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I consider it a privilege and it gives me great pleasure to present my first annual review as CEO of AngloGold Ashanti. Given that my term began almost three quarters of the way through 2007, I offer some first impressions and my perspectives on the way forward.
My first few months with the company have been eventful, beginning with the reduction in Anglo American plc’s holding in AngloGold Ashanti to 16.6% and the related secondary placement of $3 billion of ordinary shares. These events were followed by a continuation of our disappointing safety performance, with the reporting of fatal incidents in South Africa and continental Africa. At an operational level, we struggled with delivery of acceptable performances at Geita and Obuasi while the imposition of energy restrictions in South Africa in January 2008 put further pressure on the business. In response to the operational issues, we moved quickly into restructuring the organisation and established a clearer accountability structure, focussing on delivery on commitments and the institution of the programmes necessary to turn these operating weaknesses into new opportunities for improvement. While my early focus has been on addressing those issues that dominate our immediate time horizon, it is clear, as I get to know our people, our resources and our assets, we have a wonderful opportunity to go forward and build on the strengths we have as a team and as a company, to create value for our shareholders and all of our business partners.
As we now say … we must deliver on our commitments.
It is my firm belief that our starting point – every minute, every day, every week, and in every working place, every shaft, every office – is that our first and foremost value must be safety. This applies to our executive leadership team, all levels of managers, employee representatives, and all of our employees and contractors. We all must take individual accountability for our health and safety, and share a collective accountability – to look after each other in every facet of our work and interactions.
While the right to a safe work environment is fundamentally a moral issue, it also makes sound business sense. Safety and productivity go hand-in-hand. We cannot have a productive workplace if we do not have safety. There is no conflict in these objectives – the processes and actions that will deliver an accident-free workplace are the same processes that will enable us to improve productivity and deliver a sustainable work environment to deliver ‘safe operations’. It is no coincidence that our safest teams and operations are also our most productive.
In this context, it is with deep regret that I report the death of 34 of our colleagues during the course of 2007. On behalf of the AngloGold Ashanti board and management, our sympathies are extended to the families and colleagues of those who have lost their lives while in our care.
Research tells us that around 70% of the fatal accidents at our operations last year were as a result of actions or operating standards that did not meet our collective expectations or standards on work practices. After a highly introspective review process and the putting in place of a number of initial interventions, on 8 November 2007, a campaign, ‘Safety is our first value’, was launched at the South African operations, in partnership with and with the support of our employees, union representatives and government. We have identified seven key areas of action which can and will become an integral part of the continual improvement processes we are putting in place.
The key is to develop a deep understanding of the mining process and to be very disciplined and consistent in how we manage that process. Further, I believe that safety is more than an operational issue; it is a social phenomenon that reflects the nature of our underlying relationships and our ability to communicate with each other. The South African underground mining environment is a microcosm of South African society as a whole, and there are certain legacy issues that create barriers to communication. In order truly to change our safety performance, we need to change the way in which we communicate with each other – at the most personal level. Allied to that is the need to look at innovative ways in which we can mine in the future and to engineer technological changes that will significantly reduce the risk to people in the workplace. While there is much work to be done I know we have the will, the right people and the resources to create an accident-free workplace. We need to work together to turn this belief into a working reality.
Nonetheless, half of our operations operated without a fatal accident during the year, and eight of them improved their annual lost-time injury rates. To those operations, I extend my heartfelt congratulations and encouragement as they lead us towards a future we can all share.
As I reflect on our operations and financial performance for the year, I must observe and share the team’s disappointment at the results achieved.
In terms of production, there was an overall decline of 3% to 5.5 million ounces, largely as a result of declines in production at Great Noligwa and TauTona in South Africa, less-than-hoped for improvements in production at Geita and ongoing underperformance at Obuasi in Ghana. Record production at Siguiri in Guinea, Mponeng in South Africa and Sunrise Dam in Australia failed to offset these declines.
Reduced production, appreciating local currencies, higher uranium losses and increased royalty payments and maintenance expenses, as well as inflationary pressures all contributed to an overall increase in total cash cost of 16% to $357/oz. The latter was in line with or better than the reported performance of our peers, however, reflecting input cost pressures across the sector. Our cost saving initiatives, which in 2007 resulted in savings of $58 million, brought total savings over the past three years to $291 million. These saving also tempered this cost rise to some degree.
Adjusted headline earnings totalled $278 million, a decline of 32%. This was a consequence of reduced production, increased costs and greater expenditure on exploration, which offset the benefits accruing from the higher received gold price.
Three particular aspects related to performance bear mention, namely those issues encountered at Obuasi and at Geita, and the impact of the power shortages in South Africa.
The Obuasi mine again failed to deliver on its plan or to its real potential. Following urgent reviews initiated towards the end of the year, we believe that a clearer picture of this asset and its potential is emerging. The primary factors contributing to underperformance stem from inappropriate mining methods, poor grade management and a lack of mining flexibility as a result of low rates of development, the scattered geography of the operation and poor maintenance of critical equipment. A recovery plan for Obuasi is being put in place and, as we come to understand this orebody, we are more likely to be able to turn to account its potential. We have set ourselves a 15-month time horizon for this critical work.
Geita remained an area of concern during the year. The collapse of the Nyankanga pit wall in February 2007 restricted access to deeper high-grade ore. The effects of this were further compounded by reduced recoveries owing to the effect of the refractory nature of the harder ore on the mill and the loss of key members of staff. There has also been a reduction in mineral resources and reserves by 2.3 million and 2 million ounces respectively as a result of higher costs, changes in estimation methods, changes in planning models and the flattening of mining slopes. In addition to management restructuring, the team is being supplemented by additional expertise to assist with immediate recovery programmes, while the scope of the recovery plan is being determined. Detailed plans are expected to be completed and underway by the end of June.
The power crisis in South Africa, which began in January 2008, has drastically affected the mining industry. When the national power utility, Eskom, gave notice of an immediate shortage of supply, we and other mining companies were forced to close operations on 25 January. The restart of the operations was a difficult process as the deep mines of South Africa cannot be turned on and off without careful time-weighted planning and execution. The way in which the crisis was initially managed was disappointing, reflecting as it did a failure of both policy and strategy. At the same time we recognise the need for all parties to work together to find a manageable solution to the crisis – and we must use this opportunity to reflect on how we use energy and look for long-term sustainable strategies to reduce power consumption and thus improve our long-term competitive cost position.
Every attention is being given to adapting our operating plans to accommodate a stable supply of 90% of our power allocation, as has been committed to by Eskom. This is based on optimising the reduced power supply, taking into account long-term risks and our contractual obligations. We are developing ideas for this, including enhancing power supplies to and increasing energy efficiencies at our operations. It will include intensive interaction with organised labour, government and Eskom, both through our own channels and through the offices of the Chamber of Mines.
We will do our utmost to avoid shutting down operations with the job losses this would imply. However, we are unable at this stage to guarantee that we will succeed in this endeavour – but we are committed and we will leave no stone unturned as we work with Eskom to find a manageable and sustainable operating solution.
The power outages experienced in early January resulted in a loss of production of some 200,000 ounces for the first quarter. Operating at a power supply of 90% for the remainder of the year will result in the loss of another 200,000 ounces, bringing the estimated total loss in production for the year from the South African operations as a result of power outages to 400,000 ounces.
As we embark on a new phase in the life of this company, so restructuring has been necessary. As a first phase, we have tried to address weaknesses in our business performance and delivery on our commitments. The focus here has been on the restructuring and refocusing of our executive team, to flatten the operational hierarchy, to decentralise operational performance metrics to the operations where they belong, and to ensure clearer lines of accountability for delivery on our commitments. In doing so, we have now structured the business into three core management areas by time zone – Australia, Africa and the Americas – with an executive team member responsible for each one of the regions reporting directly to me. Because of the scale, both geographic and in the number of operations, the Africa region has been further sub-divided into Southern and West African operating entities, with regional offices being established respectively in Potchefstroom, South Africa, and Accra, Ghana. Their location is important – the people in those offices are dedicated to the performance of those operations that they support.
We have redefined the role of the corporate office as part of this process. Its role will now revolve around business strategy, the setting of policy and standards, providing support to the regions including the provision of shared services, the co-ordination of global exploration and product marketing.
Our fundamental objective as a business is to deliver shareholder value. We are developing our strategies to improve sustainable returns to our shareholders.
As a gold company, we have three critical tasks on which we must deliver:
My observations in relation to our current performance on these points provide an important context for our work and focus going forward: our most recent production and cost performance has been inconsistent and declining; we are not adequately exposed to the rising gold price; and our asset base has grown only moderately. We must pay careful attention to the life cycle of the assets within the portfolio, the highly competitive nature of the industry today and the robust gold market.
In order to meet the objective to create sustainable value for our shareholders, we must understand the very nature of our resource and asset base. To help us achieve this key understanding, we needed, as a starting point, to undertake a review of our asset base. From the initial stages of this review, it has become clear that 30% of our operations are not delivering on their potential. Our options are clear. We cannot leave these operations as they are – we must recover this potential through our new approach or look for alternate pathways to value. Such a review is not a once-off event; it is something that needs to be undertaken on a regular basis as the operational profile and circumstances change, with each operation’s performance and potential being continually reviewed.
In adopting this approach we have also identified areas of under-investment. The conclusions and recommendations of the review of assets, which was conducted by a team that included both internal and external expertise, are currently being finalised. This review will give us a baseline expectation of the value and potential of each asset from which each one can be re-assessed in future so as to maintain flexibility and to enable informed decisions to be made as to where capital can be most efficiently deployed. Preliminary results have highlighted the gap between the greenfields and brownfields exploration programmes, the potential to increase the intensity of production around several operations, and opportunities to make further improvements in process recoveries and cost efficiencies.
The review has also highlighted areas of value that have not been fully appreciated until now, such as the iron ore deposits in Brazil, the potential regarding the treatment of uranium tailings in South Africa and unrealised exploration potential at Siguiri in Guinea. You would already have noted the results of some early recommendations such as the consolidation of ownership at Iduapriem, the proposed acquisition of Golden Cycle, our joint venture partner at CC&V, and the potential sale of our interest in Morila in Mali.
Critics of the gold mining industry have commented that the sector has not capitalised fully on the current boom in the gold price. To some degree, I would agree. While there has been an upsurge in the gold price in recent years, the prices of many other commodities have risen to an even greater extent, and many of these are used as inputs in the mining industry. In addition, salaries and wages have increased over this period and the resulting increase in costs has reduced the benefits of the higher gold price to the industry.
It is also true that our hedge book has played a role in preventing the full benefits of the higher gold price being received by AngloGold Ashanti. In the current gold market, the received gold price continues to diverge in percentage terms from the spot price – during the last quarter of 2007, our received price was around 13% less than the market price and this discount is expected to increase to 20% in 2008 (assuming a spot price of $900/oz) as we deliver over 2 million ounces into the hedge book.
I am not a fan of hedging in a bullish gold market. We have in recent months continued to manage our hedge position and have reduced our net delta by 200,000 ounces to 10.4 million ounces during the fourth quarter of the year, when the gold price rose by $91/oz. Deliveries into the contracts drove the reduction but the effect of this was dampened by an increase in the hedge delta as a result of the increasing gold price.
Even more important is the percentage of reserves that the hedge book represents. As at the end of 2007, the hedge book amounted to 15% of reserves and 5% of resources, partially as a result of the significant increase in both reserves and resources.
We anticipate continued support for the gold price in the year ahead but, assuming that current market conditions continue, then as a result of the current structure of the hedge book, our received price will be significantly lower than the spot price as we deliver into around 60% of our current hedge book over the next three years.
There was a pleasing increase in resources and reserves during 2007, indicating the success of our exploration programme. Mineral resources increased by 18% to almost 207.6 million ounces (after depletion). This includes an addition of 6.9 million ounces which were delineated by greenfields activity at three key prospects, Tropicana in Australia, Mongbwalu in the DRC and Gramalote in Colombia. Other significant additions were 17.1 million ounces at Mponeng and 4.7 million ounces at CC&V, both as a result of improved economics and extension to mine life.
Ore reserves rose by 9% to 73.1 million ounces net of depletion. Significant additions were 3.8 million ounces at Moab Khotsong with the inclusion of Project Zaaiplats, the area adjacent to the operation which will enable access to the deeper Vaal Reef blocks to the south-west of the mine, and 3.4 million ounces at Mponeng following the inclusion of the Carbon Leader Reef below 120 level project.
Organic growth can still be expected from existing assets which have a growth base of 2 – 2.5 million ounces. The key to unlocking growth here is to improve productivity, efficiencies and to go deeper. The group is not averse to acquisitions in South Africa and elsewhere, should these propositions add value.
In line with its stated intentions, Anglo American plc reduced its holding in AngloGold Ashanti from 42% at the end of December 2006 to 16.6% in October 2007. This involved a $3 billion secondary placement of shares.
The effect of the decline in this shareholding to the company is, firstly, that AngloGold Ashanti is no longer bound by Anglo American’s global strategy and will be judged rather as a standalone company and be accountable in its own right for its performance. This, we believe, will also help to improve our growth prospects as AngloGold Ashanti is now free to compete for any asset without there being a potential conflict of interest.
The second benefit is one that is less tangible yet related. The reception by our shareholders, new and old, and the ease of placement of the shares have indicated a positive response to the removal of the overhang that a controlling shareholder presents to the market. We anticipate even greater levels of liquidity in trading and a greater diversity in shareholders than ever before, and with it the benefits that this will bring to relative share price performance.
One of the most fundamental reviews undertaken in the latter part of the year is the recognition that people are our business. At a time when the group and the industry as a whole face significant challenges in recruiting and retaining competent, skilled and experienced people, we are in a very fortunate position in this respect. But this is not something we take for granted and, during the course of 2008, our organisational development discipline will pay the closest attention to this critical aspect of our business. It is my ambition that we enter into a social contract with as many employees as possible and that in so doing we, as an employer, benefit from each employee delivering to us to the best of his or her ability in return for our contribution to enhancing his or her overall quality of life.
Our social contract extends beyond the boundaries of our operations and our individual employees. However, we recognise that we are guests in those countries in which we operate and have interests, and that if we are not adding value to those countries and to the communities around our operations, we have no future there. A comprehensive account of AngloGold Ashanti’s approach to sustainable development and its performance during the year can be found in the Report to Society 2007.
The support that I have received from the board and our executive team, and indeed from the many employees and business partners that I have met in recent months, has been tremendous and I extend to them all my sincere appreciation.
My thanks are also due to former Chief Operating Officers of the company, Neville Nicolau and Roberto Carvalho Silva, who left the group during the year.
I would like to save a special word of thanks for Bobby Godsell, former CEO and founding AngloGold Ashanti leader, who saw the company through from its inception in 1998 until his retirement in September 2007. Under his stewardship, AngloGold Ashanti has developed a high-quality asset and reserve base, an exceptional exploration portfolio and a team of dedicated employees building a global competitive company.
We face a challenging time but we have a highly motivated and skilled team in place whose members understand what they have to do and for what they are accountable. We look forward in the year ahead to dealing with our most important challenges:
The outlook for the gold price continues to be positive. In addition to fundamental demand for the metal, the price is being underpinned by the rise in underlying costs in the gold mining industry (cash costs, exploration costs, stay-in-business expenses). New gold resources are increasingly difficult to find, resulting in a relative tightness in the market on the supply side, notwithstanding the holdings of gold held by central banks and other players in the asset market.
We forecast that production in 2008 will be between 4.8 million and 5 million ounces at a cash cost in a range of $425/oz to $435/oz. This is based on the assumption that the South African operations will receive 90% of current power requirements for the remainder of the year.
AngloGold Ashanti is in a phase of substantial investment in exploration and new project development. Our total attributable capital expenditure for 2008 is forecast to be $1.2 billion. This commitment to the future clearly demonstrates our confidence in our market, our operations and our people – we will deliver.
Mark Cutifani
Chief Executive Officer
7 March 2008
AngloGold Ashanti Annual Report 2007 – Annual Financial Statements