Anglo American Annual Report 2012

01 At the Kumba/Kolomela rail loadingfacility iron ore is transferred to railwagons for the 861 kilometre journeyto the dedicated iron-ore exportterminal at Saldanha Bay onSouth Africa’s Atlantic coast.02 The jig plant at Sishen mine is oneof the biggest of its type in the world.The primary drivers of the capitalexpenditure increase from theprevious estimate in 2011 relate to:• The delay in FOOS from late 2013to late 2014;• Scope changes, including thoseagreed as part of the review processand taking into considerationadditional land access costs andpurchases, increased earth and civilworks required following access tovarious sites along the pipeline andthe increased costs of meetinglicence conditions;• Construction inflation costs,including contract adjustments andmining equipment price increases;• A centrally held risk contingencyof $600 million to accommodatea number of potential factors toachieve the FOOS date of the endof 2014, including the potential foradditional price escalation,productivity acceleration andfinalisation of the extent of earthand civil works required on landthat is yet to be accessed.Following its approval in 2011, the$279 million GEEP2 project(Anglo American’s 40% share:$112 million) will increase GEMCO’sbeneficiated product capacity from4.2 Mtpa to 4.8 Mtpa through theintroduction of a dense media circuitby-pass facility. The project is expectedto be completed, on schedule andbudget, in late 2013. The expansion willalso address infrastructure constraintsby increasing road and port capacity to5.9 Mtpa, creating 1.1 Mtpa of latentcapacity for future expansion.The addition of a $91 million (ona 100% basis) high carbon ferromanganesefurnace at the Metalloyssmelter in South Africa will add anadditional 130,000 tonnes of capacityper year. Hot commissioning wascompleted, on schedule, in thefourth quarter of 2012, with fullproduction expected in the secondquarter of 2013.Kolomelamine remainson track toproduce 9 Mtin 2013, in linewith designcapacity.OutlookA similar level of growth in globalcrude steel production is expectedfor 2013, with China’s productionrising marginally to about 740 Mt,while growth in production in otherdeveloping countries is expected tobe countered by a reduction in outputin some of the developed markets.In 2013, Indian iron ore productionis expected to remain under pressureas a result of domestic policy changes.However, new supply capacity,primarily from Australia, is expectedto partially offset this reduction inIndian supply.The start of 2013 has seen a rapidrecovery in iron ore prices. Theconsensus view is that this rally will notbe sustained throughout the year;however some positive sentiment inrelation to Chinese steel consumptiongrowth has been restored and isexpected to provide support to pricesthroughout the year. Seaborne iron oresupply growth may lead to iron oreprices softening in the second half of2013, but on average prices areanticipated growth to be firmer than in2012.The knock-on effect of the 2012unprotected strike at Sishen mine isexpected to result in lower productionvolumes than originally planned in2013. Sishen mine is anticipated toproduce at least 37.0 Mt in 2013. Theramp up in waste mining at Sishenmine continues and will continue to putupward pressure on the mine’s cashunit costs. Kolomela mine remains ontrack to produce 9 Mt in 2013, in linewith design capacity. Export salesvolumes are expected to be in linewith 2012 levels.Due to a weaker market, a supplyside response provided price supportfor manganese ore in the latter partof 2012. The recovery in pricingis expected to continue into 2013,however, muted demand expectationsare expected to limit the rate andextent of the recovery in the near term.Kumba Iron Ore updateSishen supply agreementarbitrationA dispute arose between Sishen IronOre Company Proprietary Limited(SIOC) and ArcelorMittal South AfricaLimited (AMSA) in February 2010, inrelation to SIOC’s contention that thecontract mining agreement concludedbetween them in 2001 had becomeinoperative as a result of the fact thatAMSA had failed to convert its old ordermining rights. This dispute has beenreferred to arbitration. On 9 December2011, SIOC and AMSA agreed to delaythe arbitration proceedings in relationto the Sishen Supply Agreement untilthe final resolution of the mining rightsdispute. This arbitration is only expectedto commence in the fourth quarter of2013, with possible resolution onlyexpected in the third quarter of 2014at the earliest.An Interim Pricing Agreement (IPA2)between SIOC and AMSA was in placeuntil 31 July 2012 and was extended to31 December 2012.In December 2012 a further interimagreement was concluded, afternegotiations which were facilitated bythe Department of Trade and Industry(DTI). The further interim agreementwill govern the sale of iron ore from theSishen mine to AMSA for the period1 January 2013 to 31 December 2013,or until the conclusion of the legalprocesses in relation to the 2001Sishen Supply agreement (whicheveris sooner), at a weighted average priceof $65/t. Of the total 4.8 Mt, about1.5 Mt is anticipated to be railed toSaldanha Steel and the rest to AMSA’sinland operations.21.4% undivided share of theSishen mine mineral rightsOn 3 February 2012 both theDepartment of Mineral Resources(DMR) and Imperial Crown Trading 289Proprietary Limited (ICT) submittedapplications for leave to appeal againstthe High Court judgment. SIOC appliedfor leave to present a conditionalcross-appeal, in order to protect itsrights. The Supreme Court of Appeal(SCA) hearing will be held on19 February 2013, and the SCAjudgement is expected to be receivedearly in the second half of 2013.The High Court order did not affect theinterim supply agreement betweenAMSA and SIOC, which was in placeuntil 31 July 2012 and was extended to31 December 2012. SIOC will continueto take the necessary steps to protect itsshareholders’ interests in this regard.Operating and financial reviewAnglo American plc Annual Report 2012 59