H1 Numbers - Neville Nicolau, CEO of Anglo Platinum

Eaernings may have jumped six-fold in the first half but there is stillsome catch up to do. And, if the second half goes the way of the first a resumption of dividends may be on the cards

ALEC HOGG: It's Monday July 26 2010 and in this special podcast we speak with the chief executive of Anglo Platinum (JSE:AMS), Neville Nicolau. Neville, thanks for joining us today, it's a good rebound by Anglo Platinum from where you were a year ago but you've still got quite some way to go to more acceptable levels that we saw 2006 through to 2008.

NEVILLE NICOLAU: Yes, I think over the past two years now, we've worked very hard in terms of making sure that our operations are extracting the best value. We've put a lot of effort in terms of our safety and cost effort and making sure that we deliver the ounces that we were supposed to deliver. In the last year that you describe, the market and the price of the metal has come to more acceptable levels for us.

ALEC HOGG: Dividends still suspended. You haven't paid a dividend since the second half of 2008. What are you going to need to see before dividends can be resumed?

NEVILLE NICOLAU: Well, I think, to be practical about it, if we have another half-year the way that we've had the first half-year, then I'm sure that the board will recommend dividends at the end of the year. It's just that after six months, we really didn't want to go out and be over confident in a market, which is still quite volatile.

ALEC HOGG: I was looking at the capital commitments; you really do have excellent accounting at Anglo Platinum. When you go back into previous years, it's all consistent, there's no changes, there's no funnies but the capital commitments just for this year, look substantial. When you talk about staying in business capital of R3.5bn and then project capital of R4.5bn roughly. So you've got R8bn worth of commitments in the short-term. You're not quite even covering that with your cash flows yet.

NEVILLE NICOLAU: If you take over the first part of the year, then we pretty well do cover that in terms of cash flow. So, we getting quite close to where we pay for everything and still have money left over for a dividend or something to be divided up.

ALEC HOGG: I looked at that and the operating cash flow for the first half, R3.2bn. Capital commitments R8bn. You going to have to accelerate a bit, to have something over for dividends or are you prepared to continue to borrow to meet your capital requirements.

NEVILLE NICOLAU: Well, it is a board decision and we work on the rules of dividend payout that we've set for ourselves. The idea is that we would be in a position where we would pay for everything and then pay a dividend out of money after that and use debt in times of extraordinary crisis. As is what happened last year and the year before. We wouldn't like to eat into our debt to pay dividends; we'd rather pay a dividend on good operating performance and save the debt.

ALEC HOGG: Neville, longer-term and you have paid down a lot of that debt due to the rights issue, is it hoped for Anglo Platinum to be completely debt-free, even though you've got an enormous capital programme?

NEVILLE NICOLAU: Well, completely debt-free is the utopia that we would strive for. That we would have to be completely debt-free before we paid a dividend, I'm not sure that is a criteria. It would depend on what our long-term view of the business was. We would not like to get into a position where we needed to go to shareholders for money, as we did in the beginning of this year. So we would just want to be sure that we had a balance sheet that over a longer period of time, could sustain the dividend payout that we propose.

ALEC HOGG: One of the highlights of this is the improvement in costs. It has come at a cost, the employee numbers, interestingly enough, are down 12% on a year ago. It presumes that you were overstaffed then or, hopefully not, understaffed now.

NEVILLE NICOLAU: Well, at the beginning of this year we announced that over the period from the end of 2008 through 2009, we had reduced by over 25% of our labour force. So, by halfway through last year, comparing the year on year numbers, we were really halfway through that process. We got to stability, I think, by the end of last year, where we were happy that we had the appropriate number of people for the business that we want to do. That we, from then on, said that all productivity improvements would result in more ounces and not result in fewer people. So we've set our base, we've set our production base and we are now looking for improved productivity.

ALEC HOGG: But you still employ 2 000 fewer people now than you did at the end of last year.

NEVILLE NICOLAU: We did say that our labour right sizing was largely complete. We do have natural attrition of people leaving our business. We have had a ban on replacements of people for some time. We have started to employ people again. We manage our labour according to what we expect our business to do and where we are producing from but I don't think that we'll see the dramatic moves that we saw last year.

ALEC HOGG: Does that mean that productivity improvements as well are going to be more difficult?

NEVILLE NICOLAU: Well, productivity improvements as we go forward, obviously, do become more difficult and we've been quite conservative. We've forecast just over 4% increase for next year, going from 7% this year to 7.3% next year, which is not as dramatic as what we have done over the past few years. Yes, of course, they do get to be more difficult but I think that the opportunity to produce more ounces per person is still there because grade is a factor.

ALEC HOGG: Neville, between 2006 and the second half of 2008, you were achieving at Anglo Platinum a gross margin of 35% - 45%. That's now down to 18%, a lot better than where it was just a year ago but still, a long way from those 35% - 45%. Was that a super profit period that 35% - 45% or is it an area that you could, in fact, get back to?

NEVILLE NICOLAU: One thing about precious metals is that you really have to believe in the precious metal. A very small change in the exchange rate, for example, ratchets-up our earnings and our margins very dramatically. What we do is, we plan for very conservative prices going forward. We try and run our business to get to costs, which are acceptable at those low prices, and then as precious metal markets do, they perform extraordinarily well in times. You really have to believe in precious metals to invest in them.

ALEC HOGG: It seems like there's a sense of realism that you're talking about now. Even if you go through the detail of the numbers, there's still R35bn worth of capital that has been committed at some point in time to be spent. I guess, you go back a couple of years; the guys were wanting to spend it immediately. You are now saying, "We'll wait for the prices to come to the party."

NEVILLE NICOLAU: Well, what we do is, we say we had a long term profile for our business and what we really need to do is make sure that we have a long term capital profile that is appropriate for the long term mining profile. It doesn't help to build mines and process and plant and so on, way before it is necessary. So what we have done is, we've broken down the silos within our business, we make sure that we align our capital spend directly to our business need or our mining need. As we adjust that, as we did from last year to this year, we actually increased the profile going forward, slightly. Then we do need to increase or capital spend but what the shareholder can be certain of, is that we will spend capital at the right time, just in time to make sure that our profile is protected.

ALEC HOGG: Two other bits of good news coming out of the numbers, apart from the fact that you did turn around strongly was the safety issue. Even though it's improved again by 16%, year on year, you still had five deaths. You're going for that "One death is too many" but how realistic is that in the kind of mining that you're doing?

NEVILLE NICOLAU: Well, when we get down to one death per year then maybe we'll have that debate. In the meantime, we're working towards zero. Our fatalities, if you look at the numbers year on year, and I really don't like talking about fatalities in this way because they are people and human beings and families and so on. So, it's very important to keep the human element in our safety programme but if you compare our year-to-date progress with last year, then we've actually had a 50% improvement in the number of people dying. That's still too many but what we have done along the way, is demonstrated on many of our operations and collectively that we can go long periods of time without fatalities and if you can go long periods of time without fatalities, then why can't you go forever without fatalities? So, it's work in progress, we have made good progress in what we've done, we're still not proud of the fact that people die in our business and we still believe that zero is possible.

ALEC HOGG: The problems that Aquarius had recently with the scale of the, or the size of the stopes and the working areas that the mining officer was imposing on them, we didn't hear any concerns from Anglo Platinum. Is that because it doesn't affect you that way?

NEVILLE NICOLAU: Well, it does, we all mine the board and pillar method, which is used. There is something that all of the major and junior producers use in the business. What we've done is, the same as what happened last year with the Impala disaster is, we've tried to learn from them and there's a lot of sharing that goes on in the industry in this regard. We've tried to learn from them what the mechanisms of the collapse were and what the circumstances were and then we compare that to what we do and we look at ways of actually getting out of the position. There is government involvement and we do participate in bipartite and tripartite bodies where this specific matter is being discussed but we just want to make sure that we learn from the incident and that we actually put something in place that will prevent these types of deaths from occurring in our operations and when we have something to say more positively in that regard, I'm sure we'll say it.

ALEC HOGG: The other bit of good news was the mining rights. Last Wednesday you received your letters of conversion from the Department of Mineral Resources. I'm sure that was a big sigh of relief but when you have a look at the work that you've done on this front in the past couple of years, launching BEE companies indeed in Mvela Resources, Anooraq and then helping Wesizwe with the Western Bushveld joint venture. Is that it now, as far as disposing of rights is concerned?

NEVILLE NICOLAU: Well, we had our rights issue in the first quarter and we received our rights in the second quarter. So, we think that two rights make a half.

ALEC HOGG: [Laughing] Have you used that before? Oh boy, that's a good one Neville.

NEVILLE NICOLAU: [Laughing] Look, the work that we've done and they have been significant transactions but if you're aiming for 26% of a company the size of Anglo Platinum, the only way to do that is with big chunks of deals. So I don't think that the size of or the magnitude of what we've done should be underestimated. It is what it is because we were working to get to a percentage. We've done that now, we continue to participate in those joint ventures and we will continue to try to make our partners as strong as possible because we get as strong as they do. Any future deals would be much more of a commercial nature than they would be of a BEE nature. I'm not saying that we're done with our deals. Any opportunity that comes along to add shareholder value, extracted earlier, improve the efficiency of our mining operations in farm fence issues and so on, we would look at but as I say, it would be much more commercial than facilitated.

ALEC HOGG: Well, you've bottomed-out it seems now in the June 2009 half year, at R17bn in sales and then it went up to R19bn, then to R20bn and today, this set of results almost R21bn and the same thing with the headline earnings improving. Are you comfortable now that the worst is behind you, that you've done sufficient to be able to benefit from hopefully an up-tick in precious metals?

NEVILLE NICOLAU: We remain positive in terms of PGM market, and that is despite the recent events in Europe. The reason is because the PGM market, although it's very closely aligned to the world market, it's not directly aligned. The regulations in auto, for example, is much more important than actually the number of cars sold. Jewellery consumption is very price sensitive. So, we actually are quite confident in terms of the platinum industry, the platinum market at the moment. So, the dollar price of platinum, we do see trading at above $1500/ ounce for the rest of this year, which is given where we were two years ago, quite positive.

ALEC HOGG: And from an internal perspective in productivity, improvements to continue?

NEVILLE NICOLAU: Well, we monitor these on a monthly basis and we have ongoing plans on how to do this. Getting people to work in teams, improving our infrastructure. The one thing that we want to be quite careful of is relying on people working harder, running faster and so on to improve productivity. We really want to put significant projects and campaigns in place to improve productivity, so that it is sustained on a long term basis. So far, so good, this year I'm certain that we will achieve our productivity forecast for the year. Next year we've still got to go another 4% or 5% improvement on this year and I think that we can certainly achieve that.

ALEC HOGG: Neville Nicolau, chief executive of Anglo Platinum, which today produced headline earnings per share of R10.28 compared with R1.64 a year ago but two years ago, it was R35.00/ share. So, still some way to go.

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