Executives
Thras Moraitis ? Executive General Manager Group Strategy
Trevor Reid ? Chief Financial Officer
Ian Pearce ? Chief Executive Xstrata Nickel
Peet Nienaber ? Chief Executive Xstrata Alloys
Charlie Sartain ? Chief Executive Xstrata Copper
Peter Freyberg ? Chief Executive Xstrata Coal
Andrew Fikkers ? Marketing Manager
Mark Eames ? Chief Operating Officer Xstrata Iron Ore
Mick Davis ? Chief Executive Officer
Analysts
Rob Clifford - Deutsche Bank
Jason Fairclough - Bank of America Merrill Lynch
Myles Allsop ? UBS
Rob Clifford ? Deutsche Bank
Andrew Keen ? HSBC
Nick Arch ? RBS
Nick Pascalla ? Hermes Fund Managers
Cam Gilles ? Deutsche Bank
Unidentified Analyst ? Barclays Capital
Xstrata Plc Adr (XSRAY.PK) Xstrata Plc Investor Seminar London 2011 Conference Call December 6, 2011 6:00 AM ET
Thras Moraitis
Ladies and Gentlemen, good morning. It?s wonderful to be amongst friends again to reflect on Xstrata?s year which has been prolific year for Xstrata in particular on the organic growth side. So I will be looking forward to sharing with you what?s been achieved over the last year.
Before we do that, I just want to run through the program quickly. The next person up after me is going to be Trevor Reid, our CFO. He is going to talk to you about obviously financial matters and how he set up the balance sheet in a way to deliver the organic strategy and then we are going to move into each of the business unit CEOs and they?ll talk about their businesses specifically and leave sometime for Q&A after each of their sessions. We will break for lunch at about quarter to one and then we?ll have a tea break at around quarter past three, and then we?ll conclude with Mick Davis, who will come in and give us some concluding remarks on Xstrata and how it moves forward.
Before we get Trevor Reid up here to talk to us about how we refinancing all of these interesting things that are going on in the business, I thought it would be appropriate given that we are now into our tenth anniversary as Xstrata under the current management team and under Mick Davis? leadership. In fact, that occurred in October of this year. The tenth anniversary of Xstrata as a London listed company is in March next year. And it seems like an appropriate time to reflect upon what brought us here, what are the elements of that and how that feeds into where we are moving forward.
As many of you have known, Xstrata has grown over the last 10 years from a $500 million Market Cap company to around a $50 billion. Our EBITDA has grown from $400 million to $10 billion last year. Our revenues have grown 15 times over that period of time. And this growth was built really on a couple of convictions. The first of course, was the conviction around the secular change in demand for commodities which today seems like an obvious thing, but I can assure you 10 years or 11 years ago was not something that was commonly agreed on. Secondly, that the supply side which was underinvested in since about 1989 up to that period of time would struggle to meet that demand. And so that was one of the fundamental convictions around which Xstrata was built.
Interesting, as I stand here today 10 years later, we have the same conviction. In despite the fact that we are now 10 years into this massive industrialization and 10 years into significant investment by many of the mining companies, our conviction remains exactly the same.
The second aspect of our strategic conviction was that really we wanted to build a mining company, a major leading diversified mining company based on three pillars of a stool. The first was diversity. We believe strongly in diversification and the power of diversity to deliver more stable and de-risked cash flows. Secondly, on a belief in scale. We believe that scale is absolutely imperative in an industry where as we now beginning to see building multiple, multibillion dollar projects requires one to be sufficiently large not only to finance them, but also to resource them in terms of skills. And finally optionality. And this is something that is very much in the DNA of every Xstrata executive and employee which is constantly seeing optionality in everything we do and certainly in our early phase, we continue to seek optionality through the acquisitions that we were doing.
So this prolific growth really was based and is based on three elements of our strategic evolution. The first by definition and by necessity was M&A Lead. First of all five years. Prolific M&A, three major transforming transactions, the acquisition of NX which coincided with the IPO. The acquisition of MIM in Australia in 2003 and then finally the $20 billion acquisition of Falcon Bridge in 2006. In addition to those three, there being some 40 other transactions that are being done by Xstrata over the last 10 years. So the first phase by necessity was a phase driven by M&A. The second phase of our strategic evolution was operational excellence and this is something that is continuous and will never wane in Xstrata, and in every Xstrata person?s agenda. Every single day we seek to improve the value of our assets in a small way, in small increments and in large increments.
And the operational excellence phase I think is worth reflecting on because what that has done is taken some of the assets that we?ve acquired, we acquired many great assets, but we are also acquired along the way through the portfolios that we acquired a number of assets which perhaps were not Tier 1 assets. And our operating teams, I think it is fair to say ? certainly I can say since I am not in the business units, have done a miraculous job of taking a series of assets and moving them down the cost curve, extending their lives, extending their resources, improving NPV on a year-by-year basis to the point where we now, all of our operating businesses are operating in the bottom half of their cost curves. Many Tier 1 assets in our portfolio, cost reduction which is structural in the sense that the fundamental change in the nature of these businesses.
So the new cost structures are baked into the operations moving forward. And in addition to that as you know we are the only major who has managed to reduce their cost in real terms successively every one of our last nine years of operations. In addition to that on the sustainability side which is absolutely central and crucial to our strategy, we?ve reduced safety incidences by 80% since the new management team took over under Mick Davis and we have won the Dow Jones amongst other awards, we?ve won the very prestigious Dow Jones award for Super Sector leader in sustainability for five of our short 10 years and this is something we are extremely proud of and very keen to sustain going forward.
So the second phase of our strategic evolution was and here is continuous to be operational excellence. Now, what we really going to talk to you about today is the third phase which is now well in its stride and that?s the organic growth phase. Through the acquisition of the assets that we made in the first five years, we acquired a series of organic growth options which are now beginning to bloom and our prolific and promise to deliver industry leading growth, 50% growth in volumes over 2009 on a Copper equivalent basis by the end of 2014. We are still on track to deliver that returns in excess of 20% of IOR, a reduction in real costs by around 20% and these are very important reductions in real cost because by bringing on lower cost operations, you are structurally reducing your costs. So reducing our cost even further from where we are today relative to our competitions. So our fundamental transformation of Xstrata?s portfolio yet again for the third time in a way that is sustainable and improves our relative competitive position.
And importantly, we?ve been focusing on putting the building blocks together to make sure that we can deliver against the strategy almost in an uninterrupted fashion irrespective of what happens in the macroeconomics or any other external environment and that includes making sure we have the financial strategy to deliver against that and the human asset strategy to deliver against that growth.
So I think in summary what I?d like to say is that the organic growth strategy is something you?ve heard about I guess repeatedly over the last three years. It is now upon us and by the second half of next year, we will start to see significant and sustained growth in volumes and this is something that is exciting to the Xstrata executive team significantly.
And with that I?d like to handover to Trevor. Thank you.
Trevor Reid
Thanks, Thras and good morning Ladies and Gentlemen. Yesterday I was in Switzerland presenting our budget and plan which is a budget for 2012 and then a plan for the following two years. And the key strategic thrusts of those plans was to develop a set of operating plans and financing plans that would ensure that we could deliver on our promise that we made to investors two years ago of delivering the 50% growth that Thras has spoken about. And secondly, to ensure that we had a financing plan that could achieve three things. One, finance the growth platform that we?ve spoken. Two, ensure that we can continue to meet our commitment to our shareholders in respect of progressive dividends and three, to do all of this in a way which manage the financial risks and ensure that we continue to operate within our strong investment grade ratings.
I am pleased to say that I think we developed a very credible plan and that our budget and forecast is well in place to achieve those two strategic objectives.
Before I get on to a snapshot of what our growth profile looks like and give some more color on our balance sheet, I just want to reiterate a point that I think we?ve made in the past, but I think is not yet fully appreciated by our shareholders and by the investment community. Although we have predominantly been seen as an M&A driven company and we had to be given that we started with very few assets. I think behind the glare the M&A spotlight, people have perhaps lost sight of the fact that we actually have got a very strong record of project delivery. And since the IPO 10 years ago, we?ve actually delivered 19 projects to the capital spend of $17 billion. Now looking at those you will soon realize that there are no major jumbo projects there like Koniambo. But if you do look at those projects you?ll see that there is a broad range of different types of projects, there are underground mines, there are open pit mines, there?s associated infrastructure and there are a number of complex processing plants.
And I think the other thing which we are particularly proud of is that with the exception of one of our coal projects in South Africa, the GGV project which had a time overrun because of extreme weather, all of those projects were delivered on time and on budget.
Now let?s look at the progress that we?ve in 2001. The progress has been significant. Firstly, we commissioned five projects. These include three major coal mines, the ATCOM mines in South Africa which is the second of our big open pit mega mine complexes, the Newlands underground and the Mangoola mine. And as of Mangoola a couple of weeks ago for the opening and is a truly incredible project, we are already running of [inaudible] 3:15 capacity well ahead of schedule and we are already planning expansions of that mine which can easily be expanded subject only to environmental approvals.
In Canada, we took another step forward with the optimization of our Raglan operation with the commissioning of the Kikialik underground mine and I am sure Ian Pearce, will give some color as to we are ? the rate at which we are moving that Raglan forward to an optimization which could at some point reach 40,000 tons of nickel and we successful commissioned the restart of Falcondo.
We approved five new projects including the Cerrejon expansion to 40 million tons, Tweefontein in South Africa, this an optimization project which will complete the third of our mega mine complexes and will see us transitioning to a point where 90% of our coal in South Africa will be produced from three big open pit complexes. And we are commissioning the Lady Loretta mine in Australia which although it?s a small mine, it?s very high grade, it will the Mount Isa infrastructure and consequently it will lower our cash costs and provide very good returns.
I should also note that of the 21 projects that we now have approved, four are already in the process of commissioning and will start to add significant volume in the second half of next year.
Our pipeline remains long and deep and we have 11 projects which are now at the feasibility stage and we are expecting that those 11 projects will be brought forward to the board for approval in the near term.
Now, one of the features of our budget and plan is the dramatic acceleration that we start to see in volumes and revenues from the middle of next year as numerous projects start to commission. As I mentioned, we have four projects that are currently commissioning. The Antamina expansion, the Eland underground, Santiago?s Black Star Deeps project and Handlebar Hill project.
And then in next year, we start to see the delivery of our first real mega project with the Antapaccay project in Southern Peru, which is the first of our Southern Peru project and will largely replace the Tintaya output and then of course Koniambo.
And I was at Koniambo two weeks ago and I have to say you cannot help but be struck by the enthusiasm and excitement that is so evident in the workforce there. Productivity levels have improved dramatically, the mine is substantially complete, the conveyor system is being commissioned, we?ll start delivering ore from the Massif to the plant in early part of next year and I am entirely convinced that this project is going to live up to its potential and I am sure Ian will be giving you more details on that when he talks in.
So really, the message here is that we have been through a long period of sowing, but I can really feel that it?s time to start reaping and that in the beginning of next year we will start the harvest.
Another feature of this project pipeline is not only that it delivers growth, but it delivers growth at significantly lower costs. If I look at the cost savings included in our forecast, we are expecting significant cost savings in 2012, ?13 and ?14 as we start to deliver these increased volumes of low cost product. It?s largely a result of the fact that numerous of these projects are Brown Field projects which by their nature are lower in cost and also that the number of our Green Field projects start with significantly higher grades which will given immediate impact onto our cost structure of our Coal, Copper and Nickel divisions.
I also would like to point out that in our budget and plan and we are not talking about them today, we have a number of mega unapproved projects including the Wandoan project in Australia, which is a very substantial coal project and a number of Copper projects.
It is our policy to give guidance at this meeting as to the future capital spend and will be guiding the analysts to the capital budget of just under $20 billion over the next three years. The peak spending is in 2012. Big components of that spend will be the completion of Koniambo, the completion of Antapaccay and start of the high spend period at Las Bambas. The sustaining capital numbers is not included in this, sustaining capital is expected to run at somewhere between $2 billion and $2.5 billion, and I just want to now move on to how we are financing it.
Our net debt at the end of the year is expected to be around about $9 billion, giving us a gearing of 16%. This is below our sort of traditional target area but clearly with such a large capital spend coming down the pipe, it was absolutely imperative that we enter this period with a very conservatively finance balance sheet.
We are a very alive to the uncertainties in global markets at the moment and in particular the uncertainty in Europe could have a dramatic knock on the financial markets in that area and consequently we did not want to wait till the middle of the next year when our major revolver matures. And in October, we refinanced all our bank facilities and it was a very successful refinancing, I think it evidences the strong relationships we have with our core banking group and a number of them are here today and I really want to thank them for their ongoing support. We managed to secure a $6 billion revolver. It has a term of five years which we can extend at the end of the first year and second year by another year. So effectively its seven year money. The pricing was extremely competitive, it remains without any covenant and as is our policy, it remains undrawn at the ? it will be undrawn at the end of this year.
We also took the opportunity to opportunistically tap the bond markets in November. We were looking for $2 billion of bonds and given the uncertainty in the market, our advisers were warning us on the day that we launched, that it might be difficult even to secure $1 billion. But nevertheless, we launched. We had a very strong reception, I think evidencing the fact that Xstrata is seen as a very good credit. Eventually the book billed to $10 billion and so we took $3 billion of bonds, they spread over maturity from three years to thirty years on a blended average maturity of 10 years at a blended rate of 4 ?%. So I think again, a very successful result.
So with a balance sheet where we have $6 billion of undrawn bank headroom, we have gearing at 16%, we have an average maturity on all our facilities of eight years. We have no covenants on our bank debt; I think we have a very strong balance sheet with which to take on this capital program.
So with that as a backdrop and sort of a group overview of where we are going, its now time to look at the individual business units. First up is Zinc. Now when I first met Santiago Zaldumbide there, it was almost 10 years to the day ago, and he explained to as business at that time which at that point was a single stranded smelter in Spain, which it was a very low cost smelter, but it had none of its own feed because its mine was closing down and it was essentially stranded. If we look at the Zinc business now, we are looking at an integrated business almost a million tons of production. Santiago has relentlessly driven it down the cost curve to the point now where it is one of the most competitive integrated Zinc businesses in the world. He?s done that by the application of what I can only describe and it is unusual for a finance director to say this, but only describe as miserly amounts of capital and it?s just a fantastic story. So I hope you will enjoy hearing how he?s done it from the man himself and I welcome Santiago to come and talk to you.
Santiago Zaldumbide
Thank you, Trevor. So let me have another attempt of drawing your attention. I have failed most of the times but I am going to try again today. So I am going to first of all show you ? well, we are going to cover market, we are going to cover the growth and I will conclude with our main goals.
We are established right now in seven countries as you can see there, in Europe, in Australia, South America, North America. Well, taking from what Trevor was saying, I want to spend a little bit of time on what has been the effort to get the vertical integration that we have achieved today. Many of you cover some other companies in the same sector. And you know very well that I know achieving a vertical integration is fundamental point number one, is difficult. There are different ways of trying to get that. If you want to do it very quickly, you will have to acquire assets and in many cases acquiring assets is expensive and doing that ? well, gives you vertical integration but at a relatively high cost and then while you return some capital employed present from that.
Well, obviously in my opinion the best way to do it is to do it through organic growth, extending, expanding already existing operations. This normally gives you the same or better results but at a much lower cost. And this is what can allow you to have a return on capital employed which is good. We have done it both ways. We have done it as you can see in this slide partially through acquisition and partially through organic growth. But I want to say here as I did mention in September, well, when we acquire for instance MIM, we didn?t acquire MIM for the same assets for sure. They are saying assets were in a very poor condition, they were just about to be divested or closed. So is true that we got some assets through an acquisition, but believe me those assets were in very poor condition and had to be transformed completely. We did transform them and as we will see later.
So that was the start for the vertical integration but later, we ? as Trevor will mentioned with relatively low investment, we have increased the production for instance in the case of Mount Isa a production significantly. With a very low investment cost, well, the explanation for the return on capital employed that I will show you later is mainly that, that we have increased a lot of the production through acquiring relatively low quality assets, transforming them and once that happens expanding them at a very low cost to tell you the truth.
So then -- we were in 2002 with the smelter in Spain now has been said and today we have seven mines, three Zinc smelters, three Lead smelters and five Greenfield projects. So it?s a quite a significant change.
If we talk about resources and reserves. Well, again as you can see in resources the increase has been of 295 million tons, very significant one. The same can be said about the reserves. This has ? again, this has been done through two different ways. First one, obviously drilling and then spending some money on trying to get new reserves, but also reducing drastically the costs that as you know is what also allows to transform a lot of resources into reserves. So this is a combination of the two actions.
We were talking about cost savings. Well, we have as Mick has put it in a certain meetings with you; I think we have an unbroken record of reducing cost, not one year but many years. Because of that we have an accumulated number of $700 million of cost that we have saved. And that you know the final reflection of all that is the return on capital employed. I remember when I was responsible of this business some 10 years ago; the return on capital employed in the same business was about 3%, 4%. And then today, we have an average including the very difficult 2008, but an average of 24% return on capital employed which I think is a very decent one.
So talking about how this operation improvement some things like that have impacted in our scorecard, you can see revolution from 2006 until today. And you can also see how the evolution of our cast improvement compares with our competitors which I think in comparison is quite clear.
If we speak about the health and safety performance. You can also see in the graph that the performance in this year has been quite good.
Then I am going to call little bit my views on the market. And then ? I think it has been some relatively a strange dichotomy between what, and influence has happened from a macroeconomic point of view, what is happening in the real world, with the real demand. Well, from the macroeconomic Eastern point obviously we have a problem in the European Union, we have heard and we still have problems in the United States, we also seem to have some issues in China in the sense of inflation, I am trying to have more tight monetary policy. Well, those kind of macroeconomic issues have really affected very much share price and along that.
My view on that microeconomic issues is that, well in the European union even though the situation is no doubt difficult, but in my opinion right steps are being taken especially usually now step by step, not doing funny things every week, but rather start trying to establish a well planned difficult and painful strategy that in my opinion will give rewards in due time. And with respect to the United steps, we have seen the growth that we hope or we were thinking it would happen has not been as good as we would have expected probably, but growth is happening there, I have a tremendous confidence in the United States as a country, as a country that is capable of doing very good things. Once the politicians they clear up their minds, I am very confidence that the United States also will continue in the path of growth.
In the case of China, we have also seen that the financial policy has gone back to normal; I mean they are relatively happy with inflation and I honestly don?t think they afford to really cut the growth significantly. You know it?s a question. So well ? anyway, I am sure that most of you can develop these ideas in much better way than I can, but this is what I think on that.
So I am not pessimistic about the future, but well this is one factor that obviously all of us can have our own ideas, but if we have a view on the real demand, I can tell you that the demand for Zinc in the United States is strong and more surprising the demand for Zinc in Europe is strong, and not only in Germany that is it is, but also in Spain. We are consistently selling more than last year, but pretty used in last year and this is a fact.
So, then there seems to be some contradiction between the macroeconomic fear that I think they are justified, but the fact of the demand is what I am telling you in our experience in the United States, in Canada, in Germany and in Spain.
Well, it is also a fact that the steps have been reduced at the LME Shanghai and of course stocks in China we have to estimate, we believe also have decreased. So this is another point I think is important to take into account.
Then if we talk about future prospects, well then we believe that the growth is going to be led by China. I don?t need to tell you that the different issues, different projects, different needs that China has in building new roads, new houses, many things, urbanization, infrastructure and all that. So also I believe that the growth in other developing countries will also continue to demand grow and this is what we are showing in these graphs, in all of them.
If we talk about Lead. The situation is not very different. Most of the demand comes from China. We are seeing how different sectors for instance, just by sector is big consumer of Lead, has a growth of around 20% plan and the same thing can be said about other emerging economies. So the fundamental thing in the demand of Lead are very similar.
Then if we analyze the prospects of the Zinc Lead supply, it is through ? well, we have a number of closures that ? including our own closures of Brunswick for instance that are going to reduce the supply by 1.5 million plus another 0.5 million will happen because of the attrition of mines, including for instance Antamina. So we believe with the present projects, mines under construction and other expansions, the debottleneck and all that, around 1.8 million altogether will be there. So the situation from perspective is balanced, but what we see as you can see in the graph is that the evolution that we are thinking will happen in the little ? medium and longer term is such that unless there is a lot of new projects, new developments, well there is a gap there that is very difficult to be filled. And not only for many important projects to be developed, the level of prices has to be the adequate one.
Well then, on the Zinc demand balance we know because there are some facts that we have been in Zinc ? we have been in especially in the metal type, we have been in (inaudible) in constant we are already in deficit, but because of the numbers I have shown, I really believe that we are going to enter into deficit very quickly and that really unless a lot of new investment decisions are taken, that deficit is going to stay for some time. The same in Zinc and Lead. The same evolution we are expecting on the stocks to fall rapidly.
So this is the market. This is how we see the market. So in summary, I am optimistic about the Zinc market, I have to be. I think the fundamental sign is strong and clear and then I really believe that is a good business for the next years.
Well, on our situation, on organic growth and all that. Well, it is the fact that last week for Perseverance, the production of Zinc in Antamina and the end of certain states in Black Star are really coming down in several cases are coming to a close and others are reducing their production. And then if we hadn?t done anything, we would be in a rather complicated situation because really our position had been reduced. But we have done some things and we are doing some things. You can see the projects that are under construction. Those projects more or less compensate the reduction in products that we are having.
All those projects, all those mines that come to an end, all of them together amount to about $500,000 and projects in construction also amount to about $500,000. So that would leave us in the same level that we have today. But then we are not happy with that. We want to grow and so then what I am here describing some of these projects. Not big ones. In zinc we are not people that like to do frantic issues. No, we prefer to do many, very selective ones with very high yields, high returns. This is our policy and a lot of cost efficiencies.
So every business has its own strategy. This is our strategy. So we have this one of Black Star Deeps is 15 million tons, we will expand the production until 2015. Handlebar Hill is extending another two years, additional production of 40,000 tons of Zinc contain metal until 2013. Both of them are done. Bracemac-McLeod, this is a project in Canada. Again, this is to have extended life of the mine until 2017. The Perseverance mine will be working until third quarter of 2013 and then Bracemac-McLeod will be in place just before Perseverance come to an end. So I think is a good sequence here like which more or less the same production, the same mine in the same area is sustained until 2016.
Well, the George Fisher expansion is very important one. George Fisher is a great mine and then it had a limitation of having only one shaft, we are building a new one, we will be able to increase the production considerably by 1 million tons additional.
Lady Loretta, I think is a very interesting one, is relatively close to Mount Isa, is not a big mine, is only 10 million, but is very high grade as you can see. It got 16% Zinc, 5.6% is almost 22 but also a lot of Silver. This will be very important in improving the feeding of the Mount Isa because obviously adding 1 million tons with 16% of Zinc is going to improve the return there. So this is very interesting also project that is.
Then we have this one, I think is very interesting also. We are expanding Mc Arthur River; we are doubling the capacity more or less to 365,000 tons of Zinc metal. Because this a bulk concentrate, some we can sell but some we have to transform ourselves and then we are going to do that in Germany and Spain using our own process that was denominated, have in process and we have operate is not going anymore, because we have transformed that with our own technology. And then a plant producing 20,000 tons through this project has already been working in 2011 in Germany with very good results. We are very confident that these projects are very safe and will be developed properly. And with the rest of this that we get from the plants in Germany and in Spain, we will feed the Brunswick Lead smelter, avoiding the closure of that smelter that would happen after the closure of Brunswick mine. So we will still maintain this field.
Then Black Star South is another extension of Black Star, another 14 million. We have a very interesting one in Canada Hackett River, we have acquired big area with nine mining leases and 152 claims is 120,000 hectares, we have a further 107 claims. We have ? we have made sure that at least we have 66 million tons of resources, but the potential for increasing that to over 100 million, we will obviously very high one. So we are expecting to have a production there of over 250,000 tons of Zinc metal that this more or less substituting what Brunswick produces today. So really that operation could really replace entirely what we are doing in Brunswick.
All the other small projects Errington, Vermillion not big ones but also big contributors in money because for instance, this one is only 10 million but with a lot of Copper, with a lot of Silver and some Gold.
In the case of Pallas Green Ireland, we completed acquisition of the 23% that was not in our hands, now we have 100% of that. We have now gone to a little bit of resources of 28 million that would justify a profitable mine, but we are still improving the situation. So we really believe that we have a pretty good project there in Ireland which obviously is very convenient for us from a location point of view because that would I mean the concentrate there will be use in the plants in Spain and Germany. So very close to Ireland.
So then this is our growth profile. You can see that we have in brown I say, the approved projects and implementation; we are going to implement those relatively quickly and then the future growth options that include basically Ireland and Canada. With that we are going to achieve a growth of approximately 68% on the situation that we would have in 2011, 2012. So I think this is an interesting growth story.
So in conclusion, as I was saying because of the market analysis I really believe that this is a business with a very attractive medium and long term. I also believe that we have achieved a significant growth in the past years as was said, we are the largest integrating project in the world, but to me what it matters the most is that we are the same producer with the highest return on capital employed. This is what really guides me, with big size but especially with a very profitable.
Then we have achieved a lot of cost reduction, this is part of the reason why we are where we are, we are in a very well placed in the cost curve, we will continue our cost improvements. And then as I have shown you, we have a portfolio that will facilitate our factor of money growth. So we are optimistic about the present and about the future. Thank you.
Thras Moraitis
Here is a time for questions. (Inaudible).
Rob Clifford - Deutsche Bank
Thanks, Rob Clifford - Deutsche Bank. Just a question on the market and the market timing of your expansion. You talked about the highest return on capital employed. We are in a period where many miners are expanding. So capital pressure is on. You talked about the Zinc markets remaining in surplus for a number of years. So the prospect of zinc isn?t great. Is there not an argument that there is an opportunity to buy instead of build your growth at the moment and how do you think about the balance of those two in your growth plans?
Santiago Zaldumbide
First of all, I have explained that the super revenue now is mainly in the metal side. Not so much in the concentrated side is a little bit of deficit right now. So I mean you can see that on the thesis there are very low thesis. So in the mining side, I doubt that you could get any opportunity at the price that would justify. We have examples in the market, I prefer not to mention them of certain competitors of ours that they have taken that route which I respect obviously, but I haven?t seen any acquisition recently that has not been done at a relatively high price and then this is what it is normally unless circumstances are very strange and very difficult to have that situation.
Having organic growth, extending the personal operation is always much more profitable than acquiring. The thing is if you need as we had that situation, the thing is you need to really grow quickly from a relatively weak situation, where there you have to acquire and I am not saying acquiring is about the strategy, but in answering your question I don?t really believe that the situation is now one that would allow good price acquisitions. So bargains, I don?t think so and you can see the latest acquisitions that you know as I know and I haven?t seen any bargain at all.
Jason Fairclough - Bank of America Merrill Lynch
Jason Fairclough - Bank of America Merrill Lynch. Santiago, in the context of Xstrata, do you feel that you have to fight for capital or do you have all the capital that you want? Could you do more if Trevor gave you more to play with?
Santiago Zaldumbide
Well, I have been for years seeing how my money was invested at especially in other businesses. I really believe that is time now for us to spend our money a little bit more ? this is a joke, I mean serious speaking, we have to compare projects with Zinc, with Copper, with Coal and to choose the ones that are best. And this is what we are doing. I really believe that the projects that we are presenting Zinc had very good ones and have been considered like that not by me, but by the executive committee and the boss. So I don?t think we will have any issues with that decision.
Myles Allsop ? UBS
Yeah, it?s Myles Allsop from UBS. Just thinking about the kind of the next phase of growth, the projects in Ireland and Canada. Could you give us a sense as to when decisions will be made on those and what the kind of key issues are in terms of environmental permitting and another sort of concerns?
Santiago Zaldumbide
I think you have the different projects and where they are going to be commissioned or visa avis the study opportunity for approval. A number of them that I have presented in the first block, they have been approved, some of them are commissioned, some of them not. So the big ones ? I mean the one I have presented in Hackett River plus Pallas Green, those are well advanced and I hope to present them for approval probably in the first quarter of 2015 or else. So those are the ones that are going to really represent a lot of growth, additional growth.
But if we talk about Mc Arthur River expansion, the integrated project that also I think is a very important one because represents doubling the production in Mc Arthur River plus increasing substantially the metal production in two countries, in two markets that are performing extremely very well and that we are very confident about it.
So and that also is going to be presented for approval next year. So those projects, the Canadian ones will go probably a little bit further probably instead of 2012, 2013. But as you have seen all of them should be in operation in 2013, in 2014, in 2015. Environmental issues that could condition that. I don?t see any substantial ones, we have agreed, we are very advanced in agreeing with the Northern territory in Australia for the environmental permission to go ahead with expansion, is not a very complex things because is really extending our already ? it was tough to really get the permission to go from underground to an open pit, we have to divert rivers. It was really quit a thing. But now is much more simple thing.
In the smelters in Europe, you know this is the issue of residues that we have been handling in Germany and Spain and I think we have the issues under control. So I don?t really see any major environmental issues that could condition the investment program.
Thras Moraitis
If there are no other questions I would like to thank Santiago very much for his presentation on Xstrata Zinc and invite Ian Pierce, CEO of Xstrata Nickel to join us.
Ian Pearce
Good morning. I would like now to turn your attention to our niche nickel business. I am going to cover off the nickel space and some of the four broad headings that you saw followed by Santiago. This global view shows our integrated nickel business. The present operations are depicted by the white boxes plus projects and execution are represented by the brown and green boxes resulting in a 2017 production forecast in the top right hand corner for both the integrated nickel operations and Ferronickel side of our business.
My presentation will cover off the content displayed in this slide. 2011 saw a continued focus on health, safety, environment in the communities which we operate achieving several best to date results.
Mine production and nickel production were up with several of our smaller capital projects within the operations such as Kikialik, being delivered on time and on budget. The integrated nickel operation side of the business had a cash cost of $2.14 per pound for the first half of 2011 despite a weaker dollar and inflation. And of course Falcondo startup ahead of schedule with production ahead of plan.
This year has seen the approval of four key projects that will grow the business in a value accretive way. Two involving leveraging, opposition and capabilities in Sudbury.
Last but not least, we secured a six year agreement with steel workers up as Raglan without an interruption to our business or supply to our customers.
We continue to transform our cost base while delivering record productions and increasing mine life with an emerging Tier 1 asset in Koniambo as the cornerstone for our Ferronickel business.
We are maximizing the potential of our assets through no or low capital investments improvements. We are sustaining performance with tools, processes and coaching the drive reliable and repeatable performance.
Our interest is focused on health and safety have resulted in the following: Zero loss time injuries across Xstrata nickel in May and June of this year. As of June 2011 Falcondo went 365 days without a loss time incidence. Koniambo achieved 2 million hours worked without a loss time incidence and 1 million hours have been worked without a recordable injury.
On corporate social involvement side, we have focused on investments and partnerships with long term benefits to stakeholders plus Xstrata nickel engages in building long term partnership with third party organizations, with global reach, technical expertise and of course solid reputations in sustainable practices.
Turning to the markets. Price advanced 15% to a peak of $29,030 per ton on the 21 February and has since declined to a low of $16,935 per ton on the 30 November. However, the year to date average price of $23,184 per ton is 7% higher than in 2010.
LME inventories peaked on the 17 January and fell to a low of 83,000 tons on the 9 November before recovering to its current level. This year the market is generally balanced with small deficits in the first two quarters being compensated by small surpluses in the final quarters of this year.
Stainless Steel has remained strong in China, India and Korea. Slower growth in China from the measures to curb inflation, type and credit and have reduced demand growth. The developed world?s unresolved problems adds uncertainty to the market creating the volatility you see. There is still demand in Korea which is more susceptible to the developed world challenges has slowed. For developed markets the European Stainless Steel sector remains flat with poor visibility and uncertain outlook on demand.
While the US had a slow recovery from the traditional summer slowdown, melt are picking up supported by industrial demand outside the housing and construction. The soften nickel price and ongoing sovereign crisis create uncertainty which is impacting on more order levels.
Japan has yet to rebound from the falling industrial production following its tsunami and the strong Yen is squeezing Stainless Steel exports.
The Non-Stainless Steel melt consumption for super alloys has been strong through this year with a solid order books well into 2012 for the producers. This is being driven by a strong consumption for aerospace, power generation and oil and gas.
Other multi application such as foundry production of niche costing of nickel alloys have also held up well. Plating demand has been solid for most of the year supported by improving automotive demand for applications such as decorative trim and as illustrated in the lower picture wheels which are plated with several metals including layer of nickel.
The robust growth in developing markets and most notably China and India has been moderated by slow growth in developed markets most notably Europe, Japan and the US. The top chart highlights the remarkable growth in quarterly Stainless Steel melt rate since the significant slowdown in 2009. As a result, the global melt rate this year is at a record level and at more than 35% on 2009.
Growth in Stainless Steel output continues this year with a major contribution from China and India evident. While Stainless Steel melt rates are also at a record level this year and primary nickel ratio is also higher than a year ago. As a result primary nickel consumption in Stainless Steel is also at a record level. Non- Stainless Steel consumption of nickel has also increased this year compared to 2010. This has been driven by the strength of multi applications to produce high nickel super alloys, use of nickel in batteries and consumption in plating applications.
The lower chart illustrates the recovery of nickel demand from the slump in 2009 and continue growth for 2011. As a result, nickel demand is approaching 1.6 million tons this year and is at a record level. The current nickel demand drivers which have been highlighted are expected to continue into 2012 with further growth expected as illustrated in these charts. This is despite the uncertain developed market outlook for 2012 particularly in Europe.
As the top chart illustrates, nickel supply continue to increase in 2011. Supply is essentially balanced with demand for the full year. Tightness during the first half did arise due to disruptions that existing producers and delays for new projects. Significant disruptions included a furnace melt run out at Vale?s Copper Cliff facility, damage to Pemco Ferronickel facility following the tsunami in Japan and plant maintenance of one of the lines at [inaudible] 7:49 Ferronickel plant.
Startup delays and slow than expected production ramp up, limited additional supply from new projects with considerable name plate capacity. The Tovivara [ph] by heap and the Vale New Caledonia Gorra HPAL operations continue to fail to meet targeted ramp up production. Production ramp up for On?a Puma and Barro Alto Ferronickel projects has been slower than planned. Commissioning and start up for the Ramu and ambatovy HPAL projects have been delayed. Despite startup problems for these new projects, they could increase nickel supply in 2012 and subsequently as the ramp up continues.
Nickel Pidgeon output increased considerably this year as shown in the lower chart and in response to tighter markets and higher nickel prices particularly during the first half. This remains a high cost source of nickel production. Nickel Pidgeon production responded to prevailing market conditions by adjusting monthly production rates and these rates are estimated to have ranged within 16,000 to 25,000 tons per month of nickel during the year. Nickel Pidgeon production is expected to continue to be responsive to market conditions in 2012 and consequently also to the level of nickel supply from conventional sources.
Urbanization and industrialization in developing markets boosts industrial production growth as the top chart illustrates for China and India. Growth in Stainless Steel production and in Non-Stainless Steel nickel consumption is strongly correlated to industrial production growth and for countries with large populations such as China and India translates into significant demand growth.
Accelerated industrial production growth is projected to continue for both China and India. This together with a stable osmotic and raising primary nickel ratio for Stainless Steel is expected to underpin future demand growth in Stainless Steel and the Non-Stainless Steel sectors.
Longer term, this demand growth will require additional nickel supply to what the current new wave of new projects will provide over the next several years. This incremental supply is expected to be heavily weighted to an increase share of production from left, right sources as illustrated in the lower chart. This shift to left, right base supply has key implications as a result of the resource characteristics and there are often remote location in under developed and difficult locations. Development of such resources requires significant investment and supporting infrastructure resulting in high capital intensity. This also drives large coal projects with significant incremental nickel output. The characteristics of the specific left right resources to be exploited also often dictate that complex both technically and operational risky hydrometallurgical processes be undertaken. Generally the track record for the development of such H power operations has been very poor, the evolution of nickel Pidgeon production may moderate the extent of the opportunity from future demand growth.
Dependence of import of wet, relatively low grade ore adds to costs and vulnerability to future supply. Indonesia declared a ban on left, right ore exports and it remains to be seen whether this will affectively be implemented.
Nickel Pidgeon is expected to remain a high cost source of supply but users are expected to see raising costs for key inputs including purchased ore, coke, power and labor and to be impacted by the strengthening RMB currency.
I?d like now to turn to organic growth. Here project pipeline is broken out into projects and execution and next phase projects. The projects and execution create for both the Ferronickel and integrated nickel operations, with Koniambo reaching 60,000 tons of nickel and Ferronickel in 2014. Fraser Morgan delivering 6,000 tons of nickel in concentrated in 2013 and Raglan achieving an additional 14,000 tons of nickel in concentrated by 2016.
The development of the next phase projects has Falcondo delivering 14,000 tons of nickel by 2016 and phase 1 of Kabanga delivering additional 10,000 tons of nickel in concentrate. The smelter project involves meeting specific environmental requirement. The team has used innovative process improvements to achieve the set objectives rather than M-pipe solutions and this has led to realizing a further processing capacity of 12,000 tons at our smelter. The refinery of course is ongoing in pursuit of no or low capital expansion through our S entitlement efforts.
We have established five strategic thrusts to deliver Koniambo and I will spend a little bit of time on the first thrust which is project delivery. Overall the project progress is 77% with the direct fuel construction at 58% complete. By the end of this year we will have passed the 60% complete with the construction and by the end of the first quarter, most of the work in the peripheral areas will be completed allowing us to concentrate on completing the metallurgical plant and the power plant facilities.
As we head for 2012, our focus goes to systems completion and less emphasis is placed on construction progress. So now we are more focusing on the sequencing for startup.
I have the following several slides that will show you the sequence, the progress and the timelines that we are using to achieve the startup by end of 2012.
To give certainty to startup, we have successfully secured 20 megawatts from the existing grid in New Caledonia. This in conjunction with combustion turbine generators pictured here secure 84 megawatts for the startup. The emergency generators are complete as I speak with a CTGs nearing completion. By doing this we have removed electrical supply to furnace one off the critical path.
On the much needed services in the sea water system, all -- the more sensitive offshore work in now complete. This area has unrestricted access, is 81% complete and we are well positioned for April.
Some are late with the demineralization and desalinization systems which are at 69% complete. These again are less complicated than sewerage system and on track for the April startup.
The gas plants are 56% complete and needed for the metallurgical operations and will be ready by the third quarter of 2012.
The oil preparation plant is 73% complete and will be ready for operation well ahead of the plant to deliver all to the stock pile in June of this year.
As can be seen by these pictures, the overland conveyor is 90% complete. With the conveyor being placed on the gallery using the permanent drive system. And therefore should meet the required date allowing the miners? time to run the system well ahead of the feed requirement date.
The main fuel and diesel system is 74% complete and on track to receive fuel by the end of May ahead of the early start of date of June for the CTGs.
The coal preparation plant is 66% complete with a completion data ahead of the first coal arrival in the third quarter.
Now let?s talk about the last two important areas namely the metallurgical plant which is at 56% complete and the power plant at 44% complete. After the first quarter of 2012, we will see a much reduced area to manage allowing additional focus on these two areas. The procurement of the additional 20 megawatts has distressed this congested area and this has given us tremendous amount of flexibility. The critical path of course now goes to the metallurgical area with present completion date for the second half of this year. Both areas are on track and in fact we see the power plant a little ahead of its plan allowing us to allocate some Korean workforce to the refinery area and allocating resource freely across the mid plant and the power plant give us great flexibility.
Next I would like to cover off six existing parts of our business starting with Falcondo. The restart of Falcondo has an improved cost position and low capital expansion capacity has the potential to provide significant upside in high price environments as we?ll see in 2007. The team is focused on optimizing the 50% base case while putting in place an extra components to go to the 100% case which includes the Loma Miranda deposit.
Koniambo is using Falcondo as a training area giving future operators and maintenance staff real hands on experience plus we have identified a verical slice of capability from Falcondo to help with the Koniambo startup.
We continue to both side be on the successful startup of nickel rum. The additional phrase of Morgan project and the Fraser extension through the partnership with Vale lowers fixed cost associated with Fraser Copper and of course extends Fraser?s life of mine to 2025.
The Craig infrastructure lease eliminates care and maintenance costs and affords us an opportunity to develop access to the underpinning deposit with reduced fixed costs. Necessary actions to meet emissions that I talked earlier, emission targets has enabled us to extract growth through an innovative review of existing operations.
Our land position at Raglan has a strike length of 70 kilometers. We have only explored 30% of this land position which offers significant upside potential. Focused exploration has realized growth by sequencing the new all bodies differently and this has resulted in us being able to deliver an increase production by 2014 and 2016. This year and next year will see lower grades than we have typically seen extracted at Raglan and then we should see a reversal of this in 2013. Along with these projects we continue to seek other ways to reduce our costs of this very attractive polymetalic part of our business.
Exploration has and continues to be an enabling strategy with XNA. New discoveries in AM6, Odysseus, and now Odysseus North continues to supply feeds to our base business and has helped reduce fixed costs of our downstream smelter and refinery. The next phase will be developed at XNA sees us moving to treat more disseminate ores requiring innovative ways to offset hyper inflation in the Australian setting.
Nikkelverk continues to be a reliable supplier of high quality sort after nickel with ongoing initiatives to debottle the base plant with no or little capital. The integrated nature of the flow sheet requires coordination with the smelter exploring options to process own feeds an attractive complex custom feeds thereby allowing the smelter and refinery to operate at maximum levels across a street of metals.
There is another known New sulphide ore like Kabanga. So this growth opportunity will provide reliable long term feed for the INO part of our business. A two phase approach is being adopted with modest capital for the first phase to be use a high quality much sort after concentrate. Presently the project team is making sure the key elements that are needed for on time and on budget delivery are put in place ahead of making the decision.
And to top it off. Here are four further opportunities identified to create value for shareholders as can be seen all over in the early stage of development with our immediate focus on delivering the projects in execution to secure our future through to 2017.
So to conclude. We can clearly see we are able to maintain the transform base business that will be robust through the cycle, strongly cash generative with world class assets and low capital intensity going forward. Our immediate focus is on delivering Koniambo by 2012, thereby creating a highly competitive Ferronickel business. We will also add further value by delivering the Raglan 40,000 ton project by 2016; pursue focused growth in Sudbury to leverage our own infrastructure and capability with a focus on the next project Kabanga as an entry level project with solid economics, and then finally enhance our Ferronickel portfolio with the Falcondo at 100% case. We need to do all of this with the support of our communities, creating exciting careers for our people and in pursuit of zero harm.
Thanks very much and I will take questions now.
Jason Fairclough - Bank of America Merrill Lynch
It?s Jason Fairclough - Bank of America Merrill Lynch. Ian, you didn?t really talk that I saw about the budget at Koniambo. Is there any update from the update?
Ian Pearce
No change. We still are on budget as we published when we made the announcement around the cost increases. So no change to budget.
Jason Fairclough - Bank of America Merrill Lynch
Okay. And you are pretty comfortable that that is going to be added?
Ian Pearce
Yes
Jason Fairclough - Bank of America Merrill Lynch
Okay.
Peet Nienaber
Good afternoon everybody. Since the last time I have been up here we?ve witnessed the Arab Spring split across the Middle East North Africa which led to the collapse of a number of dictatorships in the region. We watched in shock as Japan East Coast was decimated by a ferocious tsunami and then watched Japanese rebuild their cities. And in the western world, we?ve seen indecision amongst leaders resulting in chaos in the financial markets. So it has indeed been a year of brutality and it also reminds us we need to be robust through this cycle and simply put get back to basics.
Taking you through the agenda, I will first give you a general overview of operations and recap on the business strategy, then I will give you an update on the markets, followed by an update on the project pipeline.
The South African operations, our chrome and PGM operations are straight across the Western and Eastern limbs of the South African Bushveld Igneous Complex as you know. The Bushveld is regarded as the world?s most valuable geological intrusion and host to the world?s largest chrome and PGM resources.
Our geographical position and diverse asset base across the Western and Eastern Limbs of the Bushveld complex give us a significant advantage in capturing opportunities as well as in leveraging key inputs such as skills, power and water, all of which are scarce in the mining sector at large.
Further Xstrata is the only fully integrated chrome and PGM producer enabling us to exploit the full value of its by-products arising from the mining of these commodities.
Our operational strategy in chrome is to maintain cost leadership through resource efficiency and flexibility. In PGMs we have leverage the expertise gained form chrome mining to develop best in the class mechanized board and pillar mines in both Mototolo and Eland.
Before we go further into our operational strategy, it is worth spending a few minutes on the issue occupying most mining chief executives agendas, that being the issue of the due political risk and safety and sustainability.
Across the globe, governments of most mining jurisdictions are shifting their focus towards extracting a bigger share of the economic rent for mining. Proposals vary from royalties to windfall taxes to nationalization. South Africa is often regarded as the poster child of due political risk, primarily because of the investment uncertainty from the nationalization debates and politics around black economic empowerment.
But if we take a step back, the mining charter is probably the most progressive piece of legislation for mining jurisdictions in emerging economies. It?s a balanced scorecard that looks at the needs of governments, communities, employees, local business and indigenous ownership.
If effectively implemented and administered, it could be an example for other mining jurisdictions to follow. Xstrata has embraced this charter since its implementation and the slide clearly illustrates that we are well on track and in most instances; we are already above the 2014 target.
The most important development in the past year has been the principle endorsement from the regulator that Xstrata has achieved the requisite 2014 ownership target across all its South African operations.
Our total recordable injury frequency rate statistics demonstrate our unwavering commitment to safety and zero harm to our employees. Unfortunately these statistics are marked with the loss of three lives in our operations during 2011. We?ve introduced virtual reality training and other programs called the Meerkat program at our operations which we believe will enable us to create a fatality free environment. Our focus on health of our employees is primary through the successful introduction of our wellness program which includes HIV testing and treatment.
Investments in community developments are largely in the areas of education and health and partnerships with local governments.
Lastly on environments and sustainability, we are focused on conservation of our water and engineer resources and have made remarkable achievements in this area.
Our operational strategy and environmental strategy are not mutually exclusive given our focus on the efficient use of our resources at our operations. On the Eastern limb, our growth and cost competitiveness is underpinned by our proprietary premise technology which consumes energy at some 50% less than conventional technologies. And the result is that as electricity prices increase in South African and in the rest of the world, Xstrata?s competitive position will be enhanced.
On the Western Limb, where UG2 from the platinum industry is abundant, we have secured UG2 supply from majority of the platinum players and matched our agglomeration capa
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