AngloGold Ashanti Limited
Q4 2010 Earnings Call Transcript

Published: 17 Feb 2011

[Operator:]

Ladies and gentlemen, a very good afternoon to you, and welcome to the AngloGold Ashanti Q4 2010 Earnings Results Conference Call. [Operator Instructions] I would now like to hand the conference call over to Stewart Bailey. Thank you, and over to you.

[Stewart Bailey:]

Thanks Leeroy, and good afternoon, or good morning, everybody, and welcome to the presentation by the AngloGold Ashanti executives of our results for the quarter and for the year ended 31st of December, 2010. Turning to the presentation of the format. We will have Mark Cutifani reviewing the company's performance over the quarter before Venkat walks us through the financials. Mark will then wrap up and take questions. We do have members of our executive team present. We have Charles Carter, EVP, Strategy; and we've got Robbie Lazare, EVP, South Africa with us to field any questions you might have. As is customary, I'll read the Safe Harbor disclaimer before we proceed. Certain statements made in this communication, 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 the outlook of AngloGold Ashanti's operations, individually or in the aggregate, including the completion, commencement of commercial operations of certain of AngloGold Ashanti's exploration and production projects; the completion of announced mergers and acquisitions transactions; AngloGold Ashanti's liquidity and capital resources and expenditure and the outcome and consequences of any litigation proceedings; and AngloGold Ashanti's Project ONE performance targets contain certain forward-looking statements regarding AngloGold Ashanti's operations, economic performance and financial condition. AngloGold Ashanti believes that the expectations reflected in such forward-looking statements are reasonable. No assurance can be given if such expectations will prove to be incorrect. Accordingly, results could differ materially from those set out in the forward-looking statements as a result of, among other factors

[Mark Cutifani:]

Well, thank you very much, Stewart, and welcome to everybody in tune to our results presentation. I'll swing straight into the fourth quarter overview. The good news is we've had a solid performance in the fourth quarter with operations under firm control. The significant highlight was the continuing improvement in safety as we recorded only the second fatality-free quarter in our recorded history. This represents another milestone for every individual in our business and is a performance that we're particularly proud of and particularly in the case of our South African operations. We saw Project ONE continue to make a difference with production of 1.148 million ounces at $672 an ounce. Again, ahead of guidance. It is no coincidence that delivery of five consecutive quarters on guidance, as well as making our annual guidance, coincides with the accelerated implementation of Project ONE. Adjusted headline earnings of $294 million were well ahead of last quarter once you strip out the one-off tax credit of $84 million that boosted the previous results. You'll also notice our improved cash generation capacity after elimination of the hedge, with operating cash flow at almost $700 million for the quarter. We saw another strong performance from the South African team, keeping a tight rein on the cost and maintaining production despite the sale of Tao Lekoa. Uranium also delivered another growing quarter, delivering increasing volumes into an increasingly positive market. Sunrise Dam delivered a strong result on all metrics, while Siguiri showed increased traction from the Project ONE intervention. Argentina, once again, shut the lights out in what is a difficult inflation environment. Our project teams have made good progress on all fronts with Córrego do Sítio, Tropicana and the Mponeng Deepening all moving ahead according to plan as did our feasibility studies in the DRC and Colombia. Our exploration effort continues to forge ahead with some recent exceptional growth in Tropicana, reinforcing our faith in the significant growth potential of this district. In Colombia, we continued drilling at Gramalote and La Colosa and started work on the Quebredona property, which continues to look like another really interesting prospect. In terms of the full year overview, while 2010 was not without its challenges, most notably in Obuasi and Savuka, the balance of the portfolio performed well and demonstrated the benefits flowing from our interventions over the past six months. And this particularly applies in the second half of the year. A quick look at the full year performance shows a strong underlying earnings of $787 million despite 10 months of discounted gold sales. Production came within our original guidance at 4.52 million ounces at a total cash cost of $638 an ounce. On the full year, look, Uranium 1.46 million pounds was ahead of our expectation. Our four critical turnarounds, South Africa, Geita -- well, three of our four critical turnaround projects, South Africa, Geita and Cripple Creek, delivered to their recovery plans, and our Project ONE teams initiated implementation across 15 new sites as they apply it in the mining and processing. On safety, it is an enormous privilege to me, again, for us to report, on behalf of 63,000 employees, of the fatality-free quarter for only the second time in the company's history. Certainly, a most significant event. Given the strong operating result, this proves that safe and productive mining go hand-in-hand. A look at our long line achievement in improving the ol' injury frequency ratios, the very promising long-term trend and how it has dubbed up [ph] with our operating improvements in recent years. There is more for us to do, but we continue to set high water marks as we progress through our new operations model, or as we talked to it, Project ONE. On reserves and resources, our exploration effort added modestly to reserves during the quarter, with the total now at 71.2 million ounces after depletion with good additions from South Africa, the U.S. and Mali. There was little change to our significant resource base of 220 million ounces. However, you'll notice that we've maintained a conservative $850 an ounce price in calculating those reserves and $1,100 an ounce for resources. We are currently working on an update to our resource and reserve inventory at somewhat higher prices in the second half. We're looking it in the range of $1,000 to $1,100, which is in line with a robust fundamentals for the gold market and our positive medium- to long-term view on the price. It is important to note that we see our exploration investment as a long-term endeavor with discovery cycles that don't necessarily coincide with the calendar year. Over the past four years, our brownfields team has added 31 million ounces at an average cost of $13 an ounce. Our greenfields team, which is a much longer-term horizon, has contributed more than 22.3 million ounces over the past eight years at less than $25 an ounce. And we would expect that number, in terms of ounces, to go up significantly as we continue to open up the potential of these regions that we've established good positions in. And obviously, as a consequence, the cost per ounce discovery would also go down. On a combined basis, we've added 53 million ounces of less than $18 an ounce. Obviously, a very strong result. And when you add then our prudent acquisitions, we've added another 20 million ounces at around $28 an ounce. We believe that's a pretty good metric against the purchases that we've seen in the market in most recent times, going up to $1,000 an ounce in terms of cost to resources and reserves. So we're very pleased with what we've seen in our regions. And add to that, the potential that we see given those positions, we think the upside in terms of the next two or three years is quite significant. From an operations overview point of view, it was another strong result from Ron Largent and our Americas team. Production trended lower, slightly lower as planned, to 196,000 ounces. Total cash cost were $465 an ounce for the period, with the escalation contained to 7% in what we consider a challenging currency environment particularly in our Brazilian operations. Cerro Vanguardia in Argentina delivered another exceptional quarter, lifting quarterly production 4% on the back of improved tonnages while lowering costs by 5% to $357 an ounce, and again, in terms of Argentina against a continued inflationary pressured environment. This remains the operation to beat in terms of consistency and operating excellence. And if you reflect again, back two years, we were almost draining up to $100 million a year in free cash flow. So the operating free cash flow turnaround has been more than $200 million in less than three years. At Cripple Creek, we saw a planned drop in production, in line with our strategy of stacking higher-grade ore closer to the pad in the first half of the year. It's interesting to note that we've actually beaten our budget targets for the first time in five years, and I think that's certainly heralds a new understanding and operating line for the operations, which we believe sets us up nicely for 2011 and beyond. The new MLE project will kick in from Q2 this year, so you can expect higher production in the second half of the year. Notwithstanding the strong real as I mentioned earlier, the cash margin from our Brazilian operations is impressive of a cash cost base of less than $500 an ounce. Brazil remains the cornerstone for our medium-term growth plans for the Americas, with 842,000 ounces produced from the region in 2010, set to top 1 million ounces within the next two years and to step up further in the ensuing periods. And that's before an ounce from Colombia is factored into our forward projections. Production from Continental Africa was largely unchanged at 374,000 ounces with cost up 9% to $790 an ounce. Good cash flows from Mali and another strong operating result from Geita underpinned the quarter, as did good improvements in Iduapriem, Siguiri and Navachab. Geita remains on track to achieve its 500,000-ounce target for the year, a remarkable recovery for what will now be -- from what is, in our eyes, one of the group's largest contributors and certainly represents a most gratifying turnaround story. At Navachab, good tonnage and great improvements as well as the new DMS plant came together to deliver an excellent production result. While at Siguiri, the conveyor belt modifications that stemmed from the early Project ONE work helped us achieve a 15% bump in production. Billy Mawasha is doing some great work with the team in Iduapriem, with record tonnages recorded in the last two months of the year flowing from improved availability in the plant, very similar to the early days of the Geita story. While production improved, cost filled the pinch from higher power tariffs, including one such charge for energy cost at the higher rank, which was backdated to the third quarter. As flagged during the fourth quarter, Obuasi continued to lag due to an unplanned plant shutdown and also continued all past hangups and suboptimal development performance. The latter resulted in an ongoing lack of flexibility, limiting access to higher-grade blocks. These are not new problems and form part of the extensive work already underway by the multi-disciplinary task force, which is on site and developing the next phase of recovery plan for this asset. Now in Obuasi, while we have stripped out more than $70 million from our operating costs, this has obviously helped us turn a very negative cash flow outcome post two years to a positive outcome last year where we reproduced marginal cash flow, a marginal positive cash flow. However, we are still lagging on our production transition program due to the slow development rights and the inability to maintain the necessary tight control in our stope extraction processes. As I mentioned, at the last quarter in November, we have corrected the Obuasi task force under Richard Duffy's leadership and with the full support of the executive to address the significant and short-term operating challenge we face. The team comprises three areas

[Srinivasan Venkatakrishnan:]

Thank you, Mark. Good morning, ladies and gentlemen. I'll be covering the following four areas in today's presentation

[Mark Cutifani:]

Thanks very much, Venkat. Ladies and gentlemen, I'm going to ask you to try and multitask. I will be referring specifically to Overhead 21 and Overhead 22 in our presentation. So if you've got your eye on the monitor, I think it's important that you run your eye over our operating assessment. And this chart, which shows our assessment of the portfolio in 2008 -- and on the right-hand side of the chart, we show our cash flow. So the way we like to put it is engineering meets financial imparity. And for us, a very important way of thinking about the engine in the business, or the engines in the business and where they're performing. And as you can see, in 2008 -- and we've ranked our assets from one to five, a red representing a one, which indicates a cash drain material risk to the business; right up to a blue, which indicates best industry practice as we assess it; and then you've got brown, showing improvement needed; yellow is an operation with a turnaround plan that is delivering good trends; green being solid performance delivering solid cash flows. And you'll see that in 2008, looking at 16 asset clusters with a potential score out of 80, we scored 32. Obviously, lot of improvement needed. Lots of reds and browns. On the right-hand side, you can see the operating free cash flow. South Africa, $426 million, basically carrying the business. Australia making marginal cash. Continental Africa draining $126 million and the Americas making a solid contribution. But again, nothing to write home about. Total cash flow from the business, around $597 million. When you took capital and other costs into account, we were losing money hand over fist. And you roll the clock on two years and you go to the next overhead, you see the improvements that have been delivered within the operations in that two-year period. And as you can see, the reds are gone. The three reds, Obuasi, Geita and Cerro Vanguardia. Two of those assets are very strongly cash flow positive. And Obuasi, marginally cash flow positive. Each of them reflecting some very good work in terms of cost controls. Geita and Cerro Vanguardia reflecting significant operating improvements. Obuasi is obviously lagging, but at least we've taken it out of the emergency ward. Now it's a matter of getting to that potential across the portfolio. Lots of yellows. That represents -- so those yellows represent operations that had turnaround plans that have at least two quarters of positive trends indicating we're heading in the right direction. Greens are actually indicating that that's a solid operation with a solid plan with good ideas for future improvement. And the blue, our processing operations in South Africa, representing what we would consider best practice. It's no accident that when you look on the right-hand side and you see the free cash flow generation from the business -- and don't forget even in 2010, we've gone three quarters of the year with a hedged discount. You're seeing improvement across every jurisdiction. Personally, the operating improvements as a consequence of the Project ONE work and its associated projects has improved the free cash flow cost across the business by more than $500 million a year. Secondly, obviously the gold price in absolute terms as we improve the performance. And the third point being the continuing reduction in hedged discounts. And as you know, the last quarter of last year, first quarter where we've been essentially hedged for free. And as we go into 2011, you have to think about, okay, a 5% improvement in volumes, a likely, or as we can best estimate, a likely 20% improvement in realized prices underpinning what we would expect to see a better than $2 billion free cash flow performance out of our operations expected so in 2011, obviously, subject to the gold price. But gives you a sense of where we come from, almost a four-fold increase, or a four-fold increase in our operating free cash flows. And so at this point in time, we think we can reasonably argue that the potential leverage in our business runs to the gold price now, is where it should be. And certainly, we believe 2011 is where we've set up the organization for a very strong 2011 and beyond. On projects, 2010 saw significant progress in this regard. First, the MLE project at Cripple Creek, or leach pad extension, has been delivered 12 months earlier and at lower cost than planned. Córrego do Sítio in Brazil was approved in May, and since then, the speed of progress has been impressive. The Autoclave has been manufactured, delivered and installed. The stopes in mining infrastructure were also complete and ready for the production ramp-up starting at around the end of the third quarter. At Tropicana, improved in November, we planned first gold in the final quarter of 2013. Procurement for infrastructure is well advanced, and detailed plant design has commenced. We've received all key approvals and have made great strides, as promised, on the feasibility for Boston Shaker pit, and more about that in a moment. So not only have we focused on financial restructuring, getting the balance sheet right, getting the operations to start delivering to the pinch [ph] and as I said, with our assessment of the assets going from 34 out of 80, to 52 out of 80 in 2010 and delivering a $500 million free cash flow improvement, we believe we can deliver another $500 million underlying free cash flow improvement over the next three years. Put that with our new projects, then we really do become a value-accretive proposition in terms of today and into the future. The other metrics of growth for us is in the DRC, where we are running a dual track process to bring Kibali and Mongbwalu projects on track by 2014. Our partner, Randgold, is leading the Kibali process with the energy and commitment we expected when we formulated the joint venture in 2009. Mark Bristow and his team believe they can deliver the project by 2013. And while we can see some challenges to achieving this aggressive timeframe, we will do our best to be a supportive partner. Good progress has been made on scheduling resettlement and on developing infrastructure in this remote region in the Congo's northeast. The scale of work done is evident. Now we are more than the construction of that 179-kilometer road between Aru and Doko, an important staging important point for the project. This commute between these towns has been cut down to three hours, where it had used to take several days during the rainy season. This makes an enormous difference not only to the Kibali's development but also to regional commoners. We continue to plan for first production in 2014 and applaud the efforts to accelerate that schedule. We will continue to offer technical support to ensure the highest project management standards are maintained throughout and that we have a long-term, value-accretive and sustainable operation. At the smaller Mongbwalu project, our teams are working to deliver a feasibility study on schedule by the end of the first quarter. We're working on an agreement between Mongbwalu and the Kibali joint venture for hydropower generation and distribution in order to lock in an obvious regional synergy. In exploration, the project pipeline has been fed by a world-class exploration team. Just to recap those numbers, 22.3 million ounces from the brownfield discoveries at $25 an ounce. And the best part is these discoveries are still growing in Columbia, Tropicana, DRC, Block 2 in Guinea amongst others. That stands in stark contrast to the process being paid for resources by several of our major peers, which are several multiples above the numbers we're delivering in terms of our exploration team. We are happily not in that contest. We are currently having one of the world's largest exploration -- we currently have one of the world's largest exploration holdings at more than 122,000 square kilometers. We are unashamed to meet the world's most aggressive explorer, and we have first mover advantage in the world's most important -- or some of the world's most important gold belts, which is where we generate the most value. We've reached out at our drilling campaign in Colombia during the fourth quarter and plan a major exploration push this year where we will workup our knowledge, and on the Colosa region, where there is significant potential. At Tropicana, our program is considerably further along the track. As promised in November, additional drilling at Boston Shaker and Havana Deeps has been added to add upside to the production profile in years four and five in the project. The latest grades returned from Boston Shaker are pretty impressive, mostly notably 25 meters at 14.5 grams from around 277 meters with visible gold evident from that core sample. Results from Havana Deeps are similarly encouraging and not only affirm our decision to proceed with the development of this project, but also our view based on extensive knowledge of the geology that this deposit will both improve in quality and will keep growing. Elsewhere in the neighborhood, the Kelly joint venture in the Solomon Islands is also a cause for some optimism, with the latest drill results showing some exceptional growth of more than 8 grams out of a very decent win. My advice is to watch this space over the next two quarters. On earnings leverage, we've secured a long and prosperous future given the strength of our opportunity pipeline. We have the business in good health, generating strong cash flows, and we haven't paid to create that opportunity pipeline. A look at last year's profile shows impressive step-up as we built production and peeled away the hedge. And that decision to wipe out the hedge for once and for all looks good from where we sit. Despite the difficult decision to issue equity to fund the takeout from 12 million ounces in 2008 to zero at the end of 2010, we've managed to more than double free cash flow on a per-share basis, perhaps the strongest measure of shareholder creation. In terms of talking to driving shareholder value, in closing, I'd point to you the fact that our financial restructuring is complete. We have a robust capital structure, which is only enhanced by the operational prerogatives that we continue to make across the business. At the same time, our improved returns on both equity and capital investment show that we're focused on real measures of shareholder value. We'll continue to take to discipline as we push forward on our growth path. We have an improving suite of operating assets delivering real cash flows with significant potential, and we have a plan to continue to improve. Finally, we have developed the best opportunity profile in the gold sector. The good news is that we've created it substantially based on the use of intellectual capital, not shareholder capital. You see what kind of returns we can generate with one hand tied behind our backs. Now it's time to see what we're capable of with the hedge gone and our operations working toward their potential. And I think the last quarter of last year was a first insight into what's possibly in terms of the business. In terms of generating additional cash flows, we thought very carefully about where we apply those funds in terms of creating value in both the short, medium and long term. First order of priority is to continue to feed that opportunity pipeline with capital increasing 50% as we develop those new prospects and drive to 5.5 million ounces over the next four years. We're also positioning ourselves with that pipeline of opportunity to continue value growth in those following five years through Colombia, the DRC and as we look at those new exploration opportunities we've created. At the same time, we will still be reducing our debt to improve our balance sheet flexibility so we can organically fund growing the business as we promised we would. And certainly again for fourth quarter and in fact the second half of last year, giving you a glimpse of what's possible in terms of the business and where we come from. And finally and most importantly, we continue to sensibly increase dividend flows to our shareholders, and we will continue to increase those flows as we improve free cash flow and performance of the underlying business. With that, we'd be more than happy to take questions.

[Operator:]

[Operator Instructions] Our first question comes from Dan [ph] Kiskcuss from Morgan Stanley.

[Unidentified Analyst:]

I was surprised to read in the press last week that you were considering spinning off your South African assets. Could you comment on that a little bit more?

[Mark Cutifani:]

Yes, we were surprised to read it as well, Dan. I was asked a question by a Bloomberg journalist regarding a rumor that we'd been planning to split our assets. In fact, in the last 12 months, that's been a conversation. We look at a whole range of options in terms of creating value. And that conversation has been one that's been around for quite a while, and I was asked the question point-blank, and I made it very clear. We are not considering, at this point in time, splitting the assets. We have the world's best development profile in terms of the business. We've outperformed all of our major competitors in terms of share price over the last two and half years, and we believe we can continue to outperform given the results and given the cash flows we're generating. So I want to make it clear, we have no immediate plans. We continue to keep a whole range of possibilities on the table in terms of creating value, and we'll continue to look at all options. But we have no plans, and I repeat, no plans, to split the company.

[Operator:]

[Operator Instructions] We have no further questions from the conference call.

[Stewart Bailey:]

Thank you very much. Ladies and gentlemen, thank you very much for joining the call. Please do get in touch with us if there are any follow-ups. And we'll chat to you again in May for our Q1 results. Thank you.

[Mark Cutifani:]

Thanks, everyone.

[Operator:]

On behalf of AngloGold Ashanti, that concludes this afternoon's conference. Thank you for dialing in. You may now disconnect your lines.