2022 Annual Results: Transcript

2022 Full Year Results

Q&A

Thursday, 23rd February 2023

2022 Full Year Results Q&A

Thursday, 23rd February 2023

Q&A

Jason Fairclough (Bank of America, Merrill Lynch): You are super excited about Woodsmith, there is all this upside, and then you are taking quite a big write-downvery early in the project. What has surprised you about the project? Why the write-down?

Duncan Wanblad: The write-down is very much a function of the application of the accounting rules and the prudence that we would have to apply to these things, given what we know of the project today. It does not build in all of this upside that I've been speaking about and that we are very confident is going to be there, but we have to deliver it right. And that is the work that we are planning to do.

Stephen Pearce: I do not want to talk down the accounting profession in any sense, but there is a fundamental difference between what you have to do, both from management and an audit perspective, in terms of a long-dated discounted cash flow model, and the assumptions that you have to be able to verify and tick off to put in that over time; versus a model and a belief that you would have in terms of the true value that you think you could deliver over time. And we are in that circumstance.

In the detailed note on the carrying value and the write-down (Note 8, page 64 of the Anglo American Preliminary Results 2022), we have included sensitivities because we are using a very high discount rate, which is appropriate for accounting models at the moment as it is greenfield in nature. If that comes back to the corporate WACC (weighted average cost of capital), in theory, the NPV and accounting view of the value rises significantly. Similarly with the price, we have put the sensitivity in there for you as well.

Jason Fairclough: What has surprised you as you have taken over the project?

Duncan Wanblad: When we acquired the project, it was one of the most attractive options that we saw. We knew we were going to have to do a lot of work to really get under the skin of this and do it in a way that was consistent with a project that would exist in Anglo American for multiple decades. A lot of the things that we picked up during the due diligence, which we had access to at that point in time, are all playing out as expected in the design and the delivery of the project.

Danielle Chigumira (Credit Suisse): When Woodsmith goes to board for approval, what form will it be in? Will it be the 5Mtpa version, the 13Mtpa version, or something in between?

Duncan Wanblad: We will take the project in phases to the board for approval. The board approved the $800 million for 2023. We will have to go back to the board at the end of this year to give them an update on the project, how the development has turned out and we will get partial approvals to get to the point where we have dimensioned all of the risk and have the right level of engineering in the project. I would suggest that there is another couple of years; we would certainly want to get more detail in the sandstone before we had completed the design on this project, and we really want to understand the sink rate and the time to get to the bottom before we took it to the board for final approval. It is at least two years out, I would think, from a final approval for full notice to proceed in the way that you would have thought about Quellaveco.

Danielle Chigumira: In 2024, when you are in the sandstone, you will be in a position to take the 13Mtpa version to the board for approval. Is that how we should think about it?

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2022 Full Year Results Q&A

Thursday, 23rd February 2023

Duncan Wanblad: I am not sure that it would be 13Mtpa version, but it would certainly, at the very least, be the 5Mtpa at that point.

Danielle Chigumira: Thinking about it from the marketing perspective, you are speaking about up to 5Mtpa in 2030. What would you need to see in terms of feedback from crop studies and so on to have confidence in that 5Mtpa, and then ultimately to the 13Mtpa? Because the commentary that you make around the value of the product and the fairly slow ramp-up, there seems to be a bit of inconsistency in that. How do I think about that?

Duncan Wanblad: That is very much a market development strategy that is coming to play here. We could put quite a lot of this product into the market relatively early on, just simply on the substitution basis. But I think it will be really hard at that point to start building the premium that should be associated with this product. We have to let it earn its stripes in the market. The one thing that the farmer really wants to know and understand is that this is not going to have any detrimental effect to the way that he runs the farm today. It is very important that they get real-life opportunity, not just crop trials and external bodies with whom we work with, who are providing a lot of this information today. Then they learn and they experience the yield benefits and so on. And we can build into it on that basis. This is a very deliberate strategy and the pace of uptake of that might be different in different parts of the world for all sorts of reasons. And that is why we say 'up to' but we will get there.

Sylvain Brunet (BNP Paribas Exane): Why has the discount rate changed compared to when the acquisition took place in 2020?

Stephen Pearce: The discount rate has not changed. We use the same discount rate in the acquisition model as we have in this model. But remember, they are two fundamentally different projects, in terms of what we are building - the time, scale, progress, pre- investment.

The thing I would also encourage you to think about, this is very different to a normal mine - Quellaveco is probably a good example, where you have got a relatively simple mine with more complex processing and logistics piece. Whereas this project is all about the pre- investment in the infrastructure with very simple processing and logistics. It is totally a flip around to how you would normally think about it.

And in terms of the pre-investment that you need to make, I would also liken it a little bit to, a greenfield iron ore mine, where the building of the mine is actually relatively simple, but the investment in the rail and the port infrastructure is nailed to the ground upfront and you get one chance to get that right - yes, you can expand them later, but you get one chance to invest in that and scale it and get the efficiencies right. This is almost an identical scenario here.

Sylvain Brunet: Could you help us understand the difference between the challenges that Kolomela is experiencing versus Sishen. The last few years, Kumba was actually a good example of a good recovery, and it looks like things have become more difficult.

On Botswana, just to understand what is being discussed at the moment. Is it purely fiscal terms? Have you agreed on some of the items already, and why are you sure that 2023 should be the timeline for the final agreement?

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2022 Full Year Results Q&A

Thursday, 23rd February 2023

Duncan Wanblad: On Kolomela, it was hampered in a slightly different way last year from Sishen. Some of the fundamental underlying issues are associated with the weather and the mine development, which was very similar to Sishen. But it had a 3-4 month period where, in addition to that, it had had a misfire on one of the main benches in the mine. Mpumi and the team needed to navigate that misfire in a very, very careful way. That slowed the mining rate down significantly during that period of time. By the end of the year, Kolomela was doing very well.

In addition, there is a differentiator between Kolomela and Sishen in the context of access to rail, and at the end of the year when we started to really struggle with rail access - during the strike at Transnet and then the extended maintenance period at Transnet - we elected to prioritise the Sishen material onto the rail, and we stocked Kolomela.

At Botswana, the vast majority of all the elements of the negotiation have been completed. I cannot remember how many workstreams there are, but there is only one outstanding workstream. And that is where the team is working at the moment.

Ian Rossouw (Barclays): Firstly, on Woodsmith. From memory, the Sirius plan was to get to 13Mtpa eventually, with a bigger shaft, etcetera - is that ultimately the capacity the shafts can do, or is there upside longer term?

And then, from memory, the long-term price you mentioned at the time of the Sirius deal was like $120 to $140/t, explain the bridge to the new long-term price.

And then lastly on working capital, what should we expect for this year and roll-off of the platinum inventories as well, please?

Duncan Wanblad: On the Sirius plan to 13Mtpa, the real constraints in that mine are not the ore body, it is really the shaft capacity and the tunnel capacity to get to the port. And it is not simply the size of the conveyances that you need to put in there, which are really important, but it is fundamentally constrained by the ventilation. And ventilation is very important in the context of the mining method that you select, the equipment that you put down there, and so on.

Our approach was always likely to be different from Sirius. I do not want to comment on the comparison between our plan and the Sirius plan, because from day one, we said we were really attracted to this opportunity because of the nature of the product, the size and scale of this ore body. We wanted to do our own review on it, work out how we were going to optimise the execution of it, and these are our plans.

Stephen Pearce: On the price, your recollection is correct. We were talking around $140/t at the time that we acquired the project. What have we done since to inform our view? The economists have gone to town in terms of fundamental supply/demand balances across the four main nutrients that make up the four main aspects of the product. And that view of the fundamental supply/demand balance over time is expressed as a real price for the relative percentages that informs the $170/t. We have then gone through and looked at the balance of probabilities of where some of that value is. In a fairly conservative approach, we have added $20/t to it. As Duncan mentioned, if you took a different approach, you could add $100/t pretty quickly and the current market view of that it is over $300/t.

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2022 Full Year Results Q&A

Thursday, 23rd February 2023

But we are using the relatively conservative and fundamental economic build-up view of the four main nutrients into the $170/t as a starting point.

On working capital, De Beers is probably one where we have had a bit of a tick-up in finished goods - and some of that is a view of the team leading into the new year and trying to position for China reopening. The other is because we have got the transition of Venetia this year - the last cut has been completed and the underground transition will ramp up through the year. The team are keen to make sure we have got the appropriate mix of diamonds to take to the market through the year as we go through that transition.

On Copper, we have the Quellaveco ramp-up, and we see a little bit of build-up there, as well as there was a fire at the third-party port that we use to take the product out for Los Bronces. While it is back up and running at lower volumes at the moment, it will take another few months through the half year. But do not expect an impact on full year sales and certainly no impact on production from that.

And PGMs is probably the biggest WIP build-up that we have had across the portfolio. Some of that is the purchase concentrate material that we bring in off of current pricing, impacting our carrying value and some of it is the Polokwane smelter. That will take a little bit of time to run out - so even though it is up and running and processing well, you get another pinch point just this side of the ACP as you balance the right mix and feed through the ACP. So that will take through 2023 and 2024 to run out.

I would love to get at least half of that back in the near term in terms of working capital management.

Alain Gabriel (Morgan Stanley): Duncan, first question is on Woodsmith. Do you have a sense of the operating costs if you were to achieve 5Mtpa and then subsequently 13Mtpa?

And my second question is, outside of Woodsmith, your growth options for the next five years appear to have stalled, especially around Mogalakwena and the Collahuasi expansion. Can you give us an update of where we stand on these growth options outside of Woodsmith, just for the next five years?

Duncan Wanblad: Operating costs at Woodsmith around the 10Mtpa mark are still at a very competitive Q1 position on the cost curve. On our growth options, I would not characterise it as stalling - it just takes longer to get these things done. The big projects in there, other than Woodsmith and Quellaveco, are Collahuasi, Sakatti in Finland and Mogalakwena - so those are the big options and prizes to go for.

At Collahuasi, quite a lot still has to be done on extracting the optionality that exists, and now is the time to start getting our heads around how to bring that forward. But permitting is a very different type of world today than it was just five years ago. The team had to start working out how to re-permit the water that they were using in their current operations before they had to get through thinking about how they were going to expand the operation.

Mogalakwena - Natascha has the six pillars of work that she is working through to get her head around how we were going to expand this - what the best deployment of capital was between the mine and the plant, what the plant configuration could and should look like and the time to do this. We are bang on track in terms of where we should be with that at this particular point in time.

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