ANGLO American reported robust production numbers for the third quarter of its 2018 financial year but there were hiccups likely to affect cash flow generation including lock up of metal at its Johannesburg-listed subsidiaries: Anglo American Platinum (Amplats) and Kumba Iron Ore.
Logistical problems encountered with Transnet Freight Rail, a unit of the state-owned transport company, Transnet, contributed to a working capital build of $175m at Kumba of which a portion would not be cleared by year-end.
At Amplats, the impact of scheduled smelter rebuilds and maintenance at the Mortimer smelter and Polokwane smelters would lead to inventory build up totalling 270,000 ounces and 160,000 oz of platinum and palladium respectively.
“The work-in-progress inventory is unlikely to be refined in full by year-end, and therefore full year refined production is expected to be lower than production of concentrate,” Anglo said in its production report. Whilst full year refined platinum and palladium production guidance was unchanged at 2.4 to 2.45 million oz and 1.5 to 1.6 million oz respectively, “… [T]he remaining build-up in work-in-progress inventory will be processed and is expected to return to targeted levels in H1 2019,” it said.
Platinum and palladium sales volumes were expected to remain in line with refined production.
According to Goldman Sachs, the scope of the inventory builds was between $300m and $350m and would result in a total net cash outflow of about $500m. However, the bank acknowledged that the magnitude of the outflow was difficult to judge.
Anglo also noted other non-operating cash items including De Beers’ acquisition of Peregrine Diamonds for $82m and the purchase of Glencore’s stake in Mototolo platinum joint venture for an upfront cash payment of $59m.
On the positive side, Anglo was expected to receive the $851m inflow from selling a 21.9% stake in its Quellaveco mine in Peru to Mitsubishi which would be used to fund the project’s capital expenditure this year.
COPPER
Commenting in the production report, Anglo American CEO, Mark Cutifani, described the performance as “strong” and that there had been “… a relentless discipline on controllable costs” as production per employee increased 5% compared to 2017. On a copper equivalent basis, production was 1% higher in the quarter across the group’s properties.
Copper specifically was a strong performer. Production increased by 17% to 171,800 tonnes “… reflecting continued strong operational performance across all operations and planned higher grades,” it said.
Analysts have praised Anglo’s copper division recently, observing that the quality of the assets were not appreciated or evident in the share price. “We think Anglo has high quality copper assets (Collahuasi, Los Bronces) and that this is often overlooked in the context of a complicated Anglo ‘wrapper’,” said Bank of America Merrill Lynch in a recent report.
“From a cost point of view, the assets are broadly second quartile and, once Quellaveco is commissioned, overall costs move lower. Quellaveco will see attributable copper production reach 300,000 tonnes by 2024,” it said.
In July, Anglo announced capital expenditure for the Quellaveco project was estimated of between $5bn and $5.3bn. The mine is expected to have a nameplate capacity in the range of 250,000 tonnes of copper a year.
Anglo’s copper production is expected to increase to 758,000 tonnes annually in 2024 from current output of some 579,000 tonnes/year. “Longer term we see optionality in the business in terms of the ‘Los Sulfatos’ deposit near Los Bronces,” said Bank of America Merrill Lynch in its report.
There are hopes that Anglo has found a major copper/gold discovery in Brazil. Cutifani has played this down so far but is likely to face questions when he delivers the group’s full-year results in February. In today’s production report, there is a brief mention of “… greenfield opportunities” in Brazil as well as Ecuador and Canada. Exploration and evaluation expenditure for the third quarter, however, increased by 25% to $74m compared to the same period of 2017.
The stoppage at Minas Rio, an iron ore mine in Brazil, continued as the group saw to a pipeline fix. Production was set to resume next year whilst the estimated hit to earnings before interest, tax, depreciation and amortisation was unchanged at $300m to $400m.
