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Coal

Coal stockpile at Mafube colliery, which Anglo Coal South Africa holds 50:50 with a black economic empowerment consortium. During 2008, Mafube produced 5.4 million tonnes of
coal for the domestic and export market

Financial overview

Anglo Coal delivered a record operating profit of $2,240 million, a 265% increase over 2007, with coal production totalling 99.5 Mt. This resulted from higher metallurgical and thermal coal prices, combined with increased coal production for the year, weaker exchange rates and the early benefits of tighter operational discipline across the businesses, partially offset by further rises in the cost of royalties, fuel, rail, labour and most key consumables.

$ million
(unless otherwise stated)
2008 2007
Operating profit 2,240 614
South Africa 736 414
Australia 1,144 9
South America 396 227
Canada 8
Projects and corporate (44) (36)
EBITDA 2,585 882
Net operating assets 3,962 3,984
Capital expenditure 933 1,052
Share of Group operating profit 22% 6%
Share of Group net operating assets 12% 15%

Markets

2008 began with a very tight international metallurgical coal market, with supply falling into deficit as a result of bad weather in Queensland which had the effect of reducing coal production and shipping volumes during the first quarter. These events resulted in 2008 coal prices being settled at historically high levels. By the end of the year, however, market conditions had deteriorated significantly, with a collapse in global steel production leaving the metallurgical coal market oversupplied.

Demand for thermal coal remained strong in 2008, with increased consumption, particularly in the north Asia region. Prices continued to increase during the first half of the year, reaching a peak in early July, driven by the cold winter in China, together with numerous coal production and logistics difficulties, including electricity shortages in South Africa. The increase in crude oil and natural gas prices during the same period allowed thermal coal to maintain its price competitiveness against these fuels despite the significant coal price increases. In the last quarter of the year, the global economic downturn caused a sharp drop in oil prices and thermal coal prices declined in line.

Operating performance

South Africa

Operating profit from South African sourced coal was 78% higher at $736 million, mainly due to the increase in export thermal prices and a weaker exchange rate. During January 2008, South African operations were affected by Eskom load shedding, which evolved into a national electricity crisis. Despite this, annual production remained constant at 59.4 Mt, driven mainly by operational efficiency and equipment improvements, higher output at Kleinkopje, where additional coal for Eskom was produced in order to alleviate the power crisis, as well as at Mafube, which ramped up production.

Australia

Operating profit from Australia was a record $1,144 million, largely resulting from the significant increase in metallurgical coal prices and production, partly offset by cost and royalty increases. Production reached record levels of 27.8 Mt despite the delays caused by abnormal levels of rainfall in the first quarter. Such production was achieved through implementing higher cost volume initiatives to take advantage of market conditions and the successful negotiation of alternative port and rail corridors in order to alleviate expansion constraints.

South America

Operating profit from South America was 74% higher than 2007 at $396 million, driven primarily by 33.3% held Cerrejón in Colombia. Cerrejón’s significantly increased operating profit was offset by higher fuel prices, the appreciation of the Colombian peso and an increase in royalties arising from higher realised sales prices. The mine’s total sales were 6% higher at 31.5 Mt as growth continued as planned towards the 32 Mtpa profile. In Venezuela, total sales at Carbones del Guasare were sharply lower at 4.6 Mt following a lack of availability of equipment, spares and ongoing political, logistical and labour disruptions.

Canada

Peace River Coal commenced commercial production of high quality coking coal in January 2008 at its Trend mine in British Columbia, delivering $8 million of operating profit in 2008. Total coal production for the year was 0.8 Mt.

Projects

In South Africa, the $473 million Zondagsfontein project is under construction and includes a 50:50 joint venture plant with BHP Billiton Energy Coal South Africa. The project is on track to deliver 6.6 Mtpa of export and Eskom coal from 2010, with first production expected in the second quarter of 2009. The Mafube project achieved the production rate of 5.4 Mtpa in 2008. Work continues on the housing project and the conveyor system with completion expected in early 2009. MacWest is nearly complete, with first production achieved in July 2008 and full production of 2.7 Mtpa expected in March 2009.

In Australia, the $726 million Lake Lindsay coking coal project is progressing well; the coal handling and preparation plant has been commissioned, having achieved milestones on or ahead of plan, while the dragline started operations in January 2009. The $839 million Dawson expansion project was completed in 2008. The Foxleigh mine was acquired in February 2008, delivering additional volumes and synergies with Anglo American’s adjacent operations.

In Canada, Peace River Coal is making good progress on a $95 million capitalisation programme to acquire and operate its own mining equipment fleet.

In Colombia, the $42 million (attributable) expansion at Cerrejón to 32 Mtpa is complete and full production is expected to be achieved early in 2009. Feasibility studies are under review to expand the operation to around 40 Mtpa.

Outlook

Global economic weakness has led to a rapid decline in global steel production following falling demand from the construction and automotive sectors in particular. This continues to have a significant impact on the metallurgical coal market. In the thermal coal market, underlying demand remains relatively strong, although the decline in the oil price is having a significant impact.

The outlook for 2009 for both metallurgical and thermal coal remains uncertain in a testing macro-economic environment where global energy prices are expected to be highly volatile.

In response to weakening markets, Anglo Coal’s plans to grow metallurgical coal production by 10% during 2009 were curtailed and output is expected to be marginally below 2008 levels. Should conditions change materially, Anglo Coal will respond with further adjustments to its metallurgical coal production.

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Anglo Coal production