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Ferrous Metals

Financial overview

Operating profit at Anglo Ferrous Metals reached a record $2,935 million, with operating profit from its core businesses increasing by 135% to $2,843 million, mainly due to higher iron ore sales volumes and higher iron ore, manganese ore and alloy prices.

$ million
(unless otherwise stated)
2008 2007
Operating profit 2,935 1,432
Kumba Iron Ore 1,618 834
Scaw Metals 274 172
Samancor Manganese 980 225
Anglo Ferrous Brazil (8) (9)
Other (21) (12)
Core businesses 2,843 1,210
Tongaat-Hulett/Hulamin 92 114
Highveld Steel 108
Other businesses 92 222
EBITDA 3,064 1,561
Net operating assets 11,167 3,987
Capital expenditure (including biological assets) 832 471
Share of Group operating profit 29% 15%
Share of Group net operating assets 34% 15%

Markets

World crude steel production decreased by 1.2% in 2008 to 1.33 billion tonnes. China’s steel production grew by 2.6%, with its share of global production rising to 37.8%. However, as a result of the decline in steel demand in the final quarter of 2008, demand for iron ore has decreased significantly, resulting in reduced production and delays to project capital spend from major iron ore producers.

Similarly, the manganese ore and alloy market was characterised by increasing stocks and falling prices towards the end of the year, as steel mills delayed or cancelled their purchases. As a result, major suppliers announced plans to reduce production in the fourth quarter of 2008. A return to production at full capacity will depend on improved global economic conditions.

Operating performance

Kumba Iron Ore achieved a strong financial and operational performance for the year, with operating profit increasing by 94% to $1,618 million, principally as a result of higher export prices, higher export sales volumes and increased revenue from shipping operations. These improvements were offset marginally by a 20% increase in net operating expenses, mainly due to the shipping operations, rising costs of fuels and lubricants and broad inflationary pressures. Production increased by 13% to 36.7 Mt, principally as a result of the Sishen jig plant (Sishen expansion), which achieved production of 4.7 Mt for the year.

Scaw Metals delivered a record operating profit of $274 million, with strong demand for most of its products. Margins remained under pressure owing to significant price increases in key raw materials and import competition but were able to successfully pass this on to its customers.

Anglo Ferrous Brazil comprises the Group’s effective 99.4% interest in the Minas-Rio iron ore project, effective 69.2% interest in the Amapá iron ore system and the 49% interest in LLX Minas-Rio.

The Amapá system in Brazil is at a pre-operational phase while ramping up to design capacity of 6.5 Mtpa. In 2008, the ramp-up of operations was significantly slower than previously envisaged, with annual production totalling 1.2 Mt. Anglo American, together with its partner at Amapá, Cliffs Natural Resources Inc., is studying all aspects of the mine and taking proactive steps to ensure that production is ramped up to design capacity.

Samancor Manganese delivered record results with operating profit of $980 million, more than four times its $225 million contribution in 2007, following a sharp increase in manganese ore and alloy prices for most of 2008.

The Tongaat-Hulett and Hulamin contribution to operating profit declined by 19% to $92 million. Following the unbundling of Hulamin from Tongaat-Hulett and related empowerment transactions in June 2007, these businesses, which were consolidated for the first six months of 2007, were equity accounted in the second half of 2007 and for the full 12 months of 2008.

Projects

Minas-Rio’s capital expenditure programme fell behind schedule during 2008, mainly due to the delay in obtaining several environmental licences and permits that prevented the initiation of works, particularly at the mine and beneficiation plant. The project also experienced delays in negotiations with groups of landowners, thereby slowing the progress on the pipeline, transmission line and the access roads to the port. However, a number of other key environmental licences were granted during the year, including the Installation Licences for the port and pipeline and the Preliminary Licences for the beneficiation plant and the mine.

The pace of construction at Minas-Rio is driven by the timing of the Environmental Licence and other permits, and therefore, there is expected to be a 12 to 15 month commissioning delay to the first phase of the Minas-Rio iron ore project, with first production now expected in the second quarter of 2012. Planned annual capacity will be 26.5 Mtpa of iron ore pellet feed at an anticipated cost of $3.6 billion, which is currently being updated following the announced delay.

Anglo American will continue to develop the Minas-Rio iron ore project during 2009, with planned capital expenditure for the year focusing on the port and pipeline units. The timing of the capital expenditure will be further adjusted in accordance with the granting of the Environmental Licence and other permits. The pre-feasibility study for the second phase of the Minas-Rio iron ore project was initiated during 2008, a phase which will further increase Anglo American’s long term iron ore production capacity.

Sishen’s jig plant commenced commercial production during the year, having been commissioned at the end of 2007. Ramp-up continues and full design capacity of 13 Mtpa is expected to be achieved in the fourth quarter of 2009.

The Sishen South project, which involves the development of an opencast mine some 80 kilometres south of Sishen mine, was approved in July 2008. Earthworks have commenced and bulk construction is scheduled to begin with the establishment of the major civil contracts during the first quarter of 2009. The mine is scheduled to start production in the first half of 2012, ramping up to full capacity of 9 Mtpa in 2013.

The $183 million GEMCO expansion project in Australia’s Northern Territory is expected to be completed in the first half of 2009. The project is on target to increase GEMCO’s manganese ore production capacity from 3.0 million dry metric tonnes per annum (mdmt pa) to 4.0 mdmt pa.

Outlook

The first half of 2009 is expected to be a challenging period for sales volumes of iron ore and manganese ore and alloys.

Kumba Iron Ore plans to increase iron ore production by approximately 10% during 2009 as the ramp-up of the jig plant continues. Kumba will continue to target customers in China in order to redirect any lower contract sales volumes in Europe or Japan. In the short term, minor production cutbacks may be appropriate to produce a higher quality product. More substantial production cutbacks are dependent on the scale of demand reductions from Europe and Japan and the extent to which these can be offset by demand from China.

Iron ore price negotiations are a key area of uncertainty in the volatile economic conditions, though Kumba’s high quality product range and the strength of its longstanding customer relationships are expected to enable the company to continue its successful performance. Iron ore market fundamentals remain robust in the medium to long term.

The market for manganese ore and alloys is dependent on the carbon steel industry and is, therefore, directly impacted by the current weak steel markets. Should global steel production decline further during 2009, manganese ore and alloy prices are expected to remain under pressure.

Demand for Scaw Metals’ products is expected to remain strong, driven by demand from the mining and infrastructure sectors. However, profitability is likely to remain under pressure from increasing input costs.

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Anglo Ferrous Metals iron ore production

World crude steel production

Operating profit