brics metals & mining conference “beyond the dreams of

2004 Interim ResultsAnglo American plc

BRICS Metals & Mining Conference

“Beyond the Dreams of Avarice”

12 November 2004

Anglo American plc2

• What impact will the industrialisation of Brazil, Russia, India, and China have on copper prices?

• What is Anglo American doing in response to these changes?

Anglo American plc3

Beyond the dreams of avarice ?

“There will be seasons when demand will follow so closely on the heals of supply that prices will go skywards, and the fool will say in his heart that the market must forever advance.

There will also be periods when the supply will far exceed demand, and the faint of heart will say that copper mining is overdone, and never more can be profitable.

But in aggregate, the great law of averages, immutable as the law of gravitation, will give to the world the copper for its imperative requirements, at prices not prohibitive to the consumer, yet sufficiently high to provide, for the well-managed mines, profits beyond the dreams of avarice.”

Anglo American plc4




But in aggregate, the great law of averages, immutable as the law of gravitation, will give to the world the copper for its imperative requirements, at prices not prohibitive to the consumer, yet sufficiently high to provide, for the well-managed mines, profits beyond the dreams of avarice.”Horace Stevens (The Copper Handbook, 1903)

Anglo American plc5

A Secular Change in Metal Prices?

0

50

100

150

200

250

300

350

400

450

500

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Copper Prices 1900 - 2004 (e)'Real' 2004 and Nominal c/lb

'Real'

Nominal

'Best Fit' 1971-2003minus 3.1%/yr

MSU - 21.9.04

c/lb

Anglo American plc6

Price forecasting: An exercise in futility?

60

70

80

90

100

110

120

130

2000 2001 2002 2003 2004 200560

70

80

90

100

110

120

130

c/lb c/lb

Mean, Max and Min of ~20 Forecasts of the Copper Price

made in January of the Previous YearCompared with the Outturn (c/lb)

-21.8c/lb-19.4c/lb

-3.1c/lb

+42.4c/lb

eg, Forecast for 2001(made in Jan 2000) mean

max

min

Source: Reuters, FT (MSU - 4.10.04)

Anglo American plc7

1945-1970: Increasing real metal prices

0

50

100

150

200

250

300

350

400

450

500

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000


'Real'

Nominal


MSU - 4.10.04

c/lb

'Best Fit' 1945-1970plus 1.8%/yr

• High MEC industrial production growth rates• Industrialisation of Japan and rebuilding of Europe• Accommodative monetary and fiscal policies• Commodities as inflation hedge

Anglo American plc8

1970-2003: Decreasing real metal prices

0

50

100

150

200

250

300

350

400

450

500

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000


'Real'

Nominal


MSU - 4.10.04

c/lb

'Best Fit' 1945-1970plus 1.8%/yr

• Reduction in MEC growth rates• Reduction in structural sources of demand from Europe and Japan• Central banks fight inflation• Price induced over-investment in mining industry• Industry-wide cost reductions

Anglo American plc9

Secular upturn: Demand-side arguments

• Industrialisation of China (and Russia, India, Brazil)

• Synchronised growth in OECD

• Reflationary bias of Central Banks

• Commodities as a hedge against US dollar

Structural or cyclical?

Anglo American plc10

What changed: China or OECD?

-1000

-800

-600

-400

-200

0

200

400

600

1999 2000 2001 2002 2003 2004

Cha

nge

in A

nnua

l Ref

ined

Cop

per

Con

sum

ptio

n (k

t)

40

60

80

100

120

140

'Nom

inal

' LM

E C

oppe

r Pr

ice

(c/lb

)

Contributions to Global Refined Copper Consumption, 1999-2004 (kt)

OECD and Chinaand Copper Price (c/lb)

MSU - 18.10.04/OECD+China Growth

OECD

China


Major demand-side uncertainties

• China: Hard or soft landing ?

• OECD: – US deficits– Oil price– “Wealth effect” of asset price decreases– US dollar weakness/higher interest rates– Geopolitical events/terrorism


Secular upturn: Supply-side arguments

• Improved capital discipline and concentration in mining industry

• Exploration expenditure cuts

• Trend increase in costs as grades decline and mines deplete


Supply-side response: Mine production

12

12.5

13

13.5

14

14.5

15

15.5

16

16.5

2000 2001 2002 2003 2004 2005

mill

ion

tonn

es

Cutbacks & ClosuresMine Production

Global Mine Production, 2000 to 2005 (est)million tonnes

MSU - 22.10.04/Mine Production


Supply-side response:Treatment charges

40

50

60

70

80

90

100

110

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

'Ter

m' T

reat

men

t Cha

rges

- $/

tonn

e Long-term TC of $85 per tonne

Copper 'Term' TCs

MSU - 21.10.04/TCs


Is the cycle dead ?

• Demand correlated to Industrial Production• Inventory build-up during upturn/destocking during downturn• Long lead times: New supply decisions made in anticipation of, not in

response to, demand growth• Industry fragmented: Competitor behaviour hard to forecast• New mines lower grade and/or underground and/or remote: Need

economies of scale to be viable, so supply side changes are “lumpier”• Incentive to increase production to reduce unit costs even during times

of oversupply and low prices• Single asset companies cannot afford to reduce production;“free-riders”

deter others• Mothballing expensive• High barriers to exit


Downturn

Commence greenfield projectsAssess acquisitionsIncrease capex

Bottom of cycle

Make acquisitionsCommission projectsCommence de-bottlenecking projectsPeak capex – ‘borrow’

Upturn and peak

Sell non core assetsRamp up projects to full productionReduce long lead time capex – ‘repay’

Investing over the cycle: Ideal profile

Time

US$ Capex

Metal price

Free cashflow

Downturn Bottom Upturn and peak


Investing over the cycle: Actual profile

0

500

1,000

1,500

2,000

2,500

3,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Pro

ceed

s A

mo

un

t (U

S$

mm

)

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

Co

pp

er P

rice

(U

S$

/ t)

Base Metals Equity Issuance

Copper Pr ice (Smoothed)

Source: CIBC World Markets


Investing over the cycle: Actual profile

0

1000

2000

3000

4000

5000

6000

7000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

$US

mill

ion

40

50

60

70

80

90

100

110

120

130

140Copper Mine Projects and

Debt FinancingCopperPrice

Capex on MajorCopper Mine

Projects

Project Finance

Nom

inal

LM

E P

rice

-c/

lb

Source: Anglo Base Metals


A secular change in metal prices?

• A secular change is possible, but appears to be a low probability outcome

• More probable outcome is that structural increase in demand arising as a result of the industrialisation of BRIC will moderate the trend reduction in real metal prices

• Current prices reflect a strong cyclical upturn that may be expected to last until the supply-side response comes through (subject to no major demand shocks)

• Will industry capital discipline be maintained?


How is Anglo American responding?

• Maintain focus on cost reduction and operating efficiencies

• Prudently grow production to meet demand

• Maintain capital discipline


Maintain cost discipline

• Cost reduction and efficiency improvements: Base AngloMetals Group

2002 $14m $279m2003 $48m $335m2004 (H1) $39m $248m

• But significant upward pressure on costs:– TC/RCs– Energy– Steel– Acid– Labour


Project pipeline: Collahuasi Rosario project

Production*

Throughput increased from 69ktpd to 110ktpd. Maintains production at over 400,000tpa Cu

Capital cost*

US$654m

StatusCommissioned

* 100% basis. Anglo has 44% interest.


Project pipeline: El Soldado pit expansion

ProductionLife extended to over 20 years. Production maintained at 63,000tpa

Capital costUS$80m

StatusIn progress


Project pipeline: Chagres expansion

ProductionCapacity increased from 162,000 tpa to 184,000 tpa

Capital costUS$22m

StatusApproved.Commissioning Q1 2005


Project pipeline: Los Bronces expansion

ProductionDoubling of throughput to 130,000tpd. Additional ~200ktpa Cu

Capital cost~US$800m

StatusConceptual study underway


Project pipeline: Collahuasi expansion II

Production*

Increase production to 600,000tpa ?

StatusConceptual study

* 100% basis. Anglo has 44% interest.


Project pipeline: Quellaveco project

Production200,000tpa Cu in concentrate

Capital cost~US$850m

StatusFeasibility study completed. On hold





But in aggregate, the great law of averages, immutable as the law of gravitation, will give to the world the copper for its imperative requirements, at prices not prohibitive to the consumer, yet sufficiently high to provide, for the well-managed mines, profits beyond the dreams of avarice.”Horace Stevens (The Copper Handbook, 1903)

2004 Interim ResultsAnglo American plc

BRICS Metals & Mining Conference

“Beyond the Dreams of Avarice”

12 November 2004

brics metals & mining conference “beyond the dreams of

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