LETTER FROM OUR CEO, MARK CUTIFANI
AngloGold Ashanti has in place the strategy, the structures and the people to fulfil our vision of creating the world’s leading mining company.
My fellow shareholders,
The year in review was undoubtedly one of the most challenging in my 35 years in mining. It was also one of the most rewarding as the strong team we’ve built over the past five years met each challenge head on, remaining true to the company’s values and preserving the foundation on which AngloGold Ashanti has been built.
We can take some courage from the safety strides we have made in recent years, although, as our highest priority we remain vigilant and focused on the work we still have to do in this area. It is cold comfort that we have more than halved the rate of fatalities since 2007. The fact remains that one death is one too many and we continue to devote our efforts to the elimination of harm on our mines and in our plants. Risk protocols and accident investigation methods are vastly improved and modernised and work is ongoing to ensure every person in this company understands that the only true measure of success is our ability to produce value for all stakeholders, with no injury, across every site. The fruit of this work is evident in the steady decline in the all injury frequency rates to their lowest on record by the end of the year.
On an operational front, there remains much to be proud of. Our major greenfield projects at Kibali and Tropicana remain within their broad budget parameters and on track to pour their first gold by around the end of 2013 and early 2014. This is an impressive feat in an industry that has in the recent past been marked by significant capital overruns and delays. The expansion at Cripple Creek & Victor is also progressing to plan and two bolt-on acquisitions made in 2012 – Mine Waste Solutions surface retreatment assets in South Africa and the remaining 50% of Serra Grande in Brazil – are already delivering to plan.
AngloGold Ashanti also continues to deliver the best returns on capital and equity among the world’s major gold producers, the product of strict discipline in capital deployment over the past five years. While our peers have placed a new emphasis on these long-neglected metrics, they have been core to our strategy since 2008 when we outlined our new vision for the company. It will be returns, rather than production growth, that will continue to drive our decisions into the future.
Capital discipline is now more critical than ever as the operating environment becomes increasingly complex. Communities are more insistent in ensuring the appropriate benefits from their natural resources and protecting their environments, employees want better jobs and a clear development path and host governments want more from their national patrimony. At the same time, shareholders – frustrated at poor returns from their gold investments – are making clear that they want free cash flow and richer dividend streams. Balancing these interests takes thoughtful management, strong operational expertise and a holistic strategy balancing all stakeholder needs and aspirations.
The complexity of managing often disparate interests was no more evident than in the events that unfolded in South Africa in the second half of the year. Unhappiness at work conditions and service delivery from government, a difficult socio-economic environment and labour union rivalries all converged into a wave of unrest that tragically left scores dead in the northwestern Bushveld and eventually shuttered most of the South Africa’s deep precious metals mines. It was against this backdrop that our South African mines were all closed by an unprotected strike that ran from late September to early November.
We took a deliberate decision at the outset of the strike to communicate consistently and clearly with employees and all other stakeholders affected by the work stoppage, and to make clear that we would not tolerate violence, vandalism or intimidation. Our effort was focused on maintaining peace and calm, preserving our relationship with employees and protecting the collective bargaining structure which has served labour and business well for decades. The strike was resolved following an agreement to raise the entry level wage and to adjust pay scales among job categories.
While the work stoppage was peaceful for the most part, we were forced to summarily shut Mponeng, our largest mine in the region, and suspend pay to employees after random acts of violence by a small group of striking workers bent on upending the accord.
Final agreement was brokered with this last group of individuals when a broad, inclusive process with all management, employees and all major labour groupings (including the emerging Associated Mining & Construction Union) delivered an overarching code of conduct to govern workplace behaviour.
The strikes shone a bright, yet cautionary light not only on the importance of mining to South Africa’s economy, but also on the critical importance of resolving longstanding structural imbalances in South African society, creating jobs for unemployed youth and improving social performance of government and the private sector alike.
AngloGold Ashanti’s South African business is pushing ahead with significant investment in housing, healthcare and economic development projects while maintaining the fundamental production capacity of this cash generative business.
As we start 2013, with a fresh round of wage talks looming and a new union in the mix, the threat of more industrial action remains real and the need for us all to work hard to find each other in this process and create a sustainable outcome that benefits all stakeholders, is more critical than ever before. And at the same time, we will be looking to the government to create a constructive environment conducive to long-term fixed investment and job creation, and free from unnecessary and disruptive threats to security of tenure and long-term fiscal certainty.
There were other challenges faced across the portfolio during the year including, among others: safety-related stoppages in South Africa; a coup and flooding in Mali; an armed insurgency in the northeast DRC; threats of tax increases across several jurisdictions; and soaring prices for labour and production inputs.
AngloGold Ashanti is currently subject to class action litigation with respect to alleged occupational lung disease. AngloGold Ashanti is calling for the industry to engage with government (and other stakeholders) to seek an appropriate industry-wide solution.
It is this increasingly complex environment that has made it all the more important to for us to continue with the implementation of our Project ONE operating model, that brings a manufacturing-industry approach to our mining and processing operations, whilst elevating our human resources capacity to ensure the right people have absolute accountability to ensure that the right work is done, at the right time. This will provide the long-term competitive edge to continue generating industry-leading returns.
In 2012 we saw Project ONE grow in importance as a tool for our operators. Despite the deterioration of grade in maturing ore bodies, particularly in Continental Africa, a more analytical and detailed approach to planning saw tonnages across the region increase by around 20% without additional capital to expand processing capacity. That helped us maintain production levels and offset a drop in grade of almost 20%.
Geita, the asset that was amongst our worst-performing mines just three years ago, become our largest production centre and cash generator. In perhaps the most startling mark of ONE’s success, our mining teams managed to move almost 30% more rock from the pit even as they halved the truck fleet, dramatically improving our capital utilisation and efficiency. The plant, once a glaring example of inefficiency with weekly shutdowns for emergency repairs, dramatically improved availability through properly resourced and scheduled maintenance, as well as more deliberate operating methodology.
Similarly, at Siguiri, the plant continues to defy sceptics by consistently operating above its nameplate capacity, showing the potential to operators across the business. In Brazil, our development and production crews are setting new productivity benchmarks in their monthly advance rates.
But Project ONE’s success is not only evident in tons and ounces. Reportable environmental incidents are down about 80% over the past five years, demonstrating that planned and scheduled work is not only more efficient, but also less likely to exceed increasingly rigorous environmental standards. This is critical in ensuring we maintain our licence to operate. In analysing each site and coming to grips with planning, it has become clear that real and lasting engagement between management and employees and between AngloGold Ashanti and its host communities and other interested stakeholders, becomes a non-negotiable part of doing business. Not only does this set expectations at the outset of any initiative or project, but it ensures ownership of the process by all affected parties. It is the cornerstone of real sustainability for the natural resources sector.
As the year drew to a close and the South African labour situation piqued the concern of international credit rating agencies, several companies and parastatals and the sovereign itself, were either downgraded or faced the threat of an imminent relegation by Standard & Poor’s and Moody’s Investor Services. AngloGold Ashanti’s own BBB– investment grade rating from Standard & Poor’s was at risk of a single-notch drop into noninvestment grade status. With this threat to our long-term cost of capital, the executive team moved quickly to correct course and make the changes necessary to adapt to what were clearly new circumstances.
In early November, the decision was taken to trim our sails by paring back capital expenditure, determining which assets might be sold, shifting focus to higher margin production, slowing capital expenditure on some of our smaller projects and reviewing key corporate and operating cost drivers. In the end, this effort helped us hang on to our coveted credit rating while we correct course.
This change in tack occurred at the apex of another seismic shift in the gold industry. Over the past several years, it has become clear that investors in gold equities have become tired of poor returns, soaring costs, ill-conceived corporate activity, rising geopolitical and labour risk and low dividend yields. This has been clearly manifested in the underperformance of gold equities relative to the bullion price.
Notwithstanding the fact that we have consistently delivered industry-leading returns and value accretive bolt-on acquisitions, AngloGold Ashanti’s valuation has fallen victim to this trend which your management team is working to reverse.
As the new year starts, your board and executive are actively engaged in weighing the options that will close the valuation gap that has emerged. Each asset is being reviewed to determine whether it fits in an optimal portfolio. The make-up of the portfolio structure is also under scrutiny to determine whether a different configuration may unlock the value that we believe lies within AngloGold Ashanti.
Sadly, I will not participate in this evaluation of AngloGold Ashanti’s options. After much thought and deliberation I have made the difficult decision to leave this company to accept the post of chief executive officer of Anglo American. This brings to an end an enormously rewarding period at AngloGold Ashanti, during which we built a world-class team across the business that made some of the mining industry’s most significant improvements over the past five years.
While there are pieces of work that remain undone, most notably the turnaround of Obuasi and the completion of our important new development projects, I leave confident in the knowledge that the executive team will finalise these and other important initiatives in the coming months and years. AngloGold Ashanti has in place the systems, procedures and people that will fulfil our joint vision of creating the world’s leading mining company.
I would like to thank the thousands of people across AngloGold Ashanti who have made this a special and rewarding time both professionally and personally, for me and my family. We take with us many fond memories and friendships from South Africa.
My heartfelt thanks also go to so many others in government, organised labour, non-governmental organisations and among AngloGold Ashanti’s diverse and engaged shareholder base, who I have had the privilege to work with since 2007.
Finally, I extend my thanks to the board of AngloGold Ashanti for their support and wise counsel during my tenure as Chief Executive Officer.
Chief Executive Officer
19 March 2013