Anglo American Platinum's (AGPPF) CEO Chris Griffith on Q2 2016 Results - Earnings Call Transcript

| About: Anglo American (AGPPF)

Anglo American Platinum Ltd (OTCPK:AGPPF) Q2 2016 Earnings Conference Call July 28, 2016 4:00 AM ET

Executives

Emma Chapman - Head of Investor Relations

Chris Griffith - Chief Executive

Ian Botha - Finance Director

Andrew Hinkly - Executive Head, Marketing

Analysts

Chris Nicholson - RMB Morgan Stanley

Patrick Mann - Deutsche Bank

Allan Cooke - JPMorgan

Danielle Chigumira - UBS

Cedar Ekblom - Bank of America Merrill Lynch

Johann Steyn - Citi

Martin Creamer - Mining Weekly Online Media

Chris Griffith

Thank you, Emma. Good morning, ladies and gentlemen, and welcome to Anglo Platinum's 2016 Interim Results Presentation. I'd like to welcome John Vice, one of our Board Members, who's joined us here today. And also, it's -- July Ndlovu, our Executive Head of Process; where are you July? It's July's birthday today, so welcome to this party we've organized for you, July.

So, turning now to the presentation. Firstly, let's have a look at the overview for the year. As ever, safety is a key priority for Anglo Platinum and we continue to focus on our journey to zero harm. This was another half year with challenging PGM prices, which were suppressed by global macroeconomics, notwithstanding fairly positive PGM fundamentals. We continue to manage the business for the current environment and are delivering on our promises. The business generated ZAR3.2 billion of operating free cash flow. Our net debt position reduced by 2.9 billion to 9.9 billion, from the 12.8 billion that we started at the beginning of the year. We're right-sizing the business to meet the needs of a more focused portfolio, with ZAR400 million of overhead savings in the first half. We're progressing with the repositioning of the portfolio. And lastly, we had a solid headline earnings performance of ZAR3.99 per share, which Ian will discuss a bit later with you in the presentation.

Turning now to the operational review, starting as always with safety, health and environment. Tragically, we had four fatalities in the first half of 2016. We'd like to pay our respects to our colleagues, Mlamuli Kubheka, Mveliso Ntamehlo, Pieter Hendrico, and Tamsanqa Ngqambiya, who were fatally injured at our operations. Our sincere condolences, once again, go to their family, friends and colleagues. We are conducting full independent investigations into these incidents, and we'll take all the learning's that come from those investigations and introduce those into our safety strategy, and in particular, intensify our focus on critical controls. These fatal incidents came after a record fatal free period for the Group of 323 days. That compares to the best ever record that we'd had before that of 180 days fatal free, highlighting the Company's continued focus on safety.

Notwithstanding these recent events, the lost time injury frequency rate of 0.75, which was the best-ever performance, reduced by 28% when compared to the first half of last year. We continue to strive for zero harm and will continue to remain focused on our safety strategy to ensure that this is achieved. Section 54 stoppages continued to impact production in the period across almost all of our operations. The principal and chief inspectors continue to be engaged to ensure that the impact of these Section 54s is reduced, and that Section 54s are only used as a last resort when safety incidents occur. We've seen a very pleasing reduction in the number of TB and HIV-related deaths, as the Company's encouraged the uptake and the participation in our disease management programs, and it follows on the good work that we saw in 2015. We've had no major environmental incidents for the period.

So, moving on to the operation performance. Total platinum production increased by 2% to 1.15 million ounces, due to operations improvements at most of our mines. For the key retained assets in our portfolio, production was up 8% to 458,000 ounces. Mogalakwena was up 2% to 208,000 ounces; Amandelbult was up 15% to 217,000; and Unki was up 13% to 36,000 ounces.

The joint venture portfolio also had a strong performance, up 8% to 388,000 ounces. Though we've mentioned it before, it's worth mentioning again, that we've made portfolio reduction cuts of about 350,000 ounces of unprofitable production. These cuts are often hard to identify as production efficiency improvements, particularly at Amandelbult and at Mogalakwena offset these production cuts.

At our non-core operations of Rustenburg and Union, we're continuing the implementation of their optimized mine plans. Union's production was up 15%, and Rustenburg's production was down however by 10%, impacted by the fatalities and difficult mining conditions at the West mine.

Pipeline inventory is higher than normal as a result of two factors: one, we had a buildup of the work in progress as the stock has not flowed, all the stock that came from produced mining has not flowed through the PMR, due to the closure in the first quarter; and secondly, as a result of an additional 60,000 ounces of platinum that was gained as a result of the stock count. Refined inventory though dropped from 200,000 ounces to 50,000 ounces as we sold down refined stock to supplement sales. In the second half of this year the refined inventory that comes through will build up, the refined inventory will be built up back to normal levels, as the pipeline inventory is released. I think that's an important factor to keep in account, we'll mention it again in the outlook. But particularly as you think about the sales number for 2015, all the metal that comes through from this build up in the pipeline inventory will not flow through the sales, but be used to build up the pipeline inventory, to build up the refined inventory.

So focusing on Mogalakwena. Mogalakwena has maintained a great safety performance and is currently four years' fatality free, reinforcing the fact that modernized open-pit mining is substantially safer. The mine has continued to improve its operational performance, and delivered a record 208,000 ounces in the first half, improving by 2% on the first half of last year.

Mogalakwena had a strong milling performance, up 6%. However, the platinum production in the second quarter decreased compared to the first quarter as the mine has returned now to lower, more normalized grades.

We'll see these normalized grades flow through in the second half of the year, targeting full-year production of around about 400,000 ounces. We continue to spend capital on necessary stay-in business and waste stripping, to ensure that we don't take short term decisions that adversely affect the long term profitability of the mine. A 49% cash operating margin was retained, despite the increase in unit costs as a result of inflationary increases, exacerbated by the weakening of the rand, where around 25% of Mogalakwena's overall cost base is U.S. dollar related. Mogalakwena continues to have the highest rand basket price in the portfolio, at ZAR33,380 per ounce and generated ZAR2.1 billion of operating free cash flow.

Now, onto Amandelbult. Tragically, after 5.2 million fatal free shifts, we had a double fatal at Amandelbult in a single incident in April. As we focus on making Amandelbult investible again, production performance at Amandelbult continues to improve with production increasing by 15% to 217,000 ounces. We have improved underground mining efficiencies, as well as opening a new open-cast area, which added about 18,000 ounces. The Amandelbult complex has reduced its unit costs by 3% through the benefit of the restructuring, which saw Amandelbult combine the two mining -- the two mining complexes, as well as the concentrators into one complex overall, and through strong mining performances. Amandelbult increased its cash generation in the first half, despite the weaker pricing environment, generating ZAR916 million of operating free cash flow. We have invested in a chrome plant at Amandelbult, which has started commissioning in June of this year, on schedule and on budget. We should reach steady state production at the chrome plant in June of next year. The chrome plant cost ZAR400 million, and should generate additional free cash flow, at these prices, of between ZAR350 million and ZAR400 million per annum. I think this is an example of the value that we're creating from our disciplined capital allocation.

Looking at the joint venture portfolio, the JV operations continue their journey to zero harm and improved the lost-time injury frequency rate by 10% to 0.56 in the period. The portfolio had a strong production performance, as I mentioned earlier, up 8% to 388,000 ounces as a result of volume and efficiency improvements. Modikwa's production increased by 19%; BRPM's production up 16%; Mototolo up 11%; Kroondal up 6%. Bokoni's production was down by 16%. However, on a normalized basis when we account for the closure of the UN2 and the vertical shafts of about almost 14,000 ounces, Bokoni saw an increase in production, despite the impact of the two fatalities and the community unrest.

At our non-core operations, firstly at Rustenburg, Rustenburg's production was down 10% to 219,000 ounces, impacted by the fatalities and difficult mining conditions at the West mine. This was partially offset by an improvement in production from the Western Limb Tailings Retreatment, due to new production from our East tailings dam. Rustenburg generated ZAR439 million of operating free cash flow in the period. Union mine had a strong operating performance, up 15% to 75,000 ounces, due to productivity improvements and benefits from their optimized mine plan. Union generated ZAR212 million of attributable operating free cash flow in the period.

Let's look at refined production and sales for the first half. In the first quarter of this year, the PMR had a planned stock take, and as they were ramping up their production the PMR was issued with a Section 54 notice, crash stopping the operation. The Section 54 lasted 12 days, but took a further 37 days to get the PMR back to stability, which severely impacted refined production in the first half, in the first quarter. The shortfall in refined production was largely made up in Q2, but will continue throughout the second half. Just to give you a sense of the production rate in Q2, we refined 748,000 ounces, that's an annual refined run rate of over 3 million ounces.

As a result, refined platinum production was down by 9% to just over 1 million ounces. Platinum sales, however, were up by 5% to just over 1.2 million ounces, made up by selling the refined production of 1 million ounces, supplemented by the drawdown in refined inventory of circa 150,000 ounces, and some marketing activities. As a result of the stoppages, palladium refined production was down 11% and rhodium refined production was down 2%. I'll hand you over to Ian for our financial review.

Ian Botha

Thank you, Chris. Good morning, everyone. We are today reporting EBIT of 2.1 billion. 2015's EBIT of 3.5 billion included the benefit of an abnormally high stock account adjustment of 2.2 billion, compared to 590 million in 2016. Headline earnings of ZAR1 billion, or 3.99 per share, were impacted by an increase in interest and tax charges. Interest was higher as a result of an increase in the Jibar benchmark rate, and as we stopped capitalizing interest on the Twickenham project which has been placed on care and maintenance.

Our effective tax rate increased to 33% from 22% in the prior period. This is as a result of changes to South Africa's controlled foreign company rules, which provide that, from January 1, 2016, certain foreign companies are subject to tax in South Africa at 28%, with a credit for any offshore tax paid. We expect our full-year tax rate to be between 30% and 33%. CapEx at 1.4 billion is down 13% year on year as we continue to focus on disciplined capital allocation. Our business generated 3.2 billion of free cash flow, reducing net debt down to 9.9 billion.

EBIT, excluding stock account gains, increased from 1.3 billion to 1.5 billion. We've broken up the variance analysis into its two constituent parts; that portion that is uncontrollable by management, and then that portion that is controllable. Starting with the uncontrollables, dollar metal prices were down 4.6 billion, with our dollar basket price down 24% to $1,632. The platinum price was down 16% to $971, constituting 2.6 billion of that variance. The palladium price was down 29%, a 2 billion reduction. The impact of weaker dollar metal prices was more than offset by the benefit of the weaker South African rand, with the rand down 29% to 15.38 contributing 5 billion.

Moving to the controllables, sales volumes were down 400 million, whilst platinum sales increased 5% to 1.2 million ounces, supplemented by a 150,000 ounce drawdown from refined inventory as well as marketing activities. Our palladium sales were down 2% to 738,000 ounces. Rhodium was down 7% to 144,000 ounces. Costs are down 1.4 billion as a result of reduced overheads, lower operating costs, and productivity improvements. Depreciation at 2.2 billion is 400 million lower year on year as a result of the 2015 impairments.

Turning to unit costs and starting with the chart in the right-hand side. South Africa continues to experience high levels of mining inflation with electricity up 11%, wage rates up 8.1%, together contributing to mining inflation for Anglo Platinum of 7.6%, 1.3% above CPI. Turning to the chart on the left-hand side, unit costs at 19,436 per produced platinum ounce are up 1.8%, so markedly below mining inflation as we see the benefits of our cost reduction, of the overhead reduction, and the productivity improvement. It is also within our earlier cost guidance. Unit costs for our core retained portfolio, at 18,550, are almost 900 lower than the aggregate portfolio. 2016 full-year unit cost guidance remains between 19,250 and 19,750, so flat to up 2.5% year on year, and significantly below mining inflation.

CapEx at 1.4 billion is down 13% year on year, as a result of reduced project CapEx, as no new major projects have been advanced in 2016. Disciplined capital allocation remains a priority focused on asset integrity, focused on adding value and not additional volume. The Company continues to advance low CapEx, fast payback projects that unlock value from our existing assets, and from the full metals stream, like the Amandelbult chrome plant. We have a number of high value, high returning, growth projects, projects that have the potential to be mechanized and in the bottom half of the industry cost curve. However, given current market conditions, all project capital decisions are being delayed until after 2017. And then, only if the market demands the metal and our balance sheet allows. We are able to maintain our production profile through 2020 without any major or replacement expenditure. We are reducing our CapEx guidance for 2016 slightly, to between 3.5 billion and 4 billion, from 3.7 billion to 4.2 billion.

Turning to cash flow and to net debt. The balance sheet position of the Company has further strengthened, as we focus on all operations, at least being cash positive, on disciplined capital allocation and on right sizing our overheads. As a result, the net debt has reduced from the beginning of the year, of ZAR12.8 billion. Our business has generated 3.2 billion from operations and working capital reduction. That was partly offset by ZAR300 million worth of restructuring costs, which leaves us with net debt, at the end of the half, of 9.9 billion, gearing at 24% and a weighted average cost of borrowing of 8.6%. We have also extended the maturity profile for our facilities and now have limited refinancing in both 2016 and 2017, only 2.3 billion of our revolving bank facilities which matures in July 2017 which we fully expect to roll. We are also very comfortably within our debt covenants.

In summary, we continue to deliver on our guidance and on our strategy to manage the business for the current environment and to prepare for the future.

I'll now hand you back to Chris. Thank you.

Chris Griffith

Thank you, Ian. I'll turn us now to the market review, firstly starting with market prices. Despite an increase in PGM prices in the first six months of this year, average prices remain below 2015 levels. The platinum price benefit in the first six months of this year, from U.S. monetary policy and safe haven buying on concerns of the global economy over the last six months. So if we turn to the top right hand side graph.

We see the US dollar platinum price increased by 14% over the first six months, averaging $959 an ounce. However, it remains 17% below year on year, when compared to an average of $1,160 per ounce in the comparative period. If we move to the bottom right-hand side graph, tracking the red line first. The achieved US dollar basket price was down by 24% year on year. Whilst the weakening rand provided some relief and achieved the rand basket price, which is shown by the blue line, averaged 25,100 per ounce, which was 3% down when compared to the first half of 2015.

Now, looking at the platinum market and starting with the graph on the top right-hand side. We see annual deficits since 2012. In addition to Anglo Platinum's 350,000 ounces per annum that we reduced, we've seen a number of once off events since 2012. In 2012, we had the strikes after Marikana. In 2013, we saw the major move into ETFs. And, in 2014, we had almost 1 million ounces lost as a result of the five month wage strike. But 2015 was an important year to help us understand what a more normal market looks like.

Primary production was back to normal levels. Demand reflected a lower new normal from China, yet the market was in deficit by almost 660,000 ounces. If we look at the table on the bottom right hand side, using Johnson Matthey's latest published data, we see demand growing, supply flat and continued deficits into 2016. So if we take a closer look at demand, focusing first on autocats, as the largest demand sector for platinum. Global autocatalyst demand is forecast to grow in 2016, driven by, firstly, an increase in vehicle sales. In Western Europe, this first half was up 9% year on year; and secondly, rising diesel loadings, due to the full implementation of Euro 6b implementation of emissions legislation.

Diesel share is proving to be in line with expectations. The heavy duty diesel sector is forecast to grow, with an increased focus on tighter emissions legislation; and secondly, vehicle production growth.

Momentum around fuel cell vehicles, as one of the zero emission technologies of the future, continues to build, as shown by launches and proposed launches of commercially available fuel cell vehicles by major car manufacturers. Infrastructure and awareness are key challenges that are being addressed, and they're being targeted by our market development team. The journey towards a zero emission future is well underway. The trend towards greater electrification of the drivetrain continues. So a topical question at the moment is, so what does this mean for PGMs? We'll attempt to explain that in this slide.

If we turn to the top right-hand side graph. The light duty vehicle automotive market is expected to grow from around 90 million vehicles in this year to about 120 million vehicles in 2025. It's worth pointing out that these figures are not ours, but come from an industry forecaster, LMC Automotive, an expert in understanding all the various trends that are impacting the sector.

If we look at the subsets of that graph, we see that diesel, despite a declining market share, will increase the overall amount of vehicles from 18 million to 23 million; gasoline is expected to increase from about 70 million to 85 million vehicles; and electric, which very importantly and mostly misunderstood includes hybrids, is set to increase from 3 million vehicles to 11 million. This market will be required to grow at 17% compound annual growth rate just to achieve these numbers. We'll focus on that segment in greater detail by moving to the bottom chart.

The red and the green sections highlight total electric vehicle production. It's clear that PGM-containing hybrids, in red, are expected to account for the majority of the vehicles. The pure electric section, which is shown in green, includes both fuel cell and battery electric vehicles, which can, in our view, coexist alongside each other, much like gasoline and diesel vehicles do today.

So in conclusion, the electrification of the drivetrain will continue, constituting about 10% of market share in 10 years' time with -- the majority of these vehicles will be PGM-containing hybrids. Therefore, this trend is unlikely to be disruptive to our industry.

Turning to jewelry demand, the global platinum jewelry market is expected to improve in 2016. Platinum volumes on the Shanghai Gold Exchange ended up the half up 3% on 2015 suggesting the market is stabilized and could outperform 2015. We generally use the SGE volumes as a proxy for Chinese jewelry demand. India continues to extend its trajectory as a fast-growing market, particularly due to the active market development by the PGI. These market development activities conducted by PGI are crucial to how platinum is positioned in the minds of jewelry manufacturers, retailers and consumers. The graph shows the benefit that the PGI delivers to strategic partners who have outperformed the market growth as a result of the support showing just how well PGI marketing works.

Looking at the investment sector demand, after a really successful and exceptional year for platinum investment in 2015, investment demand remains positive so far this year. Liquidation of ETFs in 2016 have slowed remarkably. This has been more than offset by continued physical demand for platinum bars in Japan with approximately 320,000 ounces of buying in the first half. That's a similar rate to the exceptional first half of 2015. This positive momentum is supported by a string of successes reported by the world platinum investment counsel.

I'll now take you through a brief recap and overview of our strategy. To recap on our strategy, it's built around three key deliverables. Firstly, repositioning our assets into a value maximizing portfolio, secondly, extracting the full value from our operations, and thirdly, developing the market for PGMs and preparing for the future. The first pillar of our strategy is focused on delivering a portfolio that will be positioned in the first half of the cost curve, will have more than 70% of our production will be mechanized, a more highly skilled workforce, safer operations, a less complex organization, and more socially acceptable. We started our repositioning journey with the restructuring, as can be seen on the left hand side of the slide. We've restructured Rustenburg and Union mines and have simplified our JV portfolio.

For the first half of this year, we've placed the Twickenham mine on care and maintenance. We have restructured the Union mind further in support of the implementation of their new mine plan. Through mine closures and continuous rationalization, we have removed 350,000 ounces as we mentioned before. Subsequent to that, we've removed an additional approximately 50,000 ounces of unprofitable production at Bokoni and from placing the Twickenham mine on care and maintenance. We've already stated our plan to exit our non-core operations of Rustenburg, Union, Pandora, Bokoni and Kroondal. There are processes underway for each of those assets. On Rustenburg we've made significant progress towards fulfilling the conditions precedent, including a competition tribunal approval and completing ancillary agreements on the separation with Sibanye. The transfer of the mining and the prospecting rights by the DMR remains the key condition for completion.

On the right hand side we can show the focus on reducing the overhead for a smaller, less complex business. The early benefits of the restructuring we believe are showing and we've already taken out ZAR400 million of overheads in the first half of this year. We're on track to achieve a saving of ZAR1 billion run rate in the final quarter. When we exit Rustenburg and Union we will see another ZAR1 billion of overhead savings being reduced. Once we complete our disposal program our portfolio will comprise of our key retained assets. In addition to these assets, it's very important to note our portfolio, we've got optionality available to us. For now, though, the projects that we'll assess are high value, capital light with short payback periods, such as the Amandelbult Chrome Plant, the Mogalakwena debottlenecking and sorting options, Unki smelter, and the UG2 reef option at Dishaba and Amandelbult. We have major projects and expansion options available to us at all of our operations. They exist at Mogalakwena, Der Brochen, Twickenham, and Amandelbult, and of course, Unki.

However, decisions, as Ian mentioned in the capital section, decisions to invest capital in these projects has been pushed back to post 2017 and will be aligned with market demand for ounces, as well as the strength of our balance sheet. This portfolio will generate long term value through the cycle. The second pillar of our strategy is to focus on extracting the maximum value from our operations. Our focus remains on ensuring all of our operations are cash flow positive. This requires improving performance at our mines, at our processing and on our overheads.

Just some examples to give you some sense of that journey so far, we've increased production at Mogalakwena by over 30% since 2012. We're studying alternatives to scale up operation at Mogalakwena using capital light options.

At Amandelbult you can see from the graph the increasing production that we've achieved from 350,000 to 450,000 ounces this year. We're set to enhance the revenue generated by square meter for every UG2 tonne mined by about 10% by extracting chrome in the new chrome plant that we've just built. We've also enabled the ability of that mine production that we've spoken about to improve profitability and cash flow generation by the focus on our half-level optimization.

Increasing the utilization and efficiency of our processing assets improves current returns, but it also has the potential to unlock options to increase production further at Mogalakwena. At our base metal refinery our focus is on improving the amount of base metals produced and this can be seen by a 68% increase in the base metal production over the last two years. And lastly, as we've previously mentioned, our stain business capital allocation processes have, they have improved and they are delivering value.

Our third strategy pillar centers around preparing for the future. We continue to make focused investment in key areas of market development to create demand for PGMs; on mining and processing innovation; and then on people and communities.

We have a well established market development strategy, and continue to see the benefits of investing to create demand for PGMs, through our PGM Investment Fund; our partnerships with the Platinum Guild, to focus on jewelry investment; and thirdly, on the World Platinum Investment Council partnership, to focus on investment.

We are investing in new mining and processing technology, to both unlock value and also to modernize our business. We have moved our prototype testing of the mechanized equipment from Rustenburg to Twickenham, so we can continue to test all of these options in an underground operating environment.

And finally, we're also focusing on investment in our people and our communities. We continue to invest and are investing in technical schools. We've embarked on now for the past two years on a cultural transformational journey within our Company. We've improved our relationships with the unions and the communities. And we're currently investing over ZAR300 million per annum in the communities surrounding our operations.

Let's have a look at the outlook for the remainder of the year. As we look to the remainder of the year, we can confirm that all of our guidance remains in place and that we're delivering on our promises. Platinum production will be towards the upper end of our 2.3 million to 2.4 million ounce guidance provided.

Unit cash cost, as Ian mentioned, will be -- will remain between ZAR19,250 and ZAR19,750 per ounce. That'll be as a result of the cost improvement measures, reducing our escalation to well below mining inflation. Direct overhead savings of ZAR400 million that we've achieved so far in the first half will continue, and a full run rate of ZAR1 billion will be achieved in the final quarter. We continue with our disciplined capital allocation, without impacting the future of our business, and slightly lower our capital guidance to between ZAR3.5 billion and ZAR4 billion. We're making progress on our value-driven strategy, including the repositioning of our portfolio. We're progressing with the disposal of our non-core assets. And, we anticipate that the Rustenburg disposal will be complete by the remainder of the year.

Operation excellence has delivered ZAR3.2 billion of free cash flow across our portfolio. We continue to prepare for the future by investing in market demand, mining innovation and people in the communities. The challenging macroeconomic environment is likely to persist for the second half. But as you see, we've delivered on our promises and continued to manage the business for the current environment, but at the same time, preparing for the future. I'd like to thank the Anglo Platinum team. This has been another tough six months, with, again, more restructuring and more uncertainty in the business, but the team continues to rise to the challenge. So thank you very much to the team.

And both Ian and I and the executive team, who's sitting in the front, are happy to take questions.

Emma, over to you.

Question-and-Answer Session

Operator

A - Emma Chapman

Okay. If we have any questions on the floor, we'll just start with anyone with questions in Johannesburg and then we'll go to the phone lines. So if we start with Chris Nicholson.

Chris Nicholson

Congratulations on what looks like a very good set of certainly mining results -- operational results. Chris Nicholson, RMB Morgan Stanley. My question is around Amandelbult. Just the comments that you made, looking to develop more UG2 from the existing Merensky infrastructure, three questions. First one is that actually approved or are we still waiting until mid-2017 for approval? Number two, in terms of shaft infrastructure capacity, you'll be doing it all through Dishaba. Is there sufficient capacity? What additional risks does this bring through bottlenecks etc., in Dishaba itself? Number three, do you have any indicative capital budget on that at the moment? Thanks.

Chris Griffith

I know there's been a couple of questions around, so why don't we tackle Amandelbult as a whole? There's been a number of concerns that, for example, we're not spending enough capital at Amandelbult. There's concerns that we may be doing what we previously said at Rustenburg and saying, well, why don't we just go into the UG2 at Rustenburg and is this just more of the same, because it doesn't really work out.

This has been the comments from a number of commentators saying, well, it didn't really work out at Rustenburg, is this a good strategy for us at Amandelbult? I'm going to address that first, Chris, and then I'm going to answer your question, because I think they go together and they help put that in context.

So if we think about the Amandelbult UG2 is actually quite different to all the UG2 at the rest of the Bushveld complex. If we just think about Amandelbult Merensky, which has got the highest revenue per square meter of all of our underground operations. It has a stoping width of about 1.4 meters, and it delivers a content -- so remember, that Merensky has got a lower specific gravity, so density, but it's got a higher grade. The one thing always about the Merensky, it's got a higher prill split, so it's got a higher platinum ratio, higher platinum content. The thing about a Amandelbult UG2, it's actually very similar to the Merensky. For example, it's almost got the same PT factor, so it's got a split of 60% platinum in its UG2, whereas the Merensky has got 62%. If you compare that to Rustenburg, Rustenburg -- I'm just looking for my numbers here. The platinum factor at Rustenburg is 55% for the UG2. Also, the stoping width is very much lower at Rustenburg. So the content per square meter of our Merensky and Amandelbult, remember the highest vale that we have is 30.6 grams a square meter.

The UG2 has got 31.6 grams at Amandelbult, and it's only got 20 grams per square meter on the UG2 at Rustenburg. Just from that, you can see -- that's the content, if you look at the prill split, because remember that's 4E grams, if you look at the prill split, and look at the value in dollars per square meter at today's prices, the dollars per square meter are about $1,050 on Merensky; almost $1,000 -- just under $1,000 at the UG2 at Amandelbult; and then only $600 per square meter at Rustenburg. So you can see we've got a 60% increase in the amount of UG2 value at Amandelbult compared to Rustenburg. This is a very different proposition. That number that I quoted in the UG2 excludes the chrome recovery. Now, with a chrome recovery plant and it's expandable, it means that we'll probably add about 10% of value to our UG2 at Amandelbult. And if you do that, we'll actually get more revenue per square meter out of our UG2 than we will out of Merensky. So this is a very different game to what we're talking about at Rustenburg.

Secondly, we have the infrastructure already pre-developed, both through our vertical shaft, and to some of our -- for example, our raised bore shafts. So there's sufficient shaft capacity, Chris, to deal with existing volumes at Dishaba as well as replacing the Tumela upper replacement. So this is not short changing Amandelbult with capital. Previously we had thought about these mines separately. Therefore, we needed to replace the Tumela upper only at Tumela. Now, by putting these mines together, of course we've got different options, and we've got a seriously better capital light alternative to do the Tumela upper replacement at Dishaba. So we get the benefit of very low capital, replacement of Tumela upper, we don't need to go and build ZAR8 billion worth of vertical shaft. We've got time to do that. So we've got the next two years before we need to have whatever small adjustments we need to make at Dishaba, we've still got time to do that.

It is not yet an approved project. We don't yet have the capital, but this capital is really going to be low amounts of capital; be like haulage upgrades and perhaps some things like low weight skips for the shafts. But this is small amounts of capital and this is a very, very different capital proposition to what we previously had in place. So the notion that we are short changing Amandelbult out of capital, number one, is not correct. We have a very much better value proposition for shareholders in what we are designing now in a very much better reef horizon, and it's very different to the option that previously existed at Rustenburg. I think I've answered all the questions. There's nothing else. It's not an approved project, I think that was the only outstanding issue.

Patrick Mann

Patrick Mann, Deutsche Bank. I just have a quick question on the working capital flows in the first half of the year. I get the point that the refined inventory is now quite low, but you're going to have a release out of your concentrate and a buildup of the refined. Can you just give us a sense of overall, how does that come out on a net basis? Will there be an increase in the investment in working capital before the end of the year, or is the 12.3 billion, at the moment, the level to assume going forward? And then I suppose linked to that, your net debt's come in below ZAR10 billion. You're saying you don't have any major capital requirements until 2020. What sort of gearing levels, net debt to EBITDA levels are you comfortable with? And would you start to reconsider a dividend policy? And then sorry, very last question, just on Mogalakwena. Without spending any CapEx again, you guys have managed to get it to 400,000 ounces per annum. Is this now the absolute upper limit that this mine can do before you need to make a decision on the processing, whether it's sorting or upgrading the circuit? Thank you.

Ian Botha

Patrick, if I can start with your first question around working capital. So our working capital has moved from 14.6 billion to 13.6 billion at the end of last year, to12.3 billion. So we're now sitting at around 43 days. The reason why our working capital reduced in the first half of this year is largely down to two issues. The first is that we continue to focus on extending our creditor payment periods for our large suppliers; so the suppliers of oil, of high chrome costs and regrinding media. We're pushing them towards 60 days without any sacrifice on discounts or any other cost. That has meant that we've moved our creditor days from 23 days to 38 days. The second key area in the first half has been around reducing our stores and our aggregate stock levels. So we are focusing on optimizing our Western Limb distribution center; on improving the visibility around our store stocks; of taking out the satellite or squirrel stores. We've also seen in the first half reductions in iridium and rhodium.

As far as the work in progress and the refined stock levels, what we would expect is in the second half to move from where we are, at the moment, at around 630 back towards the normalized level of around 440; and then move back from the 50,000 ounces of finished back up towards the 200,000 ounces that we started the year with. We do expect that the savings are sustainable and we have a moderate further reduction of around 300 million forecast for the second half.

Also, bear in mind that when we complete the Rustenburg transaction, there's around ZAR3 billion-worth of working capital that's included as part of the purchase price that will go with the assets. On your second question around net debt, our priority is to reduce our net debt further to improve the underlying cash generation of the business, and then to complete the disposals, in particular Rustenburg and Union. Reintroducing a dividend is an important part of our capital allocation model, but when it's introduced, it needs to be sustainable. We are looking for confidence in the near-term outlook before reintroducing a dividend.

Chris Griffith

And then, Patrick, on the Mogalakwena's volume, we've done 208 in the first half and I think there's always a temptation to times that by 2. But I think we've guided to say we had a lower normal, so a normal grade. We had a higher grade in the first quarters. We are mining through a particularly rich area which gave us very good Q1 numbers. But Q2 went down to just under 100,000 ounces and we've guided to say, look, think about Mogalakwena for now round about 400.

Of course, we'll be pushing hard, but I think it's now small little ounces. I don't think that you should think too much more of Mogalakwena above 400. That doesn't mean we're stopping pushing. But the next tranches will come from some of the debottlenecking options that we've mentioned before. One of the difficulties that we've had -- it's a good problem to have, but we said that previously we thought we could get from 300 to 360 without capital, and then we said we thought that we would need to spend capital and did work or where we thought we'd be at 360 to how we would debottleneck the plant for about ZAR2 billion to get from 360 to 420.

Now, we're not all that far from 420 and we've spent ZAR0 billion to get there. So we've now had to go back and the team, under Indresen's leadership are now actually going back with the team at the mine to say, well, are there still debottlenecking opportunities that exist? We think they do, but we don't think it'll be as much as 60, but it will be at substantially lower capital than the ZAR2 billion. It's a bit early to say, and I think, Indresen, we're expecting by the end of the year to have firmed up some of that work.

Emma Chapman

Shall we go to Allan Cook?

Allan Cooke

Allan Cooke, JPMorgan. Could you guys perhaps talk a little bit more around the marketing activities where you have to lease or buy-in metal to supply contracts when you had the problems at the refinery in Rustenburg in the first quarter? That's the first question. The second question is that previously, I think you'd indicated that you'd look at your projects, or relook at project spend in 2017. Now, it sounds like you'll only do that in 2018. Is there something you've seen in the PGM markets that's pushed you to defer any decision on major project CapEx by a year? Are you only expecting better prices in 2018?

Ian Botha

Allan, if I start with your first question around market activity. So we will access the market, when it is commercially attractive for us to do that, across a range of instruments: borrowing, buying, leasing, forward sales. After the Section 54 at the PMR, we undertook certain leasing, borrowing and buying activities. At the end of the first half, we have 63,000 ounces of metal that has either been bought; or 50,000 ounces included in that 63,000, that is leased, where we need to deliver refined metal back into those leases in the second half of the year.

Commercially, what that means is, when we enter into a lease we get the metal we're able to supply into our committed or our discretionary sales, and then the -- we get the cash flow benefit of that. When we close out that lease, the income statement benefit comes through. So on that 63,000 ounces of metal, which we will close out in the second half of the year, there's about a cash flow benefit of about ZAR800 million and in the first half, and an EBIT benefit in the second half of ZAR200 million.

Chris Griffith

And then, Allan, I think just to be clear, we've always said that we would consider major capital at the end of 2017. We, actually, haven't deferred it for a year. So we've always said that at the end of 2017, I guess that means that in 2017 we will not be considering major projects, and I think for two reasons. One it's not like we've got any different view around prices, and -- but we've worked very, very hard over the last four years, to reduce this oversupply of metal into the market. What we don't want to do is on our own volition quickly go and put a whole lot of capital in place to go and oversupply the market again. So it's actually more to do with how we see demand evolving, and how we see both our own production and competitor production, and that we compare those, and we see where the kind of space is that the market actually wants us to increase production. So rather than just increasing production because we can, what we're being very careful on is the amount of supply to the market. We think that that is from 2018 onwards the market is going to have space again for increased production and it's combined with how we think the balance sheet will evolve. So we think we're going to have capacity again at that point in time. We think the market will want production at the same point in time. We think we're going to be in that space, we should be able -- all things being equal, being able to start paying dividends again. As we think those are the kind of factors that we said we'll take into account, and -- but we did say what we won't be doing is investing in any major projects in 2016 and 2017.

Danielle Chigumira

Danielle Chigumira, UBS. A couple of relatively simple questions, I guess. Firstly, could you give us some color on the very small reduction in the CapEx guidance for this year? And secondly, on the marketing side, with the investment in fuel sales. Could you give us any tangible examples of progress that have been made through investment in that area in terms of the infrastructure, etc.?

Ian Botha

Danielle, around the first question on CapEx guidance. As you say, it's very much a refinement. We are starting to see slightly lower levels of capital inflation. So capital inflation for our business is currently running at CPI plus 1%, and that's feeding through into the numbers.

Chris Griffith

Do you want to talk about fuel cells, Andrew?

Andrew Hinkly

On the fuel cell side, yes, we're seeing progressive developments there, most notably one of the companies that we've invested directly into over the last few years, with Tim Ballard, I -- you may have picked up on the very large order that they've secured in China, with one of the provinces there recently, for fuel cell buses, which is one of the sectors where we expect to see early penetration of fuel cell demand. That goes alongside the Honda launch earlier this year, in the first half; and continued progress on refueling stations around the world, notably in California and the rest of the Eastern Seaboard in the US. So we're seeing good early signs of continued penetration and development of fuel cells in the transportation sector, which is clearly the most important sector for us.

Chris Griffith

Just picking up on what Andrew mentioned, that we've now got almost 140 hydrogen refueling stations around the world. And that's developed over the last couple of years; another 40 in development as we speak. Just to give you a sense of what that looks like in the next 10 years or so, is about 2,000 fuel cells across the world, hydrogen refueling stations across the world, that are being planned. So there's absolutely, in addition to what Andrew's saying, that much of the infrastructure to support fuel cell vehicles is now starting to happen in a couple of key geographies across the world.

Emma Chapman

Can I quickly go and see if there's anybody on the line? Is there any questions?

Operator

We do have a question from Cedar Ekblom, of Bank of America.

Cedar Ekblom

One follow-up question. I know Union is an exit asset for you, but if we look at the cost performance at that mine in the first half, it was actually pretty impressive. CapEx is still running pretty low, but I do note quite compelling free cash flow from that asset, at the moment. Can you just talk about strategy to continue to exit that mine or progress towards an exit, considering that it appears to actually be performing quite well? Thank you.

Chris Griffith

I think it's a good question, not only for Union, but also for Rustenburg, and a number of other mines that we seek to exit. I think, to be clear, we have mentioned a number of times that we're not only seeking to exit these mines because we think that they can't generate cash. There was a number of problems in a number of these assets where we had loss making production; and we said that we're going to shut those down so that these mines can generate cash.

But the main reason why we said that we're going to be exiting these assets is because they are on the upper end of the cost curve. And when we have a look at all the capital options that we have available for our assets, means that we're not going to be putting capital into these assets. So we absolutely think that Union and Rustenburg, and a number of our other JV mines have substantially improved their performance and can continue to do so, and can generate cash. But notwithstanding the fact that these mines are generating cash, we would still seek to exit the mines, because they don't fit what we see as our future portfolio for the Company.

Chris Griffith

Thanks very much.

Emma Chapman

Can we take another question from the line, please?

Operator

Next question is from Johann Steyn, from Citibank.

Johann Steyn

Just a very quick question. Well done, first, for a solid result. First if you look back over the past three years, you've managed to keep costs, you and the team, costs virtually flat, at Anglo Platinum, which is a commendable result. Obviously, now you are in the process of selling Rustenburg and Union, but if I look at it, if you would exclude Rustenburg and Union at that stage, it doesn't really add anything to your earnings. Now, if you annualize this half's earnings to about ZAR8 or ZAR10 for the year, you're still trading at close to 40 times PE. Now, if we just ignore pricing, let's just keep prices flat from here, what else can you effectively do to justify this kind of a market rating?

Ian Botha

Johann, I think the disposal of Rustenburg and Union is significantly earnings, cash flow and return on capital employed, accretive to us.

Bear in mind that whilst the mine's moved to a new owner, in the case of Rustenburg, we have a PoC arrangement until the end of 2018. We then have a contract which provides for an eight-year toll, with a minimum period of four years for the toll. On Union, we would anticipate disposing of that asset, but retaining the PoC arrangement, and that is an annuity income stream that comes with it. So there is a significant earnings and cash flow accretion coming from it.

Johann Steyn

Can you give any kind of guidance? If, over the past six months, Union and Rustenburg was effectively owned by a third party, what's on your estimate would that do to your earnings?

Ian Botha

So it would take our return on capital employed if both were sold, from around 8% to 12%, including only the disposal of Rustenburg. Depending on the final terms of Union sale, from 12% to around 14%, and including overhead reduction, it's about an extra ZAR1 billion from an earnings and a cash flow perspective. The other key issue is clearly from a unit cost perspective, so we spoke today about the fact that our unit costs of ZAR19,436 our core retained portfolio is ZAR900 lower for the first half of the year. Over time, we expect there to be around ZAR1,000 differential between our core portfolio and those assets that we dispose of.

Bear in mind that what we are doing is we are disposing of conventional mines where around two-thirds of the cost is payroll associated, whether it's employees or it's contractors, around 8% of it is power. So both of these have structural cost pressures, over time, so we move our portfolio into a portfolio that is less labor intensive: an open cast mines is around 20%; mechanized mines around 40% labor, less mining inflation pressure, over time.

Johann Steyn

Indeed, I don't question the strategy at all. Well done, a solid result.

Chris Griffith

Thanks, Johann.

Emma Chapman

I've got one question here, which has come through via the webcast, and it's from Michael Homem of Covalis Capital. He asks if you could please comment on the progress in wage negotiation?

Chris Griffith

So we have just commenced -- thanks, Michael. We have just commenced the early stages of the wage negotiations, perhaps just a point that we were finishing the place in Twickenham mine on care and maintenance, and as well as the Union mine restructuring. So our teams, certainly Lorato, and Vishnu, and Indresen, all the guys working very hard on actually getting those two -- again, two major restructurings underway. We were -- we have completed that just before the end of the first half, so actually not having wage negotiations interrupt or get muddled up in the restructuring, was actually a very good outcome for us. And I think well steered by Lorato.

Now, that we have got those behind us, we can commence the wage negotiations, we've commenced the early stages of the wage negotiations now and in the next month or so, we should see that now enter full-on wage negotiations. We have been asked many questions already this morning, about where is your bottom line and how you're going to think you can go? And are you going to have a strike? We've previously mentioned that we don't think that there's a huge appetite for industrial unrest. The reason for that is still very much in everyone's mind, the five month strike that we had in -- halfway through 2014. At the same time, there's been huge job losses over the last number of years. So I think there's a greater realization that this still remains a very tough market for platinum producers. Last year, a number of platinum producers were struggling just to survive. I think there is a greater understanding that that is still an environment that prevails and we're likely to see a more responsible attitude taken -- notwithstanding some of the earlier rhetoric, a more responsible attitude taken by, I think, by all parties, including the unions.

Emma Chapman

I think we'll take one last question from the floor and then we'll leave it there for Q&A.

Martin Creamer

Martin Creamer from Mining Weekly Online. I just wanted to refer back to page 70 when you flashed up that graphic on the hybrid electric and electric cars with the hybrid in red and the electric in green. I just need understanding how you can make this claim? Hybrid electric vehicles contain similar amounts of platinum group metals to conventional vehicles. And also, those electric that you see in green. Is that the FCEV, the fuel cell electric including the non-fuel cell electric? Can we just a little bit of elaboration on that, I just don't quite follow.

Chris Griffith

The reason why we put this slide is up is because, as I mentioned when I introduced the slide, we have had a huge amount of questions on electric vehicles, including like, will every vehicle that we drive in 10 years' time be a battery electric vehicle? So the whole world will now be electric vehicles and the range of questions around this has been absolutely outstanding in their diversity, but also the lack of understanding about what's actually happening with the electrification of the drivetrain. So Martin, what are we trying to do here is actually describe, first of all, there's going to be a growth in the pie. The absolute amount of vehicles is growing and will continue to grow. Even for diesel vehicle that's important because the market share in diesel will reduce, but because the pie's growing overall the amount of diesel vehicles grows in absolute numbers.

Then there's a huge misunderstanding of electric vehicles, because when we talk about electrification of the drivetrain, a lot of the time people just say, well okay though that means it's a battery electric vehicle. When you hear some of the interesting announcements by, in particular, good Pretoria Boys -- ex-Pretoria Boys fellow, is, it's very easy to get a sense of well okay, eventually all of the electrification of the drivetrains will be battery electric. So first what we do is in that, in the red and the green section, we unpack, well right now today, electrification of the drivetrain. You see the majority of those vehicles as we speak today, are actually hybrid vehicles and not either fuel cell or battery electric vehicle. That's a very important starting point to understand.

The majority of electrification right now is actually hybrid vehicles. The thing about a hybrid vehicle because it still has an engine, but because it runs at much lower temperatures, well, first of all, because it's got an engine it requires an exhaust; and because it requires an exhaust then it's got incomplete combustion it means it puts stuff into the air that you don't want. Therefore, you want PGM containing catalyst to be able to manage that. Secondly, because it runs at lower temperatures means that the combustion is more incomplete. Therefore, you need to have a higher loading actually than you would have, because it's got now some benefit of electrification.

That's why generally you see and with the conformity factors happening in the future, you're likely to see about the same loading on an auto catalyst for a hybrid vehicle than you have for a conventional vehicle. And because most of them will be gasoline vehicles, they'll be pretty much the same loadings as what you've got on a palladium catalyst now. So that's the reason.

Then secondly, as this growth happens, I think, what we were saying is we were acknowledging the massive rate at which this is going to happen. So it's going to run at, the whole electrification will run at over 17% CAGR just to make that happen. On that green section, that's actually going to run at 20% CAGR to make that happen. We've seen some of the numbers already being missed. So what we're doing is we're saying we acknowledge that this huge growth is going to happen, but because it happens in a vast section of electrification of the drivetrain will be hybrids and then in that green section also, fuel cells are in amongst that. We absolutely see that fuel cells and battery vehicles can co-exist alongside each other. We try and unpack all of that and say, growth in the market, still growth in diesel, in the electrification still a bit section that contains PGM catalysts. Therefore, we conclude that whilst the electrification of the drivetrain will continue, it is unlikely to be a disrupter to our industry.

That's probably a good place to end. Okay, good, thanks, Emma. Thanks, to everyone. Thank you for your time.

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