Copper

Copper

John Mackenzie

John MacKenzie
CEO

$2,461m

OPERATING PROFIT

(2010: $2,817m)

22%

SHARE OF GROUP OPERATING PROFIT

(2010: 29%)

$2,750m

EBITDA

(2010: $3,086m)

Group strategy actions

Investing – in world class assets in the most attractive commodities

A key focus in 2012 will be in progressing the Quellaveco project in Peru to the approval stage, while a pre-feasibility study is under way to examine options for expansion at our 44% owned Collahuasi mine in Chile.

Organising – efficiently and effectively

Significant steps were taken during the year to upgrade the business' risk management profile: this included more comprehensive risk management training, as well as the progressive implementation of risk standards and of a new set of leading risk indicators.

Operating – safely, sustainably and responsibly

Copper's managed operations resumed a downward trend in lost time injuries, though one death was recorded at Los Bronces. The business continues to assess its safety performance and has set new and more demanding targets around risk management improvement.

Employing – the best people

Our Copper team aims to raise the bar in terms of both its commitment to the business and its wider community outreach, as exemplified in its multi-stakeholder dialogue and financing initiatives around its new projects.

Financial highlights

US$ million (unless otherwise stated) 2011 2010
Operating profit 2,461 2,817
EBITDA 2,750 3,086
Net operating assets 7,643 6,291
Capital expenditure 1,570 1,530
Share of Group operating profit 22% 29%
Share of Group net operating assets 17% 14%

BUSINESS OVERVIEW

We have interests in six copper operations in Chile. The Mantos Blancos and Mantoverde mines are wholly owned and we hold a 75.5% interest in Anglo American Sur (AA Sur), which includes the Los Bronces and El Soldado mines and the Chagres smelter. We have a 44% shareholding in the Collahuasi mine (the other shareholders are Xstrata, with 44%, and a Mitsui consortium, holding the balance of 12%). The mines also produce associated by-products such as molybdenum and silver.

In addition, we have a controlling interest in the Quellaveco and Michiquillay projects in Peru and a 50% interest in the Pebble project in Alaska, with Northern Dynasty Minerals holding the balance.

INDUSTRY OVERVIEW

Copper's principal use is in the wire and cable markets because of the metal's electrical conductivity and corrosion resistance. Applications that make use of copper's electrical conductivity, such as wire (including the wiring used in buildings), cables and electrical connectors, make up approximately 60% of total demand. Copper's corrosion-resistant qualities find numerous applications, particularly plumbing pipe and roof sheeting, in the construction industry, which accounts for a further 20% of demand. Copper's thermal conductivity also makes it suitable for use in heat transfer applications such as air conditioning and refrigeration, which constitute some 10% of total demand. Other applications include structural and aesthetic uses.

Copper mining is an attractive industry,with a moderate concentration of customers and suppliers, and relatively good average profitability over the long term. Producers are price-takers; hence, opportunities for product differentiation are limited, either at the concentrate or metal level. Access to quality orebodies, located in regions providing stable political, social and regulatory support for responsible, sustainable mining, should continue to be the key factor distinguishing project returns and mine profitability. With no fundamental technological shifts expected in the short to medium term, forecast long term demand is likely to be underpinned by robust growth in copper's electrical uses, particularly wire and cable in construction, automobiles and electricity infrastructure. The key growth area will continue to be the developing world, led by China and, in the longer term, India, where industrialisation and urbanisation on a huge scale continue to propel copper demand growth, and where copper consumption per capita is still well below that of the advanced economies.

What has really distinguished copper in recent times – as reflected in its strong price performance – has been its underperformance on the supply side, which is supporting more robust fundamentals for the metal. Copper mine output has suffered disproportionately from a range of constraints on output, including a long term decline in ore grades, slow ramp-ups at new projects, strikes, technical failures and adverse weather.

Constraints on the supply side are likelyto prove a structural feature of the market, driven by continuing declines in ore grades at maturing existing operations and new projects, a lack of capital investment and under-exploration in the industry, aswell as political and environmental challenges in many current and prospective copper areas.

The industry is capital intensive and is likely to become more so as high grade surface deposits are exhausted and deeper and/or lower grade deposits are developed. This, combined with the need to develop infrastructure in new geographies, requires greater economies of scale in order to be commercially viable. Scarcity of water in some countries, for example in Chile and Peru, is also necessitating the construction of capital and energy intensive desalination plants.

During the period 2000–2008, China increased its share of first-use refined metal consumption from 12% to an estimated 28% and grew further to approximately 37% in 2009 and 2010. Growth in Chinese consumption continued in 2011, while demand elsewhere fell sharply.

STRATEGY AND GROWTH

The Los Bronces expansion project successfully delivered first production inthe fourth quarter of 2011. Following the forecast 12 month ramp-up, the Group's copper production, including the attributable share of the Collahuasi joint venture, will increase to more than 900,000 tpa. Additional growth in the medium term will come from the Quellaveco project, and from Collahuasi, where a pre-feasibility study into further expansion continues. We are also continuing to evaluate development options for the Michiquillay resource and Pebble, with concept and pre-feasibility studies under way at both projects.

In Chile, we are conducting extensive exploration in the prospective Los Bronces district and at the West Wall project in the Valparaíso region, in which Anglo American and Xstrata each has a 50% interest.

In November 2011, entirely in accordance with its rights, Anglo American announced the completion of the sale of a 24.5% stake in AA Sur, comprising a number of the Group's copper assets in Chile, to Mitsubishi Corporation LLC (Mitsubishi) for $5.39 billion in cash. This transaction highlighted the inherent value of AA Sur as a world class, tier one copper business with extensive reserves and resources and significant further growth options from its exploration discoveries, valuing AA Sur at $22 billion on a 100% basis.

There is continuing litigation between Anglo American and Codelco in respect of the option agreement between them relating to AA Sur (described fully in note 34 to the financial statements). Anglo American will continue to defend its rights vigorously, while remaining open to working with Codelco to reach a settlement that recognises the strength of Anglo American's legal position and protects the interests of Anglo American's shareholders.

The sale demonstrated our commitment to delivering value for shareholders. Anglo American remains fully committed to its major inward investment programme in its Chilean business and to continuing its significant social and community investment programme in Chile.

As announced in September 2011, we are participating in a sales process to dispose of our effective 16.8% interest in Palabora Mining Company. A review of this investment in the second half of 2011 concluded that the asset was no longer of sufficient scale to suit the Group's investment strategy.

Copper stocks and prices

FINANCIAL OVERVIEW

Copper generated an operating profit of $2,461 million, 13% lower than in 2010. The higher average copper price for the year was more than offset by lower sales volumes and higher operating costs. Higher power and fuel-related costs affected all operations, particularly Los Bronces due to a period of exposure to the elevated marginal cost of power on the central Chilean grid. At Collahuasi, the decision to incur additional logistics costs in order to maximise sales while the Patache port shiploader was being repaired also had an adverse effect on unit costs.

Markets

Average price 2011 2010
Average market prices (c/lb) 400 342
Average realised prices (c/lb) 378 355

Copper prices increased strongly during the first half of the year, and reached a record (nominal) high of 460c/lb as demand increased and supply remained constrained. However, as concerns grew over the outlook for the world economy, the price moved off this peak and was more volatile in the second half of the year as Europe's sovereign debt crisis continued to affect sentiment.

After dropping sharply in September, the copper price recovered during subsequent months to end the year at 343c/lb, representing a decrease of 25% from its February high. For the full year, the realised price averaged 378c/lb, a 6% increase compared with 2010. This included a negative provisional price adjustment for 2011 of $278 million, versus a net positive adjustment in the prior year of $195 million.

Operating performance

Attributable production (tonnes) 2011 2010
Copper 599,000 623,300

Total attributable copper production of 599,000 tonnes was 4% lower than in 2010. This was mainly due to lower production from Collahuasi, Mantos Blancos and Mantoverde.

Attributable production at Collahuasi was 10% lower at 199,500 tonnes. The decrease was due to expected lower grades, abnormally high rainfall and heavy snow affecting throughput, and an illegal strike during November. Output at Mantos Blancos and Mantoverde was 8% and 4% lower at 72,100 tonnes and 58,700 tonnes respectively, due to lower grades.

Production at Los Bronces was marginally higher at 221,800 tonnes, the operation benefiting from 19,000 tonnes achieved from the start-up of the expansion project and higher throughput as a result of asset optimisation initiatives. This increase in production was offset by anticipated lower grades, a temporary failure in a return solutions pipeline impacting copper cathode production, and safety stoppages following a fatal accident in September. Production at El Soldado also increased by 16%, to 46,900 tonnes, owing to higher ore grades following a period of mine development.

The impact on Collahuasi's sales volumes arising from the December 2010 shiploader failure at the Patache port, was successfully overcome in the first half of the year through the implementation of a contingency plan that included shipping copper concentrate through the ports at Arica, Iquique and Antofagasta. The shiploader was repaired and fully operational by July 2011.

Projects

The delivery of first copper production from the Los Bronces expansion was achieved on schedule in the fourth quarter of 2011. The ramp-up period is expected to take 12 months before full production is reached, during which time processing plant throughput will increase from 61,000 tonnes to 148,000 tonnes of ore per day. The expansion will increase the mine's output by an average of 200,000 tonnes of copper per annum over the first 10 years.

At Collahuasi, an expansion project to increase concentrator plant capacity to 150,000 tonnes of ore per day, to yieldan additional 19,000 tonnes of copper a year over the estimated life of mine, was commissioned in the fourth quarter of 2011.

A further project to raise throughput to 160,000 tonnes of ore per day, resulting in an annual average copper production increment of 20,000 tonnes of copper over the mine's estimated life, is under way and is expected to be commissioned in 2013. A pre-feasibility study is also in progress to evaluate options for the next phases of major expansion at Collahuasi, with potential to increase production up to 1 Mt of copper a year.

In Peru, Anglo American is focused on obtaining the necessary permits for the Quellaveco project to progress to Board approval. Early-stage work is continuing at the Michiquillay project and drilling relating to the geological exploration programme has recommenced after completion of discussions with the local communities. It is envisaged that the Michiquillay project will move to the pre-feasibility stage following the completion of drilling analysis and orebody modelling.

Activity at the Pebble project in Alaska continues with the focus on completing the pre-feasibility study by late 2012 and targeting production early in the next decade. An environmental baseline document highlighting key scientific and socio-economic data was delivered to government agencies in late 2011.

Outlook

The ramp-up of the Los Bronces expansion to full capacity over the next 12 months will lead to significantly higher production levels. However, this will be partly offset by the lower ore grades expected at Collahuasi in 2012.

Industry-wide input cost pressures are expected to continue over the short term, particularly in relation to power and fuel related costs. However, these will be partially mitigated by the increased production from the expanded Los Bronces operation. Our global supply chain network and strong supplier relationships will continue to play a vital role in identifying opportunities to reduce costs and improve the quality and security of the key services and materials that support our operations.

Persistent market concerns arising from uncertainties over the near term outlook for the global economy will continue to lead to relatively pronounced short term volatility in commodity prices, including copper. Robust demand from the emerging economies, the lack of new supply and increasing capital intensity for new supply, however, means that the medium to long term fundamentals for copper remain strong.