Iron Ore Manganese

Iron ore and manganese

Chris Griffith

Chris Griffith
CEO - Kumba

Paulo Castellari-Porchia

Paulo Castellari-Porchia
CEO - Iron Ore Brazil

$4,520m

OPERATING PROFIT

(2010: $3,681m)

41%

SHARE OF GROUP OPERATING PROFIT

(2010: 38%)

$4,733m

EBITDA

(2010: $3,856m)

Group strategy actions

Investing – in world class assets in the most attractive commodities

At our Minas-Rio iron ore project in Brazil, more than 200 km of pipeline that will transport iron ore slurry from the mine in the state of Minas Gerais to the port of Açu has been installed.

Organising – efficiently and effectively

In our manganese businesses, a change in product mix, to focus on less energy intensive FeMn production, has helped offset the high cost environment experienced in the year.

Operating – safely, sustainably and responsibly

Kumba had an outstanding safety performance in the year, ending 2011 fatality-free and with an LTIFR 33% below 2010.

Employing – the best people

Envision, Kumba's broad-based employee share participation scheme, which includes over 6,000 permanent employee members, reached its first maturity in 2011. At the conclusion of its first five year phase it was valued at $319 million.

Financial highlights

US$ million (unless otherwise stated) 2011 2010
Operating profit 4,520 3,681
Kumba Iron Ore 4,397 3,396
Iron Ore Brazil (42) (97)
Samancor 165 382
EBITDA 4,733 3,856
Net operating assets 13,069 11,701
Capital expenditure 1,732 1,195
Share of Group operating profit 41% 38%
Share of Group net operating assets 30% 27%

BUSINESS OVERVIEW

Our Iron Ore portfolio principally comprises a 65.2% shareholding in Kumba Iron Ore Limited (Kumba), a leading supplier of seaborne iron ore, and Iron Ore Brazil's 100% interest in Anglo Ferrous Minas-Rio Mineraça o S.A., a 49% shareholding in LLX Minas-Rio, which owns the port of Açu (currently under construction) from which iron ore from the Minas-Rio project will be exported (together, the Minas-Rio project), and a 70% interest in the Amapa' iron ore system.

Kumba, listed on the Johannesburg Stock Exchange, produces a leading quality lump ore. Export ore is transported via the Sishen-Saldanha Iron Ore Export Channel to Saldanha Port. The rail and port operations are owned and operated by the South African parastatal Transnet. Kumba is well positioned to supply the high growth Asia-Pacific and Middle East markets and European steel markets in light of an expected decline in lump ore supplies from other sources.

Kumba operates three mines - Sishen mine in the Northern Cape, which produced 38.9 Mt of iron ore in 2011, Thabazimbi mine in Limpopo, with an output of 0.9 Mt, and Kolomela mine, also in the Northern Cape, which was brought into production during 2011 and produced 1.5 Mt during the year. In 2011, Kumba exported more than 85% of its total iron ore sales volumes of 43.6 Mt, with 68% of these exports destined for China and the remainder for Europe, Japan, South Korea and the Middle East.

Our Minas-Rio iron ore project is located in the states of Minas Gerais and Rio de Janeiro and will include open pit mines and a beneficiation plant in Minas Gerais producing high grade pellet feed. On completion of Phase 1, ore will be transported through a 525 kilometre slurry pipeline to the port of Ac,u in Rio de Janeiro state. Amapa', in Amapa' state in northern Brazil, continues to ramp up its pellet feed and sinter feed production, which reached 4.8 Mt in 2011, and is expected to produce 5.5 Mt in 2012.

Our Manganese interests consist of a 40% shareholding in Samancor Holdings, which owns Hotazel Manganese Mines and Metalloys, both in South Africa, and a 40% shareholding in each of the Australian- based operations Groote Eylandt Mining Company (GEMCO) and Tasmanian Electro Metallurgical Company (TEMCO), with BHP Billiton owning 60% and having management control. Samancor is the world's largest producer of seaborne manganese ore and is among the top three global producers of manganese alloy. Its operations produce a combination of ores, alloys and metal from sites in South Africa and Australia.

INDUSTRY OVERVIEW

Demand for iron ore globally is linked primarily to the state of the global steel industry and, more specifically, to the steel manufacturing sector in China. The country is the largest steel producer and consumer in the world and accounts for more than two-thirds of global seaborne iron ore imports.

In 2011, global steel production increased 6% to 1.5 billion tonnes (2010: 1.4 billion tonnes), of which 685 Mt were produced in China (2010: 627 Mt), an increase of 9% (2010: 10%). China's seaborne iron ore imports rose by 11% to 684 Mt (2010: 619 Mt). The balance of China's iron ore needs was met by domestic iron ore production, which rose by approximately 7% to 305 Mt.

STRATEGY AND GROWTH

Anglo American's core strategy is to grow our position in iron ore and to supply premium iron ore products against a background of declining quality global iron ore supplies. We have a unique iron ore resource profile, with extensive, high quality resource bases in South Africa and Brazil. Significant future growth will come from Minas-Rio (including expansion potential) and expansion at Kolomela.

Kumba seeks to sustainably maximise total shareholder value by enhancing the value of its current operations through the implementation of its asset optimisation programmes, capturing value across the value chain through its commercial and logistics strategy, executing its growth projects and ensuring that it has the organisational resources and capabilities to execute its strategy.

Kumba plans to grow its business organically in order to achieve production of 80 to 90 Mtpa of iron ore by 2020, 70 Mtpa from South Africa and the remainder from other countries in Africa.

Minas-Rio will capture a significant part of the high growth pellet feed market with its premium product featuring high iron content and low contaminants. Phase 1 of the Minas-Rio project will produce 26.5 Mtpa, with first production scheduled after completion and commissioning of the project, which is anticipated in the second half of 2013. During the year, civil works commenced at the beneficiation plant, tailings dam earthworks progressed in line with the project schedule, while good progress was made in installing the 525 kilometre slurry pipeline. Further expansion potential is supported by the 2011 resource estimate of 5.8 billion tonnes (Measured, Indicated and Inferred), and further resource potential is considered to exist. While focus has been on Phase 1 construction, studies for the expansion of the project, including consideration of the optimal production profile, continue to be evaluated.

Kolomela, which was brought into commercial production during December 2011, is expected to produce at design capacity 9 Mtpa of iron ore. With initial production of 1.5 Mt during 2011, the mine is on track to produce between 4 and 5 Mt in its ramping-up phase in 2012, before producing at full design capacity in 2013.

FINANCIAL OVERVIEW

Operating profit before special items and remeasurements increased by 23% from $3,681 million to $4,520 million, principally owing to stronger export prices, a year-on- year weighted average price increase of 26% in export iron ore for Kumba and an increase of 3% in export sales volumes.

Markets

Global steel demand growth continued to be driven by ongoing urbanisation and industrialisation in China. China is now the biggest steel producing country, accounting for approximately 45% of the global steel market. In early 2011, steel production in China reached record levels. However, the tightening in monetary policy to manage the inflationary pressures experienced in China since October 2010, led to credit liquidity constraints and a slower GDP growth rate in the second half of the year. This, coupled with margin compression as a result of higher raw material input costs and lower steel prices, led to a reduction in steel production rates and downstream steel destocking by end-users.

Steel demand and pricing in Europe has been subdued since April 2011, following concerns around the European sovereign debt crisis. Japanese steel production and prices were initially impacted by the earthquake and tsunami during the first quarter but recovered during the third quarter. However, as macro-economic uncertainty increased, this also weighed heavily on steel prices and demand in Japan towards the end of the year. As a result, European and Japanese steel producers started to implement production slowdowns in an attempt to stabilise steel markets. Consequently, iron ore offtake in these regions has slowed and China has been the target of diverted contractual tonnages from a number of suppliers. The combination of higher seaborne ore supplies and lower crude steel production during the second half of 2011, resulted in a sharp fall in index prices in the fourth quarter. Steel producers resumed sourcing of iron ore during November 2011, following a period of destocking, particularly in China. Index and spot iron ore pricing has now reached a support level provided by high cost Chinese domestic iron ore production.

Underpinned by global steel production, prices for manganese ores have been under considerable pressure, particularly in the second half of 2011 on the back of a general oversupply in the market and a build-up of port inventories in China. Alloy conversion capacity continued to grow through the year, placing additional pressure on margins for all alloys, with some higher cost producers eventually idling capacity so as to cut losses.

Operating performance

Kumba Iron Ore

The total material mined at Sishen mine increased by 8% from 153.2 Mt in 2010 to 165.0 Mt, of which waste mined was 119.0 Mt, an increase of 17% from 2010. This planned increase in mining activity was negatively affected by wet pit conditions resulting from excessive rainfall during the first half of 2011. As a consequence, the availability of run-of-mine material supplied to the dense media separation (DMS) plant reduced, causing total production at Sishen mine to decrease by 6% from 41.3 Mt in 2010 to 38.9 Mt. The jig plant achieved a run rate in excess of design capacity, producing 13.5 Mt for the year (2010: 13.3 Mt) as a result of an improved yield brought about by moderating the quality of the ore produced by the plant. Kolomela was brought into production ahead of schedule. Waste material stripped in the year amounted to 30.3 Mt (2010: 18.6 Mt) as two open pits were developed at a cost of $131 million (2010: $108 million), all of which was capitalised. The plant was successfully commissioned during 2011, delivering 1.5 Mt of production in the year.

Kumba's total sales volumes increased by 0.4 Mt to 43.5 Mt in 2011 (2010: 43.1 Mt). Total export sales volumes increased by 1.0 Mt to a record 37.1 Mt. Export sales volumes to China increased to 68% of total export volumes for the year, compared with 61% in 2010. The company's traditional markets accounted for about 22% of export sales, while Kumba sold a small portion of its total exports into the Middle East and North Africa, and South America. Approximately 73% of exports were sold to long term and annual contractual customers and 27% at prices derived from index.

Iron Ore Brazil

Iron Ore Brazil generated an operating loss of $42 million, largely reflecting the pre-operational state of the Minas-Rio project.

The Amapa' operation contributed an operating profit of $120 million for the year, compared with an operating profit of $16 million in 2010, reflecting a strong production performance and continued cost containment during a period of elevated prices. Production in 2011 totalled 4.8 Mt, a 20% increase over the previous year.

Samancor

Operating profit declined by 57% to $165 million (2010: $382 million), driven mainly by lower prices and stronger average local currencies in South Africa and Australia.

Production was lower at the South African mines owing to safety related downtime, issues concerning sinter plants and higher stripping ratios. In addition, production was lower at GEMCO in Australia as a result of concentrator downtime and unusually heavy rainfall in early and late 2011. Anglo American's share of ore production at 2.8 Mt was 6% lower than in the prior year, while alloy production of 300,500 tonnes was only marginally lower.

Manganese ore sales prices softened by 19% in 2011, due to an oversupplied market and a build-up of port inventories in China.

Projects

Excellent progress was made at Kolomela mine, which was delivered five months ahead of schedule and within budget. Kolomela is ramping up well and is on track to produce between 4 Mt and 5 Mt in 2012, before producing at full design capacity of 9 Mtpa in 2013.

Kumba's stated South African growth target of producing 70 Mtpa by 2019 is intact:

  • 9 Mtpa will come from Kolomela in 2013
  • 15 Mtpa to be delivered from other projects in the Northern Cape Province
  • 5 Mtpa potential from projects in the Limpopo Province.

The Minas-Rio iron ore project in Brazil is expected to produce 26.5 Mtpa of iron ore in its first phase and has made good progress during the year. Minas-Rio secured a number of major licences and permits during the year; the offshore and onshore works at the port are on schedule; more than 90% of land access has been secured along the 525 km pipeline route and more than 200 km of pipe has been installed; and the civil works at the beneficiation plant are well under way. As with other complex greenfield mining projects, a number of unexpected issues, such as the discovery of caves at the beneficiation plant site which require specialised assessment, continue to cause delays to the work scheduling, in addition to outstanding land access and an evolving permitting environment. Minas-Rio is assessing various options to manage these challenges in a high inflationary Brazilian mining environment, including acceleration activities within the previously announced 15% capital increase, to target first ore on ship in the second half of 2013.

Pre-feasibility studies for the second phase of the Minas-Rio iron ore project commenced during 2011 and, although still under way, the studies, together with the 2010 resource statement (total resource volume (Measured, Indicated and Inferred)) of 5.8 billion tonnes, support the expansion of the project.

The second expansion of the GEMCO operation in the Northern Territory of Australia (GEEP2 project) was approved in May 2011. This follows the successful completion of the GEMCO Expansion Phase 1 (GEEP1) project in January 2010.

The first phase expansion confirmed GEMCO's status as the world's largest and lowest cost producer of manganese ore. This second expansion, which is expected to be completed in late 2013, will further enhance GEMCO's competitive advantages and create additional options for growth. The $280 million GEEP2 project (Anglo American's 40% share: $112 million) will increase GEMCO's beneficiated product capacity from 4.2 Mtpa to 4.8 Mtpa through the introduction of a dense media circuit by-pass facility. The expansion will also address infrastructure constraints by increasing road and port capacity to 5.9 Mtpa, creating 1.1 Mtpa of latent capacity for future expansions.

Outlook

Continuing macro-economic uncertainty has undermined the short term outlook for the global seaborne iron ore market. Monetary tightening to control inflation in emerging economies such as China has restrained economic growth. In addition, an uncertain policy response to tackle the European sovereign debt crisis has also weakened economic activity. Despite the short term uncertainty, medium to long term prospects for iron ore demand remain robust as China's living standards continue to 'catch up' with those in developed economies. Nevertheless, as China shifts from an investment intensive to a consumption driven economy, the rate of growth for steel materials is expected to moderate to a more sustainable level.

While demand is a key driver for pricing, supply constraints also play a crucial role. In the short term, iron ore supply is anticipated to remain tight amid seasonal weather impacts in Brazil and Western Australia, and the government's moves in India to control exports of iron ore. The ongoing challenges faced by producers to deliver new supply is expected to lead to increased capital intensity and will, therefore, underpin the long term pricing outlook. Anglo American's ability to supply iron ore to the market will be enhanced by the ramping up of Kolomela during 2012 and the delivery of the Minas-Rio project in the second half of 2013.

A general state of oversupply in the global manganese ore market and high port stocks in China have pushed prices to lower levels of approximately $4.80/mtu CIF China. Demand is expected to slow even further owing to stock rebuilds, and short term macro-economic uncertainty.

Alloy prices have also been affected by ongoing macro-economic uncertainty and steel producers minimising stock in the pipeline. This trend is expected to continue in 2012. Prices of manganese ore and alloy are expected to decline further from current levels, with a recovery anticipated towards the latter part of 2012.

Kumba Iron Ore update

Sishen supply agreement arbitration

Sishen Iron Ore Company (SIOC) notified ArcelorMittal South Africa Limited (ArcelorMittal) on 5 February 2010 that it was no longer entitled to receive 6.25 Mtpa of iron ore contract mined by SIOC at cost plus 3% from Sishen mine, as a result of the fact that ArcelorMittal had failed to convert its old order mining rights. This contract mining agreement, concluded in 2001, was premised on ArcelorMittal owning an undivided 21.4% interest in the mineral rights of Sishen mine. As a result of ArcelorMittal’s failure to convert its old order mining right, the contract mining agreement automatically lapsed and became inoperative in its entirety as of 1 May 2009.

As a result, a dispute arose between SIOC and ArcelorMittal, which SIOC has referred to arbitration. During 2011, three arbitrators were appointed and May 2012 was set as the date for the arbitration to begin. On 9 December 2011, SIOC and ArcelorMittal agreed to postpone the arbitration until the final resolution of the mining right dispute.

SIOC and ArcelorMittal reached an interim pricing arrangement in respect of the supply of iron ore to ArcelorMittal from the Sishen mine. This interim arrangement endured until 31 July 2011. SIOC and ArcelorMittal agreed to an addendum to the interim supply agreement which extended the terms and conditions of the current interim agreement. The new interim pricing agreement, which is on the same terms and conditions as the first interim pricing agreement, commenced on 1 August 2011 and will endure to 31 July 2012.

21.4% undivided share of the Sishen mine mineral rights

After ArcelorMittal failed to convert its old order rights, SIOC applied for the residual 21.4% mining right previously held by ArcelorMittal and its application was accepted by the Department of Mineral Resources (DMR) on 4 May 2009. A competing application for a prospecting right over the same area was also accepted by the DMR. SIOC objected to this acceptance. Notwithstanding this objection, a prospecting right over the 21.4% interest was granted by the DMR to Imperial Crown Trading 289 (Pty) Limited (ICT). SIOC initiated a review application in the North Gauteng High Court on 21 May 2010 in relation to the decision of the DMR to grant a prospecting right to ICT.

The High Court Review, in which SIOC challenged the award of the 21.4% prospecting right over Sishen mine by the DMR to ICT, was presided over by Judge Raymond Zondo in the North Gauteng High Court in Pretoria, South Africa, from 15 to 18 August 2011.

On 21 December 2011, judgement was delivered in the High Court regarding the status of the mining rights at Sishen mine. The High Court held that, upon the conversion of SIOC's old order mining right relating to the Sishen mine properties in 2008, SIOC became the exclusive holder of a converted mining right for iron ore and quartzite in respect of the Sishen mine properties. The High Court held further that as a consequence, any decision taken by the DMR after such conversion in 2008 to accept or grant any further rights to iron ore at the Sishen mine properties was void. Finally, the High Court reviewed and set aside the decision of the Minister of Mineral Resources or her delegate to grant a prospecting right to ICT relating to iron ore as to a 21.4% share in respect of the Sishen mine properties. On 3 February 2012, both the DMR and ICT submitted applications for leave to appeal against the High Court judgment.

The High Court order does not affect the interim supply agreement between ArcelorMittal and SIOC, which will endure until 31 July 2012 as indicated above.

SIOC will continue to take the necessary steps to protect its shareholders' interests in this regard.