400,000 tons per year of copper and the concept sees us pumping that concentrate through to a filter plant near the Chilean coast and then through to port facilities in Chile. So we expect to be in a position to take a decision on that during the course of 2012.
A couple of quick examples of Brownfield expansion projects which are not factored into the profile that I showed you earlier, but nevertheless pretty interesting in providing some good project evaluation activities for our people on the sites at Lomas Bayas. We’ve identified around 800 million tons of sulfide resources and additional oxide resources directly underneath and surrounding the original Lomas Bayas pit and that gives us the opportunity to look at the concept of constructing a sulfide concentrator to supplement the SX-EW plant that we have at Lomas Bayas, which could add more than 90,000 tons of copper to the profile there.
And Coroccohuayco has been a bit of a surprise packet in the sense that we’ve identified some mineralization closer to the surface, which has totally transformed our view on this project into an open pit project and the great advantage of this is the synergies that it has obviously with Tintaya and Antapaccay being only – being less than 10 kilometers from the Antapaccay and Tintaya processing plants and therefore having the advantage of all the infrastructure, both the onside and offside infrastructure there as we undertake the pre-feasibility work on that.
So these are pretty interesting projects, any of which could form part of the decisions to progress into next generation of growth post 2015. And then of course we have the interests in our major joint ventures, both Collahuasi and Antamina, both of which as you see are world class, world scale mineral resources which are still at the relatively early stages of development and operations. When you consider that in Collahuasi for example alone we have 60 million tons of copper containing resources. That’s 100% and so the pre-feasibility study that we’re undertaking there and we’re engaged in at the moment is looking at constructing either a fourth or a fourth and a fifth grinding line which would take the throughput capacity from 160 to up to 390,000 tons per day to maximize the MPV of that fabulous resource. That’s underway as a feasibility study and we’ll have the results of that mid next year at which point we’ll take a decision about progressing into the feasibility study stage.
Antamina, even though we’re only just inter-commissioning phase of the 130,000 ton, we’re already looking at the expansion possibilities and there are some very substantial expansion possibilities there as well. So we’re working with our joint venture partners there to look at the best fit in terms of the optimum throughput rate and scale of the next expansions coming out of Antamina.
So just in conclusion then, we have found that our performance and our credentials in terms of sustainability has really positioned us well. It’s providing I think a competitive advantage in developing and managing our projects and our operations in some quite difficult geographies and I think most geographies these days are difficult in one way or another, but it’s also providing us with a competitive advantage in being able to attract good talent, talented people into our organization and to retain them because most people do get attracted to companies that can demonstrate very strong commitments and credentials in relation to sustainability.
Our growth strategy we believe that we’ll be delivering into a good market, a tighter market condition. So essentially what will be happening is we’ll be increasing our market share over the coming years as we move into a very strong position as a copper producer. We’ve consolidated our smelting and refining assets and then are providing a very valuable supplement to our marketing commercial team, but in addition to that, we’ve got very strong profile uplift in our custom concentrator production over the next few years.
We will be delivering this profile over the next three or four years. It’s establishing the plan. It’s all approved capital. It’s underway and been progressively commissioned as from now through to 2015. And we’ve got some very interesting possibilities and optionality with all of the other copper projects that we’re evaluating and we’re in a great position I think of being able to take decisions as to when we develop those projects or how to extract maximum value for Xstrata out of the development of the next generation of copper projects.
That provides a summary for you and I’ll be very pleased to address any questions if there are any.
Rob Clifford – Deutsche Bank
Thanks. Charlie, Rob Clifford with Deutsche Bank. Just a quick question on Collahuasi. So as also looking in, you’ve give a standalone asset managing independently with all sorts of issues. They’ve had three strikes this year, had equipment issues. So that doesn’t bode well from an operational point of view. How do you get comfortable sinking more capital into an asset that you’re not controlling and doesn’t appear to be running particularly well?
Well, thanks for the question, Rob. I think it is an interesting question I think as an outsider asking a number of questions about Collahuasi. One of the things that is important from our perspective is that we are influencing Collahuasi. It’s no longer a standalone independent management structure as it may have been some years ago and so as Xstrata, we influence, along with our joint venture partners, the way that management strategies are developed and implemented and in fact increasingly shareholder companies are sponsoring their people into the Collahuasi organization.
It has taken us some time to promote the inclusion of some solid systems, asset management systems for example in that organization, but I think that together with some organizational changes that have been made in recent months are providing for a more solid structure and giving us more confidence that going forward Collahuasi will be able to deliver against its own targets and in turn will give us the confidence to put the additional several billion dollars of expansion capital into the future when we take that decision to go into the expansion, Rob.
So very much about looking to influence the management, influence the way that the joint venture operates in every collaborative way to get the reliability and the confidence that we need to in turn then make the subsequent major investments in that, and we are actually utilizing I guess the benefits of our involvement in that joint venture and in Antamina to share the learnings from that and again we’re in a unique position in that regard to have a strong involvement in such large joint ventures that are under expansion.
Andrew Keen – HSBC
Charlie, hi. It’s Andrew Keen from HSBC. Two questions. Firstly, on your marketing arrangements, can you just remind us, you do all of that in-house and you’ve got a tremendous amount of growth coming in.
Andrew Keen – HSBC
Can you confirm that you’re going to keep that in-house as you grow?
Yeah. In fact we’ve – Andrew, we have just been consolidating that more recently in the last six months. We’ve confirmed within our own executive a marketing commercial strategy. Our Dubai base for marketing and commercial I think has proved to be very successful in terms of extracting additional value for us. The strategy that we’ve been developing has taken a couple of strong aspects and one of those is that we’ve recognized that there’s real value in custom smelting and refining, provided that it is linked to your overall materials flow through your organization. So we’re taking steps to incorporate our remaining custom smelting and refining assets essentially as part of that commercial and marketing group, which gives us enormous flexibility then of how we deliver product to the market and the blending of products.
We’ve also looked to reinforce our marketing organization and start to deliberately develop relationships into China with some key smelting companies as an example in anticipation of the quite remarkable uplift we are going to see. So our concentrate production will go to in excess of 4 million tons per annum, which on one hand is large enough that you can make a meaningful value add through your own marketing strategy, but on the other hand requires a strong organization structure. So that’s what we’ve been focusing on more recently and very much with a view to 2013, ’14, ’15 when we see that big uplift in production and sales.
Andrew Keen – HSBC
Thanks. And just a follow up on Collahuasi as well. You spoke a lot about social issues and license to operate and your partner in Collahuasi has embarked on – Anglo American has got more complex said relationships in Chile than it used to have. Do you think that that’s an issue for the industry or an issue for that JV going forward?
Well, the key thing for us and I guess all companies operating – international companies operating in Chile, is to demonstrate to the Chilean government and to the society generally in Chile that we’ve got strong commitment to growth, to investment in the country and that we’re looking to work closely with governments on a regional and national level and with communities. That’s the important thing from our perspective. That’s what we’re focused on and I think the government does recognize that. We’ve had discussions with them very recently to just reinforce our commitment and our approach and I feel confident that the government and the communities do understand the approach that we’re taking.
Good afternoon. (Inaudible). You valued to the worth of China in the global corporate demand. I was wondering if you had an estimate of how much copper demand from China is actually being re-exported to the (inaudible) in the form of finished products.
No, I don’t. But I think what we are seeing now I an increasing influence of the domestic side. So by far the largest end use for China is in the urbanization, industrialization side of it, but the exact percentages I can’t give you. I know that in terms of the demand growth that we’re seeing, it very much reflects the industrialized, the IP growth and the demand generally in China which is an indication of the extent to which copper which is being consumed in China is actually being used for the development of the country generally.
Nick Arch – RBS
Finally got a mic. Charlie, hi. Nick Arch at RBS. Two questions. You’ve talked about how long you’ve been in Argentina and obviously you’ve got the potential to make very major additional financial inputs into that economy. Can you talk a bit about the current provincial and federal political situation and any potential issues with local stakeholders? And then I guess same question relating to Tampakan and clearly there’s been the odd story about people with AK-47s running around. How does that impact your planning?
Yeah. Thanks for the question. In relation to Argentina, as I said we do have some familiarity with operating there, having been there for many years and also now having some key executives in senior roles in our company and I think that’s important in terms of the relationships that we have at various levels of government. At the national level in Argentina, I think the presidential elections were so decisive that it makes it very obvious for us and I think quite clear to us that we can now approach directly the most senior level in Argentina, the national government and explain our value proposition for the country and I think with the scale of investment that we’re talking about, I’m sure that we’ll have a very constructive conversation.
At the provincial level, we’re fortunate that we operate in two mining friendly provinces, in Catamarca and San Juan. In Catamarca in the case of Alumbrera and Agua Rica and El Pachón obviously based in San Juan, and so having provincial governments and governors that are strongly in favor of investment in those provinces does also help. We’ve got our organization in Argentina and we have more than 2,000 people in the country. The vast majority of those are from the provinces of Catamarca, Tucumán and increasingly in San Juan. So I think that helps to provide additional networks there.
We have some work to do still there before we have the confidence to take the next step and I think we’re reasonably well positioned. In fact, much better position than any other company I think to be making major investments in Argentina. In the case of Tampakan, it is more complex because of as you’ve alluded to the security situation in the Philippines generally and in Mindanao. It has its own history of course of – an unsettled history over the years and that’s one of the reasons that we – even though we finished the feasibility study and we see very good financial and economic outcomes from the project, we’re making sure that we take every step to ensure that the risks that we’re aware of of operating in the country are well understood and properly mitigated before we take what again is a major decision.
In fact, the Tampakan investment would the largest single investment ever in the Philippines. So we’re making sure that we go through a proper risk assessment and mitigation process before taking those big decisions.
Just on Las Bambas, you said that you’ll revisit the budget in Q1 2013 when you’re more advanced. Are you giving us some sort of warning that we need to worry about the budget for Las Bambas or is a concern that we should be thinking?
Yeah. What I’m referring to is the – there are key points of which you can make some pretty clear estimates on the project. We’ve still got three years of construction at Las Bambas obviously, but in most projects here, by the time you get to 70 or 80% engineering and have quite a number of capital commitments there, you’re able to then do what’s referred to as the definitive estimate. So I mean Las Bambas along with other projects has had its cost pressures, but we’ve also seen some really impressive initiatives coming from the work that’s been work by the project team. So the reference was really that the definitive estimate then provides a structure around an estimate there that we’ve got confidence in. We continually do an update on our estimates there and look at that and how we’re drawing on contingency. So the first half of next year is the first time that we’ll be able to bring all of that together into a firm estimate for the project to confirm the capital number.
You’re still confident in today’s number as the best estimate?
I’d rather wait until we’ve completed – because we really are over the next few months bringing together all the savings that we’ve been able to secure and have a look at trying to estimate escalation there going forward, which is with the volatility in commodity prices has moved from favorable to not so favorable on a month by month basis. So and there are big volumes you talk about in some of those consumables. So it’s best to actually have those pinned down in a definitive estimate. Importantly I think for that project, we are looking at a schedule which sees us commissioning in the second half of 2014 and I think if you have a look at it from an MPV point of view, that’s fundamentally important to ensure that you can stick to your project schedules.
Good afternoon and thank you for the opportunity to talk to you about Xstrata Coal, the world’s leading global export coal business. I’m going to share the load a bit today and first I’ll take you through the background to the Xstrata Coal business and I’ll talk to you about the 100 million tons or so that we manage today, which is around 85 million tons of attributable production, then I’m going to hand over to Andrew Fikkers because I know there’s always a strong and keen interest in market aspects and Andrew who’s central head of the intelligence part of our marketing team and will be able to tell you about our views on both the thermal and metallurgical coal markets.
But I guess just as a preview, our view in the medium and long term remains very bullish and certainly we will talk about the fact that both thermal and metallurgical coals continue to demonstrate a level of resilience, notwithstanding the jitters and the nervousness that we’re seeing in global markets around other commodities and we’ll explain to you and talk to you about some of the reasons why that is.
Moving on from the market, I’ll take you through some of our growth options, through our portfolio of expansion options and our growth pipeline and demonstrate to you that this is not something that’s just – we’re thinking about in the future, but that we’ve in fact delivered a whole bunch of growth already, a number of projects that we’ve commissioned over the last few years. That we have the capability, that we have the systems in-house and the projects that we’re talking about delivering are or either already under construction or we have a high level of confidence in being able to achieve that.
And we’ll close off a bit on the coal business and I’ll take some questions around coal, but then introduce Mark Earnes who is part of the coal business, because the coal business has been mandated to look at some projects in the Republic of Congo and Mauritania, look at some iron ore projects and Mark will tell you about how we progress through those. I’m taking you first of all through where our business is today.
Xstrata Coal is a diversified business in terms of being in the right geographies. We also have a level of diversification over the products that we produce. The bulk of our production around 66% is in Australia where we produce both thermal coals and metallurgical coals. And obviously being in Australia, we’re well positioned for the pacific market and the growth regions of China and India. We have about 22% of our production in South Africa which historically used to sell most of its coal into Europe, but as Asia has boomed, we’ve been selling more and more coal into the Asian market.
And then lastly we have around 12% of our production from a joint venture that we participate in in Columbia producing export thermal coal. One of the features that you see there is that we still have a level of domestic production and sales in South Africa and Australia. But as these markets – as demand continues to grow and supply battles to keep up, these traditionally lower quality coals have increased in attracting us to the market and we’re either starting to get export related prices for those low grade domestic coals where those contracts come up for renewal, or we are starting to export some of that low grade coal into the very demanding markets that we’re seeing and at prices that we would never have imagined in the past.
There are some other features on that map that show where our activities are. You would have heard about our acquisitions of prospects in Canada in British Columbia over the last few months. We will talk about those later, but we have placed a team into Canada to manage the development of those. You’ll also see that we’ve moved our marketing team out of Sidney into Singapore where we find that we are closer to the market. We’re essentially one stop away from the growth areas of India, China and Malaysia, Taiwan, Korea and China itself. So we’ve essentially relocated our marketing team to get closer to the market so that they can interact better with them.
Also then you’ll see that – on our map you’ll see that we’ve opened an office in China, in Shanghai and it’s purely focused on sourcing. We have a number of projects ahead of us in our business. We expect that we will continue to grow and build mines and it’s very important for us that we source the right materials for the construction of those operations at the lowest possible cost. And having an office in Shanghai enables our teams and our engineers to travel and to identify the right manufacturers to ensure that we have quality systems in place. That is an essential part of making sure that we deliver projects over time at the right cost.
So our footprint has changed somewhat over the last year. Just taking you through our businesses exist today. We’re organized as divisions, following Xstrata’s devolved management style. We operate essentially as four operating divisions. We have two of those in Australia, one in Queensland, one in New South Wales. We have a South African Division and we have a division that we call the Americas. The production unit of that today is Cerrejón, but as we hopefully grow our business in Canada, the production will be managed through the Americas division.
Queensland today is an obviously very significant producer of both thermal coal and coking coal, producing around 28, 29 million tons on a managed basis. We have a number of opportunities within Queensland which include Togara North, a 6 million ton business that we’re looking at. We’re currently in the feasibility stages with. We’re also currently looking at expanding our coking coal operations within Queensland.
But what we will talk about is the most significant growth opportunity we have there, which is Wandoan. So it is quite possible that over the next 10 years we’ll see that growth go from 28 million tons, that upward growth from 28 million tons per annum to in excess of 100 million tons per annum and our predictions and as Andrew will take you through our predictions for the market are that they should be able to sustain that type of growth.
New South Wales is the largest of our operating divisions, producing just under 40 million tons of product. It’s the largest producer in New South Wales. It’s the largest exporter in New South Wales. We currently have two approved projects in New South Wales that are under construction, Ravensworth North and Newland West and those two projects alone when they were brought in will add a further 40% to the output of that division.
South Africa has been an area where we actually saw some production decline over the last few years as we started to consolidate our business and as our business was restricted by rail and logistics constraints. However, we’ve been moving away from having 13 small, less sophisticated mines shall I call them and we’ve been investing into large scale open pit operations. Over the last two years, we’ve commissioned two of those, Tweefontein and the ATCOM project, which was a combination of ATCOM East and the original ATCOM mine to be a two drag line, truck shovel, large open pit operation. And we will talk today about the Tweefontein optimization plan where we’re taking three all mines, the Waterpan, Boschmans and Witcons mines and essentially combining those into one large operating open pit entity, implementing new coal hemming and washing facilities, train loading facilities and that will be the third of our large scale efficient, low cost operations in South Africa.
And then there’s Cerrejón. Cerrejón produces currently 32 million tons a year. We are one third of that, just over 10 million tons and the decision has been made this year to grow that business to 40 million tons. So a 25% increase there to be developed over the next two to three years, but we are currently undertaking pre-feasibility studies to see whether or not we can grow that business further.
These divisions are – and the portfolio is dominated by Tier 1 assets. The genesis of our business was acquisitions. We did buy a lot of mines I guess in the first half of our life and often the analysts would view those mines and say they were a patch work of second rate mines. Well, we’ve invested heavily into this business. We’ve developed the resources around the mines and we have consolidated them into synchronized, efficient mining complexes.
If you look at the Bulga complex, last year producing around 10 million tons. It has a resource base of around 1.6 billion tons around it and reserves of close to 400 million tons. This is a true world class asset with long life potential and the ability to produce high quality coal, including a semi soft product at a relatively low cost, putting it into the second quarter.
The Mount Owen complex was a single mine, single plant operation. Since then we have built the Glendell mine, we’ve added Ravensworth East and today this is operating around 8.3 million tons of output. It has a material resource still around it and reserves of around 120 million tons. We currently are undertaking studies to extend the life of that operation, utilizing our unique ability that we’ve developed in Hunter Valley to mine complex, deep resources very efficiently with high levels of recovery to extend the life of that mine. So it continues to supply the market in the long term.
Oaky Creek is one of our most important complexes. It is again a world class asset. It operates 2 underground longwall mines. We do in fact in the Oaky North operation have two longwalls in place so that we can leapfrog from one to the other, making sure that we have continuous production, making sure that establishment times and losses when you relocate a longwall are eliminated. We’re in the process of acquiring a second longwall for Oaky number 1 so that whilst the reserves change in thickness and geology, we will have enough flexibility to maintain these levels of output over the long term and over and above that, we’re looking at implementing an open pit in that area initially commencing of 2 million tons and in the longer term looking at a 5 million ton possible operation in that area.
Approved this year was the Ravensworth North mine, a very significant open pit which was the result of consolidating a number of leases. We developed a synergy during our acquisition phase when we acquired Resource Pacific where they had a very large beneficiation complex. That complex allows us today to commence production very early in the stages of this expansion moving coal into spare capacity we have there prior to expanding this and putting new modules into that wash plant.
Our position on the global cost curve as you would have seen I think from one of the early presentations, Trevor’s presentation, has shifted and not necessarily in the right direction over the last few years. What drives the global cost curve for both thermal and metallurgical coals to a large extent is exchange rate. We’ve continued to reduce costs. We’ve continued to improve our efficiencies and relative to our peers in the geographies that we operate, we have low costs. However, South Africa to a large extent where we are the third largest producer and Indonesia with its ever expanding tonnages tends to dominate the bottom of the cost curve in terms of thermal coal.
However, the cost curve has certain other benefits for us. It’s very steep in both metallurgical and on a thermal coal side and that’s driven by either expense of production out of Russia in the case of thermal coal, or in the case of metallurgical coal, by expensive US production that’s currently coming into the market.
Our business is well positioned and we are well organized around logistics and terms and we’re well positioned for growth. In a number of our geographies, in fact all our geographies with the exception of Columbia, we’ve dealt with very complex, very difficult logistical issues. In New South Wales, if we go back a few years, we had a situation where the view was the port was under capacity. There was no additional investment into port because there was always a concern by parties that they would get squeezed out. The same applied to both truck and trains by rail.
Through an industry initiative in which Xstrata played a very significant role, the industry came together and we essentially agreed that there was a need to align port truck, train contracts in New South Wales and to develop access protocols for all of those facilities. That was done and today we’re in a position in New South Wales where the capacity – there’s clear line of sights through to 300 million tons of export capacity through Newcastle, with fair and equitable access protocols allowing new players to come in to get into the queue and also acquiring those portions of infrastructure to expand, particularly track and port.
What we decided though when that happened and as you may know and you can see a picture over there, was that this was an opportunity for us to move away from what we considered to be less reliable and ever increasingly expensive rail providers, train providers and we developed Xstrata Rail which currently has four trains running. The fourth one arrived, we’re expecting the next two shortly which will take us up to six and then in 2012 a further three trains taking us up to nine trains, each delivering about 4 million tons of capacity per annum of polish between mine and port. We still have long term contracts for the balance of that capacity.
But that has positioned us for our thinking around Queensland and any expansions that we want to carry out in Queensland. We have essentially our logistics capacity for our existing operations in Queensland under contract. However, on the gross side we’re obviously having to position ourselves around rail and certainly for Wandoan. We’re participants in the Surat Basin through a joint venture where we’re a one third player and we’re confident, well we know that that rail can be developed. We’re also the lead participants in the first two stages of Wiggin’s Island, plus as Xstrata we have an option to develop Balaclava.
So our position around the key logistics aspects for our coal business in Australia is well developed and gives us a sense of confidence that allows us to build our business going forward. It’s also pleasing after many of these presentations here to be able to report to you that there is light in the South African rail tunnel. We have together, well and credit must be given where it should be, TFR has worked on acquiring new low cost new wagons, but the industry has also worked together with them on solutions to improve the service and we’ve seen from what was a slow decline from 72 million tons of capacity about four, five years ago, we have declined down to the low 60s, if not the upper 50 million tons per annum. We’ve actually seen that system running in the mid 70s for the last few months, which gives us confidence about any build in any projects that we have in South Africa, a very, very positive outcome.
So having followed logistics, we go back up the line and we make sure that we run efficient operations. Now Xstrata coal, whether it’s in its underground mines or whether it’s open pit mines, runs business improvement processes across every production unit, be it a development unit in the underground or a longwall in an underground or whether it be a drag line in open pit. We understand what its issues are, we understand where it performs relative to its peers and we’ve put an improvement plan to make sure that we maximize output.
If we look at the longwall – underground longwall mines, we’ve invested heavily into development and we continue to do that to ensure longwall continuity. I also spoke to you about the additional longwalls that we’ve placed into Oaky Creek which is one of our key earners to make sure that we have continuity there and as you can see, Oaky North remains the most productive longwall mine in Australia and last year was followed closely by the Newlands North and underground.
All of our longwalls are pushed to produce the maximum possible rate safely and we are in the process of introducing systems to make sure that we achieve that on a consistent basis. You can see Tahmoor at the bottom end. That’s probably in the toughest mining conditions that we have, but that’s a business that we acquired a few years ago. It’s actually producing at the levels that we anticipated, but it produces a very high quality coking coal. We’ve seen efficiencies improve there. We’ve seen accident rates come down and we will continue to try and improve it, but we are not just satisfied where it’s come. There was also a fair amount of management around industrial issues, which I’m pleased to report are solved and the teams are working well together at Tahmoor.
In our open pit, we view our production capacity in open pit in terms of the efficiency and the number of cubic meters moved per cubic meter of bucket per annum and we measure every single open pit excavator and drag line against that. 2011 started off as a disastrous year with the floods that we had in Queensland. It affected a lot of digging equipment, but because of our pumping system, because of our management system in place, we’ve in fact been able to still improve production out of our operations this year and we’re training for even higher production if we look right through the year.
So it’s been a very, very positive year in terms of business improvement across our mining operations. But behind all of that it’s necessary to also run a sustainable business and the first aspect that we look at in our operation is safety. Now Xstrata Coal operates a practice called Safe Coal across its business. Three years ago after our operation started to peter on safety and after we had some critical incidents that I was dissatisfied with, we introduced Safe Coal which is fundamentally a set of actions that make sure that every person in our business absolutely clearly understands the hazards around his job. That every person in our business is able to articulate what those hazards are and what the controls are to manage them.
We’ve introduced new leadership training. We’ve introduced new communication systems into our business to improve it. Since the introduction the triggering of Safe Coal which is almost exactly two years ago because it was a design part to it as well, we’ve reduced our accident rate by 46%. So that’s got traction. But it’s a multiyear program and we will continue to drive it and we will continue to in the pursuit of zero accidents in our business, zero harm.
Our coal business obviously has significant footprint. We have large open pit mines. We have extensive total extraction underground mines and it’s imperative that we make sure that we manage all of those footprint issues to the best possible standards. When it comes to rehabilitation, whether it’s New South Wales or Queensland, I believe currently we are operating at best practice. We are securing large tracts of area to make sure that we have biodiversity offsets. We are doing rehabilitation to a standard that far exceeds the legal requirement.
We manage water. One of the biggest impacts is water and our use of water and our interaction with the water table. With an objective of trying to get to almost total recycling, we have reduced our intake of fresh water by 40% and some of our operations are approaching 80%, 90% recycling in terms of their processing. We integrate our water management systems across entire divisions at times, such as in South Africa where we model manage water as one holistic business.
Air quality from the open pit mines in particular has drawn a lot of attention and we practice the best possible standards, whether it’s temporary seeding of rehabilitation which will commence next year, whether it’s designing roads and dust suppression systems using ceilings and so forth. Our dust management is aiming at a 40% reduction in emissions over the next few years. But one of the things that we’re particularly proud of is our work in the communities, both in Australia and South Africa as well as Columbia.
We’ve been recognized for it several times. In Australia, we recently became involved and were approached by the government to assist and became involved in a project looking at saving an extremely endangered species and I know the wombat down there doesn’t look too clear because we took that shot at night. But we’ve – our participation enabled the duplication of the last single habitat and we know have two habitats for these wombats. They’re having little babies as you can see. So we made a difference.
In South Africa, our HIV/AIDS program is now facilitating in assisting 17,000 people that don’t work for us in the community. That work is being done together with the government and our sustainable large scale farming project has been recognized by the government and the fact that then are starting to put millions of dollars into it to make sure that this program continues successfully as a demonstration of the quality of the program that we deliver.
One of our big challenges though remains climate change. We as a coal business face continuously an onslaught of information around the world about what coal does and we’ll talk to you about it in marketing, but the reality is that coal use will increase. What we are doing as coal miners, we’re making sure we understand our footprint. We’re making sure that we get involved in the policy debate. We make sure that we’re involved in the technology development for more efficient uses of coal and lower emission technologies and we’re also now getting involved in education of professionals through several universities in Australia and in fact we’re running short courses in Durban to educate people on energy economics to make sure as we move into a low carbon future that people actually understand and can work around the realities of energy and energy economics.
I’d like to now hand over, having spoken about the business, to Andrew who will talk to you about the market factors.
Thanks, Peter. Opportunity today to share with you some brief insights as to why we believe that the demand growth is going to continue to be very robust in the medium and the longer term. Thermal coal has been a key feature in the last couple of years of consistent growth and rebounds post economic downturns. Those declines or those slowdowns and then the record recoveries, has seen the market demand consistently grow at 7% per annum or doubling nearly every 10 years. The dominant example is shown there in 2008, 2009, but the same is the case in ’92, ’93 and ’97, ’98. Time Magazine recently stated that energy poverty is the worst kind of poverty. The only way to eradicate that poverty is through the access to cheap power and that coal will be a prime resource of that power in eliminating energy poverty in the future.
China and India are the largest energy poverty markets. Their sheer population combined with wealth generation, are fundamental drivers of growth going forward. The inability of domestic production to grow to meet demand in China and in India has been fundamental in supporting important seaborne coal demand growth.
Demand has also been supported by the growth in Europe which has been driven by the displacement of spot price gas into the European market into the Asian market and coal has filled the void. In the balance of Asia, coal remains the base load fuel of choice by virtue of its low cost electricity generation solution.
To the top left hand graph then, the size of the bubbles represents the total quantum of energy consumed within an economy. China’s total energy consumption today is greater than the US. However, its per capita position is clearly significantly below that. In fact, China and India currently sit 20 and 30 years behind where Korea currently sits and Korea represents a plausible pathway for energy demand growth into the future. The existing trend within China and within India would see energy demand within those economies double in the next 10 to 12 years.
What does that really mean? That means that in 10 to 12 years, China and India will together be 15 years and 20 years behind where Korea is today, but the quantum of energy that that equates to is a doubling of middle east oil exports, plus a doubling of the global gas train, plus a doubling of the global nuclear fleet, plus a doubling of the existing renewals generation capacity globally and on top of all that, a doubling of the existing thermal coal trade globally.
For China and India and the rest of developing Asia, coal is and will remain the dominant energy source. Wood Mackenzie recently forecast that the demand in that region will double by 2020, seeing total demand increasing by more than 3 billion tons. Imported coal continued to contribute a significant portion of that growth.
So to illustrate coal’s competitiveness, in the bottom left hand graph, again recently published from Wood Mackenzie, it illustrates the relative cost of coal in energy terms to other fuel sources for electricity generation in the Asian market. What this actually represents is that coal process could realistically increase by 50% and still be more competitive for electricity generation in those markets.
The IEA represents it slightly differently. They show that the lowest cost electricity generation option for the globe is nuclear energy. However, we’re all acutely aware that nuclear energy is both socially and politically difficult in the current environment.
Renewables within the context of Asia are reasonably competitive. However, the opportunity is very small and the ability of those fuels to make a difference in electricity generation is small. Similarly, within the European market, renewables are clearly highly expensive and can really only gain traction with subsidies from governments and in the present climate; it’s a subsidy that governments cannot reasonably afford.
LNG in the Asian market and pipeline gas into the European market is a high cost alternative. This leaves coal, the second lowest electricity generation source well placed to grow into the future market.
We’ve previously spoken about coal supply shortages and the reality is those coal supply shortages exist today. The first graph on the left hand side illustrates the year-on-year growth of electricity generation in the Chinese market. Shown alongside that is the year-on-year growth of coal production within China, domestic coal production. Clearly the gap between those two lines is unsustainable and that is absolutely the fundamental drivers to why China’s imports have grown and will exceed 150 million tons during this year.
The same is the case in India. Domestic production in India this year will be 24 million tons lower than it was last year. That shortfall, coupled with investment within India on coastal power stations, coastal port facilities, has facilitated growth of imports into that market this year exceeding 87 million tons.
On the right hand side, again a graph from Wood Mackenzie. Their forecast illustrates that thermal coal demand to 2020 would require 420 million tons of additional coal into that marketplace. The trend would imply 580 million tons into the marketplace.
Committed supply is currently projected to be able to march that demand growth for the next two to three years. Beyond two to three years, the market is anticipating that pre-FID projects will be developed. However, we’re all aware that developing those projects on time is increasingly difficult.
With the forecast continued to be centered within the Asian market, growth out of Australia and Indonesia is critical, but infrastructure constraints, skills constraints and equipments constraints and approvals delays will challenge the time of delivery of those projects.
An important change in the marketplace in the thermal coal marketplace has been the introduction of the arbitrage in the Chinese coastal market. We no longer consider that the seaborne trade is a 700 million ton market because the contestable market within the Chinese coastal regions is also 750 million tons. So operating in a market of 1.4 billion tons.
Wood Mackenzie have done some analysis and they’re projecting due to cost inflation, R&D appreciation within the Chinese market, the domestic costs will rise in the period of 2015. So and in that period will dominate the upper end of the cost curve. Based as that analysis, the implied forecast for forward curve price of Newcastle is $140 a ton and that marches the cost structure at the 100th percentile of supply into that marketplace.
Broker consensus just recently to illustrate or suggesting that the prices delivered to South Asia would be at this much lower level, around the $120 level. Basis this analysis the implication is that there would be a 300 million ton shortfall to that marketplace.
Turning to coking coal. The blue line on the right hand side represents Chinese domestic climb hard coking coal production. In the period from 2002 to 2007 production of that coal in China grew at 11% per annum. At the same time, pig iron production grew 19%. The apparent shortfall within the Chinese domestic market was made up by efficiency improvements in the blast furnace which resulted in 8% reduction in coal requirements.
Ever since 2007, Chinese coal production has only been able to grow 2% while pig iron production has continued to grow at in excess of 11%. That shortfall could no longer be made up by efficiency improvements in the blast furnace and therefore the shortfall has been made up by hard coking coal imports from both Mongolia and the seaborne market. The inability to grow that production within China means that seaborne imports and Mongolian imports are going to be sustained into the future. In response to that, the Chinese from 2007 introduced an export tariff on coke and that reduction that we see in coke exports did not compensate for the additional demand that was required in the market.
So to come to some quick conclusions. We see robust demand for coal in the medium to long term. We see that as being underpinned by demographics and urbanization. We see that there is an absolute need for continued energy growth to reduce poverty and that coal has a fundamental cost advantage in the marketplace. The new supply necessary to meet the demand into the future is attracting high cost growth from China, from the US and from Russia. This is being driven by the scarcity of large scale new, viable export basins.
The supply response continues to underperform and faces escalating time and cost pressures and skill impediments. Coupled with increasingly difficult geology, infrastructure constraints and capital requirements, these factors should collectively result in a supply growth shortfall and underperformance of the demand going forward. The ongoing growth of Chinese demand and the rapidly rising cost structure, structurally underpins pricing for the future.
Thanks, Andrew. I’ll just go on to talk about our growth now. Clearly before you start talking about growth, one of the key issues is what your resource base looks like in the businesses that we’ve acquired over time. We’ve identified very significant opportunities for growing that resource base and it continues to grow and we will be – when we release our resources next year, we expect that will be over 30 billion tons. Recent upgrades include around Wandoan, Oaky Creek, Togara North, Collinsville, Cerrejón, a very significant increase of around 2 billion tons and obviously we add to all of this what we’ve acquired in British Columbia.
So that augurs very well for any growth optionality going forward, noting that our reserves within that or be it on a slightly different basis, our reserves on that around 3 billion tons. So the gap also indicates what that opportunity is, but it’s not good enough to have the resources. You’ve got to know what to do with them and just a demonstration that over the years, over the last eight or so years, we have been able to grow our business. Some of that has been through acquisitions, but you’ll note that a number of those are in fact expansions and we do and what I said earlier on in the introduction is that Xstrata Coal in fact has a track record of delivering projects and this is an illustration of some of the work that we’ve done just over the last two years.
Glendall was commissioned 2009; Blakefield South in 2010, ATCOM East was commissioned this year, Tweefontein in the year before. Lidell – although Lidell existed as a mine, it was a total rebuild, brand new coal beneficiation plant, brand new mining feet, brand new employees and that was effected in April this year where we took it from being a contract operation into a full own operate operation that is performing exceptionally well.
But it is worth talking about Mangoola. Mangoola was a Greenfield operation that we commissioned earlier this year. We in fact had the opening ceremony for it on the 22nd of November. The reason that the opening ceremony was that late was the original plan was to commission this thing in September and then make sure it ran for a couple of months and then invite everybody to have a look. Well, we actually commissioned it around April, May this year and it’s been an unmitigated success. From the day that we pushed the button, that wash plant has been operating at capacity, but there are some other very important features about this project.
We’re under incredible pressure today in terms of cost, in terms of project delivery, but also in terms of human resources and one of the challenges we have is that where we’re going to get operators, where we’re going to get people to manage and where we’re going to get plant operators, mobile equipment operators. The fact is is that Mangoola is north of the Hunter Valley. It’s quite some distance. It’s towards Muswellbrook. It’s in an area that hasn’t had mining before and we managed to recruit 60% of our employees locally.
But one of the most important features is that more than 50% of the people working on that mine have never worked on a mine before. In our beneficiation plant we employ a total of 18 people. 12 of those people had never stepped onto a coal mine in their lives and today that beneficiation plant is operating at full capacity all the time, every day.
The open pit operation is operating and I showed you the score we had in terms of output is operating at world’s best practice and I am particularly pleased to note that we I think are leading in the industry in Australia with 22% female operators. Maybe there’s a link between that and the productivity. But having delivered that host of projects, it is important to know that this should translate into the successful delivery of two of the big projects that we have currently in New South Wales, Ravensworth North and Newland West.
I did speak about those earlier on. They are high value projects. They have had their challenges, but the challenges have not been in terms of project execution, build, but the challenges have been in terms of environmental and community issues. Ravensworth North has settled down and is progressing. Ulan West has been the subject of a court challenge or be it that the government had issued us the mining permit or the development consent. We believe we’ve continued to build and we believe that we’ll manage our way through. There has been an interim ruling from the court which recommended that the project proceeds subject to some conditions, but given the discussions that’s continuing with the court I’d quote a little sub judice at the moment.
We also have to in these projects manage our cost pressures. It is about structuring the EPCM and the project management team appropriately, but we do think about hyper inflation. We do think about mining sector inflation and we incorporate that into our budgets and manage accordingly. But at the same time, we use a bunch of external people to monitor all of those markets that supply us with our services and good and materials in these projects and we make sure that we react commercially in order to bring these projects in on time and on budget. But looking to the future, we have established procurement offices in Shanghai which we believe over time will deliver us savings.
Our pipeline is well populated. Our current focus is on the 25 million tons that is currently under construction which includes the two projects that were just on the previous slide, includes the Tweefontein optimization plan and the Cerrejón phase one expansion which is taking it to 40 million tons. But as you’ll also note, a lot of these projects are Brownfield and that obviously offers us very high returns and generally is much lower risk than any other source of projects or Greenfield projects that you can undertake.
We have a pipeline that’s well populated with projects at different stages of development and as you can see in our feasibility stage, we have a further 37 million tons in the study and an excess of 70 million tons of projects in our conceptual pre-feasibility stage.
Now as was said earlier on today, the 50% growth is on track and as we build these projects, those approved projects, we will achieve that. We are also continuing obviously to develop the near term projects as a key opportunity and the Wandoan projects that is sitting in early stage remains probably one of our most important opportunities. It’s sitting in early stage or be it that it’s in feasibility because we’re currently looking at opportunities and different ways of financing the infrastructure or be it that they are locked up and we can get the rail and the port systems in place and or be it that we currently are dealing with an environmental challenge on that as well. But again we are extremely confident having been through environmental impact study and a secondary impact study that the recommendation of the judge will be that it should proceed as per the original EIS’s that have been submitted.
So this Wandoan project, already 4.9 billion tons of resources and we’re targeting around 9 billion tons. It has a footprint in an area significantly larger than the Hunter Valley itself. It produces very high quality thermal coal, 5,800 kilo calories in the gross receive basis, relatively low ash. But it is low in sulfur. It has low SOx and NOx characteristics, which going into a lower emission future is important, but most importantly this coal when mined and also when burnt in the power station, has an extremely low CO2 emission level relative to its peers.
And I said the infrastructure systems are well developed. Now there’s a lot of talk in Australia about other basins that can be brought on. We have spent a number of years taking this project through its stages and through the feasibility study certainly for stage one and the pre feasibility for the subsequent stages as advanced and we think is well ahead of any other project.
It has a potential development schedule considering that we’ve dealt with environmental protection by diversity issues at the federal level that we have full terms of referencing. Environmental impact assessments, secondary impact assessment are completed and the coordinator general has completed its report and that we’re now just getting into the issuing of the mining leases stage.
This project is ready to go, obviously sensitive to market conditions and we will bring that forward when the time is right, but we consider it a low risk project. It’s a very simple open pit, a very low ratio, high yield and we’ve done a fair amount of work on the market acceptability for the product.
Moving on from that, I’d said right at the beginning of my presentation that 17% of our production was metallurgical coal. The fact is that 17% drives in the order of 45% of our earnings Metallurgical coal – as the developing world develops as a constructor and as the demand for steel continues to increase, metallurgical coals are an important area in terms of our growth portfolio, hence this acquisition in Canada has been I think particularly well timed and we have managed to acquire a very significant, very large contiguous lease in excess of 100,000 hectares.
This area contains very significant occurrences of metallurgical coals ranging from high quality hard coking coal through to PCI. We have as I said earlier, positioned a team in Canada in order to develop this very exciting and interesting prospect. As you can see, down the middle of it is a railway line and that railway line leads to an export tunnel that is quite expandable.
So in conclusion for the coal business, our view on price is good and the market is good. We have great portfolio of mines. We have a fantastic pipeline and we have a track record of delivering projects. So if there are any questions around coal I’ll take those now and then we’ll move on to the iron ore.
Good afternoon. (Inaudible). I have a question on the price gap between the Asian coal prices and the – I would say the Atlantic coal prices because that the increasing share of shale gas in the north American energy mix and the fact that Asia is likely to remain net exporter of coal, how do you see the price gap between the two regions evolving in the future? Do you see this gap widening in the coming years?
Obviously there’s an excess of gas in the US at the moment and we’re seeing hub prices anywhere between $250 and $350 per million Btu. The fact is is that gas in Asia is very expensive and gas is where it is. Once we see the gas prices in the US stabilize and if you consider putting LNG trains, first transporting it to an LNG train, putting it in LNG train and then shipping it, the cost of that gas will be at the sort of levels that we’re currently seeing in Europe where we know coal is competitive relative to those gas prices. So although we will see gas increase its share of the energy metrics, we don’t see it as displacing major tonnages in the global market. There’s question on the back.
Nick Pascalla – Hermes Fund Managers
Nick Pascalla from Hermes Fund Managers.
Sorry, the one…
Nick Pascalla – Hermes Fund Managers
All right. Sorry I didn’t realize there was one.
The one in the front and then we’ll go to the one in the back.
Just trying to understand the South African coal pricing, the coal mix you’ve got there because you look at the average coal price half year mark and the third quarter, it’s well below the API 4. Is that sort of suggesting you don’t have enough API 4 to ship, annual shipping a lot of the below API 4 grade coals to India?
We optimize the return to our business and our coals by looking at the yield versus the price that we can get in the market. One of the interesting things that happened in the Asian market is times where supply is tight, the traditional discounting that we used to get at 5,800 or lower CV sometimes disappears. We’re seeing with the Asian markets is accepting higher energy – higher ash coals with often just a pro rata adjustment to a point. So we’ve maximized the value of our business. The answer is we’re selling lower quality coals, but it pays us to do that because we get better yields. And there’s Nick at the back.
Nick Pascalla – Hermes Fund Managers
Thank you. Can you just talk briefly about the Australian process on carbon and what impact that might have if any on your Australian operations? And separately, just interested to know your thoughts on the South African debate on pricing carbon.
Initial – well, in Australia the law is passed. We have done a lot of work to reduce our emissions, continue to do so. Our missions currently are around 8 million tons on a consolidated basis so the impact next year should be in the order of $50 million, because it only comes in halfway through the way. It’s not just the 23. You also have to consider the coal sector jobs package that’s been allowed and obviously that gives us something back on our gassier mines. So allowing for all of those factors, we expect around $50 million and probably twice that – obviously twice the next year. The interesting thing is that as we continue to work on our missions which we were doing anyway with generation onsite, with flares on site, but as we continue to optimize that, we expect our intensity to drop over the next three or four years by around 35% in terms of the quantity of CO2 equivalent per ton of coal mined. So as we grow, we don’t think our liability just increases exponentially. Also a lot of that gas over time will be used for self generation on our mines which will reduce energy costs.
Okay, I think I need to hand over to Mark Earnes. As you know, the coal business is currently taking care of a couple of iron ore projects which are very important. Essentially the iron ore business is leveraging off our bulk mining capability of our project capability and our logistics knowledges that we have. Mark was with the coal business, but also had a long history in iron ore in his past. So I hand over to him. He’s the Chief Operating Officer of our iron ore division.
Thanks, Peter. As Xstrata completes a remarkable 10 years, we’re looking in our iron ore business, just coming up to our first year. So we’re at a little bit of a different stage in our development, but I think if we take the same vision, determination and judgment that brought Xstrata to where it is today, to this commodity, I think we’ve got a very bright future ahead of us.
First point to come to is the market. A year ago we were something of a lone voice in that when we were putting forward our views in this forum, we said that we felt that the market for iron ore had a sustained and attractive future, whereas most commentators were expecting iron ore prices to essentially fall off a cliff. It’s interesting that one year on, we’ve seen new supply consistently being pushed out. We’ve seen demand continue to grow and according to most commentators, that cliff is receding rapidly and if we take just one example of one commentator, their forecast of 2015 prices has actually doubled in a little over 12 months.
So there has been a significant revision from a number of players in terms of views about the market and that underlying conviction is what gives us a strong platform upon which to base our business. The height of our value proposition in iron ore is going to be about the resources and we spent a fair amount of time securing the optionality. Now we’ve got these resources. We’ve been working to develop them and so the first step has been to accelerate our drilling. We’ve in fact complete – this year we’ll complete 30% more drilling meters than the previous owners managed last year and there is an increase in the resource base, both in terms of the volume and ownership, which means our beneficial interest is now over 5 billion tons of iron ore and 70% of that is in the well defined measured indicated category.
We’ve also been working to realize the potential of these resources and this is where I think there’s a significant change in terms of the direction of these projects we’re heading. We’ve brought together a team from people around both Xstrata, around four commodity units within Xstrata, plus the people we inherited in Sphere Zanaga and we’ll also leaven that with some external expertise and we’ve got four studies under way across the major resources in Congo and Mauritania and the potential for those studies if we add up the production we’re starting on aggregate basis 100% is 100 million tons.
So all these projects are being managed according to the principles of our stringent project management system, which has been talked about earlier today, which explicitly manages risk and while any commitments we judged on the market at the time. We do believe these results are likely to be very promising and we see not only the potential for a very substantial iron ore business, but also one that generate high shareholder returns.
Just running through to give you a flavor of each of these project areas one by one. The first thing to note is in Mauritania, the resources, the magnetite resources we’ve acquired are largely in the form of what are called guelbs which are these small mountains that actually project out of the sands of the Sahara and we’ve got interests in 11 of them. What’s interesting if you look at our resources, we’ve actually declared resources so far in only three of these and so far this year we’ve been actively exploring six other guelbs and we’re in the process of assembling those training results now and if we look at the feature of this material is that it is quite unique.
It’s the only place in the world that we know of where magnetite is processed in sinter feed using dry magnetic processing. So this is a particular advantage in that we’ve got a course magnetite that produces a concentrate that can be directly charged to sinter tram rather than having to go on to pellet plant and that opens up the market which is substantial with relatively low cost processing.
Askaf, pictured here, is the most advanced project, 400 million tons. 74% measured indicated. We’re studying – we just moved into feasibility study stage. We’re looking at 8 million ton development and if you look carefully at the map you’ll see that the railway line, the existing railway line that’s used by SNIM, the national miner in Mauritania which is a standard gauge heavy core railroad, actually passes right through the middle of the tenement. So we’ve got an opportunity for significant development using existing rail and port infrastructure.
But if Askaf is the most advanced project, El Aouj is the one that is really starting to shape up to be particularly interesting. Most of the exploration today is focused in the northern three guelbs of the five within the El Aouj tenement area. This is a 50-50 joint venture with SNIM. What’s particularly exciting is in the last 12 months we’ve been focusing on drilling up the other guelbs which are called Bou Derga and Tintekrate in the southern part of the resource and these are the guelbs that are pictured here and we believe that there’s – from the results we’ve got to date, we think the exploration targets that we have the potential to be between 800 and 1 billion tons each.
So that gives us the potential for a very large resource upgrade as we complete the drilling activity. In parallel with that, we’ve been discussing with SNIM the best development pathway for these resources and whereas in the past the joint venture partners have completed a feasibility study of a 7 million ton pellet development, we’re now looking at pre-feasibility on a 30 million ton scale development. So that larger resource base has the potential to translate into much larger scale and substantial economies.
Turning to Congo, we’ve seen a restatement if you like potentially appearing on this project. When we talked a year ago about this project, we were talking about a 45 million ton a year rail scope. What’s interesting is that we’ve not only been able to do more drilling and more studies, but we’ve now been able to reset the project and from Xstrata perspective we’ve started a 30 million ton a year slurry pipeline investigation and we believe that due to the low strip ratio of the resource, the potential low cost of power and the availability of water in the country, this could give us one of the lowest cost annual projects in the world and gives us potentially a highly competitive resource.
In parallel with that, our partner has engaged with us and we’re in the process of conducting a joint search to find a new partner. I should stress of course that Xstrata doesn’t intend to sell down the position it acquired less than a year ago.
So summarizing the work in the last year and how we see the business today. First of all external events have reinforced our conviction about the market. Secondly we’ve accelerated drilling to deliver more and better defined resources, which is the base of the platform for our business. Thirdly, we’re realizing the potential of these resources by advancing engineering through our approved stage gate process to identify value from the resources and the final comment is that we’ve assembled a well experienced, capable final team that has the capability not only of taking these resources through the process, but also has the ability to look at other opportunities as they arise. Thank you very much.
Let’s take one or two questions for (inaudible).
Mark, just to clarify there, we see you’re looking – well, you’re jointly looking for a new partner that’s – an additional partner that could come up with a potential large CapEx rather than Zanaga itself which is probably –would struggle to come up with billions of dollars of contribution.
Yes. I mean we feel that we’re a new partner to come in. for example potentially replacing all or part of (inaudible) interest that we’re able to contribute capital expertise and market access, then that could add significant value to the project. So from our perspective we welcome that and it’s a joint process because essentially we have to work together on that process. So our interest is – we’ve got no intention of changing our interest.
And apart from those – because you’ve moved away from a fined product to a pellet product there and that’s why you can slurry it?
Probably the key change is that as the resource has grown, the potential for development by different routes effectively was reexamined after we took over the project and the change I think has come primarily from the market side in that as we sit today pellet feed is actually trading at a premium in the Chinese market today. So the view of the market for this material has substantially changed and on top of that I think when we reexamine the figures and looked realistically at rail versus slurry pipeline development in that country, they actually assume a number of advantages in going down the slurry path approach, particularly as I mentioned the cost one.
So that would leave you looking for a Chinese pellet partner?
Yes. That’s one option, but ultimately we think pellet feed is potentially a merchant product in China as domestic production is replaced. There are a number of established pellet plants already in China and so it does provide a merchant product. We don’t have to find a tied customer either.
Could you talk a bit about the timelines specifically for Askaf, where you see that now and specifically around negotiations of infrastructure and how much you’d have to pay to use that and how much you can guarantee?
The good news is that we’ve been working very closely with SNIM. So they’re our partner at El Aouj which is a flagship project in the country and we have a very good working relationship. So we’ve made a lot of progress in terms of the rail and port access discussions. The first point to note is that we have conducted joint capacity studies that indicate that we can go over 40 million ton a year through the existing port facilities and potentially up over 70 million ton a year from the existing rail facilities without needing to duplicate the line. So given that SNIM’s production is well under 50 million tons, there’s a lot of headroom there for us to be able to expand. So that’s a shared view. In terms of the access discussions, the pricing principles have already been largely established. Those have been established already for El Aouj and are based on the conventional worked on dock approach used in Australia.
So the weighted average cost of capital applied to depreciated optimized replacement cost and we’ve had discussions with SNIM about the level of access we seek both for Askaf and for El Aouj and we’ve got in principal agreement that those levels are feasible and we’ve got a framework if you like to work through in terms of how that will be passed. And so we’re exchanging information about asset costings and the various assumptions we use and out of that negotiation we’d expect to be able to secure access well within the timeframes of the project. If you look at Askaf specifically, the feasibility study is likely to take most of next year. From that point on, when we choose to commit to the project, it will be approximately a three year construction program we expect and so it gives you a feel for the potential timing.
Thanks very much. I’d like to shift gears now. Thank you Mark and call upon Mick. But as Mick comes down I just want to thank in particular the CEOs of our businesses who have added yet another long haul trip to come and be with us today and I know that certainly we do and hopefully you appreciate the time that they’ve spent with us. Mick.
Hi, good afternoon everybody. You’ve had a long day and so I’m not going to spend a huge amount of time (inaudible). I’m not going to spend a huge amount of time on this, but I think that to take you back to 10 years ago when we started out with the Xstrata venture, it was based on a conviction about two important variables, demand and supply and that’s of course with straps under the economic system. And our conviction on demand was that we’re entering a phase of real price increases in demand for commodities as a result of the emergence of the emerging market into a high demand sector after many years of declines in prices because of the changes in dynamics of the developed world.
Now I don’t think at that stage as I’ve said before that we would have guessed the huge impact that China in particular would have had, but we certainly had a feeling that this was the test that we were into and in fact when we started on these range of acquisitions, starting with MIM, we thought that the process were as low as they were going to go and that’s the judgment that proved to be correct. We were ahead of the game in that conviction and that conviction remains with us now. So even amidst the turmoils of the economic crisis of 2008, the current turmoils in Europe, the machinations of politicians in the United States, we still hold true that conviction. And while I can’t give you an informed macro view any better than you can form yourself, our judgment is that that conviction is well founded and is founded based on the fact that you have in the developing world news, China as an important proxy, a significant amount of urbanization still to take place.
The industrialization of the country continues and although the Southeast is probably exhibiting the features of the developed world, the central and northwestern province certainly are not and still remain highly (inaudible) as it were and in fact the scope for urbanization remains huge. The development of cities in China to support this urbanization is going to be profound. The demand for commodities therefore will follow from that and also note, very importantly that China has yet – as is India, yet to reflect the intensity of usages as a factor of GDP as the developed world and you can see on the screen in front of you the comparison of the position of China and India in relation to the United States and also in relation to the early to late stage commodities.
So that conviction is as strong today as it was then and although we can foresee a China which is going to grow at lower rates than it has done in the last 10 years, we must remember that those rates are based on a much higher base and therefore the actual quantum of commodity which is going to be demanded is going to be very significant and people mustn’t mistake I guess the point made by Thras at our board meeting yesterday where we discussed our budgets for next year, a very important point is when people look at China, looking at lower rates of growth and not looking at an economy which is declining in growth. Growth is still very significant of course.
With that conviction came the other side of the conviction that I came out of the industry which had invested a huge amount of time in the 1980s and the early ‘90s in exploration programs, in the technological changes in SX-EW, in finding new resources, bringing them on and producing a huge amount of quantums of supply and huge capacity supply in a market where the funnel of demand is now low because metal intensity was declining in the developed world. So as we moved into the 1990s, so companies recognized that they were destroying value as they earned in terms below the cost of capital and they shifted gears completely and focusing on returns on investment, cut back on exploration development expenditure and we got into the cycle of a contraction of development and growth and that took time to actually exhibit itself because clearly the investments up to then were creating these great and large mines which we see today.
But the environment today of course is one where there has been little investment and although companies are rapidly trying to catch up, they’re catching up in a different world to the world that prevailed in the 1980s and the 1990s. That was a world where you were finding geographies which were inherently stable and environments which were stable and you had infrastructure to support you and you generally had workforces which were capable of delivering high quality results in a not so competitive environment.
Today, we are faced with the fact that geographies are much more exotic, where the collateral investment in infrastructure associated with the project is very significant indeed with the environmental impacts that you have to deal with, with the regulatory environment that you have to deal with is much more complex. With the growth of NGOs, you are finding huge forces at play which inhibit the rapid movement in terms of the development of projects, the responsiveness to communities and the needs of the communities are heightened and you have governments which are playing fast and loose with the investment proposition. And therefore the development of significant projects going forward is going to be delayed, is going to take longer and we see that exhibited today.
At the same time, current and existing supply is impacted by a significant decline in grades right across base metals and copper is always the proxy of the use because it is the most significant product in our stable currently. And these graphs reflect to you the annual change in global copper mine production over the last decade or so and you can see that it’s a pretty sad story in the sense of how demand is growing. And the next point to be made and we use Xstrata, RIO, BHP, Anglo American as the large diversified copper producers and you can see basically what has happened from the first quarter of 2010 to the third quarter of 2011 with mine copper production. That all of us, except for Xstrata let me say for the moment, are mining less than we were in the first quarter of 2010 and that is a reflection of the very difficult circumstances we find ourselves in terms of decline in grade, challenging workforce environments and this is a situation which I don’t think it’s easily going to improve in the next few years.
So we have a situation where both the demand side and the supply side, elements of that conviction which form the basis of the investment proposition that we brought to the market where we felt at Xstrata in 2002 remains entirely intact, notwithstanding the fact that we have a much more maligna [ph] set of process is taking place in the world economy which undoubtedly has its impact and if these forces were not there in fact you could say that the pressure in commodity prices which in fact would be a whole lot higher and demand would be that much more significant and the constraints that we see from time to mine in the ability of mining companies to address the growth propositions which would be even more tenuous.
So Xstrata has enjoyed this very rapid growth as you know. It started with a whole merger and acquisition flurry. That was by force of circumstance. We had no internal optionality, but we had a great conviction and we had a fantastic market to go and buy assets in because our competition were short on conviction and had the belief that you could only actually buy world class assets. And we had the view that you create value by buying assets where you can in fact improve the value proposition of that asset base. And so we look for opportunities to do that.
Mount Isa Mines, Falconbridge are our two flagship investments. There must have been I don’t know, about 20 or 30 acquisitions over this period of time, but those are the two ones which stick one because the company transforming in nature, both presented us with opportunities of taking an existing asset base and creating world class propositions out of them and so the value inherent in that was in the price we paid based on our perception of value, connected with the fundamental conviction we had, connected with our view that we in fact could improve the asset base. And I’ll make the point just now at the back end of the presentation that this wasn’t because we thought we had a unique technical or production proposition to bring to these assets.
Now before, we had a unique proposition in terms of how a mining company should be run to bring to the whole complex and that has been the power and the force behind the success of Xstrata. And that operational excellence was the next leg to the value creation proposition. So not only did we buy well, but we actually managed well and the concept of continuous improvement and continuous cost reduction we have been able to achieve and reflect real cost savings every single year since 2002, has been the sharp window of this company and has been a driving force within the management teams of right across the group. And I’m sure you’ve heard from Santiago and Charlie and Peet and Ian and Peter on the successes that they’ve had in doing this, each in their own unique ways, each with different opportunities, each looking at the circumstances they had.
But the significant value creation of that reduction in cost base cannot affect – be overlooked at all in looking at this significant growth in the proposition that you have before you. And then while we were doing that, the third leg of the value proposition was to develop the optionality within the business because not only were we buying assets which produced, we were buying options. We were buying growth opportunities, access to growth opportunities, but I think in terms of potential Brownfield expansions where we had interconnection between existing resources and resources we were buying as well as Greenfield options. And we spent time post 2005, 2004, 2005 with MIM and then exactly after that 2006, 2007 with Falconbridge to invest a huge amount of time and effort and resource in developing that optionality to the extent that when we came before you about 18 months, 2 years ago, we said to you that we would grow this business by 50% in copper equivalent volumes between the back end of 2014 referenced to 2009 capacity. And we stay with that view that we will still remain within that target of achieving a 50% growth in our volumes in terms of capacity, in terms of by the end of 2014.
That operational excellence has resulted in this. So you can see the cost curves before you on an aggregated basis. The only exception to this if I compare our 2008 to 2011 position is coal and that’s not because coal has missed the boat in terms of managing its costs that have faced a series of fosters on the currency side, both in Australia and South Africa, which has worked against them and therefore shifted marginally their position up the cost curve in comparison to those coal production areas which are outside those regions if I look at Indonesia and Columbia in particular, especially as you’ve seen the significant growth in the ex coal production.
But if you look at other assets and I just have to point out to you nickel which I’m sure Ian waxed lyrical about this morning, zinc even more significant and copper which has been a most exciting performance. Given the fact that as you know that Charlie has been working with an asset base which has been old, aging and retiring and we are about to get into a youthful, vital asset base as the abilities projects and you can imagine therefore the impact that it’s going to have on cost coming down.
But the significant impact I think of the – almost direct deeds of the zinc group and the nickel group, are quite astounding and have really developed into a very significant proposition. And not to forget chrome which has faced not only the double whammy of the strong Rand, but also the incredible increases in electricity prices, and yet notwithstanding, they’ve managed to effect a significant move down the cost curve. And I think this reflects to you the power of this group, the ingenuity of the management team and the capability of the team to address risk and address forces in a way which is value adding for shareholders.
So now we are on the cusp of a different type of transformation with Xstrata and are about to start delivering on this 50% volume reduction. As you know Antapaccay and Koniambo in particular next year coming to production. Antapaccay, midyear, Koniambo at the back end of the year. We’ve already had projects which have come into production this year which you’ve heard about earlier this morning. And we have Antamina which starts production at the end of this year and so I think from that point of view, the delivery is now happening and we remain on track as I said to achieve a significant real reduction of costs, an impressive RO of averaging over 20% and of course the 50% volume growth.
And the graphs below, both on the left hand side in copper and the right hand side in coal, reflect you what in fact is going to take place in the growth ediments and how much Xstrata’s growth going through to 2014, 2015, essentially outstrips the competition. And again this is something we should work on. The optionality has been there. The value will now in fact be delivered. And the result of that will be a continuing enhancement of what is now becoming a company with a significant Tier 1portfolio of assets, and with some very important additions in terms of the projects that we have on us. And I think this is again something we should – should not be lost on you.
I have lived through a decade of people telling me, great company, great management but assets a bit crappy. Well, the reality is, it’s a great company, great assets and magnificent – a great company, great people and great assets. And I think this reflects it to you and that in relation to our ability to both capture value on the upside and manage downside is reflected in the quality of the assets today as well.
But of course the story is not over as the adverb goes and another thing, we have an additional range of optionality going forward after this. And I’m sure that in the individual presentations these would have been touched on. Bu they’re a whole range of next generation projects. Now, it’s not that all these projects will be done. It’s not that all these projects may be done by Xstrata and it’s not that we will keep all these projects. But this is our value proposition extending beyond the 50% growth target.
Some of these are in feasibility, some of these are pre-feasibility, some of them in scoping, some will come into the radar over the next couple of years. But they again reflect an important element of options available to the company going forward on a growth optionality basis. So that doesn’t mean to say that M&A is off the table. As always it’s on the table. We always remain opportunistic, but we’re in this very fortunate position that we can see growth before us in areas which we control. And I am very, very pleased and very, very excited about how the group in fact has developed these options to the extent that they’re now giving me indigestion and headache in the amount of money they want to capture from the organization and we sort of have to hold them back. But I’d rather be a box with a long reach than in the other position.
Now, I come to the conclusion of the presentation by saying to you that the unique proposition sits right here at the bottom with this unique organization model. And when I say to you that it is unique, it is unique because I have not yet come across any other company either that I’ve worked in or companies that we’ve taken over which has reflected the decentralized nature of the way that we run our business and which has empowered managers at the lowest possible level to deliver the value which they can deliver based on the information which they have at their fingerprints and the authority and accountability to act.
And that has been why Xstrata has been able to actually meet the challenges of the last couple of years so very effectively at the same time. Note – we have created a situation of unmanageable risk and that is because it’s based on three central propositions. The first proposition is the people who make the best decisions are the people who have the information, not the people who have information given to them. The second proposition is that if we give people accountability and authority to act, they will act with that authority and accountability in a way which creates value; because they understand that there isn’t anybody else to second guess them. And if you treat them as owners, they’ll behave like owners.
And the third proposition on which this is based is in sharing of information across the group. Now if you can share information across the group and therefore you have early recognition of where risks are, where things are going, when you are able to act and able to act decisively. And it’s based on that communication and sharing of information which is the fundamental power of this particular model. And we’ve resisted completely putting in place at the center, centralized services, centralized engineering because in no way do we want to put ourselves in a position where we are the second guess management or management believe that there is somebody else who will take accountability or responsibility for their decision making.
And that has created a powerful organization with a powerful set of people with an entrepreneurial view on life and who have the perspective that they in effect are almost like owners of the business and act in that sense. And that is very exciting and the result is a strong financial position with cash flows in the center, a structured balance sheet to be able to achieve the project industry leading growth and a world class set of assets and projects. And that really is what Xstrata is and that’s the message that we had hoped to communicate to you today. And thank you very much for being with us and giving us such a significant amount of your time.
But ours is an important story about how our company can grow and should grow and it’s a story which as much as we are really excited about as a management team of Xstrata and have been the management team for 10 years almost all of us and hopefully we’ll continue for a long period to come. I hope it’s a story which excites you as well. So if there are any questions I’m very happy to take them.
Rob Clifford – Deutsche Bank
Thanks. Rob Clifford with Deutsche Bank. We heard today from your heads of divisions about how they’re taking over the baton of growth and we heard from Trevor about how he’s going to fund that. As you’ve moved into this organic phase, how does the CEO of Xstrata devolve management structure get his buzz going forward? Because obviously the excitement of the last decade isn’t there looking over the next five to 10 years necessarily.
Well, it’s a different excitement I think. Yeah, sure it’s very exciting in the cutter thrust of M&A and that obviously gets my adrenaline going and it’s stuff that I’ve done and I think we’ve done reasonably well. But there’s a different level, a different type of excitement here. I was just 10 days ago at Koniambo visiting the project and trying to get to grips with the risks associated with that project and how we’re managing those risks and the risks obviously related to completing the project at the time. But there’s an issue around given the right number of people on the site to actually run this project when it’s commissioned. There’s risk associated with potential fiscal claims and community claims and I find it very challenging to engage with that sort of stuff because it’s not my natural skill set.
But nevertheless that’s something that I have to actually get on top of and I’m finding a huge amount of our intellectual stimulation by engaging in that sort of stuff. And so although I don’t have a direct role to play in the building of the projects, I have a really important role to play in terms of managing risks associated with these big investments we are making. And with slugging of the Australian government, or giving advice to the South African Minister of Finance or doing things like that, it nevertheless remains interesting and remains an important part of any CEO’s job. So I can tell you now from my perspective, there’s a significant role for me to play in this phase of Xstrata’s development than there has been before.
Cam Gilles – Deutsche Bank
It’s Cam Gilles at Deutsche. Mick, it’s been a tough year 2011 weather wise, other things, Japan. How do you assess your performance in cost terms this year versus some of the other years you have delivered? It’s obviously been difficult but for example there’s been some leakage in joint ventures and one or two other things, but how would you overall assess your performance this year?
Look, let me say to you, yeah if I take out the exogenous factors of heavy rains in Australia and South Africa and in fact for that matter in Columbia which really impacted us and the fire at Blakefield which was not obviously a welcome event. Even if I take those into account, the group has delivered a very, very strong cost performance this year and there will be a significant cost reduction again in real terms. It tells you how much better we would have been had we not had these factors. Now some of these issues are things which we now believe we can’t control the weather, but we can control impact of weather. So if you look at for instance in Australia, if I look at the impact on our coal mines in Queensland, when we had the floods I think sort of what, 18 months ago which had a huge impact on operations, we recognized that we had to do something about quick recovery from that and this year we recovered – the mines recovered exceptionally quickly.
What didn’t recover so quickly was the associated infrastructure, the rail track, the bridges in which we’re reliance went over and so we now recognize in fact handling our end of the things is not good enough. We have to make sure that the delivery agent actually is capable of delivering on their end of things and ensuring quick delivery on that. So I think we continue to learn lessons in how we actually cope with exogenous factors and we will get better at it. I think there have been elements we have been disappointed. I think you know the Collahuasi joint venture has not in fact been a great deliverer in this year. It’s been a disappointing exercise for us and some of that again has been out of our control, but there are some issues again we must learn from that.
But if I take it as a whole, if I take the company as a whole and I look at how we’ve done, we have reproduced a significant amount of rail cost reduction. Unfortunately I’m always able to rely on the oldest and wisest of us all, Santiago, who is in the zinc division because when the others in fact fall by the wayside, Santiago sort of marches in with another slug of cost reductions. So we’ve been very fortunate in that. But I think that you’re right, it’s been a tough year. But nevertheless not withstanding that, we’re going to be able to deliver significant cost reductions.
Unidentified Analyst – Barclays Capital
Mick, it’s (inaudible) from Barclays Capital. Perhaps just touching on capital allocation over the next couple of years. You’ve got the benefit of quite strong cash generation, but also massive CapEx outflows. Can you just talk us through your thoughts on dividends versus perhaps moving towards a more centralized approach towards capital allocation within the business as the opportunities exceed the cash flows perhaps and CapEx out lays that’s coming through. And then in terms of context of your thoughts on underperforming assets perhaps such as the equity stakes in London etc.
On the issue of dividends, we broadcast to the market that we’re going to continue with our progressive dividend policy. We had a significant adjustment in dividends to get back to the P2 2008 levels and we will now continue that progressive policy and we see nothing in our view of cash flows going forward set against our CapEx programs which will prevent us from doing that. You’ve got to understand and I think you do appreciate that we have a very low level of borrowings at the moment, a very healthy balance sheet and we have some flexibility there. But I think it is true to say as I reflected to you on a couple of slides ago, the significant amount of second phase projects that are before us and with the energy and optimism and enthusiasm of the teams to actually want to develop all the projects that we are going to be facing a situation where we have to in fact start looking at projects in the sense of some form of prioritization.
That we have to think about projects in terms of what are our best value, how they’re going to position the business, how they’re going to balance the cash flows, the risks associated with the development risk of particular projects, geographic risks of projects etc. and I think that from that perspective there will be not a centralized perspective on prioritization but a coordinated perspective on prioritization that will now probably take place at the group which we haven’t had to do in the past. And I think that is the result of success as opposed to result of failure and so it’s a problem which I welcome. But nevertheless it is a new dimension, added dimension to the work that Trevor and his team will have to do going forward.
I can’t tell you what the solution on Lonmin is and I can see that in fact it is an investment which in fact is not earning a return commensurate with what the cash should earn. We still believe that Lonmin represents a significant amount of value. We just don’t know at the moment how to capture that value and when we work that out we’ll let you know, but sort of have to – I have to say to you that fortunately it does not represent a significant issue within the context of Xstrata’s overall asset base.
Andrew Keen – HSBC
Mick, it’s Andrew Keen from HSBC. Mick, I’ve heard you talk in the past about how you’ve spent additional time thinking about succession planning in the group. Can you talk about how satisfied you are with your own provisions across the group and including yourself as well?
I’m probably able to talk about a little bit better post the December holidays. This is the time where I spend most of my thinking about the group and in the period of sort of Christmas and New Year where nothing much seems to be going on in the world and hopefully it will be the case this year as well. I make a presentation to the board every February on the results of those reflections. I’m very comfortable that we have very adequate succession in the businesses. I think that each of the business’s chief executives has built up a strong team and God forbid any of them should be knocked over by a bus; I’m very comfortable that we have people who can step in and ensure that those businesses can run and achieve their objectives that they need to achieve.
Let me say that we run a very few central processes in the company, but one of the areas where we run a central process is in trying to highlight talent within the group and explore that talent and accelerate that talent into very senior positions. And we’ve run now for the last 6 years I think, 8 years an accelerated leadership development program which has been very, very successful in not only spotting talent, but in fact getting talent placed in the right positions in groups and the right level of seniority. And that is something which we’ll continue doing and we also run programs for our most senior executives in terms of exposing them to a wide variety of business perspective and business risk to enable them to actually broaden their capacity to manage in a very complex world.
Each of the businesses has clearly because of the significant growth that they’re undertaking at the moment, has a significant demand or call on new resources, human potential going forward and they’ve each identified what that is both in terms of numbers, in terms of type of people they need, where they need them and we have – just the other day we had a session to pride our ex co. We also sat down and discussed what each of us were doing and making sure that there were no gaps in the process and when we could help each other out we would.
And so that I think is well in track. In terms of succession, for myself I think you just have to accept that at the time when I hang up my boots that one of my jobs and one of the board’s job is to make sure that there is somebody else who can step into them or maybe step into a better set of boots. And we obviously are alive to that. Again I’ve no doubt that if something happened to happen to me with a bolt of lightning, there’s sufficient talent in our organization that could make a seamless transfer into this particular leadership position. But these are questions that we clearly look at all the time and the board is very focused in on. As I said to you earlier, I report to the board in February on my thoughts. Well, thank you very much.
Thanks again to all of you for your time and for your engaging questions. Looking forward to seeing you next time. Thank you.
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