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Anglo American reports 25% drop in underlying earnings, $3.9bn in impairments

Anglo American reports 25% drop in underlying earnings, $3.9bn in impairments

Photo by Bloomberg

13th February 2015

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

  

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JOHANNESBURG (miningweekly.com) – Dual-listed mining giant Anglo American on Friday reported group underlying earnings before interest and taxes (Ebit) of $4.9-billion for the year ended December 31.

This was 25% lower year-on-year, owing to sharply weaker commodity prices, partially offset by weaker producer country currencies and higher production and sales volumes.

Anglo American CEO Mark Cutifani noted that 2014 was a year of significant operational improvement against sharp commodity price declines and generally adverse market conditions.

"Most prominently, we shipped our first ore from the Minas-Rio project in Brazil ahead of schedule in October and expect to bring the project in $400-million below the revised budget,” he noted.

However, the company reported a massive impairment of $3.9-billion, owing to a $3.5-billion after-tax writedown in the carrying value of its Minas-Rio iron-ore project as a result of the steep drop in the iron-ore price; a $300-million after-tax writedown at its Peace River Coal operation, which was placed on care and maintenance in December; and a $200-million after-tax writedown as a result of the closure of the Drayton coal mine in Australia.

"Our diversified product portfolio provided us with a degree of insulation from the particularly sharp price falls for the bulk commodities of iron-ore and coal, albeit in an environment where weaker commodity prices accounted for $2.4-billion of underlying Ebit reduction,” Cutifani noted.

IRON-ORE
Brazil-based Minas-Rio’s first ore on ship was achieved on October 25, ahead of schedule and with total project capital expenditure expected to be $400-million below the revised budget of $8.8-billion.

“The ramp-up schedule continues and is expected to hit design capacity during the second quarter of 2016,” the company noted.

Underlying Ebit was expected to be capitalised until the end of the year, when the project was expected to have achieved commercial production capacity.

In 2014, subsidiary Iron Ore Brazil's capitalised underlying Ebit loss was $57-million. The subsidiary had procued 700 000 t of iron-ore, and sales volumes reached 200 000 t.

Iron-ore production from Iron Ore Brazil  was expected to reach between 11-million and 14-million tonnes in 2015. Once Minas-Rio reached nameplate capacity in the second quarter of 2016, output would increase to between 24-million and 26.5-million tonnes.

Meanwhile, demand for seaborne iron-ore had expanded by 6.7% year-on-year, or 79-million tonnes; however, this was more than offset by seaborne supply, which had increased by 14.2%, or 167-million tonnes, on an equivalent basis. The result was a 28% decline in the iron-ore price, which reached $72/t.

MANGANESE
Anglo American noted that the manganese ore market remained under pressure, with the benchmark ore price falling 16% during 2014. Manganese ore production from its 40%-owned Samancor subsidiary, in South Africa, remained consistent at 3.3-million tonnes, with a record performance in the second half.

Production benefited from improved ore recovery and plant availability in South Africa, which offset the impact of weather-related stoppages at the group’s Australian manganese assets in the first quarter. 

Production of manganese alloys increased by 14% to 286 100 t, owing to greater furnace stability and availability in South Africa and Australia. 

COAL
Anglo’s Australian and Canadian operations recorded an underlying loss before interest and taxes of $1-million, compared with Ebit of $587-million in 2013. The loss was attributable to a 21% decrease in the average quarterly hard coking coal benchmark coal price, reducing underlying Ebit by $528-million.

This was offset by productivity improvements that resulted in a 12% increase in metallurgical coal production, despite market-related production curtailments, significant cost reductions across the Australian operations and favourable Australian dollar exchange rate movements.

Underlying Ebit included a higher onerous contract provision release at Callide, an $86-million loss at Peace River Coal, in Canada, and the impact of lower insurance receipts.

Nonetheless, the operations achieved record metallurgical coal production of 20.9-million tonnes.

Cost savings across labour, contractors and maintenance, combined with productivity improvements, resulted in the lowest unit costs since 2010, with Australian export free-on-board cash unit costs reducing by 9% year-on-year, in local currency terms.

The South African coal business’ underlying Ebit of $350-million was flat year-on-year, owing to a strong operational performance, lower costs and favourable currency movements, which mitigated a 10% reduction in realised export prices. 

Cash unit costs at trade mines decreased by 5%, benefiting from the weaker rand and a focus on productivity and cost efficiency primarily related to maintenance and contractor costs, as well as lower overhead costs owing to the business restructuring.

Underlying Ebit also included $38-million from the opportunistic sale of reserves and a surplus dragline.

Export production in South Africa was 7% higher year-on-year, at 18.2-million tonnes, with all operations delivering an increase in production.

Domestic production at 37.6-million tonnes decreased by 5%, primarily owing to power utility Eskom reducing offtake from the New Vaal colliery, and planned production decreases at the Kriel colliery prior to a move to new mining areas.

Speaking to journalists during a conference call, Cutifani noted that the company had outlined its proposals to divest part of its domestic coal supply.

“We are responding to the government’s requirements to have more than 50% in local hands and, from our point of view, the domestic supply has been a good business, but it was not a major contributor across the portfolio, so for strategic reasons, and consistent with the government’s requirements for transformation, we will look to drop our ownership to below 50%.

“Final numbers have not been determined, but we are in that conversation, which would include the New Largo project that is being discussed with government,” he noted.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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