Anglo American's (AAUKF) CEO Mark Cutifani on Q2 2016 Results - Earnings Call Transcript

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Anglo American plc (OTCPK:AAUKF) Q2 2016 Earnings Conference Call July 28, 2016 4:00 AM ET

Executives

Mark Cutifani - CEO

Rene Medori - Finance Director

Bruce Cleaver - CEO, De Beers

Analysts

Menno Sanderse - Morgan Stanley

Des Kilalea - RBC Capital Markets

Anna Mulholland - Deutsche Bank

Liam Fitzpatrick - Credit Suisse

Myles Allsop - UBS

Kieran Daly - UBS

Hunter Hillcoat - Investec

Mark Cutifani

Good morning, ladies and gentlemen. Thank you very much for taking the time to join us today. I know it's a pretty busy day generally in the market, so we'll try and be as succinct and efficient as we can possibly be. For us, and today, I'm pleased to announce that we're on track to deliver on all of our full-year business targets. While I'm not suggesting it's going to be easy from here, we've still got lots of challenges and probably a tougher market to navigate during the second half, we're very pleased with the results and what it says about our progress, but at the same time, we're not satisfied with where we are, and I think that's an important point to make.

Today, what I'd like to do is go through the results fairly quickly. I know most of you will have had a little bit of time to see the numbers and will do during the course of the day. But I think it's important that we'll just put out the key points that we see in the results that we think are important to note. What we'll also try and do is how we see the balance of the year unfolding, and why we believe the foundations that we have put in place should help us continue our improvements into ’17 and beyond.

So it is not simply about this year, it is about the foundations that we are setting for the longer-term and we have been setting for the last three years. So firstly, we remain committed to the establishment of our core portfolio of diamonds, PGMs and copper. And that core portfolio has been built around what we see as world-class assets. Our primary objective is to operate the businesses that are cost competitive or operate in businesses that are cost competitive, can generate reliable cash flow through our price cycles, while providing longer-term improvement opportunities that can be realized through disciplined capital deployment and efficient operations management.

We believe we can further support returns by exercising supply discipline in those markets in particular where we have a leadership position. More specifically I am pleased to report that the next phase of our business transformation is well underway. We are well ahead of our annual cash flow target with 1.1 billion delivered in the first half, with 2.5 billion EBITDA also tracing ahead of our full year target.

As you know, we took some heavy bruises back in the last quarter last year. As [men] said what a difference seven months makes, but from our point of view there is still a long way for us to go and the way I characterize the results in the first half it is a positive step, it is an encouraging step, but we are still very cautious and there is still a lot of work for us to do and for us to carry on during the balance of this year and into ’17 as we do the restructuring, and then beyond that clearly we have got to continue to improve to remain competitive and improve our positions across all of those selected commodities.

Our strategy to retain liquidity stood us in good stead through probably a most difficult period at the end of last year and the first quarter this year, and I think commodity prices for us were at their bottom in the first quarter, and whilst we are encouraged to see prices improve in a range of areas we are still not that optimistic, given the supply situation. The second half in De Beers, we will see some as we normally expect seasonal changes in sales, but we are certainly been encouraged with what we have seen so far.

But in terms of things we can control we have made good progress. In terms of portfolio and in terms of the $1.9 billion improvement we have seen 1.6 – we are on track to deliver $1.6 billion of volume and cost improvements, and when we went into the detailed execution planning for the improvement program, we have identified $300 billion in capital and working capital changes that we will still be realized in that $1.9 billion and we will unpack that a little bit more in the presentation.

In terms of disposals or progress on the restructuring or the portfolio restructuring, I'm very pleased to announce the Niobium & Phosphates sale that went very well, but at the same time I think it does reflect the quality of the asset, the recent work we have done in that asset and I will talk a little bit about some of the technology stuff we did that has application across the broader portfolio, and the fact that we set up competitive bidding processes and that process was competitively bid and the result I think was a solid one, but at the same time I also think [Indiscernible] has got a good of assets.

So I think we have tried to get that balance right, and so far we believe that we have done the right thing and I think they have a very good asset into the bargain. In terms of net debt, we are down to $11.7 billion, and if I had count for the announced disposal proceeds, we would be at about $10.3 billion, so again encouraging progress on the net debt target, but still some more to do.

On our medium term gearing target of net debt-to-EBITDA of less than 2.5 times, we are already in that range and that is encouraging. Again we have got to keep working hard because I think we are getting a little bit of help on both oil prices and with FX. And so still a lot to be done, but I think the direction of travel is positive.

To start with safety and environment, we have had a tough six months regrettably. We have lost five colleagues in five incidents. I'm just going to get a glass of water. So, whilst we have improved our safety performance by around 60% in the last three years, it really does – in this sort of restructuring process we have to keep our eyes very firmly fixed on how relationships are going, what are we doing on the safety front, so we have initiated some key actions to make sure we pull ourselves back to that improvement record.

On the good side or on the positive side we have shown a 21% improvement in our all accident frequency rate, and we have to continue that sort of progress across the board. So good progress in three years. Very disappointed, tragically people impacted in the last six months. We got to get ourselves back on the rails in terms of that performance.

On environmental performance, it continues to be solid and I think the environmental performance in particular reflects the greater attention to detail and the planning work we have been doing in making sure that we are controlling all of our processes. So improving availability and utilization usually means improving environmental performance because 60% of environmental issues occur in unplanned breakdowns of equipment. So when you're operating a plant and equipment more reliably you tend to get less environmental issues. And so for us it is a key measure and it is one that I have used since I started in the business, and because I think it is also a measure of a whole range of other things in the business as is safety.

In terms of the operating performance, overall production was broadly in line with the prior year. We are about 1% lower on a copper equivalent basis. This was despite pulling back production at De Beers in response to weaker market conditions. While at the same time we sold 18.3 million carats to De Beers, which was 29% higher than H1 2015. So I think the progress in the work we did in the last half of last year has certainly paid benefits this year, and we are encouraged by what we see in the market still. Although we remain cautious we want to see a bit more before we say that we have dealt with all the pipeline issues, but so far so good.

I would like to make a very important point as part of the production results. You need to remember that the production this year versus last year has been delivered despite downsizing the organization by more than 10%. So from a productivity point of view it is a more credible performance considering De Beers and the fact that our establishment numbers are lower.

In copper, a little disappointing with Los Bronces being impacted by some very significant dumps of snow. Add a little bit later and explain what impact that has had and why we have had to adjust next year’s forecast as well, but on the good side Collahuasi has done very well, and certainly we would expect them to continue to improve. So that has been a bright side to that story.

Platinum was solid after lower than expected refined production in Q1, after stock take and safety stoppages, Chris and the team have pulled that back very quickly. So I am very pleased with the second quarter performance. Mogalakwena continues to be very pleasing. We are up north of 400,000 ounce rates despite in the last 2.5 years I think we are more than 30% without spending capital. So I think Chris and the guys have done a great job and it does give some sense of what is possible with the operating model and the good work the team has been doing on a range of fronts.

Amandelbult has also begun to turn the corner and we are quite encouraged with what we are seeing there. In Nickel, Barro Alto is now operating at nameplate capacity. So that was a big jump for us, a big task to get the furnaces right. I'm very pleased with the progress there and you will see pretty good cost performance here as well.

In coal, the South African operations have continued to perform in line with the plan and the Australian met coal production was strong despite two major long wall moves in the first half. So we will do a bit better in the second half given I think we may almost sneak through with that a long wall move. So I'm really pleased with that and in fact Seamus is smiling today. He has just come – just landed back in the country I think maybe this morning.

And he tells me that yesterday Grosvenor produced 37,000 tons. So the project has been commissioned seven months early, under budget and certainly make a significant contribution. I think we will be careful in analyzing those sorts of numbers. You have got to remember you got long wall moves and that is a peak number, but so early in the commissioning, fantastic job. I'm really proud of what the guys have done at Grosvenor, for us I think it really helps demonstrate where we come from on projects and operations.

So apart from the challenges at Los Bronces and taking into account that the Kumba team has done a lot of restructuring in the first six months in dropping mining levels by 31%, a solid operating performance. Not as good as we would have liked but most importantly really good work on the cost side, and from our perspective I am more concerned and more focused on the costs and margins than we are on the absolute production numbers. So for us the most pleasing aspect of our first half performance and I think this is the key in making sure that we are generating free cash flow as the operating cost performance, overall costs were down 19% compared to this time last year. Yes, we have had help from foreign exchange, but we are also in some reasonably high inflation jurisdictions as well.

So the guys have done a good job. I am very pleased and we have seen consistent performance improvement right across the board. And from our perspective, a 19% cost reduction, reflects around about 7% really across all the businesses, but it is patchy depending on how far business we are in the restructuring, but generally you are seeing the impact of the hard work that has been done over the last 2.5 to 3 years.

So for us even though we are going through a major restructuring and it is significant in any scale the fact that we have been able to hold the cost has been pleasing, and is something that really remains a key part of our focus as we go forward. Now just to put the organization restructuring into perspective, since 2013 we have reduced our manpower levels down to 120,000, and so we have seen another 6% reduction during the course of the last six months. The majority of these reductions have been from restructuring our corporate Kumba, Minas-Rio coal; ongoing work in platinum in London and Jo'burg.

Based on our disposals announced today, Phosphates and Niobium, Rustenburg, Foxleigh and Callide we are at a pro forma workforce level around 98,000. Now that is a 40% reduction from where we were in 2013. Interestingly, and I will show this a little later, our actual full production is actually up since 2012. So the productivity improvement is quite dramatic.

Finally, as I have said before, I want people to understand and in particular my colleagues in South Africa that we are not announcing anything new today with these reductions. They have been announced before. What we are doing is simply explaining where we are on the restructuring journey, and I think that is an important point to make for those that are watching these things very closely, and have been reporting publicly on our program.

So nothing new. It is where we are in the process and where we said we would be. In terms of the change, I thought one slide would help explain what we have been doing and this is since the second half of 2013, if I could say based on what we announced in December and unpacked in February, we are on track to deliver firstly a 12% improvement in absolute production across the business since around 2012 and that is despite a one third reduction in the actual operating assets in the business. Now granted some of those assets are small.

But when we started at ’68 at the end of 2015 we are down to 45, and with asset disposals already announced we are down to 42. Second key statistic is that our productivity continues to improve, so as you have reduced the numbers, we have reduced the assets, we have reduced the numbers. We have also restructured and improved our efficiencies. Our workforce numbers will be 40% lower by year-end and on an apples for apples basis our productivity or production per person employed will be up by 50% by year-end, and that is with disposals already put in place and disposals announced.

So when I talk to those figures I am including Niobium & Phosphates and Rustenburg. So we get the good with the lower, but at the end of the year that is about where we will be in terms of the productivity that has come out of the restructuring over the last three years. Now these numbers are being delivered in spite of the pullback in De Beers due to the market issues to ensure we are matching our markets and with only modest early contributions from Minas-Rio, Grosvenor, and Gahcho Kue. Now we start to see a pickup in those contributions next year, Gahcho Kue obviously and depending on where we go with assets at Grosvenor.

The third point is when we talk about cost reductions, yes, we have had some support and help from foreign exchange, but again when you look at the input inflation numbers in jurisdictions like South Africa there has been a lot of inflation we have been swimming against in those jurisdictions, but we have reported US dollar 36% reduction in our operating cost and these are nominal terms against where we were in 2012.

And that performance improvement and that actually reflects the half year number and we expect to replicate that – we will be close to replicating that on a full year basis. That has been driven substantially by the productivity improvements but also in other improvements as we get more out of trucks that also helped reduce our capital as well. And so I think that chart more than any other chart reflects the physical changes in the business and how we are restructuring the portfolio and looking to improve our relative positions across our full commodity suite.

In terms of the portfolio, as I said, we started around 68 assets; down to 45 at the end of last year with sales announced we are at 42. There is no change to the strategy that we set out in February. In particular, on the asset program and Rene will lay that out where we are, I'm not going to talk about any individual assets sales for obvious reasons. We have a process underway and we will make announcement only as and when we are in a position to execute. Any sales have to be for value and I want to stress that point again, the main concern for shareholders, people that we work for expressed in our conversations is we support the strategy contingent upon your ability to deliver value from the sales. Now there is always some debate on what value we may have on an asset, but for us that is true north.

It is a bad value, it is about having the discipline to hold and make sure we get value for the assets and so far we believe we have delivered on that promise, and we believe with the results for the first half and in particular with the cash flow we have generated it is holding to that principle as we go forward.

So with that let me hand across to Rene, who will go through the key numbers in the finances and then I’ll pick back up with a bit of a broader summary.

Rene Medori

Thank you, Mark, and good morning, everybody. To start with the highlight for the first half, EBITDA down 25%, we will see when we go through the reconciliation the key driver was the decline in commodity prices, about $2.5 billion of EBITDA in the first six months, $1.4 billion came from the core, which includes Platinum, De Beers and Copper, and $1.1 billion from non-core.

Effective tax rate of 32% versus last year at 28%. That reflects profit mix. For the full year we expect the role of effective tax rate to be around 32%. Capex $1.2 billion compared to $2 billion last year, getting the benefit of the commissioning of a number of projects in Minas-Rio, but also Grosvenor as Mark mentioned earlier and Gahcho Kue coming on-stream in September. We are also getting the benefit of the optimization of SIB Capex and stripping.

Free cash flow was very strong at $I.1 billion compared to $0.2 billion last year. The benefit of the cash improvement initiates that we launched at the beginning of the year, the very strong working capital management. We will see that in one of the slide later in my presentation and the lower Capex.

Net debt at $11.7 billion, but $10.3 billion if you factor the after-tax proceed from Niobium & Phosphates that we are expecting in September, October. Finally we recognized $1.2 billion positive impairment on Moranbah and Grosvenor.

Turning to the EBIT reconciliation, $1.9 billion last year coming down to $1.4 billion this year. The key driver was negative $1.2 billion impact from lower commodity prices, and you see the breakdown bulks and base precious. We also got a smaller positive inventory stock adjustment from platinum, $180 million last year, around $40 million this year. In terms of sales volume variance, positive variance from De Beers, volume was up 29%. That was offset by lower production in copper due to the very high level of snowfall in the Santiago area, but also in Kumba lower production as we went through redesign of the pit.

Cash costs were $300 million lower than last year, predominately in the second quarter of the year as we develop our cash improvement initiative in the first quarter of this year. So on track to deliver the $1.6 billion that Mark highlighted earlier in the presentation. Net debt of $11.7 billion saw significant reduction compared to 2015 of $12.9 billion, including $500 million working capital release as well as a reduction of Capex as we saw earlier.

We also got the benefit of the liability management exercise that we did back in March. The benefit was $120 million and we expect further interest cost savings over the next 18 months around $63 million. And again if we deduct the $1.4 billion of net disposal proceeds the level of net debt stands at $10.3 billion. That gives us a net debt to annualized EBITDA of 2.2 times, if you exclude the Niobium and Phosphate contribution in the first half of this year.

As we announced in December, the dividend has been suspended. Looking to Capex for the remainder of the year, we are now guiding between $2.5 billion and $2.7 billion, which mostly reflects the reallocation of $200 million of cost-saving targets to lower [Indiscernible]. In 2017, we expect Capex to be lower, to be below $2.5 billion that only includes the benefit of the disposal which have been announced so far. So just Niobium and Phosphates.

Turning to working capital management, so the level of working capital at the end of 2015 was $3.8 billion. We got the benefit of $700 million of inventory reduction, $0.5 billion coming from De Beers. We sold 18.3 million carats in the first half of this year while we produced 13.3 million carats, so if you remember that at the end of 2015, second half of ’15 we substantially reduced the role of supply to the market to help the site holders reduce their level of inventory. We were able now to resume the level of supply and reduce inventory buildup, which we add in the second half of 2015.

Kumba was able to maintain the level of sales despite the level of – lower level of production and also want to highlight the platinum level of inventory. We had some issue as you remember, in the first quarter of this year at the precious metals refinery due to section 54 interruption. So there was an inventory buildup in the work in progress during earlier this year and Platinum very successfully has been able to ramp up the level of production and the level of inventories now back to normal levels.

Debt was down $200 million and then we had the impact of the recovery in prices towards the end of the first half and FX with the level of working capital at the end of June at $3.3 billion. We have maintained a very strong level of liquidity. You first see the decline in gross debt from $19.8 billion to $17.5 billion, some of that coming from the liability management exercise. The level of maturity is relatively low over the next 18 months, so $900 million this year and $1.9 billion in ’17 that after the impact taking into consideration the impact of the bond buyback that we did in March.

And we have maintained a very strong level of liquidity still in excess of $15 billion and thus before the benefit of the $1.4 billion of disposal proceeds from the sale of Niobium & Phosphates that we are expecting in September, October. So we are transitioning to a core portfolio of high quality assets. We expect transactions which have been announced, Rustenburg, the Australian coal assets, and Niobium & Phosphates to be completed in the second half of this year and as Mark has already said we don't comment on the individual asset sale. Processes are underway.

So in terms of wrap up, we maintain our commitment whether it is in terms of net debt target. Well on track to the level of net debt below $10 billion. We are comfortable with our EBITDA guidance of $4.8 billion [Indiscernible] on track to deliver the $1.6 billion, Capex between $2.5 billion to $2.7 billion and attributable free cash flow well above the billion dollar number.

Back to Mark.

Mark Cutifani

Thanks Rene. Okay. So just to go straight into the operating summaries. Firstly in platinum, Chris and the guys have done a great job. They are continuing to restructure and reduce our cost base and that process has been a tough one as each month goes by we are tightening in all parts of the business. I would have to say the performance at Mogalakwena has been really pleasing in the way the guys have brought the potential of that asset through.

And I think in many ways we are still only starting to just get our arms around what is possible, and I have got to give great credit to Chris and the guys for the good work they have done there. They have also been working hard to make sure that we set up Rustenburg Union for success post disposal.

That is important to us. In Rustenburg’s case the sectional level of approval is a last significant milestone that will be done and that process is substantially in our colleague’s hands with Sibanye in the way they have structured their BE proposals and they are in dialogue with the department. And so we have made good progress but we do have to be patient in those processes, particularly for an asset like Rustenburg where you have that complexity.

Going forward I think the focus the team has on capital and cost discipline that is the heart of the business and changes that have been made under Chris’ tenure as we have gone forward and certainly from our point of view we regard the assets that we have to work with as the best in the industry, and we are now starting to really understand what potential we have in terms of continuous improvement like the work that they have done and the hard work that they have done.

In De Beers, we have a new CEO in the building. Bruce Cleaver is here and he has hit the ground running. So congratulations to Bruce. We are very pleased to report an encouraging rebound in the first half diamond sales supported by the decisive actions we took to pull back on rough production and sales in the second half of 2015. I think a very important process and also a process which I think has brought us much closer to our site holders, but still a lot of work to be done as we make sure that we understand their sensitivities and issues, and make sure that we really are partners with both of them, and the countries in which we work.

Based on the latest data we are seeing in US sales, they have been reasonably solid although other sales around the globe are mixed reflecting differences in FX rates and on specific issues in local markets. We believe based on the mix of data it is prudent to remain cautious in terms of the outlook for diamonds, and I think from our point of view that is the appropriate way to think about and work within the business. In terms of our performance, clearly sensitivity to the market is our first priority in addition to controlling what we can control. We still expect the usual seasonality on sales and so it is very likely our second half sales will be lower than our first half sales.

The next couple of slides with also help us understand the pipeline balance, and where we need to focus with customers to get our demand and supply balance right. And that is a big task for Bruce, but certainly one that I have had great feedback from site holders specifically on the way he is interacting and working with all of the team players, and in fact he has just come back from Botswana, and we have had some very, very constructive conversations with their partners.

We have also made encouraging progress on cost reductions. Snap Lake was removed from the mix at the end of 2015. That was a tough call. The recent confirmation by the government that we can flood the mine, which in that environment is actually the right thing to do from an environmental perspective that actually reduces our annual maintenance cost by $50 million a year. So that is a very important approval for us to receive, and it allows us to maintain the asset at a nominal maintenance cost on an annual basis and again there is still the potential to access the asset longer term, but it also minimizes their cost in the short-term. So we think that has been a good outcome and the cooperation work with the Canadian government has been very constructive, and I have got their approach and the team for doing good work on the ground.

In terms of copper, we have had a tough 12 months in copper, with drafts in 2015 followed by record snowfalls and then being hit by early record snows in 2016 and Los Bronces has been a tough 12 months. Now I will deal more specifically with Los Bronces in a minute. It is not simply about snowfall, we made a couple of poor decisions in equipment selection that have impacted the outcome. But that is being corrected and I will just speak to that in a second.

At El Soldado we have turned the corner. We were originally forecasting a potential $100 million cash loss when we looked at spot prices back in December. We have adjusted the mining strategy. We have restructured and lowered the manning levels at the site, and so today we actually were cash positive in the first six months. So I think Duncan and the team has done a great job in recalibrating and getting El Soldado in the right place. So that has been a good performance.

And while we remain under pressure with some tight mining areas at Los Bronces the team has done a great job in terms of its cost management and you can see in terms of the performance that despite the volume pressures, the cost reductions predominantly have helped us improve our performance and that is where the real focus has been. So as we continue to improve and get Los Bronces back to where it needs to be, we should continue to improve that performance, but that will be more in the second half of ’17, but certainly the focus on cost will continue, and I have been very encouraged, I think the guys have done a good job in certainly improving the operations and there is a lot more we can do and acknowledging Collahuasi's good performance. It has been very solid, been very happy. The cooperation with their partner has been good. Whilst we don't have the operating model, which we think would help us improve or quicken the rate of change we are certainly very pleased with the relationship and the way we have been working together on the improvements at Collahuasi.

On Los Bronces specifically and I won’t say much other than to give you a sense of the snow and some of the tight areas in the right hand picture that we have been working in, we used gear that was probably a bit bigger than it should have been to take out some of the areas and that has impacted our ability to access high grade, and it has been pushed some months back. The good news is that pit configuration is right. We have not done anything to damage the integrity, but the sequencing will have to take a bit longer to get to that high grade, which will impact the balance of this year, which we picked up in the guidance numbers and early in ’17 and then we start to get that back into shape.

So again the snow has been the big issue. We lost some of our flexibility with the snows at the end of 15, and then when we had the early dumps in ’16, we actually impacted our ability to access, which we made a little bit worse by making a couple of bad choices on equipment. That has been corrected. Both Duncan and Tony have been working with the team. So I think a few lessons have been learnt there and we will put that back, but overall very happy with the cost performance of the operation and more improvements to be had.

At Nickel, the turnaround at Barro Alto has underpinned an aggressive cost improvement story as we continue to work the asset towards its potential. In the nickel industry good news stories have been a little hard to find over the last few years, and in my view Barro Alto has been one of the good news stories in the industry and certainly very pleased with what the team has done. Ruben and the guys have done a great job and certainly happy with the progress they have made and they are doing a good job in the operations, and that has been very pleasing.

On coal, Seamus and the team continue to do a great job. Whilst we get rather sick of talking about the improvements that have been delivered, Seamus and the guys have again improved on their productivities and costs, maybe not as dramatic as what we saw two years ago, but the base has certainly improved, and I have got to give great credit to the work that has been done and as I said, Grosvenor seven months early, under budget and continuing to improve the operations. The other point I would make and this goes across the board, but in particular with coal we are not only improving our operating cost, we are improving our capital costs as a consequence of the efficiencies in development and the other activities that we are driving across the business.

So our capital numbers are improving both as a reflection of the disciplines that we are introducing in terms of capital expense, but also as a consequence of the improving productivities that we are getting from equipment. For example, mine fleets’ are getting 30% more hours out of the gear that we have on the ground has been a key part of that improvement as well and the coal guys have done a fantastic job across both operating cost and capital.

On Kumba, Norman and the guys have had a tough six months as they have been going through their restructuring. At Sishen in particular, we have seen a 31% reduction in employee and contractor numbers. It did absorb considerable time and effort, even more than Norman anticipated, but the good news was that by June we are starting to see the numbers improve and so that is encouraging, but even with all of that restructuring and the bulk of the manpower numbers still in the half numbers, the breakeven price delivery of $34 a ton was a group performance under those circumstances. Norman and the team have got a challenge and then with Themba and Seamus taking on the challenge going forward, it will be important to continue that improvement, settle the operation and continue that improvement. It is going to be absolutely critical in making sure that Kumba can be as good as it can be.

For me I would like to say congratulations to Themba Mkhwanazi. He has done a great job in South African coal. Seamus I think has been a champion for timber and the work he has done. And so we are thrilled to see someone that has done such a good job in coal get the opportunity to take on a big job like Kumba but with the work that he has done and what he has shown us in coal, we think he will do a great job for Kumba.

At Minas-Rio, the ramp up continues. Again Seamus took over the asset a few months back. The focus has been again on settling the operation, getting the cost down and working out how we can figure and balance the performance and the commissioning consistent with the licensing processes that are in place both as a function of the Samancor incident, obviously has made the government far more sensitive on these types of things and making sure that we have got the mining strategy balanced to what is likely to take a little bit more time on the licensing front, and I think two key numbers. The 15 million to 17 million ton forecast, we think we are well on track with that with the improvements. But the cost performance is the one that from my point of view is the most encouraging.

If you look at the unit cost, FOB at $32 a ton wet, our original target at 26 million tons was $33 to $35. So the guys have done a great job pulling costs down, getting the overheads down, and they are doing a good job on those costs. We will keep focusing on those costs, and in the course of the next six months we will have a better understanding of what we should be able to do at 26 million ton design rate.

So one other in terms of the licensing process, we have gained an interim approval on the second phase license, which was important for us. So we are able to open up the next few areas, which we will make sure that we have got balance in productivity and we are in that process now. The licensing process for us, we don't see any technical problems with the facilities or the tailings dam because we are using a very different technology to what was used at Samancor, which was using upstream lifts. Our downstream strategy, which is certainly a very different civil construction seem to be probably a favorite path of construction for tailings dams. So we have got no indication that people are unhappy with the technology that has been used. So we don't see that in of itself as a risk in the licensing. It really is the process that we have to go through. It is quite a protracted process and become a little more difficult obviously since the incident.

Before I go to summary, I did want to make one point. In all of the work we have been doing in the last three years it has been very much about re-engineering the way the business works. And so it is about business process re-engineering, and cost reduction and they are two different things. So it is about efficiency, changing the way we operate, getting 30% more out of our equipment, improving our productivities so that our cost reductions and our cost improvements and our business improvements are long-term sustainable.

We also believe that innovation is going to play a more significant role in the way we run the business in the next five to ten years. I am not of the view that the industry has hit a wall on cost and efficiency improvement. In fact I am of the opposite view that I think we will see a period of time in this industry where there will be more innovation and more step changes in cost because of what we have come through as an industry.

So manufacturing type approaches, which is reflected in our operating model; that is an opportunity that will continue to deliver us beyond 2016. That is our item two there, and on the business restructuring we will see more contribution from the core assets over time. So that is another area of improvement. But I want to talk about three step changes that we have been investing in as a business because for us the key to continuing improvement beyond ’16 and particularly beyond ’17 is about the types of things we have seen in the business, so great concentration.

I will just explain that in our Niobium business we introduced a screening process in front of the main concentrator that took the run up mine feed and upgraded the grade by 30%. That has helped us improve clearly giving us more bang for our buck in the process and improved our recovery and the quality of the recovery in the process. And I think that was also part of why we were able to deliver a good price on the sale because we got to full capacity pretty quickly and people can see more opportunity improve because of the new technologies we have put in place.

Now that technology and approach is already being applied to Barro Alto and looking at improving their grade from a mining perspective and there are some improvement potentials there, or that type of approach. We see application in copper. We see it in certainly the open cut platinum operations. We see it in De Beers. So that is one area of work that Tony with the group executives are working on in terms of things that we can do to get a better bang for our buck and improve their cost.

Second, and you will see a photo of a machine that we have just put underground at Twickenham, it hasn't started cutting yet, Chris, I don’t think, but we have been doing some technical development work with Atlas Copco, on a rapid mine development system. So for us the ability to develop more productively is about reducing our cost and so we think there is great potential in resources like Amandelbult, Der Brochen and Twickenham those sorts of assets. That will take some time but it is a very different approach to what you would have seen some years back in the platinum industry.

Still very early, but we are thinking about doing things differently because we know we are going to have to continue to lead in cost reductions and efficiency improvements across the business. The third area is a bit of a catch-all, but it actually picks up two key technologies and it is water consumption. We believe that we can reduce our water consumption per ton processed in that copper business in Chile by more than 50%. Now for those that have been tracking the Chile industry and the discussions around desalination plants and the massive capital that has been committed to those types of projects we think there has got to be a better way.

So in the last 12 months in our new open technology platforms we have been working with a range of partners. We have identified a technology by course grinding and then changing the way we float material, which is obviously coarser than what you would normally do and then changing the way we process the tailings, we can reduce our water consumption by around 50%.

Now that type of technology can be applied in copper because that is what we have been doing our test work on. But it can be also applied to other environments and other processes. So it could be a platinum issue, it could be Botswana. Those areas that are short on water, this is a major step.

There is a second technology we are now working on which actually dewaters the material, and we call it interstitial, but it is a technology that also improves water or dewatering of products. So ultimately we are looking to see if we can design mines that don’t require wet tailings disposal. So in the next couple of years this for us is a game changer in copper because for us Los Bronces, Collahuasi the size of those resources at the moment are constrained by available water.

If we can break that and we are already working on pilots on how we go through the process that for us is a game changer and it starts to explain to you why we are clean on copper and why we think our assets in copper have great potential in Mogalakwena, our diamond assets and beyond. And those technologies are things that I think you will hear a lot more from us and probably over time competitors in the industry, who may not be where we are up to at the moment, but I think these are going to be game changers and so I think it is a fallacy when people say innovation and cost reductions aren’t going to occur. It will be a matter of who is quickest on the ground and how quickly they can apply those technologies to their operations.

So the main thing I want to say, we are not sitting on our bums working simply on cost reductions. It is about deficiencies and about hitting the process and hitting our capital deployment in every way we can to create value.

So finally, in terms of the new Anglo American the work on the core part of the asset we have restructured the portfolio. We are 35% smaller in terms of number of assets, but our productivities have more than offset that reduction, and our move to the core portfolio is on track, but we still hold the value imperative from the center in all of our conversations.

Positive free cash flow in 2016 at spot prices and FX were ahead of targets, and there is a lot more work to be done. In our non-core portfolio of bulks and minerals being managed for cash and disposal, all of our key assets are back where they should be. One point I'd make is when we got up in December and we talked about $600 million leakage from those assets that weren’t delivering, we have got that down to $200 million and we are improving that with, for example, the changes with Snap Lake. So that has been an important focus for us and it will continue to be a focus of improvement for us.

And then finally in terms of net debt, we have made a good start. Still a long way to go, but the fact that we are delivering free cash flow and delivering value from our disposals the two come together to help us hit those targets. So we have made a good start. It is a solid start. We are happy with the progress, but we are not satisfied with where we are.

So with that more than happy to take questions. Jason I'm going to start from the right today.

Question-and-Answer Session

Q - Unidentified Analyst

Thanks Mark. Look, I have got a question on core Anglo but before we kick off I'm going to go a little bit off-piste, you are wearing a rose on your lapel. It is almost as big as your head. To be frank it is kind of distracting me from the message here a little bit, and I'm just wondering if you want to tell us about your new found fashion flair.

Mark Cutifani

In very simple terms, some people in this room are probably aware that there was three rugby games in Australia about a month ago. And before the game went ahead I had a bet with someone that I thought Australia would probably do extremely well. As you can see I now have an English rose as my emblem, and I am wearing that with great pride today. So I'm not going to say anything more about the rugby. Non-core, core?

Unidentified Analyst

Thank you. Look, in terms of core Anglo we have been marketing, we have been talking to people about the Anglo story and there is two main push backs I get from clients, right. And one is, we have higher commodity prices. Does that mean that Mark loses his resolve to push ahead with this action, and then beyond that do these higher commodity prices mean that actually selling assets right now is the wrong thing to do, and you should be holding these and essentially writing them out for another cycle?

Mark Cutifani

Fair question. In our view in the areas we haven't changed our fundamental view on where those commodities are and why we think there will be pressure particularly on the supply side. So to be quite frank we are surprised, the iron ore price is where it is and we think there will be pressure on coal as well, and whilst we have got a couple of very good quality coking coal assets, we think overall coal is impacted by thermal coal and so we think the supply-side is a big issue.

So we haven't changed our fundamental view and therefore we haven't changed the strategy that we remain committed. I think the one thing that really is important and I mentioned it a bit earlier and I will say it again, the good news with our results is that the underlying business is performing better, and we think we can continue to do better. And therefore generating free cash flow allows you to hold your value discipline if I can say it that way. And therefore as a consequence it might take longer to realize value from those assets.

I think it is far too early to make any changes based on what we see in the market so far and I think there is still a lot of debt, a lot of risk out there and we are still very cautious on the commodities and therefore we are going to hold the strategy. We remain cautious. It might take a bit longer because our values might diminish and we will try and make the right call. But so far I think we have held pretty well to true north on value and that is where we want to stay.

Unidentified Analyst

Thank you.

Unidentified Analyst

Good morning. It is Menno at Morgan Stanley.

Menno Sanderse

Three very brief ones, first on net debt improvement Rene, it seem to have taken place 100% in South Africa right, the company went from slight net debt to $600 million net cash at the end of the period. Does it have any implications and how can you get that cash out now you are not paying a dividend. Secondly on Los Bronces, clearly exceptionally volatile, which could be El Nino or La Nina, it could be anything, but is there a need to put more Capex in this business, has it been cut back too much to try and realize its full potential, and finally a lot of talk about value and I get the message, but has the definition of value changed, have you actually increased your values in the last six months with the price increases and clearly slightly better balance sheet?

Mark Cutifani

Rene do you want to pick up net debt – no, pick up the balance.

Rene Medori

You are absolutely correct. At the end of June as we moved to a net cash position in South Africa of $600 million, the cash is available to fund the PLC dividend when we reinstate the dividend. Otherwise to extract the cash from South Africa we would require a [approval], but we would expect at some stage obviously to reinstate the dividend and we will be able to use this cash.

Mark Cutifani

On the Los Bronces, if I can be – the best way to describe it. I mean, as we have moved up higher at Los Bronces and opening up new areas, the areas that we are working is still very tight. So there are no constraints on mine development for the copper business in developing the operation. So we still got a very tight footprint. We probably are two years behind moving, so back in 2011, 2012 we didn't move up there when we should have. So we are behind in positioning, but now the guys are working, they have improved their productivities and the snow has made the fact that those areas are tight, more difficult.

So there is no constraints, and it doesn't need more capital. It just needs a consistency. What happened is we then put a gear that was bigger than it should have been on the cutbacks to make sure that we delivered copper in the short-term when we should have put the smaller gear and so we didn't have any spillover and that was an incorrect operating decision that we have corrected. It is not a capital issue. It is not a configuration issue. Hold to that discipline we will get the numbers. So it was a mistake operationally and we take accountability for that and that is why I have said that the snow made it more difficult, but we didn't make the right call. But it is not a capital issue.

Third point, in terms of our values we have been extremely rigorous in the last couple of years. And I am not saying we weren’t rigorous prior to that but we have taken some tough views on what we think will happen on supply. We have seen quite different behaviors than we have seen in the past on supply and we have taken that into account when forecasting forward iron ore and coal prices in particular. So we haven't changed that view based on everything we have seen so far, we haven't seen any real changes in behavior, and therefore the prices that we are using reflect what we see at the market and the dynamics in the market. So no change at this stage, and certainly I would have to be convinced that the dynamics have changed materially, we haven't seen that yet. That is the big issue.

Des Kilalea

Thanks. Des Kilalea from RBC. Just a clarification on Menno’s dividend, the question on cash in South Africa from Rene, how much of that cash is actually at the center, there is some in Kumba, and then maybe a sort of long-term strategic question, core Anglo other than Mogalakwena and maybe a little bit in Gahcho Kue doesn't have an awful lot of growth options that are visible right now, so where would you see the growth options and low growth is not something people are looking for in commodities right now, but where are the growth options longer term other than in the technology you talked about?

Mark Cutifani

Okay, Rene do you want to do South Africa, and then I will pick up the…

Rene Medori

Yes, there is some cash in Kumba. As you know, Kumba moved into a net cash position into the tune of 500 million rand. Otherwise the rest of the cash is in the center in South Africa. There is no exposure to the rand because we have $1.5 billion, which is in fact offshore that we can retain in US dollar, but we are required to repatriate to South Africa just before the end period.

Mark Cutifani

I will unpack growth in three parts. Number one in diamonds, we are currently forecasting production 27 million to 28 million carats. Our installed capacity with Gahcho Kue is north of 45 million carats. We will grow production with the market. We believe that the endowment associated with Jwaneng, Orapa, Venetia and those other major assets are significant and that we have not explored the true potential of those assets in particular. Now I won't declare anything beyond having a view and that is the work that Bruce is leading, with Tony and the guys having some very strong views on that, and also from an exploration perspective in positions we hold. So we think there is lots there.

But certainly there is 20% installed capacity that doesn't require major capital. It is – we can grow that with the market and beyond that we have got significant endowments to work within the diamond business. So from our point of view well positioned for the long-term endowments. Secondly, in platinum, Mogalakwena, Amandelbult, Twickenham those assets are significant assets that can make a long-term contribution and have in themselves significant organic growth potential.

If I just use Mogalakwena as a simple example, Chris hates me doing this, but Mogalakwena or over 100 million ounces reserve. We are producing 400,000 ounces a year. In my previous slide in 21 assets we had 70 million ounces and we were producing 4.5 million ounces. I'm not suggesting that is what we are going to do with Mogalakwena. The platinum industry doesn't need more platinum, but in that resource grouping we have by far and away I think the best platinum industry and again market related lots of opportunities. The key thing is to dominate the left-hand side of the cost curve, and more interesting costs and margins, and on the left-hand side of the cost curve that is where we create opportunities.

What I want to do is grow the earnings first. Make sure we maintain our capital discipline and then the opportunities will come as the best organic development opportunities in the industry, and that is where that will come. In copper, Collahuasi, Los Bronces, two of the best resources in the world. New development discovery in Papua New Guinea, Sakatti up in Finland. Lots of good opportunities emerging and certainly with the technology stuff that gives us significant potential.

So we think we have got a good portfolio that needs work and one of the things that we will do over the next couple of years is articulate but it is probably not the best time to be talking about those sorts of things. I want to put a cap on it. We are not going to run, and our capital discipline is going to hold, and that is something we have done in the last three years. We have not gone crazy. We have not committed new project other than Gahcho Kue commitment and the exploration vessel, and we are going to hold that discipline because we have got lots of options and lots of things we can do without spending capital.

Anna Mulholland

Thanks. Anna Mulholland from Deutsche Bank. Three quick questions. The first just to go back to Des’ question on the sort of copper growth that you were talking about, where does Quellaveco fit into that?

Mark Cutifani

I'm sorry. I should have mentioned Quellaveco. Please don't – will be on the phone any second now trying to tell me I forgot Quellaveco. Quellaveco is clearly a significant opportunity for us, but again when the market is right. So yes and in fact it is probably the best undeveloped copper resource in our view, but good potential.

Anna Mulholland

Okay, thanks. Where are you on the manganese exit?

Mark Cutifani

Going through the process. We prefer not to say anything more than that.

Anna Mulholland

Okay. I don't think it is on your sort of timeline list. Does that mean that it is at the end of the time frame?

Mark Cutifani

We listed the more material assets. So it is not for any other reason other than…

Rene Medori

Now the process is underway Anna, and clearly the recovery in manganese prices is a positive.

Anna Mulholland

Thanks, the final one, in terms of your production headcount reduction, obviously you are targeting you core number of positions to go down about another 7,000 to get the 50,000 employees in the core business, where are the main reductions?

Mark Cutifani

With Rustenburg, Niobium and Phosphates, and the coal assets, if we get to 98,000 at the moment the numbers look like somewhere between 50 and 55, so you have got the reductions in the balance of the coal assets in Australia. You have got Chris with Union, Bokoni and those assets in platinum and they have quite a large manpower contingent in those assets. You have got Kumba. So if you look at the assets that are non-core you will get to about 55 on paper, and we still think there are opportunities to improve our efficiencies within the core to get us towards 50. But between 50, 55 that is better we have got a bit of a squiggle on that number. We are about at that level we think. [Indiscernible]

Unidentified Analyst

Mark, first of all, congratulations on a really solid set of results. So three questions, first of all, can you quantify how much of your cost improvement was from energy prices declining and FX. Secondly your net debt is pretty much at your target if you include the Niobium & Phosphates disposal, so when you get the next disposal you are going to be well below, at what point do you reinstate the dividend and what sort of metrics are you thinking about to make that decision, and then lastly just in response to your comment that the market doesn’t need anymore platinum, are you concerned about Platreef ounces coming into the market eventually and obviously ore body is right next Mogalakwena, so what are you thinking strategically around that issue for the market?

Mark Cutifani

On a nominal basis I think energy and FX is probably about 14% Rene of the 19% or so if we back out our inflation. So it is a material contributor. The thing is as I said in real terms a 7% reduction has been really pleasing across the group and we have absorbed a lot of internal inflation in South Africa and other places, but as I said we have had some pretty good help, but I think the productivity number for me is the important one. That 40% improvement tells you how much we have done at the cost improvement level, but we will take the help where we can get it. Secondly on disposals, the focus for us is value. It may take a little bit longer. In our case – I am sorry, just on that point.

Unidentified Analyst

That was about dividend policy…

Mark Cutifani

Yes, I think we are already at the target net debt to EBITDA ratio. In terms of dividends we were looking to be in a position by the end of ’17. It is mostly where it is.

Rene Medori

The guidance we gave, which is we expect as we improve our cash origination and improve the balance sheet position to be able to reinstate the dividend by the end of ’17. So that will remain our position today. I think we are making good progress also to see a potential rewriting in the coming months.

Mark Cutifani

I think the key point there is we have had a very solid six months. We have got a lot more work to do before we start changing that sort of a thing. So that is where we are. And then third on Platreef, look we see – we have been encouraged actually by what we have seen in the platinum market. We have actually seen a bit of a tick up in platinum consumption. So from our point of view that is encouraging, but there is still quite a bit of platinum out there. The stocks are coming down. And so we would prefer not to see any new production but the market is the market. Our focus is left-hand side of the cost curve margin to make sure we are delivering and if the market is a bit tougher, then so be it. Others will fall over before we will.

Unidentified Analyst

Sorry, just one follow-up on the dividend. So for 2017 have you given any thoughts to the dividend policy in terms of would you have a payout ratio or how you want to reinstate the dividend when it is appropriate to do so?

Mark Cutifani

Yes, we have said that we will do a payout ratio. We have been very clear, and as part of our guidance at the end of last year we said likely end up ’17 when we make sure the ratios are up and the debt is down. First priority is debt.

Unidentified Analyst

Thanks, [Frazer] from JP Morgan. First question is on the cost. So $1.6 billion target for the full year you have done $300 million, you said predominantly in the second quarter, making out numbers here, but maybe you do $500 million in Q3, which means you are running at something like $700 million to $800 million in Q4. If you just purely annualize that in 2017 and you are talking about another kind of billion dollars of cost improvement versus 2016, for 2017, even with nothing else going on in terms of additional program. So can you maybe tell me what is wrong with that math, and then secondly on the working capital side of things, you obviously saw a working capital inflow from reduction of inventories, it feels like De Beers probably still has the best of room to reduce stockpiles. It feels like that is certainly the case at platinum. So is there anything for the second half that will be a big drain on working capital?

Mark Cutifani

Rene, do you want to pick up the working capital conversation and we will come back to the cost and volume trends.

Rene Medori

So, on the inventory side, De Beers we have a reasonable level of inventory from 1.5 billion at the end of December to $1 billion at the end of June. I think there is limited scope for further reduction. In fact it is more the other way around. The level of inventory should be between 1 and 1.5. Remember we have to move the stones across from the floor to the sites.

On Kumba, we have substantially reduced the level of finished goods inventory because of the production shortfall. So we are now at a very low level. In platinum, we probably now at a stable level. There will be some replenishment of finished good inventory and a reduction in the pipeline inventory. So overall should be relatively stable at the end of the year. So don't expect a reversal of what we have generated in the first half of this year.

Mark Cutifani

On your math, first, I don't think that is unreasonable math. Rene, you jump in if you don't agree with anything I may say. Remember we said that we will continue to improve session. We have taken out

Rene Medori

[Indiscernible] is cost and volume.

Mark Cutifani

Yes, it is both. And Sishen is a good example, where we have done the restructuring. The costs are up. So we will get that full benefit in the second half and our volumes will improve as a consequence of the operating stability. Coal in South Africa will continue to be grand and the guys are working hard. So there is not likely to be a volume change. It is more around costs and continuing the discipline there. We have not got the two long wall moves in the second half, so that makes a big difference in the Australian coal. Copper, you will have seen the numbers there. So you will be able to work those numbers fairly quickly.

Nickel, we are continuing to improve Barro Alto as we have got full rate. We have had some smaller issues that we resolved. We expect Barro Alto to do a little bit better. So you have got incremental improvements across the portfolio from a volume perspective, and you have also got the continuing impact of the reductions in the work we are doing on the cost side. So I don't think your math is too bad at all.

Sorry into 2017 the trend continues, and we talked about the billion dollars, so the improvement trends should continue into ’17, and that is the momentum, but that is an additional or separate set of areas and the innovations that probably make some contribution next year, when that starts to kick in. We are not putting any numbers to that at this stage. Rene and then I will come back.

Unidentified Analyst

Thanks. Just following up on that in terms of Frazer’s question, the billion that you put out previously for 2017, how much of that is – we haven't had a breakdown between volume and cost there, and we haven't had a breakdown in terms of what the carryover is from 2016 into 2017 or if you are suggesting that is completely independent 1 billion additional. Could you potentially give some sort of update in terms of what the bigger initiatives are that you have identified. I appreciate that six months ago that was a thumb suck number or a reference number, but obviously there has been ongoing work since then in terms of clarifying that. And the second question is just in terms of the disposals and following up on Anna’s point about manganese, if you look at the potential sources, there is still $500 billion hole versus your full year target of $3 billion to $4 billion so you have got nickel, potentially you have got South African coal and you have got manganese potentially, where would you – what is the most likely potential sale and if you do sell South African coal would that be contingent on approval from the [SAR] to be able to repatriate those profits for debt reduction. And then the third thing is just an observation, do you think the simplification of the business has maybe gone too far judging by today's front row?

Mark Cutifani

You are very perceptive and yes, we are doing things differently these days. You will see the team is actually – some of the team members are in the audience. But now I have gone from 17 down to 11 direct report; probably end up with about nine in the new configuration. I think that reflects a different way of doing things. By the time Rene turns 60 and is retired, with Norman going into his new role. I think Chris is the only one still in the same role when I started.

So the management restructuring has been significant. We have downsized the executive by I think it is 45% by numbers. It will be about half where it was, and it is about sharpening the focus. That is the first point. Second point, on the costs we are not going to give detail or a breakdown on the cost as you probably expected, but what I would say is that in the continuing work with the operating model we are seeing improvements on a consistent business.

It is reasonable to expect improvements will continue into 2017 and Tony and the guys, Tony and the executives in each area have identified a number of things they believe they can deliver as part of that improvement. That is point one. Two, we do get the benefit of new assets making a contribution to Gahcho Kue as an example, and continuing improvements within those businesses, which we do have in the numbers.

The third element, the technical stuff is relatively small in its contribution next year. So it is mainly from the stuff that we can see. It was in the thumb suck. We had actually backed that with real opportunities, but to be fair they were opportunities that had been defined predominantly within the center and now we are in the conversation with the regions working out where the priorities will be and how we’ll deliver against those objectives. So we are already planning that work now as you would expect us to be so that we can deliver. So that is a very active process as we speak.

In terms of South Africa cash – sorry, in terms of the disposal, one major sale we believe would get us to $3 billion. So we think we believe me we will hit the minimum threshold. But again it has to be subject to value. We would need two sales to get to [four] and so we have got the processes in place. If we don't get there it will be because we have said we can’t there for value.

And I am not scared and we are not scared to stand up and say, we haven't sold something because we are not getting the value. So we will know in terms of where we are heading by the end of the next quarter, we will have a very clear view of where we are going to land. So I think that will be pretty clear because the processes are all doing fairly well and we are happy with the progress. I'm not going to tip which one will go first. You can probably guess where we are more advanced, but the next couple of months will tell those tales.

In terms of South Africa cash, we have always assumed that the current arrangements with South Africa would remain in place and that for us to repatriate funds would simply be a matter of time once the dividend was installed. So we have kept our liquidity. We have kept all of our flexibility on the basis that we know how to repatriate those funds in an appropriate way for the dividends. So we are not concerned about having cash-strapped in any positions.

There is always an opportunity to have a sit down with and set up and work something through and we will keep that option open, and we want to keep a good relationship with the South African government. So, we are quite comfortable either way. We can deal with the issues either way.

Liam Fitzpatrick

Morning. It is Liam Fitzpatrick from Credit Suisse. Two questions, firstly on Minas-Rio, when do you expect to stop capitalizing the asset and the related interest. And secondly just on the strategy, it has probably not gone on notice that there is very strong interest out there for copper assets. Your platinum business still trades at a big premium, so how seriously have you looked at the full breakup option?

Mark Cutifani

Firstly, the reason for being – and people have asked me why does Anglo exist. When we first did the value proposition for the major diversified, we talked about what made the major diversifieds major, was there ability to share information and be on the front edge of cost and cost effective practices. In our case, the operating model we think is somewhere between 5% and 10% on our operating costs on an apples for apples basis, and their ability to continue to implement that over time and be competitive is about sharing the expertise we got across the group.

We weren’t doing that as a group and hadn’t been doing it. That is what has changed within the group and we are sharing these ideas across the group and helping each other with the cost improvement hence the more rapid improvement in our cost structures. And that is worth a lot of money.

In terms of administration, when we consolidated De Beers we saved $100 million a year in administration and some support functions, but just consolidating the two reduced financing costs, supply, administration, IT a whole range of areas across the business. We think it is worth $1.5 billion a year to the group by being the group. And a lot of that stuff we are working with Bruce at the moment, on additional improvements we think we can help the team with.

Now the technical innovations. I mean how do you put a number across the three groups on what that water innovation technology is worth and us being five years ahead of competitors in trying to get that sort of thing in, by the way it is 3 to 5, but those sorts of changes are what we haven’t leveraged in the past. That is the value proposition. We think it is worth a lot of money.

In talking about copper, in making a decision between a coal asset and a copper asset, Collahuasi is a 70 year asset, how do you value a 70-year copper asset where we could double or go even further than that in terms of its production potential. Whereas a coal thing we know is very clear. We have got the dimensions. We only debate about whether you are getting the right price for coal is actually the pricing assumptions you make.

So hence any deals we try and do we try and put some kickers in there on price because none of us are going to get the price right. So we thought long and hard about what is core. It is around the quality of the assets and in many cases we don't think the market appropriately values those assets. Those assets we are selling are assets we think we can price reasonably well in the market, and so far we have been able to do that. So that is the decision. But we do think there is a compelling reason for being Anglo American.

Unidentified Analyst

Sorry. Just on Minas-Rio?

Rene Medori

On Minas-Rio based on where we are in terms of ramp up and provisional license that we just received we expect to commission the project early 2017. [IOB] was cash flow positive in the first half of this year. I think generated $10 million revenues and in terms of interest charge capitalized, we capitalized $120 million in the first half of interest charge.

Myles Allsop

It is Myles Allsop at UBS. Just a few quick questions. One of the targets seems to have dropped out of the presentation is your medium-term net debt target of $6 billion, are you still looking to get to that level medium-term or are you focused more on your 2.5x net debt to EBITDA multiple. And on the Capex side as well, what should we expect beyond 2017 is $2.5 billion really a sustainable level without the kind of growth projects that could get approved medium term. And then with the Moranbah and Grosvenor impairment what drove the change in pricing – at this point why didn't you change your long-term net coal price at the same time as the iron ore price. It seems a bit bizarre or is it to some extent linked to the sale process, what is the sort of the book value at the end of it, and then maybe just lastly on De Beers as well, it will be helpful to get a sense as to where inventories are in the mid-stream, how financing issues are in the mid-stream. I heard another bank was withdrawing from sort of diamond financing earlier this year. Thank you.

Mark Cutifani

Okay. I will pick them up and Rene I will ask you to kick in on a few points. On the $6 billion net debt target no change. Our view is that in holding and hanging tough on value, I think the important thing is that net debt target goes with the figuration at spot prices, and so we haven't changed. That is the logic to get to 2.5, less than 2.5x net debt over – or EBITDA over net debt, the other way around. The key point is the 2.5 is more important to us than the absolute debt figure. I think that is the point we wanted to make. It is actually the EBITDA over net debt is the more critical point.

Secondly, [Indiscernible]. On the EBITDA sustainability again, we believe with the incremental improvements that we are making even though we will probably have some headwinds, we should again be pretty solid in the second half and beyond that with the improvements we are continuing to deliver we think. That is a solid number. I won’t try and forecast prices, but certainly from where we are in terms of controllables we think we have got the right configuration on the operations and the incremental improvements we can see will continue to carry us pretty well into the core.

On Moranbah, Grosvenor, and the price lines in coal we actually – we are doing continuous work on forecasting for commodities and there has been a lot of work done in coal in particular given where we are and thinking about those ratios and when we come back to the board with a recommendation that recommendation has to have a pretty well thought out view on pricing as you would expect and as a consequence on pricing we have done that work in the last couple of months.

We have reflected the view on pricing in the write down of the asset. Rene, do you want to add anything to that?

Rene Medori

Yes, we have a very clear process, which is to reassess our pricing assumption mid-term and long-term every six months, and when there is a change we have to reassess the carrying value of our assets, so that is something we have done systematically for a number of years. So back in March we adjusted our long-term price assumption for coking coal and that is what triggered the review of the carrying value for our coking coal assets. So that was not linked to the disposal program, which is underway. The carrying value for Moranbah and Grosvenor is down to $1.6 billion.

Mark Cutifani

On De Beers I will have a crack at the two points, and I will watch to see if Bruce nods his head or shakes his head. Firstly on inventory, we think the inventory pull down is somewhere in the range of two to three months. In all of our conversations with site holders, certainly a lot more comfort with the inventory that is held through the pipeline. There maybe some classifications that have got more than others as you would expect recoveries can always be a little bit lumpy, but in general pretty constructive set of conversations. The next two sites I think are very important. So we watch carefully what is happening there, but certainly a lot has moved through the system.

We may not be at a balanced position, but it varies depending on the product. So we are being cautious and we are being very flexible with our customers as well. I think that is the key. Financing of the midstream, it is not surprising. Banks are becoming tougher on their financing. We have also set some pretty clear requirements of anybody that we do business with. We think in the long-term it is probably the right thing for the industry, and we are making sure that again we are being as flexible as we can be with their partners.

So it is not surprising there are some changed faces in the financing side, and probably will continue for some time as things settle down. But what we want is a healthy long-term vibrant industry and those issues need to be resolved. But we have seen pretty good progress. Bruce, anything else?

Bruce Cleaver

[Indiscernible] I think on the industry side, of course, we are going to look at inventory of producers at mid-stream both rough and polished, and at retailers. And we do feel they are much more in balance than they were maybe six months or a year ago, obviously [Indiscernible].

Mark Cutifani

Thanks, okay.

Hunter Hillcoat

Hi, Mark. It is Hunter Hillcoat from Investec, just wanted to ask a little bit more about how you define value, in this market no one wants to overpay for an asset. You have shown with your coking coal assets as well valuations change as you write down and impair the book values of assets. So how do you define the asset, how do you leave value for your customer or for the purchaser of your assets when in a situation, do you look at the value and use the value derived from acquiring the assets that may serve to offer the incentives that you can see?

Mark Cutifani

We look at value as being the financial value in our hands in terms of what we think we can realize in terms of cash flow from that business on a go forward basis. We look at the risks associated with those cash flows and in some cases there are cash flows from an asset or a jurisdiction, which is very different to different types of assets and what the prognosis is.

We look at a range of prices for the commodity in testing how robust those cash flows are and we determine a range of value and a likely value. Again we don't try and value the assets in someone else's hands. We have a sense of what those assets are worth in our hands and what we think we can do to improve them. But at the same time again I think you get into a slippery slope try to valuing it in someone else’s hands.

What is it worth in your hands I think is critical and that is the first point. The second point, which I think people don't consider as much as they should and certainly something important for us is what is the opportunity cost of having that capital tied up in that asset compared to the other options you have for that capital with the new business. And for us that is where the arguments are compelling in the way we are deploying our capital across the group, and we have made a decision about high-quality assets that over the years they haven’t been getting the support they should have been getting compared to assets that we have been putting money into that shouldn't have got money.

And if I can say it as bluntly as this, if anybody put their hand up, and this is a little unfair they got the capital, not today. It is aggressively competitive and we look at where is that capital going to work hardest to deliver value to shareholders. So it is the opportunity cost, which is a compelling part of the way we think about that capital allocation. I hope that helps.

[Indiscernible]

Mark Cutifani

So, take those and then we will come back to Rene. Yes, we are good for South Africa.

Operator

Kieran Daly, UBS. Please go ahead.

Mark Cutifani

Hi, Kieran.

Kieran Daly

Hi, well done on the performance Mark. A couple of questions just South Africa centric, the first one being on the Eskom coal business or domestic coal business, a lot of rhetoric out of Eskom not just you guys, but others as well about those assets, those types of operations, those types of relationships, and how would you characterize Anglo’s relationship with Eskom in terms of those operations at the moment and how do you see what looks to be a pretty much an impasse or not only a meeting of the minds how do you see that panning out in respect of those particular operations because it just feels like disposing of them is going to be very, very difficult given the different views on either side there. And then secondly, I think moving Norman to oversee the South African disposal as a package is probably a great move. But does it also suggest perhaps that and again, given the sort of common complexities across all those assets, be it BEE or the South African-specific issues, does it kind of also suggest that maybe these assets are more likely now to be exited from the Group as some sort of package rather than individual? Thanks.

Mark Cutifani

Okay, two good questions. Firstly on Eskom, based on the direct conversations with Eskom we believe we have got a good relationship. One might think that might not be the case based on the public conversations, but what we don't do is we will not engage in a public conversation around the assets. Based on the conversations we are in it is constructive. It is a little bit different to see people negotiating the process. We don't intend to do it. We will keep the conversations direct and I'm sure that we will land somewhere that works for us and that works for all of our stakeholders and that is the objective we have and we are going to stick with that as a principle in terms of the way we operate.

That is point one. Two, in terms of Norman, yes, I think Norman has done really – or he has taken really hard yards at Kumba, done a good job. The major restructuring is done. He and I have been talking about the possibilities for him for the future. He has made the decision on Kumba and from my perspective navigating of the complexity in South Africa is absolutely critical, and I don't think there is anyone better than Norman to be able to do that for us on the ground, and I think that will – we have received great feedback by the way.

It isn't meant to suggest that we are going to package or not package. Our current strategy is to continue on with the process on each of the assets, but we remain very open to possibilities to deliver value for our shareholders. At the same time it has to work for stakeholders including that for the government and making sure that we capture that sweet spot, I think it is going to the key in getting this done the right way from both perspectives, and that is why Norman is on the ground. We want to make sure that we don't drop all balls through the process, and so I think it is the right call, and we remain open to the right opportunities on the basis it delivers value for all parties.

Unidentified Analyst

It is a quick one for Rene, in terms of linking the – is there any validity to linking the dividend resumption by the end of FY ’17, with your expectations of getting back to investment grade or do you see them as two separate?

Rene Medori

Not directly linked, but I would expect if we are in a position to reinstate the dividend, it means that we are either we have already been upgraded back or very close to being upgraded back to investment grade.

Unidentified Analyst

But what is the reason to dance to the tune of the rating agencies given that the only use for the South African cash is through dividends, so from a cash flow perspective it is – the logic of how the rating agencies look at it is not necessarily the way the cash flow works, so why not look at them as two separate issues, look at the cash buildup in South Africa and say well…?

Rene Medori

[Indiscernible] Thank you for asking the question.

Mark Cutifani

Okay guys. I am sorry, one other. Yes, I will take this as the last one.

Unidentified Analyst

Just going back to sustaining Capex, what is the normal level beyond 2017, is $2.5 billion a reasonable estimate as to where Capex should be medium-term or do you expect naturally you will see that creep back up to 3 when you include development as well?

Mark Cutifani

We think we have still got improvement on our sustaining capital in certain areas and in other areas we now are going to have do more as mines become deeper or require stripping. But if I can give you a figure, we have done really detailed work on our operating fleet. We are only getting 4800 hours out of a truck across our organization.

We need to be getting better than 6000 hours, and there are always shift issues and different perspectives. We still have a lot of potential to improve the utilization of the assets on the ground, and it remains a great opportunity for us to improve. And the amount of capital that we have cut out of the business that doesn't need to be spent is significant. We think $2.5 billion is a good starting point. Our job is to see if we can improve that in terms of the go forward value proposition for the business and that is what we – the guy in the front row here, plus his colleagues are working hand in glove to improve all of those numbers. And the good news for us is I still think we have got lots of opportunities to improve and it hits both operating and capital.

Mark Cutifani

Okay, guys. Look, much appreciated. I think the final thing to say from our perspective is we still have a long way to go. We are pleased with the progress but we are not happy with where we are. It is a continuous process, and I would like to say thanks for joining us today and we appreciate the questions and the observations.

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