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AngloGold Ashanti (NYSE:AU)

Q1 2012 Earnings Call

May 10, 2012 9:00 am ET

Executives

Mark Cutifani - Chief Executive Officer, Executive Director, Chairman of Executive Committee, Member of Safety, Health & Sustainable Development Committee, Member of Investment Committee, Member of Risk & Information Integrity Committee, Member of Party Political Donations Committee and Member of Transformation & Human Resources Development Committee

Srinivasan Venkatakrishnan - Chief Financial Officer and Member of Finance Committee

Analysts

John D. Bridges - JP Morgan Chase & Co, Research Division

David Haughton - BMO Capital Markets Canada

Harry Mateer - Barclays Capital, Research Division

Joung Park - Morningstar Inc., Research Division

Operator

And good afternoon or good morning to those in the U.S. Welcome to the AngloGold Ashanti first quarter call for the 3 months, to March 31. Members of the AngloGold Ashanti executive team are present. And as it's customary, Mark Cutifani will give an overview, followed by Venkat with a walk through the financials. Mark will talk through an exciting slate of exploration and projects and then offers concluding remarks before our Q&A.

As is customary, I'll just briefly read through our Safe Harbor Statement. Certain statements made in this communication, other than the statements of historical fact, including without limitation, those concerning the economic outlook for the gold mining industry, expectations regarding gold prices, production, cash costs and other operating results, growth prospects and outlook of AngloGold Ashanti's operations individually or in the aggregate, including the completion and commencement of commercial operations of certain of AngloGold Ashanti's exploration and production projects and the completion of acquisitions and dispositions AngloGold Ashanti's liquidity and capital resources and capital expenditure and the outcome and consequence of any potential or pending litigation or regulatory proceedings or environmental issues are forward-looking statements regarding AngloGold Ashanti's operations, economic performance and financial condition. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause AngloGold Ashanti's actual results, performance or achievements, to differ materially from the anticipated results, performance or achievements expressed or implied in these forward-looking statements.

Although AngloGold Ashanti believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct.

Accordingly, results could differ materially from those set out in the forward-looking statements and as a result of among other factors, changes in the economic and market conditions, success of business and operating initiatives, changes in the regulatory environment and other government factors, including environmental approvals and actions, fluctuations in gold prices and exchange rates and business and operational risk management.

For discussion of these and other factors referred to AngloGold Ashanti's annual report on Form 20-F, which is filed with the SEC in the United States on 23rd of April, 2011 These factors are not necessarily all of the important factors that could cause AngloGold Ashanti's actual results to differ materially from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have material adverse effect on future results. Consequently, stakeholders are cautioned not to place undue reliance in forward-looking statements. AngloGold Ashanti undertakes no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after today's date or to reflect the occurrence of an unanticipated events except to the extent required by applicable law. All subsequent oral or written forward-looking statements attributable to AngloGold Ashanti or any person acting on its behalf are qualified by the cautionary statements herein.

This communication may contain certain non-GAAP financial measures. AngloGold Ashanti uses these non-GAAP performance measures and ratios in managing its business. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for the reported operating results or cash flow from operations or any other measures of performance prepared in accordance with IFRS. In addition, presentation of these measures may not be comparable to similarly titled measures other companies may use.

AngloGold Ashanti posts information that is important to investors on the main page of its website at www.anglogoldashanti.com, and under the Investors tab on the main page. This information is updated regularly. Investors should visit this website to obtain important information about AngloGold Ashanti. I'll now hand it over to Mark.

Mark Cutifani

Thanks very much, Stewart. Ladies and gentlemen, it's, again, a pleasure to be here. I am working off the presentation that you should have on your computers. But I will continue to refer to where I'm up to and try and keep the commentary succinct for those that may not be listening or reading off presentations.

For us, very important quarter this quarter. Obviously, important in terms of earnings in spite of the short-term headwinds we've been experiencing South Africa with good result and whilst the tax credit that we received based on the great news we've had from the South African government on reduction in corporate tax rates. A good result, cost have held pretty well in line, in fact, better than guidance and I think about 10% up on last year, this time last year, against the inflation rate across the industry of about 15%.

So we've done a lot of work on our costs, as people know, with the implementation of Project ONE and we're certainly seeing some benefits. But still more we can do and we can do a lot better on the cost side and if South Africa had delivered in terms of its potential, you would've seen probably a 5% better results. So so real opportunities for us to continue to improve.

EBITDA is up 39% to $800 million against the gold price that's up around 22%. So a solid effort there, which sets some good results across the operations. The other thing that or the other couple of key features of the result has been the exciting exploration results. And I'm being told that I used the word exciting 39x in my presentation this morning. So I'm going to try and use that word a lot less this time around, Stewart.

Finally, the big news for us, the commitment to 3 major projects being the Cripple Creek expansion and extension, which also positions us we think to start looking for additional gold, high grade gold parts underground, the commitment to Kibali, the former commitment to Kibali and Mongbwalu in the DRC.

So certainly a very exciting quarter with lots of importing news to share with you today. Firstly, starting off with safety, it has been a tough quarter on the safety front, 3 fatal operating incidents in South Africa and one fatality in Argentina. I think that's the second fatality that we've had in the life of Argentina. So obviously, a disappointing result.

In terms of business results, the Section 54 stoppages and associated safety stoppages in South Africa had a real impact on the first quarter. The good news there is that we're developing quite a constructive set of dialogues with the Department of Minerals and Resources, and we're certainly seeing a pretty significant change in our conversations. And certainly, less interruption, as a consequence of doing a number of things on the safety front, which I think are every important. But also, at the same time, the department has recognized that across the industry, those were the stoppages, don't make sense and so we've -- I think, in a very constructive dialogue and we should see improvement. We're expecting to see the 30,000 to 50,000-ounce improvement in the second quarter as a consequence of that and other things we've done. So a tough quarter. But certainly, improving towards the end. And as we come to the new quarter, we should be able to recover and start moving forward in South Africa. Again, that will help us improve both production and cost.

We will move to Slide 6 in your pack, regional overview, Continental Africa. A great quarter. 382,000 ounces, up against 363,000 this time last year. Geita, Siguiri, Iduapriem, never have all doing good work and certainly improving. Sadiola, result is a little bit be down because of low-grade. We've actually been processed within preferentially processing some low-grade stockpile material as we move people in and out of the operation. We're getting back to normal operations. We'll start to see some high grade come through these, so that will pick back up. We did have a problem in one of the shops at Washington, that impact us for 21 days. Again, you'll see a recovery in performance there. So against that backdrop, great performance by the African team.

On budget. Costs are on budget, if you look at the cost in a 12-month basis, flat against the 15% inflation rate across the industry. So fantastic performance by Richard Duffy and his team. Again, confirming the positive trends we've seen probably last 8 quarters now. So great results.

In the Americas, Cripple Creek, again, a solid quarter, 225,000 ounces total cash cost. This is across the Americas' region, at $534 an ounce. Cripple Creek strong performance. Cerro Vanguardia in Argentina, again, a strong performance in spite of some of the constraints people were experiencing. We're doing pretty well with the government. We're getting material through. So the operation performed very, very well. In fact, we have the president visit our operations during the quarter and she declared that Cerro Vanguardia was a model for a mining government relationship. The government owns 15% through thermal crews and they've been very pleased with what we have. And obviously, the great performance that we've delivered in terms of dividends, the government has been very much appreciate it.

Result, too good operating performances, but that can get better as the team recovers from tougher quarters at the end of last year. So we are seeing the operation on the upswing, and I expect next quarter to be better again.

In Australia, again, operation's coming in on plan. Production, a little bit lower compared to this term last year, mainly as a consequence of bit lower grade because we're mining the lower grade stockpiles and we're starting to transition towards the new Vogue discovery. And whilst we'll spend much of the time, much of this year getting there. Graham Ehm got some very good work going on, which is an addition to the Project ONE, where he's looking to get his production steady-state around 75,000 ounces a quarter and trying to get those costs down to near $1,000, which then gives us a couple of years before we start to see the largest gold underground starting to impact on the operation, which will then see us both improve production and our operating cost performance on a more sustainable basis.

You must remember, that we had, 4 years ago, we had about 5 years left at Sunrise Dam. Now, we look like we've got 10 to 15 years. So the transition will be a little bit bumpy because we're a bit light in finding that extra potential. But it's still open a bit. So we're pretty confident that we've got a real future. And certainly, the transition is already starting to occur, so very happy to see that transition occur and we'll see margin improvements during the course of the year.

In South Africa, as I said, tough quarter, impacted by safety stoppages. In fact, safety stoppages in Section, what we call, 54 stoppages, which is associated with safety risks identified, hit us to the tune of about 76,000 ounces. The rest was a consequences of some additional seismicity we've had in a couple of our best bits [ph] operations.

Certainly, the Section 54 impacts have reduced in the last month, and I think that's a direct consequence of improving safety performance and the dialogue that we've had with the Minister, the chief inspector and the various inspectors. And even myself, I've been involved in at least half a dozen conversation, 2 with the minister. I certainly think we've got a much more conservative process agreed going forward. And we should see improvements in those results, which should and will flow-through to the operating cost. The jump from $637 to $849 was a direct consequence of the production, and that should similarly turn around. And I'm guessing, we're going to be somewhere between what we did this quarter and the fourth quarter last year in terms of Q2. I would expect the 30% to 50%, 50,000-ounce improvement, but a little bit of work still to be done there and by the end of the year, we should be back on track.

Now with that brief overview. I'll hand it across to the CFO, Mr. Venkat.

Srinivasan Venkatakrishnan

Thank you, Mark. Good morning, ladies and gentlemen. You'll see from the first quarter results, which we presented today, that we are presenting our consolidated group financial results in U.S. dollars only. This change brings our reporting more in line with the global spread of our business, reporting by our international peers and our investor presentation. This change also brings with it the incidental advantage of reducing the size of our printed quarterly report and content of the tables supporting the financials by around 50%. However, for the benefit of any analysts, who uses our rand numbers. These have been made available by way of supplementary information on our website.

If I can now turn onto the slide headed First quarter financial results. Despite the production setback in South Africa that Mark outlined earlier. The adjusted headline earnings for the first quarter was strong at $429 million. You will recall that the first quarter of 2011 was the company's first quarter following the removal of the hedge book, which with the benefit of the full exposure to spot prices, adjusted headline earnings rose to $209 million during that quarter.

The first quarter 2012 adjusted headline earnings of $429 million represents a more than doubling of the adjusted headline earnings off that base. When compared against the previous quarter, which tends to be seasonally our strongest quarter, adjusted headline earnings rose by 45%, or $134 million from $295 million last year to $429 million, primarily due to 3 factors.

Our previous quarter's earnings were adversely impacted by $105 million worth of environmental provisions; net impact of $61 million from lower quarter-on-quarter production, partly negated by favorable phasing of expenditure and one soft impact of deferred tax credits relating to the statutory tax rate changes as outlined in our announcement in early April.

South Africa, the decrease was USD $131 million. And in Ghana, the impact of the tax rate increase was $41 million with a net favorable impact of $90 million during the quarter.

Adjusted headline earnings per share amounted to $1.11 for the quarter. The total cash cost of $795 per ounce came in better than the guidance of $820 to $830 per ounce due to weaker local currencies, less expenditure being incurred during period of safety stoppages, better-than-anticipated grades at Geita and phasing of consumable and maintenance spend. Margins calculated at both total cash cost and cash cost plus capital expenditure remained healthy at 53.1% and 32.3%, respectively.

Now turning to free cash flow and balance sheet. During the first quarter of 2012, all cash flow metrics were strong as follows. EBITDA was $800 million. Cash inflow from operating activities, which is after working capital and tax was $581 million; free cash inflow, which is after all items of expenditure except dividends payable to shareholders, was $185 million.

In addition, $20 million was received for the sale of certain non-core investments. The free cash flow and cash inflow from operating activities both benefited from a lower capital expenditure profile during the first quarter, whilst free cash flow also benefited from the timing of interest and tax payments.

The net debt levels therefore dropped to $483 million, some $127 million lower than Q4 2011 net debt level of $610 million. Given the residual capital expenditure of $2 billion for 2012, a large proportion of which is on project capital, funds earmarked for the acquisition of Mine Waste Solutions aggregating $335 million and ongoing quarterly dividend payments to shareholders, we expect net debt to increase during the remaining 3 quarters of 2012.

During the first quarter of 2012, Moody's Investor Service upgraded AngloGold Ashanti's international credit rating from the BAA3 to BAA2, citing improved fundamentals. This is currently the highest credit rating enjoyed by a South African domiciled gold producer.

Now turning to outlook, anticipating a stronger second half of 2012, the group's gold production target and total cash cost for 2012 remained unchanged at between 4.3 million ounces to 4.4 million ounces at $780 to $805 an ounce. Gold production for the second quarter of 2012 is estimated at 1.04 million ounces. Total cash costs are estimated at $840 to $855 an ounce, an average exchange rate against the U.S. dollar of 770 for the rand, 173 for the Brazilian real, 0.97 for the Aussie dollar, 4.4 for the Argentinian peso and fuel at $125 a barrel.

The increase in unit cash costs quarter-on-quarter is due to power tariff increase and winter power tariff and assay, lower silver credits, timing of maintenance and consumable spend before stripping an inventory adjustments. Both production and total cash cost estimates will be reviewed quarterly in the light of any safety-related stoppages in South Africa and any other unforeseen factors impacting these estimates. I will now hand you back to Mark Cutifani.

Mark Cutifani

Thanks very much, Venkat. I think, as an observation, I think we're the most highly rated gold affiliation in the hemisphere of those numbers Venkat, even more than South Africa. Ladies and gentlemen, I'm actually on Slide 15, looking at the exploration slide with the yellow and the green dots. Very simply put, we're showing 15 exploration projects. The 11 yellow dots represents our current active projects, and as you know, we renewed the portfolio on an annual basis. And 4 green dots are showing forms, what are potentially significant gold discoveries. Firstly, in terms of Egypt, we continue to see hits on the Hutite prospect. And certainly, does continue to confirm, we think we've got 3 to 5 million-ounce potential there. We've seen new hits on a 1.7 kilometers surface trend on what appears to be a 5-kilometer structure in Djibouti, which is near Ethiopia. We've seen 2 new discoveries in Guinea one which we've talked about before in Saraya. But we also have Kounkoun, which certainly is support for our strategy to look at doubling the size of Guinea within 7 years. And in Colombia, it looks like we put some holes through what could be a significant copper gold portrait deposit. So very exciting and continuing to renew the portfolio.

And just to reinforce that point, Mineral Economics Group in their most recent publications have acknowledged the AngloGold Ashanti team as the most successful exploration outfit in the gold industry. And I think with these results, one could easily argue that we are, if not the most successful, one of the most successful exploration outfits in all of the mining industry. And I think Roric Smith have done a tremendous job and the results this quarter are exceptional.

Firstly, if I go to slide 16, you'll see La Colosa, the resource is growing 48% to 24 million ounces with the addition of the current drilling. And if you noted in the last 6 months, we've had grades well in excess of the average grade of the deposit of 0.8 to 1 gram to well over 2 grams. And again, this quarter, we've seen a 26 meters of 1.9 grams and a 352 meters at 1.45 grams. So we're continuing to see improving grades. And with the new resource of 24 million ounces, significant improvement, and we are still growing the deposit. And we certainly haven't finished that process by any stretch of the imagination.

In terms of drilling in Guinea, 2 discoveries. Additional information on Saraya within the sections of 37, 34 meters at 4 grams, 39 meters at 4 grams, 65 meters at 5.4 grams, 21 meters at 4 grams. New surface deposit with a significant oxide cap through to fresh rock, which is very encouraging in terms of long-term, both open pit potential and potentially underground possibilities.

So certainly very encouraging results, which are about 40 kilometers from the mill. Kounkoun, the most recent discovery, 20s to 70-meter intersections above 1 gram, again, very encouraging. And when you look at our current mill feed of 0.8 grams a ton, those intersections take on even more significance. So we've had a great quarter from an operations perspective in Guinea and we've had a great quarter from the exploration perspective as well. So very, very happy with what we've seen and I'm going to use exciting for the second time in my chat.

Going to Slide 17. Again, looking at the intersections from Hodine, the Hutite prospect in Egypt, solid intersections ranging 4 meters to 35 meters, grade 1 gram to 18, 19 grams a ton, reinforces the view that we could be on to something of around 3 to 5 million ounces. So again, very happy with the work the guys have been.

And new prospect in Djibouti. And for those that may not be aware, Djibouti is a small country on the east, northeastern coast of Africa, basically surrounded by Ethiopia. Now we have exploration work in Ethiopia. What we found here is a structure about 5 kilometers long, daylighting it's surface on a 1.7 kilometer trend. And right along that trend, we picked up grades ranging from 0.5 gram through to 25 grams a ton. The widths vary, at least around channel chip samples, around 1 to 3 meters. So very excited with what we've picked up there. There's another 2/3 of that structure that are untested because it's below cover. But we'll be setting up to drill in the next few months and that looks, again, very encouraging.

To go to Slide 18, Quebradona. And for those that don't have a section in front of them, it would be advisable to have a good look at this. We have been drilling this prospect, it was a blind prospect where we picked up on our electro mag surveys a significant anomaly. We've been drilling the last few months. We've got about 300 meters of cover. And you'll see that we're starting to poke some holes and we've stylized the section there that is probably about 1 kilometer across. And the most recent hole that we put through, what we think could be significant deposit, is a 580 meters at 0.18 grams per ton gold, 0.48% copper, and 175 parts per million of molybdenum.

Now if you look at the bottom of that hole, as we start to move into what we suspect is a higher grade bromide core, we have intersection of 244 meters at 0.25 grams per ton gold, 0.68% copper and 179 parts per million molybdenum.

Now, if you look at copper equivalent, if we are talking copper equivalents, we're looking at something that could be between 0.8% to 1.2% copper. That is in copper equivalents. And the molybdenum probably adds about somewhere between 5% to 10% to the value.

So it is still very early days. We have a few holes in the deposit. It looks like 600 meters breadth width of about 1 kilometer open to depth. Very interesting intersections. We're obviously mobilizing some large scale, deeper drilling rigs to get a good handle of what this might be. But certainly, very excited. Backs up the forts that our geologists have some 2 or 3 years ago. So very happy and it's great to back pure geological judgment and assessment and come up with something like this. So we'll wait for the next couple of quarters to see what the drill results indicate. But as people know, copper or copper gold porphyries generally can be large in size reasonably consistent. So very interesting prospect that will provide a stream of information flow over the next few quarters, I expect.

Moving onto projects. So stuff we've actually got on the ground, so that's stuff that really has the place buzzing in terms of what's potential going forward. But what we're doing right on the ground, we're talking about growing the business to 5.5 million ounces. We're backing that, we're building the projects. Nuevo Chaquiro [ph] is running up the full scale, will be up to full scale by June.

Cripple Creek, leach extension pad delivered a year ahead of schedule on budget. Tropicana currently delivering on schedule. In fact, a little bit ahead of schedule, on budget in terms of cost. Compare that to, what everybody else seems to be reporting at the moment, major cash blowouts on capital. We've kept our capital tight. We're keeping to our project deadlines. Yes, there's lots of pressure particularly in Western Australia but were holding schedule and we're holding the capital costs. So very encouraging there.

And if you flip across, you'll see Tropicana there on schedule. We've got a drill rig mobilized to side drilling. Havana Deeps and these other prospects continuing to pick up gold. So that reinforces the view that we have a potential underground operation in Havana Deeps. So very encouraging there.

We commissioned the airport literally today. We had our first flight land. So first milestone, as well as the commissioning of the road from Calguli. Construction facilities in place. We're starting the civil works, major concretes already being poured for primary crusher, the leach area, the mill foundations and the thickening areas. So very excited and very happy with the progress the team is making. And they are working under some pressure. But certainly, that team has done a great job. And the fact, we've finalize all the major contracts and will look like we're still within our budget limits. Very tight, but were there, and the schedule looks pretty good. So very happy with the progress they're making.

On Cripple Creek, very good slide on Slide 23. For those that are looking at the presentation, it gives you very good aerial view. The good news is, we've just been awarded the best of the best award on environmental management. So we very proud of the team and what they've done. That goes with the best in Brazil award and the commendation, the President of Argentina has just given us in South America. So very pleased with Americas' team and the standards they're setting for the rest of the group.

What we are doing with the Cripple Creek project is were installing a new mill, based on the high-grades we're finding deeper in the pit. That will improve production somewhere between 70,000 to 100,000 ounces. With the grade variation that we have in the leach pad extension, not only do we take the operation up to 400,000 ounces, we're also extending the life of the project to be on 2025. And even beyond there, we have about a 350,000-ounce profile. That is without taking into account the underground potential that we see based on the high-grades we're finding in the base of the pit. And don't forget that Cripple Creek that we're mining down to 1,000 meters over the last 100 years. So we're now getting ourselves in a position where we can start testing some of those loads, looking for material the miners might have left behind and were certainly on the couple of those lodge at the moment in the pit which provides us with confidence of putting the mills on. So an exciting development there, very pleased with the great work the Cripple Creek guys have done.

On Page 24, we have provided a schematic showing both Kibali and Mongbwalu and the DRC. And as you can see, based on the map, it's not that far away from another major mineral problems. And on the same sort of trends across the African continent, where we have Geita and obviously the 3 Barrick operations. It's just interesting to note that Geita at the moment is delivering free cash flow in excess of African Barrick in Geita. So again very pleased with the sort of performance that Geita is a delivering. Project ONE has been an outstanding success with productivity improvements almost up to 100%, cost reductions about 40%. And again, another still a quarter.

Kibali, good progress. We've been supporting Randgold all the way. We took a little bit longer to approve the project. We actually cost an estimate final numbers a little differently to Randgold. And if I should explain that, Randgold's $800 million estimate for the project for this year compares to our $981 million. We actually -- or Randgold estimates contingency at a unit level, which is what we support. But what we do then is we make another provision, which we call a broader contingency for those items that are difficult to plan for. So whether it's some sort of disruption to supply lines, some other disruptions that are very difficult to plan for. And our view is in like a country in the DRC where the unexpected can happen, we make an additional contingency provision based on our experience of the many projects across the globe. We also provide escalations so they our different numbers, our numbers are nominal, whereas the Randgold number is a real number.

Now we're very happy with the way Randgold is estimating their numbers. Mark and the team are absolutely committed to delivering on that number or as close to that number as they can, and that is consistent with the December 2013 commissioning target.

We, again, also include a bit of contingency for slide on the schedule, which goes into our costings. But again, we are fully committed to support Mark and the team deliver that December target and hopefully, I'm going to have to buy Mark a very expensive bottle of red wine in December 2013.

At Mongbwalu, we've advise of a $345 million project expenditure estimate for Mongbwalu, takes us to 130,000 ounces a year for 3 years. Average over the lot will be about 100,000 ounces. We believe we'll able to hold that 130,000 ounces beyond that 3 years. It really is a function of the areas we are mining in the early life of the project. We expect and will deliver a quick return on our cash with a view to then reinvesting and at least doubling the size of the project within 4 to 6 years.

And so from our point of view, very low risk approach. We bootstrap it up over time. We use cash flow to expand the operation. And so we will be very aggressive on the exploration looking to expand that operation. But again, very excited with what we have there and the team has done a great job in getting that to a point we're approved and we are actually building today. The roads are commissioned, powerplants, a whole range of things are actually in place. The lease areas are quite significant.

And the Mongbwalu, we can file about the 6,000 square kilometer area of ground. So again, lots of room for exploration plays through those areas, and we remain committed to exploration on both leases and Randgold has done a great job continuing to add ounces to Kibali.

More specifically, on Page 26, you can see some of the diamond drilling work that we're doing at Mongbwalu. We have a timeline there for the operation looking to commission at the end of 2013, moving into early 2014. So we will go for that. And the following 2 slides just shows you the work that we've already done at Mongbwalu, upgrading pipelines, upgrading our power stations on Page 28. So well progressed, going well, long lead items have been ordered. So we're in good shape in terms of Mongbwalu.

The Mongbwalu footprint relatively small as you'd expect with an operation about 130,000 ounces. But you can see on Page 29 a couple of blank areas on the processing plant footprint. That areas provide us the ability to expand the operation. We can double the size in relatively quick order. And in fact, 70% of the capital that we're putting in place now will serve as an expanded facility. And if I could say that on a 15% return project as we stand, we move that to well over 25% with incremental capital expansion and we position ourselves for long-term growth and opportunity in a very prospective part of the world.

On Kibali, again, the schedule showing that, very happy with the work Randgold has done. Very professional. Fantastic work on relocation. Good project work. They've engaged us through the process and we do feel like we're part of it. You can see on Page 31, it's a magnificent ore body. The grade styles as you can see, under the ore body, 1 kilometer grid. Great ore body, very well tested in terms of the drilling. You can see the concentration of the drilling. So very confident that the guys will be able to deliver on their promises in terms of tons and grade and deliver on improvement.

Ladies and gentlemen, and just moving through into a conclusion, I'm going to jump to Page 33, which just shows a couple of the financial metrics. Gold prices up 22%, our EBITDA is up 39%. Normally, we would expect to see EBITDA up 44%. But remember that we're are a little bit off on the South African operations. If it had delivered even half what we were hoping for, we'd be above the 44%. So that 2:1 leverage ratio that we use in terms of percentages for every 1% in the gold price, we delivered 2% improvement in EBITDA, still holds pretty solidly.

Earnings, both EPS and earnings, much higher than you would expect as a consequence of the tax credit we got in South Africa. Now that is obviously a one off. But certainly, we hope that the positive conversations continue in South Africa while all the other governments are adding taxes, it's great to see a government pulling the tax back and the government's been very constructive in the tax restructuring that they're looking at for the mining industry.

And I have to say, we're the only country in the world that has already negotiated what we call a mining charter, which is a tripod type agreement between government, unions and its industry to grow the mining industry in the country. And despite all the rhetoric, the misleading commentary on South Africa, we have had a very supportive regime in the main. And if we can deliver on the mining charter commitments and the tax conversations is a constructive and positive when given, we have a very modern earnings-base royalty regime. We believe South Africa is positioning itself to be the go-to exploration or destination in the mining industry. It's an important year this year.

I'm committed to be involved in the processes as Vice President of the Chamber of Mines and I'm pushing the point on the mining charter being a leading edge document. If we can deliver that, we will turn around the perceptions on South Africa. And it would be the go-to destination within 12 months. That's the vision we have for those conversations. And for us, we believe it has great potential.

Page 34, value proposition. It's one thing to find resources. It's one thing to develop new projects. It's one thing to deliver on your commitments, but were also delivering industry best returns on equity, on return on capital employed. And as we say about value, our enterprise value add or EBITDA, we're the cheapest if not the second cheapest stock in the market. In our view, we have 50 -- we're creating 50% to 60% under true value. So we will be pushing the delivery and continuing to deliver cash, cash flow, production, earnings growth, new projects, new exploration discoveries. And at some point, when you're delivering the best turnaround, the best story in the industry, the market will get on board. That's our belief, and that's where we're going.

And a Page 35, a simple summary of where we are. Best industry exploration performance, delivering new discoveries at a rate no one can compare to in this industry, which means we're delivering new resources of $35 an ounce, not $350 an ounce, not $1,000 an ounce, $35 an ounce.

We had committed within our teams to deliver 20 million ounces this year. We've already banked 12 million ounces. We've upped the target to 25 million for the team. And I'm sure we've got the people that can deliver.

We've proven turnarounds with EBITDA performance increasing from $1 billion to $3 billion. We're going to continue to improve the business. And we're going to make sure that, that improvement and the way we operate is reflected through our project delivery. And so far, we're on track. We have high-quality, low-execution risk projects. They're not $3 billion projects. They're 100 to 500 with Kibali being the largest project we're throwing a full weight of our support behind Matt Bristow. But we've demonstrated the ability with our current projects to deliver, and we will deliver those projects on time and certainly, within schedule. Yes, there is some risk. We might have a couple of bumps. But they won't be major blowups.

The balance sheet is in good shape, low-gearing, substantial unused debt capacity. We will fund those projects from our operating cash flows. We have the geographically most diverse portfolio in the global gold industry, when you think gold, when you think global gold, you should be thinking AngloGold Ashanti and given the performance that's being delivered by this team, over 4 years, we believe, we represent the most significant value in this industry.

And with that, we're very happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from John Bridges from JPMorgan.

John D. Bridges - JP Morgan Chase & Co, Research Division

I was just wondering, your comments on the changes in South Africa seem pretty amazing. I just wondered, was there any particular trigger that has led to these changes?

Mark Cutifani

John, I think, I'm very frustrated. I'm an Australian in South Africa. And I watch the debate in Australia and I watch the debate in South Africa, and I can't understand why people report Australia in a reasonably constructive way and South Africa so destructively. Very simply put the nationalization debate has been put to bed, very clearly. The company debates of these things in a very open way. What we are now debating is what is the tax structures that should apply in the country? It's an open debate. Unlike Australia, we are being asked to comment and propose alternatives to the ANC [ph] as a ruling party on what we should see as a tax structure. And we praised the government on their royalty ratio. We thanked the government for reducing corporate taxation rates. And we've been given an opportunity to debate the SIM's document unlike any other jurisdiction in the world. For the life of me, I can't understand why things get reported so negatively. Now I do concede that we don't promote ourselves as a country. And we, as a company need to promote what's happening in the country better than have. I'm very encouraged, certainly a long way to go. A long way to go in terms of the next 6 months. But I tell you what, we positioned to debate with the government in South Africa, very differently to the way the debate was positioned in Australia. And I am sure we're going to deliver better outcome because we are engaged. We have a say. And we get off our bums and we lobby and we're working the problem. That's all I've got to say.

John D. Bridges - JP Morgan Chase & Co, Research Division

That's quite a lot. Over the years, it's been quite amazing to see Anglo and AngloGold Ashanti popping up as discoverers or joint discoverers with some of the major -- world's major deposits.So I really like the recognition you got from those guys up in Canada. Just -- could you talk a little bit these things you're finding in Djibouti and Ethiopia? Given all the political uncertainty we see nowadays, what would be required for you to actually get involved over there?

Mark Cutifani

Again, Roric Smith and the team have just done an outstanding job on the exploration front. We've now put on the title several major discoveries. And if all of these comes through, I think its up to 8 or 9, I mean, that's a remarkable performance. And the guys have got more prospects and they're drilling other prospects. So we appreciate the feedback. On Ethiopia, to be frank, John, I was focused on Ethiopia. And we're watching it very carefully. But there's a structural trend that runs into Djibouti. So when the guys told me that we picked up a 5-kilometer structure, I had to go back to the maps and look where Djibouti was. Being very honest. So they've done great work. They've worked off the major structural trends. And like the good explorationists they ignore the boundaries of countries and they look at the major geological trends. And this thing runs through from Ethiopia. So very good structural first principles geological work. It's a 5-kilometer trend. The guys believe it's sort of a 3-meter type structure. We've had some very high grade hits which is always encouraging or high grade channel samples, which is always encouraging to see that you've got that intensity of mineralization. So quite frankly, we're not sure what we've got other than we've got 1.7 kilometers, a very good channel sample results. And we can get back to you on the JV details. We're still getting the details. It only come through on the last week. But more I'm happy to follow-up with you and give you some background on that. And we've been doing less work in Ethiopia. This thing was the thing that caught our guys' eye. And they haven't even told us that they sort of move into Djibouti. And we're quite excited. And I'm going to have and do a trip to Djibouti.

Operator

Our next question comes from David Haughton from BMO Capital Markets.

David Haughton - BMO Capital Markets Canada

If I could just start, perhaps, with your again there Mark and Venkat looking at the earnings. Can you talk us through that $90 million rebate that you got from South Africa? And I presume that's included in your $429 million, which is about a $0.20 impact. Is that a one-off? Or what should we be looking forward on?

Srinivasan Venkatakrishnan

Okay. David, you're right. The 90 -- if I can just explain to $90 million credit. It includes a credit from South Africa with just purely a deferred tax rate adjustment of $131 million. And it's partially mitigated by the Ghana tax rate increase because the stability agreement protects us beyond 30%, but we will be on the hook from 25% to 30%, and that's a $41 million. So the net impact is $90 million. Yes, you are correct that's one-off on the deferred tax credit. In cash terms, this year, 2012, we are looking at a ZAR 300 million saving. And I think ZAR 300 million saving and cash flow terms in terms of tax. Our South African tax rate used to be around 43% on the gold tax formerly. That is now dropped to around 34% in South Africa. And group as a whole, our effective tax rate based on current assumptions, et cetera, is around 32% consequent to those change.

David Haughton - BMO Capital Markets Canada

That's right you anticipated each of those questions on various tax rates there. So that's [indiscernible] I haven't finished yet, Mark.

Mark Cutifani

Sorry, sorry, David.

David Haughton - BMO Capital Markets Canada

Down to Cerro Vanguardia. Visited that operation late last year, as you know, very impressive part of the world. All sorts of confusion thereabout what the state of players is in Argentina. I'm pleased that you seem to have be held in high standing there. How are you going in repatriating funds out of there? Or are you just investing funds domestically?

Mark Cutifani

David, we've had a good track record in Argentina, and with the turnaround of the operation in the last 3 years and the investments we've made in San Julian, we'd certainly kept the good relationship, the good environmental performance being good. The actual President comes from that region. So when she heads down that way, we invited her to come have look and she said some very nice things, which was helpful. We are moving things through very carefully keeping operation going. Although, it certainly become a lot tougher but we're certainly been supported in what we've been doing. And so we've been able to continue to do well. And obviously, want to keep that relationship in the right side of things.

David Haughton - BMO Capital Markets Canada

All right, specifically ask Barrick, Humana and Goldcorp over the last quarterly, how they been able to get funds out of the country? None of them have an answer because they're all still net investors. Because what I'm uncertain about is that if you want to pull money out, what exchange rate do you get charged at? Is it the official or the unofficial rate?

Mark Cutifani

David, what we've been doing, as I said, we've been able to move parts and materials because some guys who have trouble moving parts, importing parts. We've been able to move some stuff in, so we've manage that. We have not tried to do any thing on a cash flow basis, Venkat, so we haven't really tested the system. We are being prudent in looking for the right circumstances and opportunities to do that in a constructive way. So we haven't tested the system as yet.

David Haughton - BMO Capital Markets Canada

Okay, well, given the feedback that I had from Barrick, Humana and Goldcorp. No one has tested the system yet. But everyone is talking about the requirement to have goods manufactured in country. It doesn't seem to be a huge impediment, there is capacity in country to manufacture these items. But its just been lifted hassle factor.

Mark Cutifani

Yes, not everything -- one thing I'd say some of the high precision engineering stuff will be problematic. We've been able to bring some stuff in, David. But our experience -- we've been in Argentina for a long period of time. We've seen this, they tell me before, you have to keep a constructive and positive engagement going with the government. The good news is the government has 15% of our business, sorry, 7.5%.

Srinivasan Venkatakrishnan

7.5%.

Mark Cutifani

And we've been -- we've changed the numbers. We've been in a dialogue. We've been dividending, we formed crews, which is the government. And the President was saying that was the only shift model she was looking at for the mining industry. Now if you know the history of the problem at the petroleum producer, there's been a long running argument over the history of ownership and commitments on investment and we continue to invest. So not wanting to comment on that specific circumstance. We certainly not considered to be in the same category. We've been very constructive in our engagements. And we want to keep that relationship. And we want to keep it there. So I can't say any thing more other than that's where we are.

David Haughton - BMO Capital Markets Canada

Right. Over to Cripple Creek. I thought one of the major hurdles for expansion there was the pad footprint. How have you addressed that? And do you -- and is that no longer an issue for you?

Mark Cutifani

We -- it's actually a process. So we extend the pad footprint. We've got all the approvals in place. So we're in good shape. And in fact, we don't go with the project unless we've got that in place. But we are going out and up. So we were in place, were putting stuff and some of the low level pads, as we speak. That's also helped us to get some nice production going, as we speak. So we've got those approvals. We've had to really relocate roads. We still have to do a couple of things on county permits, but we lay our low risk permits. So all the hard works being done. Roads have been relocated. And we've got a mill position that's been approved. So we're in good track right across the board. The other thing, David, on the volumes, we -- the mill has been designed so that represents less than 15% of the material. So we will actually take the tailings and put them back onto the pads so we get a second crack at the gold on the leach pads that we don't have to build a dedicated tailings facility because we've kept it below the 15% threshold. So it becomes economically a very smart way to set the operations up and set the leach pads up. So...

David Haughton - BMO Capital Markets Canada

So you'll have filter places on that tiles. So you can dry stack it?

Mark Cutifani

Sorry, say that again, David.

David Haughton - BMO Capital Markets Canada

Sorry, at the backend of the mill, you'll have some filter pressures so you can dry stock the tiles predominant leach?

Mark Cutifani

Yes, but we don't have to do too much because it's such a low volume. But yes, it strike. I'm not sure if the that the filter pressures in the flowsheet, but it's actually a dry material that goes back into the leach pad. But we have a second crack at it. So it doesn't matter if it's a bit moist. Because you're putting solutions through it anyway.

David Haughton - BMO Capital Markets Canada

Right. Now to South Africa, Section 54 stoppages. Obviously problematic, not only for you, but for how many in the first quarter.

Mark Cutifani

Right.

David Haughton - BMO Capital Markets Canada

You were describing the dialogue that you had to improve that. Is that to reduce the stoppage period or to enhance the safety principles? Or what should we be thinking about?

Mark Cutifani

All of the above. I've had 2 sessions with the minister, one as an AGA representative and one with my Chambers Mines Vice President hat on. We talked about the safety issues in their own right. Industry, we all have a lot to do a lot better on the safety front. We've all agreed on that. We're at a point now where our Project ONE implemented. It takes about 12 months for us to get to the operating level on our Project ONE implementations at a site of 500 people. Given that some of the South African sides of 4,000 or 5,000 people, it actually takes you 2 years. We are only now implementing at the operating level. And we think that will give us a big kicker over the next 12 months. We're hoping on the safety and productivity front. And certainly, the mines department have been very impressed with the work they've seen so far in the early days of the changes we've been introducing. The key [ph] change that I think we're walking through with the mines department at the moment is that what I suspect you'll see is, instead of a whole mine being stopped for a safety incident, it's more likely we'll get sectional shutdowns as opposed to full mine shutdowns. So they call that a Section 55. And that we'll get a much more, certainly, circumspect application of the Section 54. No we've seen that so far in the last month across the industry both the platinum sector and the gold sector. But I must say that we got to keep improving our safety performance, which we've been doing to reinforce that. But the ministers been open. The principal inspectors have been very open. I had a number of meetings with Mike out here and we're certainly in the right dialogues. And I think we've improved our connection with the DMRS as part of that process. And we're certainly seen probably the 50% to 60% reduction in those types of stoppages, which is material.

Operator

Our next question comes from Harry Mateer from Barclays.

Harry Mateer - Barclays Capital, Research Division

Venkat, just a clarification question for you. You mentioned that you do expect net debt to increase a bit during the balance of their year, given CapEx and the acquisition activity. Can you just give us a bit more detail on that? Do you expect to use the company's cash balance, which is fairly ample at the end of the first quarter? Or do you anticipate gross debt actually increasing, so actually borrowing on your bank lines or potentially doing a bond deal?

Srinivasan Venkatakrishnan

Okay. If I can pick up that response to the question. The first comment I want to make is as you would have seen in our annual report, our commitment to maintain our international investments credit rating stands. That's sacrosanct. We will not go to any point which will compromise our investment grade credit ratings, and that was a quite an important discussions we have had with both Moody's and S&P. That's point #1. Point #2, certainly, under the metrics, as you would've seen based on what Moody's published, based on our cash flow metrics now, you've seen an improvement in fundamentals. Our first approach is to draw down on the existing cash balances. Then, as and when the project capital increases, needless to say, the funds will be generated from operations. But we do have the 2 revolving credit facilities available to draw down as requested -- as required. But in any event, what we're looking at is any increase in debt will be well within the tolerance limits of the rating agencies. We have had dialogues with both the rating agencies in this regard. We also fully recognize that these project capital, which would be spent over '12 and '13, is going to contribute to quite increased cash flow for periods '14 and beyond. So they do allow an element of effectively shorter peaks in the debt levels, but within certain elements [ph]. So the key message here is certainly, the net debt would go up quarter-on-quarter, but not to a point which would impact credit rating.

Mark Cutifani

Harry, just another point. Obviously, the gold price is very important to that equation. And for $100 movement in the gold price, on a net cash flow basis, we get about $300 million back. So Venkat and I are debating how, what gold price we would see. So we still think the gold price has legs, particularly in the second half. So that sensitivity, about $100 on a full year basis about $300, $300 million dollars to $100 an ounce, that gives you a bit of a sensitivity -- a feeling for the sensitivities on the revenue side.

Operator

Our final question comes from Joung Park from MorningStar.

Joung Park - Morningstar Inc., Research Division

So just a couple of quick questions. First, given the new second quarter outlook, as well as the first quarter costs, the full year cost guidance implies a big drop in costs in the second half of the year. So what's the main drivers behind those costs improvements? Looks like at least fuel prices assumptions are going down throughout the year.

Srinivasan Venkatakrishnan

I think the main driver is ounces. If you look at the ounce profile, we've had 980,000 ounces in Q1, 10 40 for Q2, and we're expecting a very -- a stronger second half of the year. So the main driver is basically in terms of ounces. That's what drives the full year cash cost down.

Joung Park - Morningstar Inc., Research Division

Okay. And then have you guys heard anything from Eskom about future rate hikes in South Africa coming over the next, say, a couple of quarters?

Mark Cutifani

John, the latest information we have from Eskom is that they downgraded the last hike from 26% to 16%. I'm looking at Venkat, yes, he's nodding his head, so I've got the numbers right. We are also, as an industry, in active conversation with Brian Damers. Eskom has done very well. Revenues have been strong. The industry is arguing that they continue to be circumspect with those increases. We are lobbying the finance department. Again, as I said, we're are active in a number of fronts. So we have not been given a forecast beyond that reduction. But I'd have to say that the politicians, the government, in particular, is very sensitive to cost pressures, to encouraging jobs, to encouraging investment. And so we're hopeful if you have anything better than that most recent announcement.

Operator

Thank you very much. We have no further questions. If you wish to make final statements.

Mark Cutifani

I think, ladies and gentlemen, we've had a mixed quarter in terms of 3 of the regions that have delivered very strong results. And we've been sailing into some heavy headwinds in South Africa. We certainly see the situation improving in South Africa, but with the implementation of the new Project ONE initiatives on the ground, we deliberately make sure that what we put in place sticks. So you're not going to see a mad rush improvement, albeit, I'd love to see that. But it is going to be measured. It's going to be sustainable. We're doing it with the government, and you will see improvements. So more work to be done. More opportunities. The other regions continue to go well. We're very pleased with the based that they've established in terms of the Project ONE improvements and the sustainably, which has been a great improvement. That will be I think, the key feature of the operating or should be a key feature that we're expecting in the operations. The other thing will be news flow from some of these new prospects that we've identified. And obviously, keeping you abreast of the project developments that we have right across the portfolio will be important. And certainly, we are very switched on to the sort of things that others have seen on projects. But again, we're probably been quite conservative in the way we've estimated our numbers. And you will see that, that conservatism is in the Kibali numbers and other projects. That's the way we operate, certainly, committed to delivering and making sure that by 2014, you're seeing all these new projects hitting the bottom line and really going the base for the new AngloGold Ashanti. Thank you.

Operator

Thank you very much. On the half of AngloGold Ashanti, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.

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