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AngloGold Ashanti Plc (AU)

Q2 2018 Earnings Call· Mon, Aug 20, 2018

$93.62

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Transcript

Operator

Operator

Good afternoon, ladies and gentlemen and welcome to AngloGold Ashanti’s First Half 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this conference is being recorded. I’d like to hand the conference over to Mr. Stewart Bailey. Please go ahead, sir.

Stewart Bailey

Analyst

Thank you, Judith, and everyone welcome to our presentation today of our first half results. We have a pretty packed schedule today running through the overview of the financials and the operating performance. I would ask you all to please have a look at the safe harbor statement at the beginning of this presentation. It has important information concerning the presentation and forward-looking statements. Without further ado, I’m going to hand over to Venkat.

Srinivasan Venkatakrishnan

Analyst

Thank you, Stewart. Good morning to you all. If I can start off with the slide on strategy, slide number four. As always, if we can reiterate how we are guided by our strategy which has enabled us to be deliberate, in terms of how we allocate capital in a way that we believe will create value over the long-term. Once again, it is this focus and commitment that has helped us again deliver a strong set of results, across every metric today. We remain committed to delivering a safe and actively managed portfolio with tightly managed costs and capital, which helps ensure that the balance sheet stays robust enough to handle this volatile gold market. We have also never wavered in our commitment to invest in the long-term sustainability of our business, regardless of market condition. These pillars support our central objective of improving cash flow and returns on a sustainable basis, and we will -- and as we will highlight in this presentation, we are well underway in the disciplined work to achieve these outcomes in the business. I’d like to start with our safety performance, which was unfortunately marked by one fatality during the start of the second quarter at Mponeng, which takes the number of fatal accidents for the year to three. These workplace deaths remain far and away the most difficult aspect of the job, and I’d like to use the opportunity to send the heart full of condolences of the entire AngloGold Ashanti team to the loved ones of the deceased. As we continue on the journey to eliminate all injuries from our mines, we believe that we must deliver reliably safe production to ensuring ongoing sustainability of our business. We are making important progress in this regard with an all-injury frequency rate that…

Ludwig Eybers

Analyst

Thank you, Venkat. We are at slide nine. It’s very pleasing to see the international operations deliver another strong performance, now that the high investment last year has begun to bear fruits. We had solid contributions from Iduapriem, Kibali, and there are two mines in Australia. Production was up 5% year-on-year to 1.37 million ounces, at a total cash cost of $769 per ounce. All-in sustaining costs were also down 4%, at $948 per ounce; this is not only to lower capital but also the intensified efforts of our Operational Excellence initiatives. This performance was achieved despite inflationary pressures, dominated by higher fuel prices, as well as inventory movements, and the underground transition of Geita, which led to higher cash costs when compared to the same period last year. We expect further increases in production in the second half, especially given the last quarter and the continuing declining trend in the unit cost, given the visibility we have on the success of the Operational Excellence program. Turning to slide 10. Turning to Continental Africa. We had another strong contribution from Iduapriem, delivering an 18% increase in production year-on-year, driven by better grades and higher tonnage treated. The performance also reflected the benefits of the conversion to CIL tanks improved the recoveries. Another stellar performance in the region was from Kibali, which delivered an impressive 32% increase in production year-on-year. This has been driven by the ongoing ramp up of the underground mining of the successful commissioning of the automated underground ore handling system and the integration of the vertical shaft. At Siguiri, production was down, as planned, due to lower grades, or Geita was negatively affected by a 6% drop in recovered grades, a point [indiscernible] as we see those improving over the balance of the year. As we’ve mentioned…

Chris Sheppard

Analyst

Thank you, Ludwig. If we can turn to slide 18. In South Africa, we started the second quarter with a smaller and more focused footprint. Mponeng continues strong with production increasing 12% year-on-year to 119,000 ounces as the mining -- improved mining practices together with higher reef values. This is our flagship mine in South Africa, which we are working on developing to reach its long-term potential through the mine life extension project. The project has unfortunately experienced some delays over the quarter due to the fatal accident as alluded by Venkat early on, which occurred in April. This fatal accident caused a delay in the ore reserve development and also had an impact on the construction activity to a little extent. We are however hard at work to ensure progress in this project. On the technology innovation project, this has been scaled down in line with the accelerated closure of the mine TauTona. Work continues to establish the site for the High Strength Backfill plant at Mponeng mine. And it is estimated, the plant construction will now commence in the second half of the year. At surface operations, Mine Waste Solutions saw focused improvement in plant recoveries, assisting production as the operations reverted to normal production levels compared to the first half of 2017, which was impacted by significant weather storms. Costs in the regions were impacted by power, annual salary increases, and the stronger rand against the dollar. The work to further reorganize this region in our portfolio continues as we optimize our cost base, support the smaller operating footprint, and we are encouraged by stronger year-on-year performance from our retained assets. In quarter three, we aim to conclude the current Section 189 process and hopefully finalizing our wage negotiations, and returning South Africa to its positive cash flows in quarter four. Turning to slide 19. Work is underway to ensure that the cost structures are resized appropriately for the now smaller footprint. Our focus is to responsibly create South African business that can be profitable on a sustainable basis. We tend to do this by simplifying the operating model, reducing the surface footprint by pursuing commercial opportunities along with the rehabilitation of unused infrastructure, and then finally completing the dialogue that’s currently ongoing under the Section 189 process. I’ll now hand over to Graham.

Graham Ehm

Analyst

Thank you, Chris. Today, I’ll cover few projects, make a few comments on exploration. As Ludwig’s already outlined, Kibali delivered an excellent result for the quarter and for the first half. The underground ramp-up and continued improvements in throughput and recovery helped boost production to a record 203,000 ounces on 100% prices, a 17% increase from the first quarter. Cash costs decreased by almost a third to $645 an ounce. For the first half, production was 374,000 ounces, or 32% year-on-year increase at cash cost of $699 an ounce and all-in sustaining cost of 876. The final element of the original project is the third hydropower station Azambi. Commissioning has commenced and the power station will be fully operational in the third quarter. Total hydropower capacity is now 40 megawatts and can provide most of the mine’s power requirements. Turning to slide 22. In regard to Obuasi, Ghana Parliamentary ratification of the development and tax concession agreements was achieved on the 21st of June. The EPA subsequently issued the environmental permits on acceptable conditions. We have also previously agreed reclamation security agreement which defines the scope and the costs for the rehabilitation of this 120-year old mine. This is also ensured that there is no change to our reclamation liability and the related ending requirements. With these approvals fully in place, we are now ramping up the implementation. The project continues to target first gold by the end of 2019 and ramp up to commercial production at the end of 2020. Most of the key construction management roles have been recruited; detailed design is progressing; process flow diagrams and design criteria are being finalized; and preparation of the first contracts for demolition and the handling refurbishment of construction workforce is well advanced. Establishment of the operating management team is also…

Christine Ramon

Analyst

Thank you, Graham. Good day, everyone. As we’ve heard from Venkat, we’ve had a strong first half underpinned by solid operational performance and good cost control. Our balance sheet has strengthened on the back of improved free cash flow, the South African sale proceeds and a continued focus on capital discipline. We’re on a positive trajectory for the rest of the year, and I’ll conclude on the outlook a bit later. I’ll now move on to the detail of our first half performance. Moving on to slide 30. Our half year financial performance is very pleasing, which benefitted from improved operational performance and efficiencies, good cost control, and a 6% higher gold cost year-on-year. Total production declined by 7% compared to last year. However, on a like-for-like basis, after stripping out the sale of Moab and Kopanang as well as adjusting for the closure of TauTona, we show a healthy uptick in performance from retained operations, up 4%. Both, our all-in sustaining costs and all-in cost metrics improved on last year despite 3% higher cash costs. I’ll go in the cost detail in a little while. Adjusted EBITDA of $722 million from retained operations which excludes impairment, retrenchment costs, and other defined items was 22% on last year. The increase on the tax charge compared to the prior year reflects the overall improved profitability of the business. Free cash flow improved significantly compared to last year with $19 million free cash flow generated for Q2. Excluding the one-off restructuring costs for the South African region and the working capital lockups, we are at free cash flow positive for the first half. The improvement in free cash flow was underpinned by the improved operational cash flow, lower capital expenditures and positive working capital movement. As Ludwig mentioned, sustaining capital, particularly in…

Srinivasan Venkatakrishnan

Analyst

Thank you, Christine. As you all know, well, we have named Kelvin Dushnisky as my successor and he’ll be taking up his role at the start of next month as the head of an experience and well established executive team. Kelvin is a great fit for us with a very good working knowledge of the market, of our strategy and the work we have done on margin and efficiency improvement and strict capital allocation. I expect the transition to be seamless, and I wish him only the very best in his new role. Turning on to the penultimate slide. Low price [ph] is suggesting what the focus areas for the balance of the year are and where our work is clearly cut out for us. First, a firm focus on safety, tops the list as always. Secondly, supporting Ludwig and his team in embedding the Operational Excellence plan, it’s something Kelvin has also indicated, will be his priority. Third, is ensuring that we don’t miss a beat on executing the Obuasi redevelopment project. Chris is in the middle of a clear plan to restore the remaining South African asset base to profitability, which is critically important for its long-term sustainability. We continue to engage with our host government in Tanzania to get greater clarity over the legislative changes there, in the context of our mine development and stability agreements, given the uncertainty that exists in the market over the resource sector there. I am hopeful that those discussions will be productive. Likewise, working alongside our joint venture partner in the DRC, to arrive at a mutually acceptable term with the government, given the stability previously granted and the benefits compared to mining companies that operates in land-lock, infrastructurally challenged provinces, such as ours. And finally, as Graham has laid out,…

Operator

Operator

Thank you very much, sir. [Operator Instructions] We do have a question from David Haughton of CIBC. Please go ahead, sir.

David Haughton

Analyst

Good morning, everybody. I think there was a technical snafu there. I had to dial back in. So, Venkat, thank you very much for your last quarterly update. Best of luck for the future. My first question I guess is for Christine. You ran through some of the CapEx expectations for this year. And my particular interest here is looking at the spend at Obuasi. Can you just run through what your expectations are for the balance of the year at Obuasi?

Christine Ramon

Analyst

So, David, at this stage, for the full year, we’ve got $102 million spend for Obuasi, and most of that will actually be spent in the second half. It was about $4 million spent in the first half. So, as you can see, as the project gains momentum, the balance is really going to be spent in the second half of Obuasi. And it seems…

David Haughton

Analyst

Yes. Okay. So, that’s slightly below previous expectations. And clearly, it’s because of the relatively slow start there. What would you think the CapEx spend might be in 2019?

Christine Ramon

Analyst

I think overall, we’ve always seized of the $500 million capital, 20% in the first year, 55% in the second year and the balance in the following year. And that’s pretty much what we expect to see next year.

David Haughton

Analyst

Okay. So, at -- the momentum really starts to pick up and it continues on.

Srinivasan Venkatakrishnan

Analyst

That’s correct, David.

David Haughton

Analyst

The other slide in the presentation that I found quite fascinating was on page 28. Now, Graham has spent some time talking about the upside at Sunrise Dam. And we had a session about a month or so ago to get a better understanding of it. I guess, my question on this slide would refer to Geita. You’ve only got a relatively short life on reserves, but you’re targeting something like 12-year planning life. I presume that that is an underground expectation at Geita?

Ludwig Eybers

Analyst

Yes. Absolutely that’s underground and actually ramping up at this moment in the underground exploration that will increase over time. So, you will see that 2.3 years will stick to longer reserves or larger reserves.

David Haughton

Analyst

Okay. And with the underground ramp up, where you see the underground throughput going to in excess of 1 million of tons per annum, what do you target?

Ludwig Eybers

Analyst

So, we don’t see the tons throughput because with the underground typically it would be opposite [ph] of the open pit throughput. So, we’re looking at more or less same kind of ounces, maybe a little bit lower ounces but at obviously coming at higher grade. So, the throughput will be around 5.5 -- would be closer to 3 million tons, where we actually would shut down this SAG mill and only use the ball mining.

David Haughton

Analyst

So, the underground has the potential to feed 3 million tons per annum by itself to the mill?

Ludwig Eybers

Analyst

That’s what we’re targeting.

David Haughton

Analyst

Okay. And when would you expect to be able to get to that 3 million ton per annum rate?

Ludwig Eybers

Analyst

Well that’s -- we’re looking at around 2021. And it’s all the things, because we’re still continuing with the open pit exploration program. So, that can change depending any open pit resources. And at this moment, I must say it actually quite promising.

David Haughton

Analyst

Okay. And to get to that kind of throughput rate, quite a lot of development, I would expect would be require to get the number of bases to produce 3 million tons per annum. What sort of development CapEx would you be envisaging?

Ludwig Eybers

Analyst

Well, it’s typically what we’re looking at this moment and that’s why you can see the ramp up of -- in the Geita mine. So, typically, anything that between $60 million or $90 million, I would say in total, yes.

David Haughton

Analyst

Okay, $60 million to $90 million through to 2021?

Ludwig Eybers

Analyst

It will taper down by end of 2020.

David Haughton

Analyst

Okay. And the kind of grades that you’d expect at that kind of throughput rate, the grades that we’ve been seeing recently are in the 5-gram kind of level, although the reserve grade or adjusted reserve grade I guess is getting closer to 6 grams. Would you be taking some dilution to be able get to that 3 million tons per annum?

Ludwig Eybers

Analyst

Yes, we will. So, it will be around depending on [indiscernible] actually grade, and where we’re actually opening up new portals at this moment. So, it’ll range anything between 5 to 6.5 grams, depending on the timing as well, maybe more, 4.5 to 6.5, as we progress to the distance areas.

David Haughton

Analyst

Okay. Yes. That’s quite a different kind of mine to what I guess we’d been envisaging previously.

Ludwig Eybers

Analyst

Yes. It’s a -- the grades are much better than Sunrise Dam.

David Haughton

Analyst

All right. I’ll just leave it there for someone else. Thank you.

Operator

Operator

Thank you. The next question comes from John Tumazos of John Tumazos Independent Research.

John Tumazos

Analyst

Thank you very much. Do you anticipate any significant changes as Kelvin succeeds? Barrick’s Chairman makes what he calls Tier 1 gold mines over 500,000 ounces with very low cost. Of course, your largest mine Geita doesn’t quite reach that threshold. Do you see AngloGold’s portfolio of 16 smaller mines is too much of a management challenge?

Srinivasan Venkatakrishnan

Analyst

I’ll take that one actually. In terms of your question, really, it’s one for Kelvin, if I may. But certainly, Kelvin is aware of our portfolio. We have actually slim the portfolio down from 21 to around 13 core mines. In reality, I do know that Barrick went on a particular strategy to sort of focus on 6 or 7 key assets of large-scale and cash flow. But there is up to Kelvin in terms of what he wants to do in terms of the portfolio. But, certainly, he is aware of all the brownfields options which are within our portfolio, certainly in terms of Brazil, likewise in terms of various parts in Africa and Australia as well. But to be fair, I’d rather he answer this question in the next conference call in a month’s time, or in 2 months time.

Operator

Operator

[Operator Instructions] So, we don’t seem to have any further questions in the queue. Do you have any closing comments?

Srinivasan Venkatakrishnan

Analyst

Nothing from my side operator. Once again, I can thank everyone on the call for the support they have provided and certainly wishing AngloGold Ashanti many years of prosperity ahead. Thank you.

Operator

Operator

Thank you, sir. On behalf of AngloGold Ashanti team, that concludes our earnings conference. Thank you for joining us. You may disconnect your lines.