AngloGold Ashanti Limited (NYSE:AU) 2019 Half Year Results Conference Call August 8, 2019 9:00 AM ET
Stewart Bailey – Executive Vice President-Corporate Affairs
Kelvin Dushnisky – Chief Executive Officer
Christine Ramon – Chief Financial Officer
Sicelo Ntuli – Chief Operating Officer-Africa
Ludwig Eybers – Chief Operating Officer-International
Graham Ehm – Executive Vice President-Group Planning and Technical
Tim Thompson – Senior Vice President-Growth and Exploration
Conference Call Participants
Patrick Mann – Bank of America
Good afternoon, ladies and gentlemen, and welcome to AngloGold Ashanti's 2019 Half Year Results Analyst Presentation. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded.
I would now like to turn the conference over to Stewart Bailey. Please go ahead, sir.
Thank you, Denay, and welcome, everybody. Welcome everybody. Good morning to those of you in North America. Welcome to the first half 2019 analyst call. Before we commence, I just direct you to the disclaimer, safe harbor statements at the beginning of the presentation. It has important information concerning forward-looking statements that we may make and I urge you to look at it please. And today Kelvin is going to kick off with a few introductory remarks with respect to the highlights from first half of the year, Christine will talk to the financials; our Chief Operating Officers will talk to their respective portfolios; Graham Ehm, we'll talk to our major projects; Tim Thompson to exploration; and then Kelvin will conclude.
Without further ado, I'll hand over.
Thanks, Stewart, and thanks everyone for joining us. Many of you are familiar with our strategic approach. It guides us in mitigating risks, protecting our balance sheet, managing costs and capital and ensuring we have a pipeline of options to sustain the business into the future. Maintaining our license to operate is fundamental to the success of the business. We do this through delivering on our ESG objectives, specifically working towards zero harm, sound environmental management and community development. The second quarter has been another encouraging period when it comes to safety.
At the end of the quarter, we achieved 449 consecutive fatality-free days, which is a new company record. All other safety measures are also trending in the right direction. While this is an important milestone, there'll be no complacency and our focus remained on ensuring our goal of zero harm. The South Africa region achieved an all injury frequency rate for the period of 5.28, the lowest in its history, benefiting from the new shift arrangement at Mponeng. It's also important to note that there were no reportable environmental incidents during the quarter.
As we mentioned in May, 2019 production is backend weighted. This reflects normal seasonality as well as a slower start to the year at certain of the assets. We expect another small step up in Q3 before a further lift in production in Q4 with strong performance as expected from Brazil, Siguiri and Geita. Production of 1.55 million ounces for the first half of the year reflected solid contributions from Geita, Iduapriem, Tropicana and Kibali. Iduapriem benefited from improved grade control and higher grade ore from – Teberebie – I apologize, I missed one – Teberebie Cut 1 and Cut 3. Geita saw a strong recovery following the mill maintenance that took place in Q1.
Tropicana delivered higher mill throughput, improved head grade and increased metallurgical recoveries. Our cash cost improved by 4% to $792 per ounce. All-in sustaining costs in the first half improved to $1,002 per ounce compared to the same period last year. EBITDA margins remain healthy and growing despite lower volumes and a lower gold price when compared to the same period last year. Production and cost guidance remain on track. As this slide indicates, we continue to focus on expanding margins, which are seeing the benefit of prior investment and we continue to drive operating efficiencies, which will help to ensure we capitalized on the current gold price environment.
And with that I'll hand it over to Christine to provide an overview of the financial performance.
Thanks, Kelvin. Good day everyone. The operational performance in the first half continues to reflect a strong performance on operational efficiencies and capital discipline. Production from retained operations was down by 2% mainly due to planned volume and grade reductions at CVSA, lower grades at Sunrise Dam, lower production and feed grades at Siguiri due to the combination plant being commissioned and lower production in the South African surface operations. Tropicana, Kibali, Geita and Iduapriem delivered solid improvements in performance, which offset a large portion of the production declines. Q2 reflected an improving production trend with a 7% increase compared to Q1.
All-in sustaining costs also improved by 2% year-on-year ensuring a healthy all-in sustaining cost margin of 23%. Despite a slightly lower average gold price received, free cash flow improved by $20 million for H1 compared to the prior year. Free cash flow in Q2 was $78 million and is expected to improve in H2 across the majority of our operations. Free cash flow was impacted however by slower cash repatriation from the DRC due to the introduction of the mining code last year and the change in administration. While we've received $51 million from Kibali during H1, free cash flow would have been $121 million higher had the remainder of the Kibali cash due been received timorously.
Based on discussions with our JV partner, Barrick, we were expecting to receive the cash in the near future. We also saw higher levels of working capital relating to unsold gold and higher ore stockpiled labels, Argentina export duties and fleet prepayments with CVSA, which except for the export duties will unwind in H2. However, prepayments on equipment and preproduction capital for Obuasi are expected to increase working capital in H2. Overall, VAT receivables between Tanzania and the DRC remained largely steady as we continue to offset against corporate taxes.
Capital expenditure is 5% lower than the first half in the prior year, largely due to the South African asset sales, a completion of the Siguiri combination plant and lower capital at Sunrise Dam, Iduapriem and Kibali. Capital expenditure is weighted towards H2 in line with pass stream and taking the Obuasi growth capital into consideration. Looking at the cost performance year-on-year, cash costs improved by 4% to $792 an ounce. This reflected the advantage provided by weaker currencies, improved grades, favorable stockpile movements and the South African asset disposals. These benefits were partly offset by inflationary pressures, lower silver bar product sales at CVSA and lower volumes and efficiencies. We are expecting further operational efficiency improvements in H2 to benefit both cash and all-in sustaining costs supported by improved production across our operations and the operational excellence program. The $18 an ounce net improvement in all-in sustaining costs year-on-year was supported by lower cash cost and sustaining capital.
Environmental rehabilitation receipts which are non-cash in nature and IFRS 16 finance lease effects both had a negative impact on all-in sustaining costs. However, the impact of the new IFRS 16 accounting standards was neutral when taking the positive impact on cash costs into account. All-in sustaining cost for our Africa operations at $982 an ounce was 5% below the prior year helped by 11% lower all-in sustaining costs for the South African business. The focus in South Africa remains on reducing the off-mine legacy costs and improving safety and productivity at the existing operations. Good progress is being made in this regard.
All-in sustaining costs for the international operations was 2% higher for the half year at $974 an ounce reflecting lower plant production in Argentina and inflationary pressures in the Americas region in particular in Argentina. Our balance sheet strategy continues to enforce a capital discipline through on decision making and capital prioritization. Net debt at $1.74 billion reflects a 44% reduction from the peak levels in 2014. Adjusted net debt to EBITDA ratio of 1.2x reflects ample headroom to the 3.5x covenant. Leverage would have been 1.1x had the Kibali cash due being received by the end of June. Liquidity remains strong and continues to provide good flexibility in the current volatile climate. Weaker currencies continue to benefit our costs and provide a natural hedge to inflationary pressures across our portfolio. We remain strongly leveraged to the higher gold price and we expect this together with improved production and efficiencies in H2 to benefit cash generation.
Finally, we now have two investment grade credit ratings with Moody's and Fitch, both with a stable outlook. S&P's credit rating was also recently affirmed at one notch below investment grade with a stable outlook. Finally, as Kelvin mentioned, our guidance on all key operating and cost metrics remains intact in line with pass streams both production and capital is back way to the second half in particular Q4. We expect to see improved production from Geita, Brazil, Siguiri, Mponeng and Sunrise Dam. In addition, cash costs and all-in sustaining costs are expected to improve on the back of improved production based on the weaker currency and current commodity price assumptions. This benefit will largely be realized in Q4. Gross capital has been revised down to $350 million to $360 million due to the timing of the Obuasi project capital, which will be skewed to Q4 with the refocusing on the completion of phase one. Graham will elaborate on Obuasi a little later.
Phasing of the Obuasi project capital of $545 million in total is now roughly 10% spent last year, 50% to be spent in the current year and the remaining 40% to be incurred in 2020. The balance of this year’s gross capital of about $45 million relates to advancing the Quebradona feasibility study, Tropicana, Boston Shaker and the completion of Mponeng phase one. Sustaining capital guidance remains unchanged at approximately $160 to $170 an ounce totaling $520 million to $560 million.
I'll now hand over to Sicelo Ntuli, who will talk about the Africa portfolio.
Thanks, Christine. The Africa region delivered a strong performance in the first half of the year. Production at Geita was up 6% against the same period last year, despite the planned maintenance undertaken on the ball mill in the first quarter. Geita continues to transition to a higher proportion from underground operations as planned with a 20% increase in grades recovered from underground. Cash costs were down 5% on the back of the stronger production. At Kibali production was up 12% as underground mining operations reached steady state performance with the completion of the material handling system ramp up. Total cash costs were 23% lower at $541per ounce. On the back of higher production, 21% increased in recovered grade and improved cost management.
At Siguiri, the ramp up on the new combination plant is underway. We saw a 12% improvement on gold produced vessels in quarter one and production is expected to continue to ramp up through the second half as the plant continues to be integrated, stabilized and optimized. This is a key area of forecast for us. Iduapriem delivered another strong performance. Production was up 8% mainly due to 10% increase in recovered grade from the Teberebie Cut 1 and Cut 2. Cash costs were down 6% on grade improvement.
Given the seasonality in the first half of the year, we are expecting to see a stronger second half production driven by improved performances from Geita, Iduapriem and Siguiri. At Mponeng notwithstanding the standard production was 4% lower than the first half of 2018, the all-in sustaining costs improved by 9%. The notable improvement in costs is the result of a range of factors, the successful restructuring of both on and off-mine structures as well as the implementation of a new shift arrangement. In less than eight months since implementation, it is now considered to be the normal way of working at Mponeng with employees responding positively.
We have seen significant benefits across most mining matrices year-on-year, which includes a 58% improvement in safety performance, 9% uplift in productivity, 6% increase in phase advance, 5% rise in ore reserve development despite fewer shifts in the current calendar. I'll remind you that production from the surface sources operations in Q1 was impacted by inclement weather in sporadic power availability. However, we saw a turnaround in Q2, particularly at Mine Waste Solutions due to higher grades and some metallurgical winds. The regional team is working on a number of additional improvements, which we hope to see bear fruits over the balance of the year.
Lastly, an update on the Siguiri brownfields expansion. The combination plant has now been completed. Our current forecast is achieving a higher proportion of hard materials. As the crusher is stabilized to design throughput through fleet blending and scalping of fines, which will assist the material flow. Improving the overall performance here is a key priority for us.
Now, I'll hand over to Ludwig to cover the Australia and Americas region.
Thank you, Sicelo. Tropicana had an impressive performance with production up 18% year-on-year, driven by higher mill throughput, higher head grade, and increased metallurgical recoveries. This is on the back of the 6 megawatt ball mills which I am pleased to report is outperforming initial expectations. We expect a similar production performance in the second half of the year. At Sunrise Dam lower mill feed grades resulted in production of 136,000 ounces. We’re expecting an improvement in production in the second half. Recovery and throughput improvements at Sunrise Dam are our key focus. We’re doing a work to create mine flexibility in a Vogue ore body, which will give us the ability to increase our fleet grade.
Looking ahead, Tropicana has committed this thing autonomous drilling which has potential to lift productivities by about 15% and reduce the number of drills. This technology, which has been successfully applied to roughly 100 drill rigs globally will allow us to operate with an exclusion zone during blasting, which brings the reigns of benefits. At Mineração, we saw a flat production year-on-year. Higher cost resulted from in the investment in dry stacking equipment for our mines. This extra cost was slightly offset by operational excellence initiatives and exchange rate movements. We see production increasing in the second half with an especially strong fourth quarter expected.
At Serra Grande, production was 7% lower due to a planned reduction in tonnages. At Cerro Vanguardia production was down in line with the mine plan, which is mainly grade driven. Cost increase in line with the lower production though this was partially offset by efficiency gains and the favorable exchange rate. In Cuiabá, I think the development rate is critical area of focus. Our aim is to increase ore body flexibility and confidence by opening up the main high-grade mining areas. This will also have a cost benefit as we fold the spare capacity in the shelves and in the plants. Development meters at Cuiabá reached a track record of over 1,400 meters per month during quarter two. This beats the previous high watermark by more than 30%. The step change was made possible by our operational excellence projects to increase jumbo utilization and reliability plus improving infrastructure and mobilizing a new underground development contractor.
The Boston Shaker underground project was approved in April of this year. It is extremely pleasing to note that the first blast took place in early of May and since then the team achieved about 322 meters of development during the quarter, achieving up to three blasts per day. The project reminds on track to deliver first gold in the second half of next year. Looking ahead we will continue to drive operational excellence program and we'll place a particular emphasis on increasing ore development and resource drilling. We are looking for less initiative to increase production flexibility and grow reserves of our underground mines.
This will includes sustaining the step-change in development performance as seen at Cuiabá, identifying the additional near-surface ore sources at CdS and fast-tracking our exploration at Palmeiras Sul at Serra Grande. At Sunrise Dam, we continue to focus on creating underground mining flexibility, increasing results and driving down costs. On projects we expect to progress their feasibility study at Quebradona, continue drilling at Gramalote and maintain the strong momentum at Boston Shaker.
With that I will hand over to Graham, who will talk about Obuasi and Quebradona.
Thank you, Ludwig. Turning to Obuasi, the overall project remains on budget and schedule to achieve the production rate of 4,000 tons per day at the end of 2020. Many of you will have joined us on today's call visited Ghana and Obuasi at the end of May and met with senior government officials and traditional leaders. I believe this gave you a good sense of the project and how it is being managed as well as a good feel for the positive working relationship with our host government and our key stakeholders.
As communicated previously, the schedule to achieve our interim milestone, the first gold at the end of this year reminds very tight. The schedule requires extremely close management and there's no room for slippage. Build up of the bacteria for the biox and is on the critical path and this is a slow process. We are arranging the purchase suitable sulfide concentrate to enable the bacteria growth to occur in parallel with plant refurbishment and construction. The electrical contractor has just commenced and will work day shifts and night shifts to expedite the schedule. This will help us to achieve first gold on schedule and then ramp up to the 2020 planned production rate of 2,000 tons per day.
As we have progressed with phase one refurbishment, we've had a few surprises, which have increased the refurbishment scope and the scope of procurement. Some steel work required more extensive rebuild, the sticking of gearboxes, MCCs and variable speed drives will stand to be obsolete and no longer have OEM support and consequently new equipment is being purchased. We’re managing these changes within the project contingency and the capital costs range as previously provided. In terms of progress with the plants required for phase one, structural steel work is almost complete on the crushing milling, floating, biox module one and CIL circuits. Minor refurbishment works continue to be completed on the biox CCD circuit. We have focused on expediting our equipment to site and installing the electrical and the control systems. The new jaw crusher and grizzly feeder were delivered to site and the new motor control switchboards are in transit, the cooling tower has been shipped and is expected to arrive at the end of this month.
In regards to phase two this is progressing well. Engineering is close to completion and we'll be wrapped up in quarter three. Procurement is also close to completion. Demolition is complete. The SAG and Ball mills have been stripped to the shells. Civil works have commenced and the current S&P and electrical instrumentation contractors will roll into the phase two works. Major packages for the supply of the structural steel and plate work have been awarded to a local contractor and the piping package tender is currently in the market. The Paste-Fill plant contract has recently been awarded. The underground shafts, materials handling and pump station tenders have closed and will be awarded shortly.
In regards to operational readiness, the work is on track and cumulative progress now is approaching 50%. Underground mine development is on track with 3,080 meters completed so far. Development to achieving first stoping, the vent shaft and KRS shaft access is on schedule. Well, the new GCVS vent shafts, the raise boring contractors has been awarded. Underground geological drilling has recommenced with four drill rigs currently operating. The recruitment is progressing quite well and is in the second phase for operator roles in processing, engineering and mining.
You would recall that a key agreement for Obuasi’s redevelopment is the reclamation security agreement. In accordance with that agreement, we have formed the mine closure and rehabilitation community consulted these committees. The committee comprises representatives from the community and the regulators. And in line with our commitments, rehabilitation of the old treatment plants and the shafts area to the north has commenced. Ghanaian participation has also been a key commitment and we have made very good progress in this area through contracting, procurements and employments.
Even so expectations for local employment are very high and exceed the requirements of the project. To facilitate transparency and manage expectations, we have established a local employment procedure and are engaging with the various community groups. And the comprehensive social management plans, which is aligned with the Ghanaian development goals has been rolled out and socialized with the community. Now, a few comments on Quebradona, the selected firms hatch the plant and infrastructure and [indiscernible] for tilings and water have commenced the feasibility study drilling at Quebradona and both are based [indiscernible].
The detailed design of sublevel cave is progressing well and the title study on tunnel boring, this is conventional development that has narrowed the costs and time differences and conventional development has been selected for the current project. New technologies and automation and mobile miners are being analyzed. And the licensing process will begin in the second half of 2019. The team is very focused on the social and political enablement program. Engagement with the community, regulatory groups and leadership is active and polling results are showing the social support for the project is advancing.
Thank you and with that I'll hand over to Tim to cover exploration.
Thanks, Graham. Our Greenfields generative exploration hubs in Australia, in the United States continue to identify an advanced project through the portfolio of pipeline with fieldwork followed by stage gated drilling programs. Our drilling programs are front-end loaded during the year to provide the best opportunity to have the results available for our budgeting and reserve declaration processes. About 40,500 meters were drilled during the first half and our generative exploration programs and that's up 19% year-on-year. Our Mine Site Exploration programs drilled about 417,000 meters in the first half, which is 23% more than the same period last year and nearly double the levels we were achieving four to five years ago.
We're taking advantage of the opportunity to unlock ore reserve addition linked to better ore reserve development, advance rates in our underground operations to produce stable year-on-year replacement in growth. This will support our planning process and allow better operational flexibility for the mine site portfolio. A few of the highlighted programs are shown here from our mine site exploration. 114 million is budgeted and allocated towards our brownfields mine site drilling programs. The brownfields exploration budget for the year is planned to provide the stable delivery of production, ore reserve addition and new mineral resource development projects across the portfolio.
We have a specific focus on maintaining and increasing the reserve base as ore reserve development unlocks drilling platforms that are our larger mines either had already established underground sites such as Sunrise Dam in Cuiabá or those such as Geita that are transitioning to underground operations. 2019 has seen an active start to the year across our greenfields generative exploration portfolio. As I mentioned earlier our meters drilled in 2019 have increased significantly compared year-on-year. A few of the highlighted programs are shown here with 30 million budgeted and allocated towards generative exploration. Our focus remains firmly committed to advancing projects in our Australia and North American exploration hubs and identifying new projects in our West Africa and Brazil target generation focus areas where we can leverage synergies with our existing operations.
In this slide, we see the continuing development of our exploration project pipeline of generative and mine site exploration programs. Additional early stage projects are coming from the work of our target generation teams to continue this progression. The support and complement ongoing mine site exploration development programs that are the foundation of the stable mineral resources and ore reserve replacement in our portfolio.
With that, thanks and back to you Kelvin.
Well, thanks Tim. To wrap up, as I’d mentioned at the start of the call, we're pleased with our sustainability performance for the quarter, but that said, we know that we can do better and we won't become complacent in any respect. We know that's an area where we can continue to improve. As Tim discussed, our exploration and operating teams are working to increase the reserve conversion. This will support long-term planning. And in next year, we'll see a drop in our care and maintenance costs, particularly when Obuasi comes back into production. The process to streamline our portfolio is progressing and we expect to provide an update on this before the end of the year. For the more recently announced South African assets, there's very strong interest. Parties are in the data room and management presentations are underway with a view to receiving indicative proposals as the next step.
Obuasi is another important deliverable while the project remains on schedule, albeit tight for yearend gold pour, we'll be careful in getting there prudently no shortcuts. And as you've heard from Graham, we have more flexibility in the schedule for the ramp up from 2000 tons a day to 4,000 tons a day in 2020. Last but not least, we'll continue to keep a tight reign on cost and capital, keeping a close eye on margins and we'll ensure that investors see the leverage that they invest in us for. Our vision is clear to be a solid, predictable business that delivers value to the cycle.
And with that, let's open it up for questions. Thanks.
Thank you. [Operator Instructions] The first question we have is from Patrick Mann from Bank of America.
Hi, good day guys. Thank you very much for the call. I just wanted to ask a question around the cash costs. If I look at your guidance for the year, you're still looking at 730 to 780, but Christine showed a slide earlier where – the waterfall slide where the exchange rate has contributed quite a lot to bringing down that your current – or your current cash costs. It's still – I know the second half is higher production, but it's still sitting above your range for the year. Would it be fair to say you could bank that $50 plus versus the range of guidance by the end of the year? So if it's 730 to 780, but using – worse exchange rates for you than what you have at the moment, could we knock $50 of that or is the exchange rate benefit coming through an inflation and we should still look at 730 to 780 range?
Hi, Patrick. I think look at this point in time, we'd like to just stick to the guidance range and we give you more breakdown in terms of what you should be factoring in. What we did say is that the production profile in Q. So certainly a stronger production profile in H2, but you'll see more – it's more skewed to Q4. And hence, you can see the cash costs coming down in Q4, but I think for now let's stick to the range. We have no control over currency and inflation and I think we've just got to be that in mind.
Okay, thank you.
Well, I think that might be a record. Are there any further questions? And if not, then – pardon me.
At this moment sir it doesn't seem like we have any further questions.
Well, that was a very thorough presentation. If there are no more question then – well, we thank Patrick for his participation on the call. And, we'll sign off and look forward to updating Patrick and anybody else with our Q3 results. Thank you very much.
Thank you, sir. Ladies and gentlemen that concludes today's conference. Thank you for joining us. You may now disconnect your lines.