Thermal coal

Financial highlights
US$ million (unless otherwise stated)
2010 2009
Operating profit 710 721
South Africa 426 442
Colombia 309 305
Projects and corporate (25) (26)
EBITDA 872 875
Net operating assets 2,111 1,707
Capital expenditure 274 400
Share of Group operating profit 7% 15%
Share of Group net operating assets 5% 4%
A remote controlled continuous miner

A remote controlled continuous miner in operation at Goedehoop colliery.

Group strategy actions

Investing – in world class assets in the most attractive commodities

Thermal Coal has a diverse, high quality, low cost asset base that underpins its current focus to expand in the booming Asian energy market. This is being supplemented by an extensive portfolio of expansion projects, supported by targeted acquisitions.

Organising – efficiently and effectively

Given changing domestic and seaborne markets, logistics constraints and maturity of its assets, Thermal Coal maximises its use of available export capacity and delivers optimal value from its portfolio. This includes value driven asset optimisation and prioritisation, the alignment of its portfolio with its strategic objectives and development of highest margin products. To this end, Thermal Coal has announced that it intends disposing of its Kleinkopje Colliery and in February 2011 commenced a formal sale process for the asset.

Operating – safely, sustainably and responsibly

Thermal Coal reported an outstanding safety performance, with its first ever fatality free calendar year, and LTIFR improving 27% versus 2009.

Employing – the best people

Diversity amongst our employees is foremost on the agenda – women represent 17% of the workforce and plans are in place to grow that proportion.

Business overview

Thermal Coal operates in South Africa and has a one-third interest in Cerrejón in Colombia. In South Africa, Thermal Coal wholly owns and operates nine mines and has a 50% interest in the Mafube colliery and Phola washing plant. Five of the mines collectively supply 22 Mtpa of thermal coal to both export and local markets. New Vaal, New Denmark and Kriel collieries are domestic product operations supplying 32 Mtpa of thermal coal to Eskom, the state-owned power utility. Isibonelo mine produces 5 Mtpa of thermal coal for Sasol Synthetic Fuels, the coal to liquids producer, under a 20 year supply contract.

Anglo American Inyosi Coal, a broad based black economic empowerment (BBBEE) company valued at approximately $1 billion, is 73% held by Anglo American: the remaining 27% is held by Inyosi, a BEE consortium led by the Pamodzi and Lithemba consortia (66%), with the Women’s Development Bank and a community trust holding the remaining equity. Anglo American Inyosi Coal, in turn, owns Kriel colliery, the new Zibulo multi-product colliery (previously known as the Zondagsfontein project) and the greenfield projects of Elders, New Largo and Heidelberg. The outstanding conditions precedent to the Anglo American Inyosi Coal transaction were fulfilled by the end of May and the transaction became effective from 1 June 2010.

Thermal Coal’s South African operations currently route all export thermal coal through the Richards Bay Coal Terminal (RBCT), in which it has a 27% shareholding, to customers throughout the Med-Atlantic and Asia-Pacific regions. Within South Africa, 62% of total sales tonnes are made to the Eskom power utility, of which the majority are on long term (i.e. life of mine) cost-plus contracts. A further 8% is sold to Sasol and 2% to industrial sector consumers. The remaining 28% is exported through RBCT.

In South America, we have a one-third shareholding (with BHP Billiton and Xstrata each owning one-third) in Cerrejón. Cerrejón is Colombia’s largest thermal coal exporter. This opencast operation has a 32 Mtpa production capacity (10.7 Mtpa attributable). Cerrejón owns and operates its own rail and deep water port facilities and sells into the export thermal and pulverised coal injection (PCI) coal markets.

Seaborne thermal coal demand by country

Seaborne thermal coal demand by country

Operating profit
(2009: $721m)

$710m

share of group operating profit
(2009: 15%)

7%

EBITDA
(2009: $875m)

$872m

Industry overview

Coal is the most abundant source of fossil fuel energy in the world, considerably exceeding known reserves of oil and gas. The bulk of all coal produced worldwide is thermal coal, which is used as a fuel for power generation and other industries, notably the cement sector. The seaborne thermal coal market accounts for nearly 692 Mtpa and is supplied from a large number of countries, with coal producers operating in a highly competitive global marketplace.

Thermal coal usage is driven by the demand for electricity and is influenced by the price of competing fuels, such as oil and gas and, increasingly, the cost of carbon. Global thermal coal demand is also affected by the availability of alternative generating technologies, including gas, nuclear, hydro-electricity and renewables. The market for export thermal coal is further impacted by the varying degrees of privatisation and deregulation in electricity markets, with customers focused on securing the lowest cost fuel supply in order to produce power at a competitive price. This has resulted in a move away from longer term contracts towards shorter term contracts priced against various coal price indices, which has given rise to the development of an increasingly active financial market for hedging and derivative instruments. The extent to which these pricing instruments are used, however, varies from region to region.

Strategy and growth

Thermal Coal’s strategy is focused on serving the power generation and industrial sectors from large, low cost coal basins. The business unit has a diverse, high quality asset portfolio in South Africa and Colombia and aims to be a long term, reliable supplier. It also strives to participate actively in the pursuit of cleaner coal solutions for the world’s energy needs.

Thermal Coal is focused on expanding its strong standing in the export market, while maintaining a significant position in the domestic market in South Africa. It will deliver on this ambition through its extensive portfolio of expansion projects, supported by targeted acquisitions. By year end, it had substantially completed a major programme of investment, including investigations into expansions at Cerrejón and the development of Zibulo. The business unit has commenced its feasibility study on New Largo, identified by Eskom as a primary coal supplier to its Kusile power station now under construction. Kusile’s first units are scheduled to be operating in 2013.

India is an ever growing market for South Africa sourced coal, with 2010 showing a pronounced swing from the Med-Atlantic to the Asia-Pacific market. For the year as a whole, 32% of South Africa’s coal exports, and a similar proportion of Thermal Coal’s own exports, through the RBCT were destined for India. Thermal Coal is evaluating opportunities to increase its market share to India.

In Colombia, Cerrejón’s growth strategy encompasses a two-phased expansion strategy. The first phase requires an increase in the port and logistics chain capacity in order to reach 40 Mtpa. Thereafter, a river diversion would be required to expand the pits. This expansion would allow for a potential increase in production to 50-60 Mtpa. The feasibility study for phase 1 is being reviewed by the shareholders. Phase 2 expansion is at the concept phase of development.

In addition to developing its operations in its existing geographies, Thermal Coal is constantly evaluating potential opportunities in new regions which are well placed to service its growing markets.

Financial overview

Thermal Coal delivered an operating profit of $710 million, a 2% decrease compared with 2009, predominantly as a result of the stronger rand, partly offset by a strong recovery in thermal coal prices. Export sales volumes, including capitalised export sales volumes from Zibulo, increased by 3% compared with 2009.

Markets

Anglo American
weighted average achieved
FOB price ($/tonne)
2010 2009
RSA export thermal coal 82.49 64.46
RSA domestic thermal coal 19.64 18.48
Colombian export thermal coal 72.69 73.47
Attributable
sales
volumes (‘000 tonnes)
2010 2009
RSA export thermal coal 16,347 15,857
RSA domestic thermal coal 5,178 6,251
Colombian export thermal coal 10,461 10,103

The global seaborne thermal coal market experienced a robust year in 2010. Despite a challenging environment for thermal coal imports into Europe, surging energy demand growth in Asia, provided predominantly by coal fired power generation, helped drive global demand and support prices.

Thermal coal markets in Europe and the US saw softer demand as weakened power markets and cheaper gas reduced coal consumption. At the beginning of the year, Colombian producers were compelled to price competitively to move thermal coal into their traditional US and European markets. This resulted in delivered thermal coal prices in the European market regularly trading at a discount to the South African FOB export price, which excludes the cost of freight. As demand in the Asia Pacific market progressively improved, South African thermal coal sales into this market increased and Colombian producers began exporting significant volumes to this region for the first time.

China and India imported significantly more thermal coal during 2010, compared with 2009, increasing by some 40% and 15% respectively, which boosted demand for South African coal. RBCT exported 63 Mt during 2010, a 2 Mt increase over 2009, with some 65% exported to Asian markets and about 30% going to the European and Mediterranean region.

Operating performance

Attributable sales volumes
(‘000 tonnes)
2010 2009
RSA thermal coal 21,612 22,186
RSA Eskom coal 36,403 36,225
Colombian export thermal coal 10,060 10,190
South Africa

Operating profit from South Africa sourced coal was 4% lower than 2009 at $426 million. This was mainly due to the stronger South African rand, which was partly offset by a 28% increase in average export thermal coal prices. Export sales volumes, including capitalised export sales volumes from Zibulo, increased by 3% compared with 2009. As in previous years, Thermal Coal utilised the full rail capacity entitlement that was made available, and rail remains the key constraint. Annual production stayed steady at some 58.5 Mt, driven mainly by higher output at Mafube, which has ramped up to full production, with the Zibulo operation also ramping up towards its commercial production levels. New Denmark improved production, with the new longwall equipment being commissioned during the first quarter of 2010. This was, however, partly offset by lower production from the remaining underground operations which were adversely impacted by geological conditions and pit room constraints. Isibonelo’s production was also affected by pit room constraints, coupled with reduced demand from Sasol.

Colombia

Severe wet weather conditions in the second half of 2010 had a significant impact on production, logistics and sales at the majority of coal mining operations in Colombia, where the total annual rainfall for the region was almost double the previous average recorded figure.

Operating profit from Cerrejón of $309 million was marginally higher than that achieved in 2009, despite the extreme wet weather conditions and the strong Colombian peso. Overall saleable production was in line with 2009 performance, primarily as a result of a very good start to the year when dry conditions prevailed at the mine.

Improvements in coal recovery rates continued to contribute positively to all aspects of the operation. Cerrejón’s in-pit mining initiatives have enabled the mine to cope with the unprecedented rainfall. The 4% increase in total tonnage sold was partly due to the utilisation of the stockpile which had been built up over the previous dry periods.

Projects

In South Africa, the $517 million Zibulo project is approaching completion, the opencast operation is at full production and the underground operation has four of eight production sections deployed. The washing plant, which is a 50:50 joint venture with BHP Billiton Energy Coal South Africa, is fully commissioned and is operating at 80% of planned monthly production. Completion of the man and materials shaft is expected to be in the second quarter of 2011. The mining rights of Zibulo colliery and the environmental management plan were approved during 2010.

The feasibility study for the New Largo project started in 2010 and is expected to be completed in the first quarter of 2012. Significant progress has been made to complete a provisional coal supply agreement with Eskom by the end of March 2011.

At Cerrejón, a two-phase growth strategy has been adopted and is currently being implemented. The first phase, referred to as P500 Phase 1, requires an increase in the port and logistics chain capacity, while maintaining the current operational footprint, in order to reach a target of 40 Mtpa. The second phase, referred to as P500 Phase 2, will require a river diversion and pit expansions to access the additional reserves required to reach a potential 50-60 Mtpa. The feasibility study for Phase 1 was reviewed by the shareholder review teams towards the end of 2010. A process is under way to address the findings of the review process. The aim is to have the Phase 1 ready for approval by the shareholder boards towards the end of the second quarter of 2011.

Outlook

Extreme wet weather, predominantly in Australia, Indonesia and Colombia, has significantly affected short term thermal coal availability and 2011 export prices are expected to trade in a range considerably above those prevailing during 2010.

Norman Mbazima
CEO

Norman Mbazima

Thermal coal resources

3.4 bn tonnes

2010 attributable production from thermal coal

68.5 Mt

Projected coal production from the new Zibulo mine

6.6 Mtpa