Gold cost profiles and nationalisation – Cutifani [AngloGold Ashanti CEO] – by Geoff Candy ( – February 10, 2012)

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In a wide ranging discussion, AngloGold Ashanti’s CEO Mark Cutifani talks about nationalisation, cash cost and the outlook for the gold price.

CAPE TOWN – GEOFF CANDY: Hello and welcome to this Newsmaker podcast, my name is Geoff Candy and joining me from the Mining Indaba, in Cape Town, is Mark Cutifani, he’s the CEO at AngloGold Ashanti. Mark, I suppose the first question I wanted to ask you was if we look at where AngloGold is, one of the big unknowns at a macroeconomic level is what’s going to happen with oil and what I wanted to get a sense of from you is how much of an impact does oil play on your business and is this a concern?

MARK CUTIFANI: Ja, I think it is, it’s a concern for everyone. The good thing from an AngloGold Ashanti point of view is given the high proportion of underground operations that we have, oil tends to be less of an issue for us than, let’s say, compared to the North Americans, who have large open carts with lots of waste stripping and low grades but it’s still a 10% to 13% cost factor for us, so it’s material. But it’s not as material as, let’s say, for the North Americans but it’s one we watch carefully and if we saw a 20% rise, then from us that would have a 2% to 3% impact on our unit cost, so it’s one we watch fairly carefully.

GEOFF CANDY: What about the rest of your cost profile because clearly costs are an issue for the sector as a whole?

MARK CUTIFANI: We’re fairly proud of what we’ve been doing on our cost structures in relation to overall inflation. I showed a chart yesterday in my presentation that of the major gold mines in South Africa, we’re the ones who’ve seen the lowest cost increase over the last two years and really that’s a function of the cost improvement stuff and productivity work we’ve been doing. We are also the absolute lowest cost by some 20% or 30%, so the team’s done some really good work but we’re still seeing cost inflation, after we’ve made improvements, of around 10% in South Africa. So it’s challenging and if you put that with the strong rand then it makes a doubly difficult environment but the team in South Africa has done a good job, we have made improvements but we’ve still got a long way to go.

GEOFF CANDY: I was going to ask, clearly there has been a lot of improvement, how much more improvement can you really get? How much fat is left in the cost?

MARK CUTIFANI: I never call it fat…

GEOFF CANDY: [Laughing]

MARK CUTIFANI: …I like to call it opportunity [laughing]. But when I talk about fat, I talk about the weight I could lose…

GEOFF CANDY: [Laughing]

MARK CUTIFANI: …but like myself doing more exercise and getting myself trimmer for the job, I think there’s work we can do. In our business the way we’ve set up our new operating model, we’re looking to try and reduce on an annual basis or a real basis our cost by at least 5%. Now, it doesn’t sound like much but a year on year basis that’s actually quite significant and, for example, if we can do that then we would halve the industry…our cost would be drifting at half the industry average rate or less than half the industry average rate and the gold price is sort of tracking inflation, so that would help us improve our margins by more than 5% on an annual basis, which is, if you look at what we’ve done over the last four years, we’ve gone from producing around US$600m operating cash flow, this is before capital, to $2.6bn. Now, the good part of that’s been on the cost management, along with the gold price opening up our margin. So for us it’s about 5% a year, so if I said in the next five years we’d like to see at least, at least 25% reduction in our real costs through those sorts of programmes.

GEOFF CANDY: Does that get offset at all by, perhaps, slightly lower grades? I know in the September quarter there was a decline in grades and that clearly would have an impact on cost.

MARK CUTIFANI: Yes it does and if you look at our operation since 2006 through to 2011, we’ve seen a 23% decline in grades. The good news is that we’re starting to see that flatten off, we’re now working at a little bit under reserve grade. So for AngloGold Ashanti you should see over the next five years an increasing grade. So the good news for us is that from a fundamental point of view or a cost input point of view, we’re working hard to reduce our costs on a real basis and we’ve got the benefit of grade probably going our way a little bit in the next three or four years, which reverses a trend that we’ve seen over the last five or six years. So we’re setting the business up to be successful and certainly very excited in terms of what’s possible.

GEOFF CANDY: How much of that increase in grade is going to come from the likes of Tropicana and how much is it from the existing operations?

MARK CUTIFANI: The existing operations will in some cases see slight declines. So the real benefits come from a Kibali, a Mongbwalu, a Tropicana, as you point out, Córrego do Sítio in Brazil, an increase in the underground mining grades from [? 4:53], where the heat bleach will actually drop it down a bit. So it’s a combination of those new projects that start to turn that trend around.

GEOFF CANDY: Mark, in terms of the Tropicana project it’s scheduled to come on stream midway through next year, are those projects still progressing nicely?

MARK CUTIFANI: Yes, they are, I actually was flagging a couple of issues yesterday. Tropicana is scheduled for commissioning in October 2013, project’s making good progress, we’re probably tracking a little bit ahead of that target but I always caution that Australia, unfortunately, has had lots of inclement weather in the last few years and so whilst we think we’ve taken all the appropriate precautions, you never know.

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