AngloGold Ashanti Plc (AU) Q4 2005 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the AngloGold Ashanti Results Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask your questions at the end of today’s presentation. If you should need assistance during the conference, please signal an operator by pressing *, and then 0 on your touchtone phone. Please note that this conference is being recorded. At this time, I would like to turn the conference over to Charles Carter. Please go ahead, sir.

Thank you, Dylan, and welcome to this presentation by the AngloGold Ashanti Executive team of our results for the fourth quarter and year ended 31st December, 2005. The format of the presentation will be as follows. Bobby Godsell, our Chief Executive Officer, will review AngloGold Ashanti’s performance over this period, and offer a production outlook for the Company. Kelvin Williams, our marketing director, will briefly summarize the gold market conditions and comments on the management of our hedge book during the quarter. Venkat, our Finance Director, will unpack the numbers and address key aspects of the financials. This will be followed by brief presentations by our two Chief Operating Officers, with Neville Nicolau discussing the operations in Africa, and Roberto Carvalho Silva covering the international operations. Finally, Richard Duffy, who heads our business development and exploration, will outline our exploration plans for 2006. After these presentations, we will take your questions. Before we begin, it is necessary for me to read a declaration regarding forward-looking statements that maybe made during this presentation. Certain statements made during this presentation 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 for AngloGold Ashanti’s operations including the completion and commencement of commercial operations of certain of AngloGold Ashanti’s exploration and production project, and its liquidity and capital resources and expenditure contain certain forward-looking statements regarding AngloGold Ashanti’s operations, economic performance and financial condition. 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 be incorrect. Accordingly, results could differ materially from those set out in the forward-looking statements. As a result of many other factors: changes in economic and market conditions, success of business and operating initiatives, changes in the regulatory environment and other government actions, fluctuations in gold prices and exchange rates, and business and operational risk-management. For a discussion of such factors, refer to AngloGold Ashanti’s Annual Report on Form 20F for the year ended 31 December 2004, which was filed with the Securities and Exchange Commission on 14 July 2005. 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 unanticipated events. With that, let me hand it over to Bobby Godsell.

Thank you, Charles. The December quarter saw a steady operational performance, with production down slightly to 1.5 million ounces, and excellent cost-control in spite of rising external cost pressures. Good participation in the gold rally helped lift the adjusted headline earnings some 86% from $22 million in the third quarter to $41 million in this last quarter noting that the third quarter’s earnings have been restated to reflect the removal of the fair-value adjustment on the option component of the convertible bond. Operationally, the South African region reported production nearly inline with that of last quarter. And importantly, a 5% improvement in cash costs which, at 56,000 rands a kilogram represents the 8th consecutive quarter that these have been managed to around the 60,000 rands a kilogram level. Our African assets also reported mostly steady operational performances marked by improvements at Obuasi in Ghana, Siguri in Guinea, and Yatela in Mali. In Tanzania, the greater mine production declined inline with expectations, although cash costs improved 8%, highlighting the good work the team on the ground is doing to realize the benefits associates with the transition to owner mining at that mine. Turning to the international assets, operational performance at our South American mines was generally in line with that of third quarter. Although, cash costs at our Brazilian operations were higher in part, due to significant depreciation of the Brazilian Real. This is currently the strongest by some way of our local operating currencies. Sunrise Dam in Australia continued to mine lower grades in the Sunrise Shear Zone, as we indicated. Although the operation saw a 27% improvement in total cash costs this quarter. Cripple Creek and Victor in the United States reported decreased production due to lower heap leach recoveries but this operation remained in steady state. In the…

Thank you, Bobby. We've noted in our comments in writing, in the shareholders report on the gold market, and these are comments that you yourselves will have observed in the gold market in the past quarter. That gold has had a most-remarkable quarter. On the back of a spot price, which written almost 25% during a 3-month period, and having touched price levels not seen in the past 25 years, we are living firmly in what are particularly exciting times in our market. The gold market’s become all the more interesting, for it's delinking from the other markets that have driven the gold price higher during the past 3-4 years. In particular, the significant increases in the gold price during this past quarter have not depended upon a weaker dollar, nor upon increased buying on the New York Commodities Exchange. In fact, the price rose, in spite of both a firmer dollar and firm-but-flat investor positions oncoming. Factors outside of the currency market and New York trading, which operated favorably toward gold in this quarter included the strong resurgence of investor buying of gold ETF shares. And this occurred both in late 2005, and strongly throughout January, 2006. And the record buying of gold on the Tokyo Commodity Exchange during November and December at the end of last year in response to a 10% fall in the value of the yen against the dollar. These 2 together, along with oil-price volatility and the sum measure of international tension in the Middle East helped the gold price to current record levels. Turning to the hedge the Company’s strategy of active management of maturing hedge positions and of the hedge book has a whole has not changed during this more-positive gold market. We have continued to allow all maturing forwards to roll…

Thank you, Kelvin. Let me start with the gold price received, which climbed 10%, quarter-on-quarter to $476 an ounce. This compares to an average spot price for the quarter of $495 an ounce. This represents, as Kelvin pointed out, strong participation in the gold price valley. Total cash cost decreased by 2%. This was primarily achieved through increased efficiencies and continued implementation of cost-savings initiatives. A higher price and lower costs boosted our adjusted headline earnings to $41 million. We have recently relooked at our definition of adjusted headline earnings in order to be able to use that number as an approximate proxy for cash earnings. As in the past, the fourth quarter’s adjusted headline earnings strips out impairments, costs associated with discontinued operations, profit-or-loss related to asset disposals, and importantly, the volatility associated with our hedge book. From this quarter, as we promised you during the last call, you will note that we have also begun to exclude the volatility of the convertible bond in the calculation of adjusted headline earnings. For ease-of-comparison, we have therefore restated last quarter’s adjusted headline earnings upwards from 1 million to 22 million to take account of the volatility of the bond. Despite this upward restatement, our quarter-on-quarter comparison showed an 86% increase from 22 million achieved in the third quarter of 2005 to 41 million in the fourth quarter. In addition, it is worth noting that the $41 million of adjusted headline earnings is after emphasize, "after," deducting three significant and largely once-off charges. First, this quarter saw the full implementation of the new International Accounting Standard 16, which carried with it a 13 million increase in depreciation charge related to a redefinition of "Useful Life of Fixed Assets," and the associated catch-up. Secondly, a 28 million increase in the estimates of our rehabilitation provisions at mines in Tanzania, Australia, Ghana and Namibia. And third, a 52 million increase in the tax provisions in Africa and South America, although this increase was mostly offset by a $48 million tax credit in Ghana, after a further reduction in that country’s corporate tax rates from 28% to 25%. Looking at the year as a whole, adjusted headline earnings stands at $200 million, or 76 cents per share. Bobby has provided you with the outlook for production, total cash costs and capital expenditure for 2006. I'd just like to add to it our estimates of depreciation and amortization charges, which are forecast to be around $577 million for 2006. This is due to more upcoming on-stream. The transition to owner-mining at Geita and the reassessment of the useful life of some of our assets. I will now hand it over to Neville, who will discuss our operating performance in Africa.

Thank you, Mr. Venkatakrishnan. In respect to the African assets, this quarter was operationally solid. Turning first to South Africa the total gold production was slightly lower, at 669,000 ounces due primarily to decreases at Kopanang, Savuka and Tau Lekoa. Mponeng however, had an excellent quarter with production up 12% and cash costs 9% lower. And TauTona also showed production and cost improvements of 3 and 4%, respectively. The region’s major achievement for the quarter, however, was as Bobby mentioned a 5% decline in the total cash costs, which came in at just over 56,000 rand a kilogram. This is testament to a continuing solid commitment to cost control, in spite of globally increasing costs of consumables. Looking ahead, South African production in the first quarter of 2006 is expected to decline by approximately 7% on that of the fourth quarter of 2005, primarily due to a reduced number of production shifts associated with the Christmas break, and several public holidays, which seized quarter-on-quarter, 5 fewer production days in the West Wits, and 8 fewer production days in the Vaal River operations. Additionally, as we had flagged in the quarterly, Tau Lekoa is undergoing a restructuring in the first quarter, with a view toward downscaling production and significantly decreasing costs, which should return the operation to profitability. Mponeng is also as much as we would like not scheduled to repeat its exceptional fourth quarter performance in the next quarter. Finally, we have recently reduced our buildup rate plan at Moab Khotsong. The geology in this area is more complex than we anticipated. And this has resulted in a delay in achieving the volumes we had planned for. Although, we are confident that these levels are still attainable. Grades at Moab are still initially lower than we expected in the initial…

Let me first talk North America operations, Serra Grande and AngloGold Ashanti Mineracao in Brazil, both reported once again solid results, with production more or less in line with that of the previous quarter. The total cash costs, however, for these operations increased between 9 and 10 cents partially as a result of the 13% depreciation of the Brazilian Real over the quarter in addition to several mine operational issues. Total volume in – reporting a 14% improvement in cash costs owing to a higher grade for both gold and silver in spite of a slight production decline, as predicted, to 41,000 ounces. In North America, production at the Cripple Creek and Victor was 8% lower, at 85,000 ounces, as a result of lower heap-leach recovery while cash costs increased 3%, primarily as a result of external cost pressures. Including higher diesel price and component-part price the effects of which continue to be actively managed by the team onsite. Finally, at Sunrise Dam in Australia, production is estimated an anticipated decrease of 9% to 92,000 ounces, as mining continues in the lower grades Sunrise Shear Zone where it will remain for the next 9 months, before enjoying higher grades at the beginning of the fourth quarter of this year. The underground project, which is beginning to supplement the current lower-grade commercial production, is proceeding as planned. During the quarter, 1,300 meters of underground capital development, and 225 meters of operational development were completed. I will now hand it over to Richard Duffy.

Thanks, Roberto. As Bobby mentioned, one of our key aims going forward is to continue to replace depleted ounce in part to exploration. The full exploration budget for 2006 is approximately $91 million, with 55 million of this allotted for Brownfield’s exploration, and the balance of 36 million for Greenfields. As Bobby had mentioned earlier, I'm pleased to welcome Eric Graf as the new head of our exploration team, who joined us as AngloGold Ashanti in 2002, and has until now been running our exploration activities in Peru. Eric and I have recently refined our Greenfield strategy to ensure that we optimize the funding of our most-respective projects, which are located in 4 key areas. The Democratic Republic of the Congo, Colombia, Australia and Alaska. Beyond these project areas, which I will take you through in a minute, the Greenfields approach focuses on our joint-venture and minority-equity stakes in companies working in Lao, the Philippines and Russia, as well as broader business-development areas mainly, China and Greater Russia where we continue to look at potential opportunities. Our most-perspective Greenfields exploration project is located in the Mongbwalu region of the Northeastern DRC. As we've mentioned before, the initial drilling supports historical tonnage and grade estimates of 1.2 million ounces of 9.9 grams a tonne. And we are targeting a 5-million ounce resource in the area. In 2006, at the Adidi Kanga, we expect to delineate around 3 million ounces of a third resource. We will also begin resource-definition drilling in the 10x15 kilometer Mongbwalu Ridge region, in addition to drill-testing both high-grade, underground and low-grade, open targets. An evaluation of the regional upside will also commence in 2006, as our concession covers virtually the entire kilo of Greenstone belt, in the area of some 3,000 square kilometers. In South America, our…

Thank you, Richard. I should just note that the slide presentation is on our website. And in respect of Richard's and other colleague’s presentations, you’ll find more detailed graphics. At this point, we'd be delighted to take your questions.

Thank you very much. Ladies and gentlemen, at this time if you would like to ask a question, please dial * and then 1 on your touchtone phone. If you then decide you would like to withdraw your question, please dial * and then 2. Our first question comes from Victor Flores of the HSBC. Please go ahead, sir.

My first question is for Richard and Eric, on the exploration. You budgeted $91 million for this year. If you expect to replace reserves, that would imply that you can find an ounce of gold for about $13 a piece. Is that an achievable goal? Or do you actually need to increase your exploration budget in order to achieve reserve replacement this year?

It’s Richard. I think it is realistic because what you need to remember is we are expecting to see some reserves come back into our reserves, as a result of improved typing. As Bobby explained, around 6 million ounces came out of our reserves for last year largely or entirely as a result of the rand gold price. So you will see a slight of reserves come back. And the balance, which is around 3-4 million ounces will come from Brownfields reserve growth in our business plan, this year. So I think the budget allocation would support the reserve replacement.

Great. Thank you. Next question is a financial question. And I'm just curious as to what plans or goals you have this year for ongoing cost-cutting, given the success you had last year. Does that mean you've kind of taken out of what you might have achieved, this year? Or are there plans to get even more cost savings this year?

Well, Victor if I can pick this up and then Neville can comment on South Africa. As part of our budgeting process, we build in cost reductions to beat inflation. We are targeting a similar sort of level for the current year, which we are putting into the budget. And Neville can expand on South Africa.

I'm not sure whether I would expand any on South Africa, but for Africa as a continent. The methodology of managing costs, which we've implemented and have rolled out across the continent should continue to show benefits. Cost-management is a sort of a continual improvement process. The streamlining of logistics channels and the simplification of procurement contracts and so on across the content should continue to realize the savings. And then on the operations, we have specific plans in place to improve the productivity of each of our mines across the continent. And we put all of these action plans in the form of a project-management schedule. We’ll manage that across the year. And the bottomline of all of that is that the cost improvements, which we are forecasting are improvements that we are not hoping for but that we are actually planning for.

Sorry just to pin down a number…does that put you in the neighborhood of $100 million, as it did originally, for 2005? Or do you think it could be more than that?

No, I think $100 million is a pretty good number. That’s what our target is for the year.

Our next question comes from Heather Douglas, of BMO Nesbitt Burns.

I have a couple questions about your 2006 guidance. I’ll start with Moab Khotsong. I noticed that costs are really, for the first year, are quite high. Can you tell us where you think costs may level out, once it’s more at steady state? Or is it certainly even in 2007?

Heather, it’s Neville, here. Moab Khotsong you have to look at in terms of the overall buildup. I said in my presentation a few key things. It’s important to look at Moab Khotsong in terms of what we've been telling the market for some time, now. Moab is an ore body which is very similar to Great Noligwa body. The reason that we were able to develop this mine with very little drill data was because of a geological exercise called, "Paleos Best-Agree Construction," which puts the ore bodies together and tells us that the Great Noligwa ore body is very similar to the Moab Khotsong ore body. With that, you have all of the information that you actually need, to be able to look at the complete life of mine of Moab Khotsong. The buildup that you talk about…One has to look at the shape of the ore bodies. A simple view of the shareholders plan will tell you that we are in sort of a triangle to the waist of the ore body. That mans that the buildup is actually slower than what typically are able to achieve in the deep-level South African mines. We have limited rise access, to start with. We have to start in the corner of the triangle, simply because of logistics and location and seismicity issues. So the buildup is over several years, and not over a year or two as we've been able to achieve. The second point is that Great Noligwa, as we've told the market, mines with a yield going from about 12-13 grams a tonne. And we've told the market it will end at 8 grams a tonne. Moab actually mines from the other side. So it starts off with a lower grade, and builds up in a higher grade. A mistake would be to take the average reserve-grade that we've published for Moab Khotsong and use that to forecast the model. If you take all of that, you've got a gold buildup which is slightly slower than what we typically are able to achieve. It takes us a few years to get to the full gold production. And the costs start off quite high and come down over the next 3-4-5 years down to the levels that we expect in the medium- to long-term. I think I hope that answers your question.

So, if Great Noligwa went from 12 to 8, what are the numbers for this coming year? What grades should we look at that, that will be at the low end?

They will be at the low end, as I say. The ore body’s being mined from West to East. It’s mined from where we're going to in-grade the ore body in terms of grade. The start of the mine is very complex, geologically. It’s an intersection of 2 major faults. It drags the ore body up and down. There's a whole lot of sympathetic and smaller faulting in that area. So the off-reef component of what we mine is quite high, to start with. This all sort of stabilizes, as we get into the rays, as proper and as we start to mine into the future.

So the reserve grade at Moab Khotsong is that 14. Does low mean it’s going to start around 10 or even lower?

No. It’s going to be about 8 grams a tonne.

Okay. So it’s the same. I didn’t understand that, because of the… So it’ll go 8 to back up toward 14. I'm sorry.

Yes.

Thank you very much. Our next question comes from Muneer Ismail of Deutsche Securities. Go ahead.

I just wanted to wish Kelvin Williams all the best. He’s been really good to us analysts allowing us the time to meet with him, as well as to try and understand what was a very difficult hedge book. I expect, Kelvin, you’ll give it a few months before you join the Mining Board. Take a bit of a break. Just starting off with… Well… It’s one question, with regards to the balance sheet. Your net debt position. I could appreciate that it’s only moved up 2.7% higher. The net debt equity looks really… I mean it’s bumped up quite a bit, there. I think the ratio’s around 62%, if my memory serves me correctly. That’s following a significant reduction in shareholder equity. I'm just trying to understand. I think, if you could help with this, the reduction in shareholder equity. Why such a big knock, there?

Yes. If I can just come in, Manier, quickly. Let me address that. There are 2 parts to the question. 1, the movement in shareholder equity. What you've got to understand is that a chunk of our hedge contracts are mark-to-market on the balance sheet. And given the rally in the spot price, you've got to account for that leg of that movement, on the balance sheet. But given the very stringent accounting rules, we can’t bring the other leg on the asset side of the balance sheet, which is valuing those ounces, which are mark-to-market on the balance sheet at the relevant prices on the asset side. That’s a chunk of the movement. In addition to that, obviously, the movement of the volatility on the convertible bonds is another factor. Just commenting on your net debt question if I can make a couple of points. Firstly, the cash-generation at $441 is what you see in last year’s cash flow. The gold is currently trading at about $550 per ounce. There's quite a lot of cash coming through the door. We are certainly going through a high capex phase, and that cash generation will help us. And this, in terms of net debt, we've got significant room, in terms of our covenants, which is required by our banking facility. We're not suggesting that they are going to raise more debt, we're watching it quite carefully. But certainly, there is enough headroom both in terms of covenants and cash-generation of the business.

So there's nothing to be concerned about. It’s just mark-to-market movements, mainly movements on the convertible…

And there's also a detailed note in there, Muneer, on page, just give me 2 seconds. On page 27, which breaks it down by individual components.

Perfect, perfect, I see it, I missed it sorry. Okay great, that’s my question, thank you.

Our next question comes from Peter Townsend of BJM. Go ahead, sir.

Just one question on the reserve side. I understand what the SEC requires you to do, in terms of your reserve calculations. But just on the Moab Khotsong Phase II, and at Mponeng and other projects, are you actually changing anything in terms of the gold price you're using to evaluate those projects? And what gold price are you using internally?

It’s Richard Duffy. I think in terms of the reserves, particularly at the project operations you mentioned in South Africa, we used a lower planning price, and we are obliged to use a lower price, in terms of the SEC guidelines. So that defined or dictated the reserve. But for this year, we are using a higher gold price. We're using a planning price of $500 an ounce. And we're looking at a rand of 625. Obviously, in terms of SEC guidelines, we’ll still have to carry out an exercise of the average price, over the last 3 years. But for the purposes of compliant-reserves, we will be running prices around those levels. So, in effect, we could potentially be able to calculate two reserves. One, on the basis of the SEC and 1 that follows the normal guidelines.

Right. Just to clarify, then… If you were to go ahead with a particular project and sort of forget… wouldn’t necessarily be on the back of the gold price that you're using in your SEC filing?

No. We would use the price that we think is the most-relevant and realistic for our business, going forward.

And if I could just come in here to clarify, that is perfectly acceptable to the SEC. We have clarified that with them.

Our next question comes from Brenton Saunders of Craton Capital. Please go ahead.

I think this one’s for Venkat. I just wanted to find out what was the reason behind the removal of the option components of the convertible. And if you could, also just remind me what the conversion price is on the convert?

The convert price is at $65 per share. And for the conversion to take place, obviously, the bondholder can convert at any time. For a mandatory convert to take place, it needs to trade at 30% premium, to $65 per share, for a 20-day period within a 13-consecutive-day period. Now, just in terms of the reasons behind why we removed the convertible bond element was… At the end of the day, you want investors and analysts to understand what the cash-earnings of a Company are. The volatility of the convertible bond particularly given sort of market movement in the share price, and the associated vols, was making the income statement meaningless. Therefore, we promised that we would actually strip that out, in our definition of, "adjusted headline earnings," to best represent our cash earnings measure for the Company.

If I could just follow up. I mean with all due respect… Income statements have been quite unrepresentative of that for some time. And, I mean if there's going to be additional equity coming into the Company at a later stage, if this bond does convert, if this market continues, I think analysts and shareholders should be just as aware of that.

That’s correct. But then, should the bonds convert, these amounts do come back into our income statement and balance sheet, that's out.

How much equity could it convert into?

It’s basically 15.5 million shares, or thereabouts. It’s 1 billion divided by 65.

Ladies and gentlemen, just a reminder, that if you would like to ask a question, please dial * and then 1 on your touchtone phone.

Our next question comes from Brendan Ryan from The Financial Mail. Please go ahead.

Bobby, have you had any clarification from AngloAmerican, regarding how they propose to reduce their equity holding in AngloGold Ashanti?

No.

If I may follow up on that, do you think that AngloAmerican is wise to be wanting to reduce its exposure to AngloGold Ashanti, given the way the gold price has moved over the last month, and given the outlook for the middle?

When they announced it on the 27th of October, we made a comment. We understand the underlying reason for their decision to decontrol and not to maintain 51% is the fact that gold equities have a distinctive and data credit of shareholders, and that gold equities trade at different multiples, to any measure of underlying value-diversified miners. I think those 2 reasons hold true at any gold price.

Our final question comes from Leon Esterhuizen of Investec Securities. Please go ahead.

Just a question for Neville, quickly, please. The performances of Africa is really fantastic, in my view. It’s very commendable. But I sort of don’t understand exactly how you achieved this over the last 2 years. We've had dropping volumes, reduction in churns mine. We've had declining yields. And even though the ramp at some cost is down a little, it’s nowhere near the sort of drop equal to the drop in tonnage or yield. Have you been reducing labor aggressively? Or could you just give us some sort of hint of how you achieved this?

Well, I'm glad you put it that way, Leon. Because our board should take note of the outstanding effort achieved, in this regard. The reality is that we put business plans in place, which we try to simulate the business. These have given us early-warning of problems ahead. In others words, when the rand continued to weaken, at a time when many people expected it not to weaken, and the rand price for gold dropped down to the low 18,000 rand a kilogram. We had forewarning of that in our business-planning process. We put in the 4 action plans, which are repeated regularly. We've put cost-management into place. We removed overhead from the region before we closed operations. In other words, before Ergo closed and before Savuka closed, we actually removed the overheads associated with those. And we removed a bit more than that. We have managed escalation down by looking at the contracts that we deal with. And we have managed productivity very closely. Productivity is a nice cost-management tool for operating managers. Particularly, where you have a high component of labor costs. And we've been able to improve productivity in this time. To say that we haven’t reduced labor would be lying. We have reduced labor. It’s been well-managed. In some cases, it’s been moving labor to operations that are in build-up. For example, to Moab Khotsong. In other cases, it’s been removal of contractors, and replacing them with mine labor. And in many cases, it’s been actually reducing or retrenching and voluntary retrenching people out of the operations. All of that has been managed very, very carefully, so that it hasn’t made a great deal of noise.

Yes. It’s a phenomenal performance. You reflect about 43,000 people employed in South Africa, last year. Can you give me an indication for 2005?

I'm going to give you the wrong number. It’s about 32,000. But then there are some contractors, on top of that.

I’ll give you a shout later. Thanks.

Gentlemen, we have no further questions. Would you like to make some closing comments?

No. Thank you, Dylan. And thank you to all the participants on the call.

Thank you very much. On behalf of AngloGold Ashanti, that concludes this afternoon’s conference. Thank you for joining us. You may now disconnect your lines.