Anglo American Interim Results 2015

Improved operational performance and accelerated cost and capex reductions to mitigate price weakness

• Group underlying EBIT⁽¹⁾ of $1.9 billion, a 36% decrease due to sharply weaker commodity prices ($1.9 billion⁽²⁾ underlying EBIT impact), partially offset by weaker producer country currencies and cost reductions ($0.6 billion underlying EBIT benefit)⁽³⁾
• Commodity price-driven impairments of $3.5 billion after tax, including $2.9 billion at Minas-Rio
• Productivity improvements and indirect and capital cost reductions accelerated, with disposals being progressed:
  • $1.5 billion⁽⁴⁾ of operating and indirect cost reductions and productivity gains targeted in H2 2015 and 2016 (operating costs $800 million, productivity gains $400 million, indirect costs $300 million)
  • Additional capital expenditure reductions of up to $1.0 billion by end 2016
  • $1.6 billion of disposal proceeds delivered in July 2015
• Improved operational performance and cash flows delivering net debt of $13.5 billion as at 30 June 2015 (31 December 2014: $12.9 billion), with $15.0 billion of liquidity maintained. Following receipt of Lafarge Tarmac proceeds, net debt is $11.9 billion.
  • Production volumes increased by 8% (Cu eq.)⁽³⁾
  • Unit costs decreased by 5% (local currency) and 14% in US dollar terms⁽³⁾

Notes to the highlights and table are shown at the bottom of this section.

Mark Cutifani, Chief Executive of Anglo American, said: “The transformation of Anglo American that I set out 18 months ago is progressing, despite considerable external challenges. I expect the operational turnaround to generate $1.2 billion⁽⁴⁾ of underlying EBIT upside over the next 18 months, in addition to the $1.7 billion delivered to date. Structurally, we are focusing the portfolio around those assets that are of the scale and quality to generate most value to the Group. We expect to generate proceeds of at least $3 billion from asset sales, including the $1.6 billion received from the sale of our 50% interest in Lafarge Tarmac. We are unrelenting in enforcing strict cost and capital discipline across Anglo American, building upon the unit cost reductions delivered to date. Combined with planned capital expenditure reductions of up to $1.0 billion by end 2016, we are on track to deliver our long term net debt target of $10 billion to $12 billion, with net debt after the Lafarge Tarmac proceeds at $11.9 billion.

“Having defined our portfolio and significantly improved operational performance, now is the right time to accelerate the right-sizing of the organisation that supports the future business; we are targeting a $500 million⁽⁴⁾ total cost saving, of which $300 million will be realised from our ongoing core business, through the reduction of 6,000 overhead and other indirect roles, a 46% decrease, including those that will transfer with the businesses we are divesting. Post asset sales, we expect to have reduced our number of assets from 55 to 40 and reduced total employees by 35%, while maintaining copper equivalent production. As a result, and following the asset disposals and further business improvement, our underlying EBITDA margin of 25% in the first half of 2015 would increase to 35% on a like for like basis, representing a 40% improvement off a substantially lower cost base.”

Mark Cutifani added: “Safety performance is my first priority and I am saddened to report that we lost five colleagues in incidents in South Africa, Australia and Brazil in the first half of the year. There is no acceptable reason for us not to ensure a safe working environment for all our people and our work to consign all safety incidents to history continues with absolute determination.

“The first six months of 2015 saw considerable further price decreases for our products amidst a volatile market environment and economic uncertainty in certain key markets. Our work to drive yet greater operational performance and productivity has continued, with a 14% decrease in copper equivalent unit costs (in US dollar terms). Cash costs were down $600 million⁽³⁾, partially offsetting the $1.9 billion underlying EBIT impact of sharply weaker commodity prices. Looking to the balance of this year and into next, I expect the current period of volatile markets and economic uncertainty, fuelled in part by pockets of geopolitical tension, to continue.

“Overall performance for the half year was solid and largely in line with our expectations, reflecting a number of planned or otherwise expected impacts, such as the rebuild of the nickel furnaces in Brazil and the water shortage in our Copper business in Chile. Of particular note was the performance of the Platinum business following last year’s strike, with the Mogalakwena open pit delivering strong volume, productivity and unit cost improvements, while Rustenburg also showed greater productivity with its now optimised mine plan. Cost control is a major focus, particularly given our footprint in certain high inflation jurisdictions, and we recorded strong unit cost decreases in Coal and De Beers.

“In Iron Ore, Kumba’s production volume was in line with 2014 while US dollar unit costs improved by 4%. The Kolomela mine continued to perform strongly although we have adjusted the mine plan at Sishen to reflect the current market environment and have revised Kumba’s volume guidance downwards for 2015 and 2016. Taking into account the volatility in the iron ore market, and to protect against the downside, we are positioning Kumba for a $45 per tonne benchmark iron ore price by optimising the Sishen pit design and restructuring overheads and support services while preserving the life of the mine.

“We are taking the same approach to costs at Minas-Rio in Brazil. The ramp-up of the operation is progressing and we are now in a position to reduce targeted FOB unit costs by $5 per tonne to $28-30 per tonne once full run-rate is reached in Q2 2016. Given the significant further weakness in iron ore prices, we reviewed our near-and longer-term price assumptions at the mid-year, resulting in a $2.9 billion post-tax write down in the carrying value of Minas-Rio.

“Our Coal businesses in Australia and South Africa delivered a 3% underlying EBIT increase due to a combination of productivity improvements, including unit cost reductions of 13% in Australia and 3% in South Africa in local currency terms, and volume discipline in Canada.

“De Beers saw a continuation of the market weakness of late 2014 during the first six months of 2015, resulting in a 25% underlying EBIT decrease. In response to these market conditions, the business has revised production guidance for 2015 to 29 to 31 million carats, while continuing to focus on its operational metrics. De Beers also reduced unit costs by 10% in dollar terms.

“We are making fundamental changes to transform Anglo American – operationally, structurally and culturally – into a fit for purpose organisation with an enhanced resource endowment. Combined with our diversified strategy across the early, mid and late cycle demand segments, we are ensuring that the business is sustainable through the commodity price cycles, as well as shorter-term price shocks, and offers investors attractive and differentiated exposure to the mining industry.”

Notes to the highlights and table

⁽¹⁾ Underlying EBIT is operating profit presented before special items and remeasurements, and includes the Group’s attributable share of associates’ and joint ventures’ underlying EBIT. See notes 4 and 6 to the Condensed financial statements for underlying EBIT. For definition of special items and remeasurements, see note 7 to the Condensed financial statements.

⁽²⁾  Excludes De Beers.

⁽³⁾  Platinum strike underlying EBIT impact of $0.4bn included in cash cost benefit. Cu equivalent production is (2)% if adjusting for 2014 Platinum strike and excluding Peace River Coal Care & Maintenance impact. Cu equivalent unit costs adjusted for Platinum strike would be 2% increase in local currency and (7)% lower in USD.

⁽⁴⁾  Underlying EBIT improvement targets are broken down as follows:

•  $1.5 billion of underlying EBIT benefits from the core business, broken down by:
  • $1.2 billion of operational improvements, including $0.8 billion of operating cost reductions and $0.4 billion productivity gains
  • $0.3 billion of indirect cost reductions
• Indirect costs are targeted to fall by a total of $0.5 billion, of which $0.3 billion is from core operations (above) and $0.2 billion will  be realised through the divestment of non-core assets.

⁽⁵⁾ See note 6 and 10 to the Condensed financial statements for basis of calculation of underlying earnings.

⁽⁶⁾  Includes the Group’s attributable share of associates’ and joint ventures’ revenue of $1,788 million (30 June 2014: $1,923 million). See note 4 to the Condensed financial statements.

⁽⁷⁾ Underlying EBITDA is underlying EBIT before depreciation and amortisation in subsidiaries and joint operations, and includes the Group’s attributable share of associates’ and joint ventures’ underlying EBITDA.

⁽⁸⁾  Stated after special items and remeasurements. See note 7 to the Condensed financial statements.

⁽⁹⁾  Attributable ROCE is based on underlying performance, and reflects realised prices and foreign exchange during the current period. Where ROCE relates to a period of less than one year, the return for the period has been annualised (with the exception of De Beers when presented as an individual business unit– see footnote on page 21).

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