Anglo American Annual Report 2012

OPERATING AND FINANCIAL REVIEW IRON ORE AND MANGANESEOur Manganese interests consistof a 40% shareholding in SamancorHoldings, which owns HotazelManganese Mines and Metalloys,both in South Africa, and a 40%shareholding in each of the Australianbasedoperations Groote EylandtMining Company (GEMCO) andTasmanian Electro MetallurgicalCompany (TEMCO), with BHP Billitonowning 60% and having managementcontrol. Samancor is the world’slargest producer of manganese oreand is among the top global producersof manganese alloy. Its operationsproduce a combination of ores andalloys from sites in South Africaand Australia.Anglo Americanhas a uniqueiron oreresourceprofile, withextensive,high qualityresource basesin South Africaand Brazil.Iron ore price (FOB Australia)$/t20018016014012010080Jan 11 Jun 11 Dec 11Jun 12Dec 12Spot QAMOM (1)Source: Anglo American Commodity Research(1)QAMOM is a pricing mechanism based on average quarter in arrears minus one month.INDUSTRY OVERVIEWGlobal demand for iron ore is linkedprimarily to the state of the globalsteel industry and, more specifically,to the steel manufacturing sector inChina. The country is the largest steelproducer and consumer in the worldand accounts for more than two-thirdsof global seaborne iron ore imports.Manganese alloy is a key input intothe steelmaking process. Manganesehigh-grade ore is particularly valuableto alloy producers because it isproportionately more efficient thanlow-grade ore in the alloying process.STRATEGYA key element of Anglo American’sstrategy is to grow its position in ironore and to supply premium iron oreproducts against a background ofdeclining quality global iron oresupplies. We have a unique iron oreresource profile, with extensive, highquality resource bases in South Africaand Brazil.Kumba seeks to maximise totalshareholder value by enhancing thevalue of its current operations throughits asset optimisation programmes,capturing value across the value chainthrough its commercial and logisticsstrategies, executing its growthprojects efficiently, and ensuring thatit has the organisational capability toexecute its strategy.The company plans to grow itsbusiness organically in order toachieve production of 70 Mtpa fromSouth Africa and, in the longer term,through expanding its productionfootprint into other countries in Africa.Minas-Rio will capture a significantpart of the pellet feed market with itspremium product featuring high ironcontent and low contaminants. Phase1 of the Minas-Rio project will produce26.5 Mtpa, with potential optimisationto 29.8 Mtpa.During the year Anglo Americancompleted a detailed cost andschedule review of the Minas-Rioiron ore project. The review includedthird party input and examined theoutstanding capital expenditurerequirements in light of currentdevelopment progress and thedisruptive challenges faced by theproject. The review included a detailedre-evaluation of all aspects of theoutstanding schedule, with a focus onmaximising value and mitigating risk.Following completion of the review,capital expenditure for the Minas-Rioproject is projected to increase to$8.8 billion, if a centrally held riskcontingency of $600 million is utilisedin full. On the basis of the revisedcapital expenditure requirements andassessment of the full potential ofPhase 1 of the project (excludingat this stage the potential forfuture expansions to 90 mtpa),Anglo American has recorded animpairment charge of $4 billion at31 December 2012, on a post-taxbasis. The first phase of the project willbegin its ramp up at the end of 2014.Operating safely, sustainablyand responsiblyKumba faces a number of materialissues in its current operatingenvironment and at the forefrontis meeting rising expectations anddemands from stakeholders –including government, employees,communities and shareholders – ina financially and resource constrainedeconomic and social environment.Achieving and maintaining our licenceto operate also remains of the utmostimportance – including social andenvironmental compliance – amidstincreasing regulatory, cost andgovernance requirements in SouthAfrica. The attraction, retention anddevelopment of human resourcesremain critical priorities for Kumba.We address these issues through aconsidered and proactive approachto talent management and retentionas well as workplace health andsafety, responsible environmentalmanagement, and the application ofleading social performance standardsand management systems. At the coreof each of these strategic work streamsis a culture of regular and transparenttwo-way engagement.56 Anglo American plc Annual Report 2012