Copper

Financial highlights
US$ million (unless otherwise stated)
2010 2009
Operating profit 2,817 2,010
EBITDA 3,086 2,254
Net operating assets 6,291 4,763
Capital expenditure 1,530 1,123
Share of Group operating profit 29% 41%
Share of Group net operating assets 14% 12%
Copper being leached

Copper being leached in the tankhouse of the Los Bronces processing plant.

Group strategy actions

Investing – in world class assets in the most attractive commodities

Our Los Bronces expansion is on track to deliver first production in the final quarter of 2011, raising our total attributable copper output to over 900 ktpa by 2012, while substantial increases to our reserves and resources base have recently been announced.

Organising – efficiently and effectively

Our asset optimisation and procurement initiatives continued to deliver significant benefits during a year in which unit operating costs were impacted adversely by a range of climbing input costs and an appreciating Chilean currency.

Operating – safely, sustainably and responsibly

Our Chagres smelter excelled in the Chilean mine safety awards, taking second place in the prestigious John T. Ryan award for safety in the workplace.

Employing – the best people

The development of talent remains a priority and we are working closely with The People Development Way to recruit, retain and develop the skills needed to stay in the forefront of the world’s top copper businesses.

Business overview

We have interests in six copper operations in Chile. The wholly owned operations comprise the Los Bronces, El Soldado, Mantos Blancos and Mantoverde mines as well as the Chagres smelter; while we have a 44% interest in the Collahuasi mine (where the other shareholders are Xstrata with 44%, and a Mitsui consortium holding the balance of 12%). The mines also produce associated by-products such as molybdenum and silver. In addition, we have interests in two projects in Peru (a controlling interest in Quellaveco and Michiquillay) and a 50% interest in the Pebble project in Alaska.

Leading copper consumers

Operating profit
(2009: $2,010m)

$2,817m

share of group operating profit
(2009: 41%)

29%

EBITDA
(2009: $2,254m)

$3,086m

Industry overview

Copper’s principal use is in the wire and cable markets because of the metal’s electrical conductivity and corrosion resistance. Applications that make use of copper’s electrical conductivity, such as wire (including wiring used in buildings), cables and electrical connectors, make up around 60% of total demand. Copper’s corrosion-resistant qualities find numerous applications, particularly plumbing pipe and roof sheeting, in the construction industry, which accounts for a further 20% of demand. Copper’s thermal conductivity also makes it suitable for use in heat transfer applications such as air conditioning and refrigeration, which constitute some 10% of total demand. Other applications include structural and aesthetic uses.

Copper mining is an attractive industry, with moderate concentration of customers and suppliers, and relatively good average profitability over the long term. Producers are price takers; hence, opportunities for product differentiation are limited, either at the concentrate or metal level. Access to quality orebodies should continue to be the key factor distinguishing project returns and mine profitability.

With no fundamental technological shifts expected in the short to medium term, forecast long term demand is likely to be underpinned by robust growth in copper’s electrical uses, particularly wire and cable in construction, automobiles and electricity infrastructure. The key growth area will continue to be the developing world, led by China and, in the longer term, India, where industrialisation and urbanisation on a huge scale continue to propel copper demand growth, and where copper consumption per capita remains well below that of the advanced economies.

What has really distinguished copper in recent times – as reflected in its strong price performance – has been its underperformance on the supply side, which is supporting more robust fundamentals for the metal. Copper mine output has suffered disproportionately from a range of constraints on output, including a long term decline in ore grades, slow ramp-ups at new projects, strikes, technical failures and adverse weather.

Constraints on the supply side are likely to prove a structural feature of the market, driven by continuing declines in ore grades at maturing existing operations and new projects, a lack of capital investment and under-exploration in the industry, as well as political and environmental challenges in new copper areas. The industry is capital intensive and is likely to become more so as high grade surface deposits are exhausted and deeper and/or lower grade deposits are developed, requiring greater economies of scale in order to be commercially viable. Scarcity of water in some geographies, for example in Chile and Peru, is also enforcing the construction of capital- and energy-intensive desalination plants.

During the period 2000-2008, China increased its share of first-use refined metal consumption from 12% to an estimated 28%. The figure then leapt to 38% in 2009 as demand elsewhere fell sharply, while China’s consumption continued to increase strongly. Through 2010, prices trended higher as demand picked up, supply remained constrained, visible inventories continued to decline and the dollar weakened. Anticipation of physically backed copper Exchange Traded Funds (ETFs) is further fuelling the bullish consensus surrounding copper.

Strategy and growth

Our Los Bronces Development project is on track to deliver first production in the final quarter of 2011, raising our total attributable copper production to more than 900 ktpa by 2012. Additional growth in the short to medium term will come from the Quellaveco project in Peru, and from Collahuasi, where studies are in progress into further expansion following the nnouncement of a more than 40% increase in reserves and resources. We are continuing work on evaluating the development options for the resources acquired in 2007 at Michiquillay in Peru and Pebble in Alaska, with pre-feasibility studies under way in both projects in 2011.

In Chile, we are conducting extensive exploration around the two high quality copper prospects near Los Bronces at Los Sulfatos and San Enrique Monolito. Supplementing these, in October 2010, we announced a mineral resource estimate of 750 Mt for the West Wall project in Chile’s Valparaíso region, in which Anglo American and Xstrata Copper each have a 50% interest.

Financial overview

Copper generated an operating profit of $2,817 million, an increase of 40%, mainly due to record copper prices, coupled with higher molybdenum revenues related to both higher prices and sales. This was partly offset by higher unit costs driven by increased power costs and a strengthening in the peso, lower sales volumes reflecting lower production and shipping constraints following the failure of a shiploader at Patache port in December, and an increase in project evaluation expenditure in both Chile and Peru.

Markets

Average price 2010 2009
Average price
(LME cash, c/lb)
342 234
Average realised price
(c/lb)
355 269
Copper stocks and price

Copper prices increased significantly during 2010, particularly during the second half of the year, as demand picked up in the OECD countries and remained relatively robust in China, while supply continued to be constrained, visible inventories fell and the dollar weakened. The emergence of physically backed copper ETFs further fuelled the bullish consensus views.

The LME copper cash price ended 2010 at a (nominal) record of 442 c/lb, a 33% increase over the prior year closing price. The 2010 average price of 342 c/lb represented a 46% increase compared with the previous year. The average realised price for the year was 355 c/lb, 32% higher than for 2009. The lower percentage increase in the realised price versus the average price reflects the lower level of provisional price adjustments in 2010 compared with 2009.

Operating performance

Attributable production
(tonnes)
2010 2009
Copper 623,300 669,800

Total copper production of 623,300 tonnes was 7% lower than for the prior year, which with the exception of Collahuasi, was in line with expectations.

Los Bronces’ production of 221,400 tonnes was 7% lower than 2009’s record production, principally due to, as forecast, lower throughput as a result of harder ore and lower grades. The earthquake in February 2010 also had a small negative impact on production levels due to power outages and the need to realign a SAG mill. Recoveries were marginally higher than the prior year.

Collahuasi attributable production at 221,800 tonnes was 6% lower than the record level achieved in 2009. In addition to lower grades, production was also impacted by an illegal contractor strike in May, which had a negative impact of 5,000 tonnes, a 33-day strike in November during wage negotiations with employees which reduced production by a further 5,000 tonnes, and a number of smaller negative impacts on production relating to unscheduled outages in the concentrator plant. These were partly offset by targeted improvements and debottlenecking, which significantly improved throughput at the concentrator plant. In December 2010, a catastrophic failure occurred in the shiploader at Collahuasi’s Patache port. Collahuasi is currently implementing a contingency plan to ship copper out of alternative ports in Arica, Iquique and Antofagasta during the first quarter of 2011 whilst repairs are being carried out. The incident reduced Anglo American’s share of December sales by approximately 8,800 tonnes of copper but did not impact production.

Mantos Blancos’ production of 78,600 tonnes was 13% lower, principally due to there being no purchases of third party solutions (from which the prior year had benefited), expected lower grades and the impact of a conveyor failure in the first quarter. At El Soldado, production of 40,400 tonnes was 2% lower. The impact of mining lower grade ore and recovering low grade stockpiles was mostly offset by additional copper recovered from processing slag from the Chagres smelter. Production at both Mantoverde and the Chagres smelter were in line with 2009.

Higher power, labour, contractor, spares and fuel costs, coupled with a stronger peso and lower production levels, adversely impacted unit operating costs, although their impact was partly offset by higher by-product revenues, lower sulphuric acid prices and lower TC/RCs, in addition to benefits generated by asset optimisation and procurement initiatives.

Projects

The Los Bronces expansion project is on schedule for first production in the fourth quarter of 2011. Production at Los Bronces is scheduled to increase to 490 ktpa over the first three years of full production following project completion and to average 400 ktpa over the first 10 years. At peak production levels, Los Bronces is expected to be the fifth largest producing copper mine in the world, with highly attractive cash operating costs, and reserves and resources that support a mine life of over 30 years, with further expansion potential. Also within the Los Bronces district, work continues on the exploration tunnel being constructed. The tunnel will provide underground drilling access to explore and define the resources at the Los Sulfatos discovery.

At Collahuasi, the expansion project to increase sulphide processing capacity to 150,000 tonnes of ore per day is scheduled to be commissioned in the second half of 2011. In July 2010, Collahuasi announced the increase of its copper reserves and resources by 40%, or by more than 2 billion tonnes, to 7.1 billion tonnes at 0.82% copper. A concept study to evaluate the next phases of expansion at Collahuasi, to ultimately increase production to at least 1 Mt of copper per annum, is expected to be completed in the first quarter of 2011.

Studies continue at both Mantos Blancos and Mantoverde to evaluate further extensions to the lives of the operations. During 2010, the life of Mantos Blancos was extended by five years to 2020, and Mantoverde by two years to 2016.

In Peru, the feasibility study for the Quellaveco project is complete. It is the intention to submit the project for Board approval during 2011 once the necessary water permits have been awarded. Some early works activity is under way in order to maintain the project completion date of late 2014. Also in Peru, early-stage work continues at the Michiquillay project. The drilling relating to the geological exploration programme will restart once certain social agreement issues under discussion with the local communities have been resolved. It is currently envisaged that the project will move to the pre-feasibility stage once drilling analysis and orebody modelling have been satisfactorily completed.

Activity at the Pebble project in Alaska continued during 2010, with the focus on engineering work to advance towards a pre-feasibility study, further environmental study work towards completion of an environmental baseline document, and additional geological exploration drilling. The project’s pre-feasibility study is expected to be completed in 2012.

Outlook

Copper production is expected to increase during 2011, with the start-up of production from the expansion project at Los Bronces in the fourth quarter of 2011, together with improvements in plant throughput, and at El Soldado due to a significant grade improvement as the development phase of the open pit mine nears completion. A further step change in production will be seen in 2012, when the Los Bronces expansion project reaches full capacity, delivering the targeted economies of scale, driving unit costs down the industry cost curve and offsetting upward cost pressures expected to continue in 2011.

The short to medium term outlook for the copper price is robust, underpinned by healthy demand growth, in particular from China and other industrialising countries, and insufficient copper supply from existing mines and planned projects. Such conditions are expected to lead to a period of metal market deficits and dwindling inventories, exacerbated by the emergence of physically backed ETFs. Copper is also expected to benefit from continued investor interest in commodities as a new asset class. While some further price-induced substitution is expected to occur, this is not expected to be significant enough to undermine the other positives, certainly over the medium term.

John MacKenzie
CEO

John MacKenzie

Increase in reserves and resources announced at Collahuasi in 2010

>40%

Group attributable copper production by 2012

>900ktpa

Los Bronces expected mine life

>30 years