Nickel

Financial highlights
US$ million (unless otherwise stated)
2010 2009
Operating profit 96 2
EBITDA 122 28
Net operating assets 2,334 1,787
Capital expenditure 525 554
Share of Group operating profit 1% 0.04%
Share of Group net operating assets 5% 5%
Administrative assistant Jose Carlos de Lima

Administrative assistant Jose Carlos de Lima checks nickel inventories at Codemin’s warehouse in Brazil.

Group strategy actions

Investing – in world class assets in the most attractive commodities

Barro Alto will more than double our Nickel business’ production, at a highly competitive cost; beyond that, our Jacaré and Morro Sem BonÉ projects have the potential to make Anglo American a significant and growing player in the global nickel market.

Organising – efficiently and effectively

Our recent reorganisation has brought increased efficiencies through a more streamlined reporting structure with greater management responsibilities at the business unit and operation levels.

Operating – safely, sustainably and responsibly

Nickel had an improved year on year safety performance in 2010, with an LTIFR of 0.07 versus 0.14 in 2009. At Barro Alto, Nickel has worked closely with government and NGOs in the area of enterprise development to build lasting capacity for self-sustainability in surrounding communities.

Employing – the best people

Nickel is committed to developing a local workforce and more than 75% of Barro Alto’s operational team has been recruited from the communities around the project.

Business overview

Nickel has two operating assets, Codemin in Brazil and Loma de Níquel in Venezuela, both producing ferronickel, as well as the world class Barro Alto project in Brazil, which is expected to enter production in early 2011 and will more than double the business unit’s production, adding an average of 36 kt of nickel per year. Within the business unit’s portfolio there are also two promising unapproved projects, Jacaré and Morro Sem Boné, both in Brazil, and early-stage exploration projects in Finland, Canada and Australia.

Leading nickel consumers

Operating profit
(2009: $2m)

$96m

share of group operating profit
(2009: 0.04%)

1%

EBITDA
(2009: $28m)

$122m

Industry overview

Nickel can occur as two main deposits: sulphides that are found underground and laterites that can be mined by open pit methods. Sulphides contain a significant number of by-products such as gold, silver, copper and PGMs, which typically generate processing credits.

Nickel’s main use is as an alloying metal, along with chromium and other metals, in the production of stainless and heat resistant steel. Approximately 66% of nickel is used to manufacture stainless steel and around 25% in other steel and non-ferrous alloys. Primary nickel is used in the form of pure nickel metal, ferronickel, nickel oxide and other chemicals. The steel industry is also supplied by recycled nickel and, in a more recent development, by nickel pig iron (NPI) in China. However, NPI production, which is a highly energy intensive process, decreased in 2010 due to the initiatives implemented by the Chinese government in order to save energy.

The industry is highly cyclical. World stainless steel production increased by nearly 21% in 2010, albeit from a very low base, its strongest growth since 1995. Nickel consumption has risen from about 1.12 Mt in 2000 to about 1.48 Mt in 2010, a compound average growth rate of 2.8% per annum, reflecting an increase in the pace of industrialisation and urbanisation programmes in developing nations.

The nickel market experienced its best year in recent years in 2007 when the average price was $16.86/lb compared with $11.02/lb in 2006 and $6.68/lb in 2005. It has subsequently fallen back and ended 2010 at $11.32/lb.

Strategy and growth

Nickel aims to become a major low cost producer by managing efficiently its existing assets, extracting value with asset optimisation initiatives. In the mid- to long term the business unit will grow organically, maximising value from greenfield projects and looking for brownfield opportunities.

The business evaluates inorganic growth options and acquisitions as well as technology development through Anglo American’s ARNi (Anglo Research Nickel) section. ARNi is developing a hydrometallurgical process, which could provide the business with a strong competitive advantage.

Significant future growth will come from the Barro Alto project, which began its ramp-up in early 2011, and will make Anglo American a growing player in the nickel market and one that is well positioned on the lower half of the industry cost curve.

Financial overview

Nickel generated an operating profit of $96 million, following a year of much improved nickel prices. Nickel’s operating profit was net of $11 million of costs relating to development of the unapproved project pipeline, a $10 million increase compared with 2009.

Markets

Average nickel price (c/lb) 2010 2009
Average market price
(LME, cash)
989 667
Average realised price 986 668
Nickel stocks and price

The average nickel price was 48% higher than in 2009, underpinned by strong stainless steel demand. Global nickel consumption increased by 12% to 1.48 Mt in 2010, while supply remained constrained owing to strike action and delays to new projects experienced by a number of producers.

From a low of $7.73/lb during February 2010, prices rose sharply to a high for the year of $12.52/lb in April as a result of improved underlying fundamentals and stainless steel restocking. Prices retreated to $8.14/lb in June amid concerns over the impact of the European debt crises, but rebounded during the fourth quarter, ending the year at $11.32/lb.

LME stocks decreased by 18% from a high of 166,000 tonnes at the beginning of February to 136,000 tonnes at the end of December, indicative of underlying physical demand for nickel.

Operating performance

Attributable production
(tonnes)
2010 2009
Nickel 20,200 19,900

Nickel production increased by 2% to 20,200 tonnes in 2010 primarily owing to improved production levels at Loma de Níquel. Overall unit costs were 7% above 2009.

Loma de Níquel produced 11,700 tonnes of nickel, an increase of 13% compared with 2009, when production was impacted by the non-renewal in January of the environmental permit to dispose of smelter slag and by a metal run-out in May from the operation’s No. 2 electric furnace, which halted production for the rest of that year. Despite resuming operations at the rebuilt furnace in March 2010, production was severely impacted until August by electricity rationing imposed by the Venezuelan government, resulting in approximately 2,400 tonnes of lost output.

Loma de Níquel’s unit operating costs at $5.83/lb were 12% lower than in 2009. The principal factors in the reduction were the higher volume of output and the 50% devaluation of the Venezuelan bolivar, partly offset by high local inflation.

Due to uncertainty over the renewal of three mining concessions, which have not been cancelled but which will expire in 2012, and over the renewal of 13 concessions that were cancelled in 2008, an accelerated depreciation charge of $73 million has been recorded against Loma de Níquel mining properties. This has been recognised as an operating special item. Refer to note 5 in the Financial statements.

Year on year production at Codemin decreased by 11%, or 1,000 tonnes, primarily due to the planned relining of a furnace in the last quarter of the year. Production was also negatively affected by lower grade. Unit operating costs were higher than in 2009, principally due to a stronger Brazilian real and the impact of planned maintenance.

Projects

The Barro Alto project ended the year at 99% complete, remaining on schedule to deliver first production in the first quarter of 2011.

This project makes use of a proven technology and will produce an average of 36 ktpa of nickel in ferronickel at full production, averaging 41 ktpa over the first five years, with a competitive cost position.

The Nickel business’ unapproved project pipeline has the potential to increase production by an additional 66 ktpa, with further upside potential, leveraging the Group’s considerable nickel laterite technical expertise. Jacaré, with Mineral Resources of 3.7 Mt of contained nickel, was the largest nickel discovery in the last decade and has the potential to significantly strengthen Anglo American’s position in the worldwide nickel market.

Outlook

Nickel’s production is forecast to more than double in 2011 as the Barro Alto project ramps up. Codemin production is expected to normalise, with no significant maintenance planned, and production at Loma de Níquel should benefit from a more stable power supply and a full year with both furnaces.

The long term outlook for nickel is positive, underpinned by stainless steel demand driven by growth and urbanisation rates in emerging economies. In the short to mid-term, nickel prices will be heavily influenced by the successful delivery of new projects, some of which use an unproven processing technology, as well as the introduction to the market of physically backed ETFs.

Walter De Simoni
CEO

Walter De Simoni

Contained nickel at Jacaré

3.7Mt

Average nickel production over first five years at Barro Alto

41ktpa

First production from Barro Alto

Q12011