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Base Metals

Copper cathodes in the solvent extraction/electrowinning plant at Mantos Blancos, Chile

Financial overview

Operating profit at Base Metals of $2,505 million was some 42% lower than the previous year. This followed sharply lower copper, nickel, zinc and lead prices, including a significant $591 million adverse mark to market and final liquidation adjustment due to lower realised copper prices on revenue initially recognised on provisionally priced sales, as well as lower copper prices at the end of 2008. Of the negative mark to market and final liquidation adjustment, there was a positive impact of $265 million in the first half, offset by a negative impact of $856 million in the second half. Lower overall sales volumes and continued rises in input costs also contributed to the reduction in operating profit. The sale of Namakwa Sands was completed on 1 October 2008, with that operation therefore contributing for only nine months of the year.

$ million
(unless otherwise stated)
2008 2007
Operating profit 2,505 4,338
Copper 2,017 2,983
Nickel, niobium, mineral sands and phosphates 507 786
Zinc 136 654
Other (155) (85)
EBITDA 2,845 4,683
Net operating assets 5,474 4,989
Capital expenditure 1,494 610
Share of Group operating profit 25% 45%
Share of Group net operating assets 17% 19%

Markets

Average market prices (c/lb) 2008 2007
Copper 315 323
Nickel 953 1,686
Zinc 85 147
Lead 95 118

During the first nine months of 2008, the copper market continued to be tight, with prices rising to an all time record level of 407 c/lb in July. However, concerns about future global economic growth in the latter half of the year led to a sharp drop in prices, with copper ending the year at 132 c/lb. Weakness in the nickel market continued into 2008, with rising inventories (London Metal Exchange (LME) stocks closing the year at a 13-year high) and declining economic sentiment, leading to a material drop in prices. Zinc prices continued to weaken materially for similar reasons.

Operating performance

Copper division 2008 2007
Operating profit ($ million) 2,017 2,983
Attributable production (tonnes) 641,300 655,000

Los Bronces, Collahuasi and Mantoverde all increased production in 2008, partially offsetting lower production at both El Soldado and, less so, at Mantos Blancos. Record production was achieved at Los Bronces and Mantoverde.

Los Bronces increased output by 2% principally due to higher ore grades. The Group's share of Collahuasi's production was 3% higher than for 2007 as a result of significantly improved grades, somewhat offset by pipeline and pumping constraints, and a SAG mill motor stator failure in September. Production at El Soldado was 32% lower as a consequence of lower ore grades, largely owing to challenging rock stability conditions impacting sequencing in the underground and open pit mines. Output from Mantoverde was 2% higher following recoveries from the heap leach operations achieving a record level. At Mantos Blancos, production fell by 3%; while improved throughput and grades lifted concentrate production, this was offset by lower cathode production resulting from lower volumes of ore and enriched solution purchased from third parties. Chagres' output fell by 11%, mainly due to the lower average grade of concentrate treated.

Nickel, niobium, mineral sands and phosphates 2008 2007
Operating profit ($ million) 507 786
Attributable nickel production (tonnes) 20,000 25,600

At Codemin, output fell 8% owing to a scheduled stoppage to reline one of the furnaces. Sales fell 15%, reflecting the lower production and also a slowdown in stainless steel producer offtake. At Catalão, niobium production reduced by 2% as a result of lower recoveries on ore from the Boa Vista mine. Performance at Copebrás during 2008 can be divided into two distinct phases: from January to August, demand for all products was extremely strong and the company sold its entire production at rising prices; from September onwards, sales volumes and prices reduced sharply as farmers were forced to reduce or even curb fertiliser usage completely owing to the reduced availability of credit arising from the global economic downturn.

Loma de Níquel's production declined by 31% following strike action and a consequential series of operational difficulties on restarting the plant, as well as two nationwide power outages. Sales fell 33%, partly reflecting lower production, but also because of congestion and delays at the port compounded by the bankruptcy of the main shipper and a number of cancellations from customers towards the year end.

In January 2008, Minera Loma de Níquel (MLdN) was notified of the intention of the Venezuelan Ministry of Basic Industries and Mining (MIBAM) to cancel 13 of its exploration and exploitation concessions due to MLdN's alleged failure to fulfil certain conditions of the concessions. These concessions do not include the concessions where the current mining operations and metallurgical facilities are located. MLdN believes that it has complied with the conditions of these concessions and has lodged administrative appeals against the notices of termination and is waiting for a response from MIBAM. MLdN may in the future undertake further appeals, including with Venezuela's Supreme Court, if MIBAM's ruling does not adequately protect its interests.

Anglo American and MLdN continue to strive to resolve the matter by way of constructive dialogue; however, Anglo American and MLdN believe that there is a valid legal basis to reverse the notices of termination and will pursue all appropriate legal and other remedies and actions to protect their respective interests both under Venezuelan and international law. As such, Anglo American anticipates restoration of these 13 concessions and renewal of those that expire in 2012. As a result, the Group continues to consolidate MLdN and no impairment has been recorded for the year ended 31 December 2008.

In a separate development, the environmental permit for slag deposition expired on 23 November 2008. Pending reissuance of the permit, MLdN implemented a short term contingency plan to allow operations to continue by storing the slag in various locations in the plant area. On 23 December, MLdN suspended operations but a satisfactory temporary alternative operating and deposition approach was developed which enabled operations to restart on 28 January 2009.

At 31 December 2008, Anglo American's interest in the book value of MLdN, including its mineral rights, was $443 million (as included in the Group's balance sheet). In the 12 months to December 2008, MLdN's production and contribution to Group operating profits were respectively 10,900 tonnes of nickel in ferronickel and $30 million. The average price of nickel in 2008 was 953 c/lb. As of 19 February 2009, the price of nickel was 447 c/lb.

Anglo American is proud of its record in Venezuela, where it has invested substantial amounts in exploration and subsequently the construction of the country's only primary nickel producer. It is a major contributor to and employer in the Venezuelan economy as well as a significant taxpayer. The operation continues, as it has always done, to work constructively with all stakeholders, employees, local communities and government and to the highest sustainable development, social and environmental standards.

Zinc division 2008 2007
Operating profit ($ million) 136 654
Attributable zinc production (tonnes) 340,500 343,100
Attributable lead production (tonnes) 62,900 62,100

At Skorpion, production was 3% lower owing to electricity supply constraints in southern Africa in the first quarter, mechanical failure of a cathode crane in the electrowinning cellhouse and industrial action. Despite tight cost control, mine operating unit costs rose following lower production volumes and rising input costs. At Lisheen, zinc production increased by 2% primarily as a result of higher feed grades and improved metallurgical recoveries, but lead output was down 21% due to lower grades and recoveries. Improvements in stope availability and underground infrastructure at Black Mountain resulted in a 13% increase in tonnage mined, despite a week-long unplanned stoppage of the mine and plant in January following a power shortage in South Africa. Lower zinc grades and recoveries resulted in zinc production decreasing by 1% to 27,900 tonnes, although lead production increased by 12% to 47,000 tonnes. The sale of 26% of Black Mountain and Gamsberg to Exxaro Resources was completed on 3 November 2008, following the successful conversion of old order to new order mining rights.

Impairments of $78 million and $62 million were provided at Lisheen and Black Mountain respectively.

Anglo Base Metals operating profit by commodity 2008 LME daily closing copper/nickel/zinc price

Projects

Base Metals has a strong project pipeline which provides significant scope for organic growth in the medium and long term. Anglo American's review of its capital expenditure programme in late 2008 resulted in the decision to slow the rate of development of the two major projects under construction, Barro Alto and the Los Bronces expansion project.

The Barro Alto nickel project in Brazil has been delayed by a year and first production is now planned for early 2011. Owing to pressure on project costs and exchange rate fluctuations, total capital expenditure for the project is now estimated at between $1.6 billion and $1.8 billion, of which $1.2 billion has been spent and committed.

Construction progress on the $2.2 billion to $2.5 billion Los Bronces expansion project in Chile was in line with plan. Targeted commissioning has, however, now been pushed out by eight months to late 2011. Cost pressures remain and will be managed closely under the revised project schedule and in the context of the changing global economic environment.

At Collahuasi, further progress was made on the 140,000 tonne per day concentrator throughput debottlenecking project, which has now been commissioned.

The revised feasibility study for the Quellaveco project in Peru reached an advanced stage of completion during the year. Resource development, community projects, a technical review and project optimisation work are continuing. Also in Peru, the Michiquillay project, acquired through a privatisation auction in 2007, received the social licences from both the Michiquillay and La Encañada communities, and will now proceed into the exploration phase.

Chagres, Mantoverde, Collahuasi and Gamsberg all have early-stage studies under way, examining options for projects that will either increase production and/or extend mine lives.

Outlook

In January 2009, Codelco, the Chilean mining company, did not exercise its option to purchase up to a 49% minority interest in Anglo American Sur, the wholly owned Group company that owns the Los Bronces and El Soldado copper mines and the Chagres smelter. The window for exercising the option is limited to once every three years in the month of January until January 2027. The next such window is in January 2012.

Production of nickel, subject to operating difficulties in Venezuela, and copper are forecast to increase in 2009, with zinc and phosphate production remaining at similar levels to 2008. Operating margins are expected to start to benefit from declining costs of certain key inputs, such as fuel, energy, sulphur, sulphuric acid, ammonia and explosives.

For all base metals, a period of price weakness is anticipated due to the weak outlook for global growth. Across the industry, persistent supply side constraints in the case of copper and, for nickel and zinc, the closure of operations or deferral of projects, should support a price recovery once signs of a sustained improvement in demand start to emerge.

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Anglo Base Metals production