Iron ore and manganese

Financial highlights
US$ million (unless otherwise stated)
2010 2009
Operating profit 3,681 1,489
Kumba Iron Ore 3,396 1,487
Iron Ore Brazil (97) (141)
Samancor 382 143
EBITDA 3,856 1,593
Net operating assets 11,701 10,370
Capital expenditure 1,195 1,140
Share of Group operating profit 38% 30%
Share of Group net operating assets 27% 27%
Inspecting the conveyor belt at the Kolomela Mine

Inspecting the conveyor belt that runs from the primary crusher to the scalping screen at the Kolomela Mine under development.

Group strategy actions

Investing – in world class assets in the most attractive commodities

Our Minas-Rio project, based on a Tier One resource, is expected to be a substantial cash generator and significantly enhance Anglo American’s position in the lucrative global seaborne iron ore market.

Organising – efficiently and effectively

In both the iron ore and manganese businesses, considerable progress is being made in capturing further value across the value chain by tailoring niche products for customers.

Operating – safely, sustainably and responsibly

The communities where Kumba Iron Ore operates now own an unencumbered 3% in the business, valued at c. $750 million, after redeeming the acquisition funding in full in 2010. This milestone is a meaningful step in realising empowerment in South Africa.

Employing – the best people

Minas-Rio is very proud of its substantially Brazilian workforce, which continues to attract some of the best talent in the country’s mining industry.

Business overview

Our Iron Ore portfolio principally comprises a 65.25% shareholding in Kumba Iron Ore Limited (Kumba), a leading supplier of seaborne iron ore, and Iron Ore Brazil’s 100% interest in Anglo Ferrous Minas-Rio, a 49% shareholding in LLX Minas-Rio, which owns the port of Açu (currently under construction) from which iron ore from the Minas-Rio project will be exported (together, the Minas-Rio project), and a 70% interest in the Amapá iron ore system.

Kumba, listed on the Johannesburg Stock Exchange, produces a leading quality lump ore and is the only haematite iron ore producer that beneficiates 100% of its product. Export ore is transported via the Sishen-Saldanha Iron Ore Export Channel (IOEC) to Saldanha Port. The rail and port operations are owned and operated by the South African ‘parastatal’ Transnet. Kumba is well positioned to supply the high growth Asia-Pacific and Middle East markets and is also geographically well positioned to supply European steel markets in the light of an expected decline in lump ore supplies from other sources.

Kumba operates two mines – Sishen Mine in the Northern Cape, which produced 41.3 million tonnes (Mt) of iron ore in 2010, and Thabazimbi Mine in Limpopo, with an output of 2.1 Mt. Its third mine, Kolomela (previously Sishen South), that will produce 9 Mtpa, is under development in the Northern Cape. In 2010, Kumba exported more than 80% of its total iron ore sales volumes of 43.2 Mt, with 61% of these exports destined for China and the remainder to Europe, Japan, South Korea and the Middle East.

Our Minas-Rio iron ore project is located in the states of Minas Gerais and Rio de Janeiro and will include open pit mines and a beneficiation plant in Minas Gerais producing high grade pellet feed. On completion of phase 1, ore will be transported through a slurry pipeline more than 500 kilometres to the port of Açu in Rio de Janeiro state. Amapá, in Amapá state in northern Brazil, continues to ramp up its pellet feed and sinter feed production, which reached 4.0 Mt in 2010 and is expected to produce 4.5 Mt in 2011.

Our Manganese interests consist of a 40% shareholding in Samancor Holdings, which owns Hotazel Manganese Mines and Metalloys, both in South Africa, and a 40% shareholding in each of the Australian-based operations Groote Eylandt Mining Company (GEMCO) and Tasmanian Electro Metallurgical Company (TEMCO), with BHP Billiton owning 60% and having management control. Samancor is the world’s largest producer of seaborne manganese ore and is among the top three global producers of manganese alloy. Its operations produce a combination of ores, alloys and metal from sites in South Africa and Australia.

Seaborne iron ore demand by country

Operating profit
(2009: $1,489m)

$3,681m

share of group operating profit
(2009: 30%)

38%

EBITDA
(2009: $1,593m)

$3,856m

Industry overview

Steel is the most widely used of all metals. In 2010, global crude steel production returned to above pre-2008 levels, at 1.4 billion tonnes, an increase of 17% on 2009. China, the world’s principal steelmaker, showed year on year growth in crude steel production, despite its government initiated cooling down, power restrictions and destocking through the supply chain. Chinese crude steel production for 2010 was 626 Mt, an increase of 52 Mt or 9% year on year.

A strong recovery in iron ore demand and an apparent collapse in Chinese domestic iron ore supply were the main reasons for the strong growth in 2009 in seaborne imports. In 2010, however, Chinese domestic iron ore supply accounted for 285 Mt of apparent iron ore consumption, a 34% increase year on year. With iron ore consumption by China only increasing 9% year on year to 888 Mt, this resulted in a decrease of 2% in seaborne imports to 603 Mt compared with 2009.

Crude steel production in China is expected to grow by 5% to 10% during 2011. Domestic iron ore production in China is unlikely to grow significantly beyond the 2010 level of 285 Mt, mainly due to diminishing qualities and increasing mining costs. The additional demand for iron ore in China during 2011 is expected to be sourced from seaborne supply, with the demand levels in the rest of the world remaining at 2010 levels.

Both manganese ore and alloy prices firmed owing to improving market conditions in the year, boosted by restocking steelmakers. In 2011, the prices of both manganese ore and alloy will be heavily influenced by steel production trends and the stocking and destocking cycles, while, in the case of manganese alloys, prices will largely be determined by supply responses resulting from latent capacity in the industry.

Strategy and growth

A core strategy is to grow our position in iron ore and to supply premium, high quality iron ore products against a background of declining quality global iron ore supplies. Anglo American has a unique iron ore resource profile, with large, high quality resource bases in South Africa and Brazil. Significant future growth will come from Minas-Rio (including expansion potential) and expansion at Kolomela.

Kumba’s business strategy is to be a leading value adding iron ore supplier to the global steel industry. The business is focused on optimising the value of current operations by successfully executing its asset optimisation initiatives and the optimisation of its product portfolio. Kumba seeks to capture further value across the value chain through its niche product strategy and the professionalising of its ocean freight management. Minas-Rio will capture a significant part of the high growth pellet feed market with its premium product featuring high iron content and low impurities.

Phase 1 of the Minas-Rio project will produce 26.5 Mtpa, with first production scheduled after completion and commissioning of the project, which is anticipated 27-30 months after commencement of civil works for the beneficiation plant and tailings dam construction. Further expansion potential is supported by the 2010 resource estimate of 5.3 billion tonnes (Measured, Indicated and Inferred), and further resource potential is considered to exist. While focus has been on phase 1 construction, studies for the expansion of the project, including consideration of the optimal production profile, have continued to be evaluated during the year.

Kolomela is expected to produce 9 Mtpa of iron ore, with initial production scheduled for the end of the first half of 2012 and ramping up to full capacity in 2013. Further growth projects in the Northern Cape and Limpopo regions of South Africa could potentially increase Kumba’s production output to 70 Mtpa.

The manganese strategy is to focus on upstream resources businesses, despite their low-cost alloy smelters having been significant contributors to profit in recent years. In addition, alloy smelters add value to the overall manganese business as they enable Samancor to access markets with an optimal mix of ore and alloy, to optimise production to best suit market conditions and provide ongoing information on the performance of their ores in the smelting process.

Financial overview

Iron Ore and Manganese generated an operating profit of $3,681 million, 147% higher than 2009. This was as a result of higher iron ore export prices and sales volumes, as well as higher manganese ore and alloy volumes and prices.

Markets

World crude steel production continued to increase during 2010 and returned to above pre-2008 levels at 1.4 billion tonnes. China’s continued robust economic growth contributed to growth in crude steel production, despite power restrictions and destocking through the supply chain. Crude steel production in China increased by 9% to 626 Mt and continued to exceed demand. The European, Japanese and South Korean markets saw a 24% increase in crude steel output, bringing total production to 341 Mt, only slightly below levels achieved in 2008. Despite the continued strength in iron ore demand in China, a surge in Chinese domestic iron ore supply during 2010 resulted in a decrease of 2% to 603 Mt in seaborne imports. Global seaborne iron ore demand increased by 5% to 979 Mt, driven by a 19% increase in demand from the steel industry in the rest of the world.

Index prices rose strongly during the year, with the 62% Fe Platts index averaging approximately $147/t (CFR), up from $80/t in 2009.

The manganese ore and alloy market reflected the increase in world crude steel production and demand, resulting in significantly increased prices for alloy and ore during the year. Production increased to meet demand, with furnaces reaching full capacity for the first time since 2008.

Operating performance

Kumba Iron Ore

Kumba generated an operating profit of $3.4 billion, more than double the $1.5 billion for 2009, largely attributable to a 92% weighted average increase of realised iron ore export prices and a 6% increase in export sales volumes. This was partly offset by the 15% strengthening of the rand against the dollar and the implementation of the South African mining royalty, effective from 1 March 2010.

Total sales volumes increased by 8% to 43.1 Mt. Export sales volumes from Sishen Mine for the year increased by 1.9 Mt or 6% to 36.1 Mt. Export sales volumes to China of 19.8 Mt represented 61% of total export volumes for the year, compared with 75% during 2009. Export sales volumes to Europe, Japan and South Korea increased by 54% to 13.9 Mt. Total domestic sales volumes for the year increased by 21% to 7.0 Mt due to higher demand from ArcelorMittal South Africa.

Volumes railed on the Sishen-Saldanha IOEC increased by 5% to 36.5 Mt. This performance was adversely impacted by industrial action at Transnet and significant derailments during the second and third quarters of 2010, before returning to a more solid performance in the fourth quarter.

Total tonnes mined at Sishen Mine increased by 19% to 153.2 Mt, of which waste material mined comprised 67% or 102.0 Mt, an increase of 24%. Total production at Sishen Mine increased by 5% to 41.3 Mt. The jig plant achieved 13.3 Mt of production for the year, 0.3 Mt above the nameplate capacity of the plant, through improved quality of plant feed material and more efficient shutdown intervals. Production from the dense media separation (DMS) plant decreased by 3% to 28.1 Mt due to the failure of single-line equipment and less feedstock from the pit.

Sishen Mine’s unit cash cost of R113.69 ($15.83) per tonne increased by 15% compared with R98.83 ($11.78) per tonne in 2009. This expected increase was driven by a 24% increase in waste mining volume and above inflation increases in the key input costs of labour, diesel and electricity.

Iron Ore Brazil

Iron Ore Brazil generated an operating loss of $97 million, reflecting the pre-operational stage of the Minas-Rio project, partially offset by operating profit at Amapá following a substantial production improvement, a focus on cost containment and the price environment, partially offset by an adverse change in product mix and plant availability issues experienced in the early part of the year. Amapá produced 4.0 million tonnes of iron ore, a 52% increase. The production and cost profile at Amapá remains in line with the study conducted at the end of 2009 and production is forecast to increase further in 2011 and 2012.

Samancor

Samancor generated an operating profit of $382 million, a 167% increase, due to higher sales volumes and prices following the improvement in global steel demand.

Projects

The development of the 9 Mtpa Kolomela Mine is well advanced and overall project progress reached 81% as at 31 December 2010. The project remains on budget and on schedule to deliver initial production at the end of the first half of 2012, ramping up to full capacity in 2013. To date, 22.6 Mt of waste material has been moved, 18.6 Mt of it during 2010. Capital expenditure of $679 million (excluding capitalised costs for pre-strip waste removal) has been incurred to date, with $307 million incurred during 2010.

Significant progress has been made at the Minas-Rio project in Brazil, expected to produce 26.5 Mtpa in its first phase. The award of the second part of the mine, beneficiation plant and tailings dam installation licence (LI part 2) in December 2010, being the final primary installation licence, supports the start of the civil works for the beneficiation plant and tailings dam construction in March 2011, after the rainy season. This licence followed the award of the mining permit in August 2010. As previously stated, it should take between 27 and 30 months from commencement of these works to construct and commission the mine and plant, complete the project and deliver the first ore on ship; however, there are still a number of other licences and permits to be obtained during this period.

Anglo American also reached agreement on a fixed 25-year iron ore port tariff with its port partner, LLX SA, in relation to the LLX Minas-Rio (LLX MR) iron ore port facility at Açu. The iron ore volumes associated with the first phase of the project will be subject to a net port tariff of approximately $5.15 per tonne (in 2013 terms) after taking into account Anglo American’s shareholding in LLX MR ($7.10 per tonne gross). As part of the agreement to secure the long term tariff arrangements, Anglo American has agreed to fund a greater share of the development cost of the first phase of the port. This agreement is expected to result in additional capital expenditure attributable to Anglo American of approximately $525 million in relation to the port.

Project development at the plant has been focused on progressing earthworks in preparation for the commencement of civil works. The pipeline element of the project is well progressed, with pipe laying, welding and burying beginning in June and ended the year ahead of schedule, including the completion of two underground river crossings (one of which is the longest of its type in Brazil). The civil works for the filtration plant are under way and, at the port, offshore works have continued with the commencement of the construction of the iron ore pier and breakwater, following completion of the 2.9 km main trestle.

Studies for the expansion of the Minas-Rio project continued during 2010 and the latest resource statement provides a total resource volume (Measured, Indicated and Inferred) of 5.3 billion tonnes, supporting the expansion of the project. In addition, the port agreement noted above also covers a long term tariff arrangement for all Anglo American’s iron ore volumes beyond the first phase of the Minas-Rio project. The level of the expansion tariff will be dependent upon the capital cost to expand the port to accommodate those additional volumes and that capital cost will be determined in due course.

Outlook

Analyst forecasts indicate that global crude steel production is expected to grow by 5-10% in 2011. The rate of growth in crude steel production in China is anticipated to decrease as the Chinese government seeks further improvements in overall energy efficiency for the next five-year plan. However, with anticipated shortfalls in seaborne iron ore supply, in particular from India, the overall global seaborne iron ore market is expected to remain structurally tight.

Kumba’s export sales volumes are anticipated to be in line with volumes achieved during 2010. Domestic sales volumes remain dependent on the offtake requirements from ArcelorMittal. Waste mining at all the operational sites is anticipated to increase, which will put upward pressure on unit cash costs of production. Annual production volumes during 2011 are expected to remain at levels achieved during 2010 as the jig plant has reached its nameplate capacity.

Kumba’s operating profit remains highly sensitive to the rand/US dollar exchange rate.

The market for manganese ore and alloys is dependent upon the carbon steel industry. Increased demand and prices will be underpinned by strengthening steel production trends and the level of Chinese exports.

Kumba Iron Ore update

Kumba’s Sishen Iron Ore Company (SIOC) notified ArcelorMittal South Africa Limited (ArcelorMittal) on 5 February 2010, that it was no longer entitled to receive 6.25 Mtpa of iron ore contract mined by SIOC at cost plus 3% from Sishen Mine, as a result of the fact that ArcelorMittal had failed to convert its old order mining right. This contract mining agreement, concluded in 2001, was premised on ArcelorMittal owning an undivided 21.4% interest in the mineral rights of Sishen Mine. As a result of ArcelorMittal’s failure to convert its old order mining right, the contract mining agreement automatically lapsed and became inoperative in its entirety as of 1 May 2009.

As a result, a dispute arose between SIOC and ArcelorMittal, which SIOC has referred to arbitration. SIOC and ArcelorMittal reached an interim pricing arrangement in respect of the supply of iron ore to ArcelorMittal from the Sishen Mine. This arrangement will endure until 31 July 2011. Both parties have exchanged their respective pleadings, and the arbitration panel has been appointed.

After ArcelorMittal failed to convert its old order mining right, SIOC applied for the residual 21.4% mining right previously held by ArcelorMittal and its application was accepted by the Department of Mineral Resources (DMR) on 4 May 2009. A competing application for a prospecting right over the same area was also accepted by the DMR. SIOC objected to this acceptance. Notwithstanding this objection, a prospecting right over the 21.4% interest was granted by the DMR to Imperial Crown Trading 289 (Proprietary) Limited (ICT). SIOC initiated a review application in the North Gauteng High Court on 21 May 2010 in relation to the decision of the DMR to grant a prospecting right to ICT.

SIOC initiated an application on 14 December 2010 to interdict ICT from applying for a mining right in respect of the Sishen Mine and the DMR from accepting an application from ICT, nor granting such 21.4% mining right to ICT pending the final determination of the review application. This application is currently pending.

The DMR informed SIOC on 12 January 2011 that ICT had applied for a 21.4% mining right over Sishen Mine on 9 December 2010, and that the DMR had accepted this application on 23 December 2010. The DMR’s acceptance of the application means that the mining right application will now be evaluated according to the detailed process stipulated in the Mineral Resources & Petroleum Development Act 2004 before a decision is made as to whether or not to grant the mining right.

SIOC does not believe that it was lawful for the DMR to have accepted ICT’s application, pending the High Court Review initiated in May 2010, and has formally objected to, and appealed against, the DMR’s acceptance of ICT’s mining right application. SIOC has also requested that its interdict application be determined on an expedited basis, in order to prevent the DMR from considering ICT’s mining right application until the finalisation of the review proceedings. In addition, SIOC is in the process of preparing a challenge against the DMR’s decision of 25 January 2011 to reject SIOC’s May 2009 application to be granted the residual 21.4% mining right. Finally, on 26 January 2011, SIOC lodged a new application for the residual 21.4% mining right.

On 4 February 2011, SIOC made an application to join ArcelorMittal as a respondent in the review proceedings.

SIOC will continue to take the necessary steps to protect its shareholders’ interests in this regard.

Price of iron ore (2009 to 2010)

Chris Griffith
CEO Kumba Iron Ore

Chris Griffith

Stephan Weber
CEO Iron Ore Brazil

Stephan Weber

Minas-Rio's resource estimate

5.3 bn tonnes

2010 Group iron ore output

47.4 Mt

Minas-Rio phase 1 planned iron ore production

26.5 Mtpa