Anglo American Bounces Back To Profitability

Anglo American, the global diversified mining giants returned to profitability following tough decisions its senior executives had to make to restructure the business and become a group that can deliver sustainable shareholder returns.

The international mining out—which is the parent company to De Beers said on its prelimary results for 2016 that earnings before interest, tax, depreciation and amortisation (EBITDA) went up 42% to $1,406 million from $990 million reported in the same period in 2015.

Anglo American Chief Executive Officer, Mr Mark Cutifani

It attributed the rise to higher revenues from stronger rough diamond demand, which led to reduced inventory levels, reflecting improved trading conditions compared with those experienced in the second half of 2015. Results also benefited from cost-saving programmes, portfolio changes and the impact of favourable exchange rates. Unit costs decreased by 19% from $83/carat to $67/carat.

The net debt was reduced by 34% to $8.5 billion (2015: $12.9 billion), which is well below the $10 billion target while profit for the financial year attributable to equity shareholders stood at $1.6 billion as opposed to a $ 5.6 billion on the prior period.

Chief Executive of Anglo American, Mark Cutifani said the decisive actions they have taken to strengthen the balance sheet put the company well on track to achieve its net debt target of less than $10 billion at the end of 2016 – both through stringent capital and cost discipline and improved operational performance – and assuming the completion of announced non-core asset divestments.

“Sharply lower prices across our products were mitigated by our self-help actions on costs, volumes, working capital and capital expenditure, together contributing to the $1.1 billion of attributable free cash flow generated in the first half of 2016. Across the business, our copper equivalent unit costs have reduced by 19% in US dollar terms, representing a 36% total reduction since 2012,” said Cutifani.

The group’s total revenue increased by 30% to $6.1 billion (2015: $4.7 billion), driven by higher rough diamond sales, which increased by 37% to $5.6 billion. This was attributable to a 50% increase in consolidated sales volumes to 30.0 million carats (2015: 19.9 million carats), partly offset by a 10% decrease in the average realised rough diamond price to $187/carat (2015: $207/carat), reflecting the 13% lower average rough price index, offset to some extent by an improved sales mix.

Anglo American said its rough diamond production decreased by 5% to 27.3 million carats (2015: 28.7 million carats), reflecting the decision, taken in 2015, to reduce production in response to prevailing trading conditions. The global diversified mining outfit—which is parent company to De Beers—said Debswana maintained production at close to the previous year’s levels, with output of 20.5 million carats (2015: 20.4 million carats).

Jwaneng’s production increased by 23%; driven by higher tonnes treated, largely offset by Orapa, where production was 20% lower. By year end, 85% of the 500 million tonnes (Mt) of waste stripping required to expose the ore had been mined at Jwaneng Cut-8.

The first Cut-8 ore to the processing plant remains scheduled for the first half of 2017, with Cut-8 becoming the main source of ore from 2018. Damtshaa (a satellite operation of Orapa) was placed onto temporary care and maintenance from 1 January 2016.

Production at Namdeb Holdings decreased by 11% to 1.6 million carats (2015: 1.8 million carats), with reduced output at Debmarine Namibia (as a result of the Mafuta vessel undergoing extended planned in-port maintenance) and lower grades at Namdeb’s land operations. Debmarine Namibia’s new sampling vessel, the SS Nujoma, was completed three months ahead of schedule and within budget, and sea trials commenced in November. The vessel is expected to become operational during 2017.

In South Africa, production declined by 9% to 4.2 million carats (2015: 4.7 million carats), mainly due to the early completion of the sale of Kimberley Mines in January 2016, partly offset by an increase of 12% at Venetia owing to the processing of higher grades. Construction of the Venetia Underground mine continues to progress, with the underground operation expected to become the mine’s principal source of ore from 2023.

In Canada, production declined by 45% to 1.0 million carats (2015: 1.9 million carats) owing to Snap Lake being placed onto care and maintenance in December 2015. In July 2016, approval was granted to flood the underground workings, which will reduce the costs of care and maintenance while preserving the long term viability of the orebody.

Following conclusion of an unsuccessful process to gauge interest in an acquisition of Snap Lake, flooding commenced in January 2017. Production at Victor decreased by 7% to 0.6 million carats. Development of the Gahcho Kué project was completed on schedule, with the ramp-up to commercial production expected to be reached during the first quarter of 2017.

Owing to continuing depressed markets in key industrial sectors (principally oil and gas), Element Six, the industrial diamonds business, experienced a challenging year. The reduction in contribution arising from lower sales has been largely offset through a comprehensive cost-reduction programme.

Markets

Sustained diamond jewellery demand growth in the US and marginally positive growth for the full year in China (in local currency, though declining slightly in US dollars) contrasted with weakening demand in the other main diamond markets. In India, a month-long jewellers’ strike in March and the government’s surprise demonetisation programme which started in November, had a considerable negative impact on demand. For the full year, global consumer demand, in US dollars, is estimated to be in line with 2015. Additional marketing in the US, China, India and Japan in the final quarter of the year, the main selling season, had a positive impact.

Producers destocked during 2016, as sentiment in the midstream improved and rough and polished inventories normalised, supported by a series of initiatives put in place by De Beers, starting in the second half of 2015. These included lowering rough prices, providing flexibility to Sightholders for their purchase arrangements and increased marketing activity to drive consumer demand.

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