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"There's no doubt in the world that you're looking at a new AngloGold Ashanti and a great future for the company and its shareholders."
GEOFF CANDY: Hello and welcome to this Boardroom Talk podcast, my name is Geoff Candy and joining me on the line is Mark Cutifani, he's the AngloGold Ashanti CEO, they've put out results for the second quarter of the year. Production was 1.07m ounces, cash cost slightly up at US$801 an ounce and a 41% dip in Q2 earnings. Mark, let's talk a little bit first before we get into the details of it, it was a dip in earnings, it wasn't a surprise, you had announced it beforehand but what were the reasons behind it?
MARK CUTIFANI: I think the main thing Geoff and hi, how are you? Geoff, the main things were gold price off a little bit, we had a one-off tax benefit in the previous quarter and costs just a little bit high. They were the three main reasons but nothing too surprising and certainly seems to have been well received in the market.
GEOFF CANDY: Let's talk about the costs, they were up a little bit, grades at four of the six of your South African operations were down. That must have hit your cost as well, how are your grades looking overall?
MARK CUTIFANI: Our grades across certainly our business up until about now have been trending down but we're starting to turn that around as we build these new projects that have generally got higher grades, we'll start to see that trend turn around. But if you look in continental Africa for example, we've seen a 20% decline in grades over three years but the good news is we've seen a 20% improvement in throughputs and whilst that comes at a little bit higher cost, it demonstrates that our business improvement programmes are having an impact and we've been able to hold production and, in fact, starting to drop our costs. So you lose in one end but if you're working on the right things you'll pick it up on the other, so we're starting to see ourselves turnaround and with the new projects we'll start to rebuild volumes.
GEOFF CANDY: Let's talk about that business improvement project, you have got rid of your hedge book now that's been seen in the results, you've talked a lot about the Project ONE, which is the business improvement programme. There were some comments by Nick Holland, he's the CEO at Harmony Gold, saying that a lot of the gold companies have been disappointing investors and failing to live up to expectations, particularly like things on cost improvement and predominantly leveraged to the gold price, how would you say AngloGold is faring in those respects?
MARK CUTIFANI: Well, I hope Nick excluded us from that category. In 2007 I actually said that the model was broken and that the industry had to focus on our fundamental cost improvement project management, we had to get our returns north of 15% and if you look at our return on equity it's about high 20s, our return on invested capital, which is at about 15%, 16%, we're at the top of the industry on those benchmarks because we started that type of work five years ago. So it's positioned us well today relative to our peers, we've added a $1bn worth of free cash flow from our business improvement programmes and the fact that we got rid of the hedge book has helped us improve margins and go from a $1bn EBITDA to $3bn EBITDA and with the new projects we should go north of $4bn EBITDA in the next 18 months. So I think one could argue that we're the exception to the rule.
GEOFF CANDY: So you would say that there is a problem, well, not necessarily a problem but there are challenges within the sector as a whole though?
MARK CUTIFANI: I think there is no doubt in the sector as a whole you've got a mature industry, not a lot of new projects, those projects that are coming on are low grade, high capital cost. That's why we've been focusing on developments that are a little bit different in character that preserve margins, so we think that's pretty important. I think Randgold is another one that's gone down that road and I think both of us have benefitted relative to our peers, neither of us had those massive blow-outs and we've been able to keep our costs reasonably in check. Our cost increases in the last 12 months are about two thirds the industry average. So we're holding it, it's tough but we're getting there and all the hard work we've done in the last three or four years is starting to really come through on the bottom line results.
GEOFF CANDY: What is the different character that you talk about in your operations?
MARK CUTIFANI: We look at grades, look at managing cut offs and delivery so that we maintain a margin. We have, unlike others, we think about costs in the industry on a strategic basis, so we won't bring new gold into production at higher than $1200 an ounce. Now, the reason for that is we want to keep a margin and a consistent delivery on capital return of better than 15% through the cycle and that keeps our discipline tight, that means we aren't going out buying crazy assets at probably two or three times the price. We've made five acquisitions and even with the acquisition price and the capital we're developing new gold production from those assets at two thirds the average North American cost. So it really is understanding the nature of costs and the margins you want to operate to and then being disciplined in either exploration, bringing through projects to development through your brownfields development strategies or through M&A acquisitions.
GEOFF CANDY: I want to get into exploration and M&A in just a second but you talked about keeping things to 15% through the cycle, where are we do you think in the gold cycle at the moment?
MARK CUTIFANI: I still think we're well in the cycle, I think we're still on an upward run in that right today at $1650 the industry is still not returning on average it's weighted average cost of capital. We're above our weighted average cost of capital because of all the hard work we did two and three years ago and continuing to do. But on an industry basis we're still struggling, when you weight everybody's capital cost in there they're well above $1500, $1600 an ounce. Even with some of our new project spends we're still at about $1200. So we're positioned well and the one thing we think we can control is how we're positioned against our competitors and I think that's absolutely critical.
GEOFF CANDY: You talked about exploration and acquisitions, let's talk a little about your debt because clearly that has increased on both exploration and on the acquisition of Serra Grande, where would you like to see your debt going forward and how much more can you spend?
MARK CUTIFANI: We think the right range for our net debt is somewhere in the range $1.7bn to $2bn, we like to keep it below $2bn. We believe it could be in the range $1.7bn, $1.8bn as we progress through the course of this year as we're building Kibali, Mongbwalu, Cripple Creek, we're starting Sadiola Deeps, we are finishing off CDS expansion. So we've got a number of things on the boil but we're generating cash at the operating level as our plus $3bn EBIT run rate tells you. So keeping it about that level keep us well within our investment grade rating that's important to us and during the course of events we continually look at all of our projects and our capital, if they're not making the grade then we do think about selling things and we've done that a couple of times before where we didn't see value it's proven to be the right step for us. So we'll continue maintaining capital discipline and ownership discipline as well.
GEOFF CANDY: Are there any projects at the moment that you're considering getting rid of?
MARK CUTIFANI: No, we've got none on the sale block. Every asset is looked at from the perspective of how much more value can we add versus what would you do if you realized it is a sale. We do that every year, everybody in our organisation is aware of that process. We're happy with the assets we've got, we think we can add value but if someone were to come to us with something that puts a value above what we've got on it we'd have to consider it but nothing ready or rolling to go at this point in time.
GEOFF CANDY: Mark, what about the other side of the M&A front, we've seen a lot of juniors' share prices come under considerable pressure over the last few months, is there anything on the horizon that could be an interesting acquisition opportunity for AngloGold?
MARK CUTIFANI: Well, obviously we've done a couple of things, we've bought back our share of MSG, given Kinross' travails. We've bought Mine Waste Solutions, we thought that was a great bolt-on for our business. We've bought shares in Mariana, we've actually stepped out of a few joint ventures. We continue to scan the environment and if I could say this in a very simple way, we tend to say no about 98% of the time and that's probably about the right ratio, and that's kept us out of doing silly things.
GEOFF CANDY: Indeed. In terms of your operations, if we look at them briefly, you had some good numbers coming out of South America and Central Africa. Tropicana is also starting to produce, on the operational front how is that going?
MARK CUTIFANI: Pretty good, pretty good, look, we're very happy with Australia, Sunrise Dam is starting to improve, the Americas have been good across the portfolio, continental Africa has made some real gains. There are a couple of challenges at Obuasi but we're working through a long-term strategy there. So we're very happy with all of those, all of them hit their budgets, which is very pleasing and if you think about where we were four years ago, missing our budgets by 25%, a massive turnaround, very pleased with the operations there. South Africa is challenged and will continue to be challenged because of pit room but we're improving that and we've improved 18% in one quarter, so the signs are good but too early to book it yet but certainly encouraging and as I said, on the international portfolio it just keeps going from strength to strength.
GEOFF CANDY: On the South African front clearly safety was an issue and there's been a lot of talk about the Section 54 stoppages, they have diminished somewhat in this set of numbers but it is clearly still a concern. Has much headway been made with regard to renegotiating those things with the government?
MARK CUTIFANI: I'd have to say I think you've articulated it pretty well, we lost 76 000 ounces last quarter due to safety stoppages and if I add the slow start we got in Q2 we're probably up near 90 000. For the balance of the quarter we lost 15 000, for the second quarter we lost 15 000 ounces, so a significant improvement and that's a consequence of two things, firstly we did much better on the safety front, so less need to impact operations and secondly I think we had a much better and more constructive dialogue with the DMR, which also improved things. So lots of work still to be done but good progress has been made and don't forget we were awarded best safety wward last year in South Africa, given where we'd come from in the last two or three years. So we've come a long way, it was a tough first quarter but we're getting ourselves back on track, so I'm hopeful for the second quarter but there are still some risks there.
GEOFF CANDY: Mark, with regard to the South African operations, how much deeper can they legitimately get?
MARK CUTIFANI: That's a good question, I think we can go...we're mining between 2500m metres down to 4000 metres, so on average we're somewhere between around the 3000 metre mark on average. We believe we could mine successively beyond 5000 metres but it will be contingent on success that we're having with our new technologies, our drilling technologies. As we've unveiled today we've piloted and successfully completed two holes mining on the reef, mining about a one diameter hole through a reef and taking the full reef structure, 28 ounces in one hole and so we're very happy with that. [It] did take us about five weeks to do the first one, the second one took us nine days and we're halfway through the next one in about half that time again. So if we get that down to a day per hole then we're really cooking with something that might be quite different.
GEOFF CANDY: Mark, the one question with regard to that sort of level of depth mining is who would pay for it because one gets the sense that in the current market place people are looking for returns every quarter, so it's quite difficult to imagine somebody saying signing off on a project that's going to take a very long time to get very deep before they see a return.
MARK CUTIFANI: Ah, not really, we've changed the way...normally what used to happen here in South Africa is we'd put $1bn on the table and tell you that you might see something in 12 years' time. We've actually taken a very different approach, where we actually break it into about four different projects, where we decline towards the early gold as early as we can and start a cash flow within three years and then we use the cash flow from that development to - what we call - bootstrap up to the next level. So for example, Moab and Mponeng have been totally redesigned and we're spending about 25% of the capital that we would have normally spent in the first phase and we're seeing production very early. So we've changed the game and that's made a real difference in terms of our capital return. So a project that would have previously given you an 11% return is now showing 15% to 20% returns on an incremental strategy, which also lowers you're risk. So we've brought a new level of thinking to the way we execute these two projects and it's working very well.
GEOFF CANDY: Mark, two quick questions to close off with, firstly two high profile CEO oustings in the last two months at Kinross and at Barrick. Firstly, are you worried that something might happen to you and how tough is it out there as a CEO of a mining company?
MARK CUTIFANI: Look, I know both of the guys and I've got a lot of time for both of the guys. It's a tough business but the one thing I could say is when you look back and look at what people have done, we focused on getting our operations right, which includes our safety, get our project execution right, make sure we're focused on value, deliver capital returns and we've done better than anyone else on all those four fronts. Now I hear the new leaders of some of the organisations talking about doing the same things that we talked about four years ago. So as they say, copying is the greatest form of flattery. So at the moment, no, I'm not concerned, I've got a great board, I've got a great team. In fact, unfortunately I've got too many people interested in stealing guys out of our team because we've been successful on those fronts that I think are absolutely critical to deliver a good and strong business for the long term. The good news is they're starting to copy what we started about four years ago.
GEOFF CANDY: And what are you expecting to see over the next six to 12 months?
MARK CUTIFANI: A good gold price, I think [the] gold price will be strong, I think the basics are there and in place to support a reasonable gold price, lots of uncertainty, which is not what we want to see but it's the reality of the world we live in. I think from our point of view good delivery on our projects, we're tracking all of them and we've hit our budgets four years running now on capital and I don't think there will be any difference over the next 12 months. I think we've got a great future and if there's a risk it might take a little bit longer, only a quarter or two, to get to that full production level but there's no doubt in the world that you're looking at a new AngloGold Ashanti and a great future for the company and its shareholders.
GEOFF CANDY: Mark Cutifani is the CEO at AngloGold Ashanti.
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