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Edited Transcript of AMS.J earnings conference call or presentation 22-Jul-19 9:00am GMT

Q2 2019 Anglo American Platinum Ltd Earnings Call

Johannesburg Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Anglo American Platinum Ltd earnings conference call or presentation Monday, July 22, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Ivan Griffith

Anglo American Platinum Limited - CEO & Executive Director

* Craig Miller

Anglo American Platinum Limited - Finance Director & Director

* Emma Chapman

Anglo American Platinum Limited - Head of IR

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Conference Call Participants

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* Arnold Van Graan

Nedbank Capital, Research Division - Analyst

* Christopher Nicholson

Morgan Stanley, Research Division - Research Analyst

* Johann Steyn

Citigroup Inc, Research Division - MD and Head of South African Equity Research

* René Carlo Hochreiter

NOAH Capital Markets (Pty) Ltd - Mining Analyst

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Presentation

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Emma Chapman, Anglo American Platinum Limited - Head of IR [1]

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Good morning, everybody, and welcome to Anglo American Platinum's 2019 Interim Results Presentation. Before we begin with proceedings today, can we please take a moment to listen to the safety briefings? And with us, we have [Mr. Lelly] from the JSE, who will take us through those.

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Unidentified Participant, [2]

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Good morning, ladies and gentlemen. The safety briefing, we didn't have any information as -- if there will not be any testing today. So if there is any testing, please abide by the following. Take note of the fire alarm. First siren, stay put. Second siren, wait for the announcement on PA system, then follow the instructions. Proceed to the nearest emergency exits. There will be one. There's another one there through the main entrance and outside. Do not run. Under any circumstances, do not panic. Evacuate orderly and stay calm. Report to assembly point. That would be on next door, 24 Central, in which your fire marshals will do your roll call. Security personnel to ensure that everyone was evacuated safely from this room and the building to this assembly point. Do not enter the building until all is clear. Thank you.

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Emma Chapman, Anglo American Platinum Limited - Head of IR [3]

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Okay. Thank you so much.

As ever, please can I draw your attention to this cautionary statement? And in your own time, can you please take a moment to read through it?

And leading to the agenda for today, Chris Griffith, our CEO, will present on our safety and sustainability performance and the operational performance of the company. Craig Miller, our Finance Director, will present the financial results. Chris will then continue and take us through the PGM market review and finish with a look at Anglo Platinum's next phase of value delivery. And there will be time for Q&A at the end of the presentation.

And with that, I'll now hand you over to Chris.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [4]

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Thanks, Emma. Good morning, ladies and gentlemen, and welcome to Anglo Platinum's interim results presentation. I'd love to also take the opportunity to welcome the Chairman of the Board, Norman Mbazima. Welcome, Norman. And so without further ado, I'll continue.

So right at the outset, I would like to emphasize that safe production continues to underpin the way in which we do business. I'm pleased to say that we've had no fatalities at our managed operations in the first half, and we continue to see improvements in all key safety performance metrics.

Highlighting the half's key achievements. It's clear that our value proposition is delivering value. Aside from the strong safety performance, we've had recognition of our leading ESG performance with the first place ranking by Sustainalytics out of 55 peers in the precious metals sector globally. We've had robust PGM fundamentals, leading to a 33% improvement in rand basket prices, particularly helped by palladium and rhodium and a weaker rand. Our return on capital employed increased to 45%. We've got a strong balance sheet, increasing our net cash position to ZAR 6 billion. And finally, the Board, thanks, Norman, has approved a dividend based on the payout ratio of 40% of headline earnings, leading to a cash dividend of ZAR 3 billion or ZAR 11 a share.

Turning to the safety and sustainability performance of the company. The strategic focus of the company remains the elimination of fatalities. And by incorporating a revised safety strategy a year or 2 ago, we've achieved 0 fatalities at our managed operations in the first half. Tragically, though, we did have one fatality at our nonmanaged Modikwa joint venture. And we'd once again like to extend our sincere condolences to Thomas Maluleke's family, friends and colleagues. We continue to work with our joint venture partners to improve safety and to ensure that we have 0 fatalities at all of our operations.

Our safety performance indicators continue to improve, and we've seen a reduction in injury frequency rate, with a total recordable case frequency rate down by 6% to 2.83 per million hours worked. The implementation of our revised safety, health and environmental strategy has materially improved the safety performance by focusing on 3 key areas predominantly: firstly, the elimination of fatalities; secondly, robust operational risk management; and thirdly, improved reporting and learning from high-potential incidents. We've also made significant progress of effort and investment in our organizational cultural transformation to change behavior and attitude towards safety, ensuring our employees are safer in their day-to-day work activities.

Tailings storage management is clearly a big issue for the global mining companies all over the world. Our facilities are subject to mandatory Anglo American Group Technical standard and has 6 levels of oversight and assurance. These standards have been in place since 2014 and exceed current ICMM and regulatory requirements. This best-in-class standard requirement sets design criteria, monitoring, inspection and surveillance, and has been peer reviewed by international specialists.

There's been quite a bit of concern about upstream tailings dams post the 2 failures in Brazil. But in South Africa, the South African region is well suited to upstream tailings dams due to the low rates of rise, low rainfall and high evaporation rates as well as low seismic risk and suitable topography. We've disclosed extensive information on our website relating to the status of our own and our joint venture facilities.

We continue to ensure that the manner in which we conduct business minimizes harm to the environment and supports surrounding communities, mining responsibly and sustainably.

We have clear carbon and emission reductions pathway. And you can see from the top box, we continue to reduce emissions and energy intensity. We're assessing the potential to use renewable technologies within our portfolio, and they include the launching of now a tender process for our 75-megawatt photovoltaic plant at Mogalakwena. We're also assessing further potential solar farms at Unki and at our processing operations.

We're screening the opportunities to use fuel-cell trucks in our fleet. And we think, by this time this year, we'll have the largest fuel-cell truck operating anywhere in the world. We also continue to invest in our smelters to reduce sulfur dioxide emissions with a capital investment program of ZAR 2.5 billion over the next 5 years.

We actively invest in creating value for the host communities and to make a positive impact on society. You will remember that we increased the donation of land with a further 270 hectares of land donated to the Rustenburg community in March of this year, supported by the national government.

On the right-hand side of this slide, you can see that we continue to receive global recognition by respected institutions for our ESG performance, including being awarded, as I said earlier, a first place ranking by Sustainalytics out of 55 precious metal peers in the global mining industry.

Turning to a review of the operational performance for the business. The business has had a relatively steady operational performance. Our own mine production decreased by 2%, but it's worth noting that we an increase in production from Unki delivering another record performance. This performance is despite headwinds that occurred in the first half, including the Eskom power disruptions as well as the unprotected strike at Mototolo and the period prior to the -- in 2018 benefited from once-off production benefits. We expect to see an improvement in our production performance in the second half, which we'll talk to in a moment.

Refined production, which included the metal that we need to refine for the tolling at Sibanye, was up by 6%, which was higher than the mined production as the buildup in work-in-progress inventory that rolled over from 2018 was partially refined. However, the Waterval smelter rebuild, maintenance at the ACP and the annual stock count, which this year resulted in a net gain in inventory, has led to an increase in work-in-process inventory from the year-end position. This is a temporary increase, and we expect that, that work in progress is largely -- it's expected to be refined by the end of the year. The all-in sustaining cost of $517 per platinum ounce sold, that was against an achieved platinum price of $831 per platinum ounce sold.

Mogalakwena continues to deliver and had another strong performance, producing 610,000 PGM ounces. This was a 5% decline off the very strong performance that we had in the first half of last year. Eskom power outages impacted our production by about 12,000 PGM ounces. It was an increase -- it was a decrease in the concentrated throughput and recoveries due to a shutdown that we had for maintenance on the secondary mill at the North concentrator. We had scheduled in the first half of this year an increase in waste tonnes mined from a new mining cut at Mogalakwena. We also had some lower equipment availability, and the combination resulted in a decrease in the ore mined portion of the pit over that period. That has been partially offset by a drawdown in ore stockpiles. In the second half of this year, we expect greater mining equipment availability. We had a purchase of an additional 2 trucks and as well as mining all that we've now exposed will result in greater mined production in the second half. Despite these headwinds, Mogalakwena had the best EBITDA margin in the portfolio of 57% and a return on capital employed of 47%. The mine generated ZAR 3.8 billion of economic free cash flow at a negative all-in sustaining cost of $292 per ounce, and that highlights the benefit of the basket of metals that we produce at Mogalakwena.

Amandelbult has been a mine in transition, something we've been talking about for the last 2 years, as we seek to the reduction in Tumela Upper to develop a new mine, so developing a mine within a mine, at Dishaba Lower. Amandelbult produced 422,000 PGM ounces, and that was an annual decrease of 3%. The mine had a really difficult first quarter, which had impacted the half year performance, largely due to a number of electrical breakdowns that exacerbated by the Eskom power outages. We also had the upgrade of the shaft infrastructure at Dishaba, which we've upgraded so we can increase the hoisting capacity. The big shutdown that we had over the December break ran over into the first half of January and resulting in the impact in performance in the first quarter. However, the mine had a much better second quarter. It was up by 19% quarter-on-quarter, and the next slide will highlight some of this trajectory. Amandelbult's EBITDA margin was 26% with a ROCE of 33%. The mine generated economic free cash flow of ZAR 504 million at an all-in sustaining cost of $672 per platinum ounce sold.

We're starting to see some of the benefits of the Amandelbult turnaround. We've completed, as I said, the winder and the hoisting upgrades at Dishaba. As a result of this increased development, immediately available ore reserves and the developed ore reserve at Amandelbult, you can see from the slide, increased by 6% from the first quarter to the second quarter, but Dishaba was up by 8%. As a result of the increase in working places, Amandelbult -- Dishaba will continue to increase developed reserves, and they will increase again for the second half of the year.

And now that we've developed the ore reserves, the focus is now converting immediately available to immediately stopeable reserves in the second half. Now that we've established additional mining phases, you can see in the charts on the bottom left-hand side that we're now sustainably increasing the square meter output, and that has resulted in a 23% increase in the monthly square meter average profile.

Increasing the amount of UG2 mined has led -- feeding into the chrome plant, coupled with the stabilization of the interstage process, has led to increased throughput and yield, leading to higher chrome production in this half. Chrome production will once again increase from the third quarter as we now commission on time, on budget the third chrome module in this next quarter. Chrome sales, though, in this period have been impacted by temporary rail constraint leading to some stockpiled chrome.

Unki mine remains a strategically important asset to us. It delivered a record performance again in the first half. PGM production was up by 3% to 96,000 PGM ounces, as we've improved underground mining efficiencies, improved concentrated throughput, higher mill time and recoveries. The mine delivered an EBITDA margin of 27% and a ROCE of 12%, economic free cash flow of ZAR 229 million due to the strong performance at an all-in sustaining cost of $456 per platinum ounce sold.

You'll recall that we commissioned the Unki smelter at the end of last year. The Unki smelter is operating as planned. And we've not been impacted by any power outages in Zimbabwe. The macroeconomic environment in Zimbabwe is challenging, and the Zimbabwe government is attempting a comprehensive structural reform program to stabilize the economy. Despite these difficult local economic conditions, Unki continues to deliver.

Mototolo had a difficult start to the year, with PGM production down by 21%, largely due to the impact of the 3-week industrial action, but also the subsequent ramp-up. The mine has also had a lower built-up head grade as it transitions through difficult ground conditions containing multiple geological features. Production at Mototolo is expected to stabilize in the second half as the mine continues now to unlock a congruent ground that has moved into the operation as a result of the acquisition to make it 100%-owned operation at the end -- in last year. The mine delivered an EBITDA margin of 40% and a return on capital employed of 40% as well. It also generated economic free cash flow of ZAR 443 million at an all-in sustaining cost of $237 per platinum ounce sold.

Although we don't have a slide on our joint ventures, just briefly, our joint venture PGM production declined by 3% year-on-year, largely as a result of Modikwa being down by 14%. That was largely as a result of the stoppages post the fatality and the subsequent ramp-up. Kroondal was up by 4% year-on-year. It's worth mentioning that our joint ventures generated ZAR 1.2 billion of economic free cash flow for the period.

So I'll thank you. I'll hand you over to Craig to take us through the financials.

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Craig Miller, Anglo American Platinum Limited - Finance Director & Director [5]

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Thank you, Chris, and good morning, everyone. I'm delighted to be presenting my first set of results for the company. We are today reporting another set of strong financial results, benefiting from robust market fundamentals, reflecting the quality of our portfolio, steady operational performance and our commitment to balanced and disciplined capital allocation.

In the first half, we've seen headline earnings per share up 120% to ZAR 28.15. EBITDA is up 82% to ZAR 12.4 billion. Return on capital employed doubled to 45%, and net cash improved from ZAR 2.9 billion at the end of December to ZAR 6 billion at the end of June. And consistent with our dividend policy, we've declared a first half cash dividend of ZAR 11 per share, totaling some ZAR 3 billion.

EBITDA of ZAR 12.4 billion is up from ZAR 6.8 billion in the comparative period. Higher dollar metal prices added ZAR 3.6 billion to EBITDA. And despite platinum down ZAR 1 billion, the benefit of producing a basket of metals is shown from the ZAR 3.2 billion contribution from palladium and a ZAR 1.4 billion from rhodium price increases. This reinforces the benefit of Anglo Platinum being a PGM producer, not just a platinum producer. EBITDA was further increased by the weaker rand, contributing ZAR 3.3 billion, but partially offset by the impact of CPI and the royalties of ZAR 0.9 billion. Earnings were reduced by the lower measured value ore stockpiles of ZAR 0.2 billion as a result of the drawdown at Mogalakwena and lower sales volumes from minor metals, which have been impacted by trade wars and the particularly strong sales volumes in H1 2018.

The group EBITDA margin improved year-on-year from 21% to 32%, supported by strong mine-to-market margins from our own operations of 43% and 38% from our joint venture portfolio. The POC margin rose to 16% from 11% in the prior period due to a portion of the 4E purchased concentrate transitioning to tolling arrangements with effect from the 1st of January 2019.

Unit costs rose by 13% to ZAR 22,027 per platinum ounce over the period, a less pleasing performance. We experienced higher costs driven by mining inflation of 7.5% and additional costs due to increased maintenance activities as well as equipping developed working areas at Amandelbult. Lower production and the drawdown of ore stockpiles at Mogalakwena added a combined ZAR 600 per ounce. Whilst our current unit costs are above our guidance, we believe that we can offset this increase through increasing ore mining at Mogalakwena, which will replenish stockpiles, plus the benefit of increased production to come through in the second half. As a result, we retain our 2019 cost unit -- sorry, unit cost guidance of between ZAR 21,000 and ZAR 22,000. The all-in sustaining cost per platinum ounce was ZAR 517 -- sorry, $517 per ounce against an achieved platinum price of $831.

Working capital. Working capital increased from ZAR 4.9 billion to ZAR 8.2 billion. The net ZAR 0.7 billion increase in inventories reflects the impact of the stock count adjustment, which added approximately ZAR 1 billion. And then as a result of the additional maintenance activities at our processing facilities, we've seen the build-up in work-in-progress inventory levels. We expect the elevated work-in-progress levels to reduce in the second half of the year.

Trade creditors reduced by ZAR 3.3 billion as we paid Sibanye for the final purchase of 4E concentrates as they transition to the tolling arrangement. This was offset by a ZAR 1.3 billion increase in the customer prepayment, which is valued at ZAR 7.4 billion due to the higher dollar metal prices and the weaker exchange rate.

Disciplined capital allocation remains a key priority. H1 2019 CapEx was ZAR 2.1 billion, SIB and Project CapEx of ZAR 1.7 billion was spent in the period and a further ZAR 400 million was spent on the SO2 abatement project. Our project CapEx continues to be focused on low-CapEx, fast-payback spend, which currently includes the module 3 of the Amandelbult chrome plant and the Tumela 15 East mechanized mining section. Project capital also includes projects to drive best-in-class performance.

Capital guidance for 2019 remains at between ZAR 5.7 billion and ZAR 6.3 billion as more SIB capital to maintain the integrity of our assets and safety standards is expected to be spent in the second half. Capitalized waste stripping at ZAR 1.1 billion is ZAR 0.5 billion higher than the prior period due to additional waste tonnes being mined in line with the revised mining plan at Mogalakwena. Guidance for 2019 capitalized waste stripping remains at between ZAR 2 billion and ZAR 2.2 billion for the year.

Most pleasing has been the ZAR 3.1 billion improvement in net cash from the beginning of the year to ZAR 6 billion. In the chart on the left, you can see the underlying operational free cash flow increased by 126% to ZAR 4.3 billion, as this -- and this was lower than it could have been had we been able to process the additional inventory in work in progress. The ZAR 3.1 billion increase in the net cash position was after paying the 2018 final dividend of ZAR 2 billion. Excluding the customer prepayment, which is valued at ZAR 7.4 billion, the company will be in a net debt position of ZAR 1.4 billion and a net debt-to-EBITDA ratio of 0.1x.

Finally, underpinning our strategy, we have a value-focused approach to capital allocation with clear prioritization around the maintenance of the integrity of our assets, to pay dividends to our shareholders with the base dividend determined at the headline earnings base ratio of 40%, ensuring a strong balance sheet. And any remaining discretionary capital is then allocated towards growth investments that meet our stringent value criteria. And in the event there being excess cash, we would return that back to shareholders. So in summary, we have a strong set of results which reflects the delivery of our strategy.

I'll now hand you back to Chris.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [6]

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So thanks, Craig.

Turning to a review of the platinum market. The dollar basket price, which is referenced by that beige line, performed well in first half, rising by 16% year-on-year. Platinum price, which is shown by the black line, was lower by 11%, but that was offset by the palladium and the rhodium prices, with palladium reaching all-time highs in April. At the same time, the rand weakened by 15% from an average of ZAR 12.38 to ZAR 14.26 to the dollar in the first 6 months of this year. And this helped the rand basket price, which is shown in that green line, to increase to 33% per platinum ounce sold this year.

We continue to see demand for the 3E platinum group metals above the short and the medium term as positive. If we have a look at the chart on the left-hand side, let's focus first on platinum. Platinum is being boosted so far this year with very strong investment demand, over 700,000 ounces going into ETFs, and continued healthy demand from a number of industrial sectors.

Automotive, which you'll recall has been seeing a decline in Western Europe diesel in particular, which is about half of all the metals sold into the auto sector, has been declining for a number of years. What we've started seeing is that decline flattening off this year. And then in addition to that, we've seen light-duty outside of Western Europe increasing as well as heavy-duty diesel. The combination of those actually says that the auto sector is scheduled to see very small declines in this year.

One negative so far this year has been the expected decline in Chinese platinum jewelry sales, but that will be offset by double-digit increases in India. Japan and the U.S. and the rest of the world will see slight increases. Perhaps, the red dot on that slide is overly pessimistic because we only forecast this year about 50,000 ounces decline from the jewelry sector in total.

If we look at the 2 bars on the right-hand side, you can see that both palladium and rhodium demand, as you know, is dominated by the gasoline auto sector. What we've seen is that tighter emission rules in a number of countries leading to increased loadings on the catalysts is more than offsetting the decline that we've seen in absolute vehicle numbers, meaning that we should see demand increase again for both metals this year, with palladium increase -- with palladium deficits this year expected to be about 800,000 palladium ounces.

So turning towards how Anglo American Platinum can continue to deliver the next phase of value. So taking a moment to reflect on our value proposition, which is based around 3 key pillars: firstly is the quality of our assets and operational excellence; secondly, around capital discipline and shareholder returns; and thirdly, around the long-term sustainability of our business.

We are underway with a revised strategy from what we've previously internally described as a burning platform to what we're now describing as the burning ambition to further leverage our differentiated value proposition.

So the next phase of value can best be described on where we're focusing -- you see that value from in these 4 blocks. On the top left-hand side, you can see the block that we're calling P101 and FutureSmart. That focuses on our assets, on the optimization of our assets, by achieving and beating global benchmark, and we call that internally P101 as well as modernizing our assets and the use of FutureSmart technology, which we'll go into a bit more detail later.

On the top right-hand side, we still remain committed to low-CapEx, fast-payback projects. You can see the list of projects there. We still believe that significant value can be generated through the investment in chrome at Amandelbult and Modikwa, modernization of the 15 East [tractor] section at Amandelbult, concentrator debottlenecking at all of our operations and the base metal refinery and copper leach circuit improvement.

On the bottom left-hand side, we continue the studies of both Mogalakwena and Mototolo/Der Brochen to find the best value options available to this company. As the studies are progressing, we're seeing further optionality in the high-quality assets that we own, but we do need to conclude these studies to see where the next best value is for the company. Both Mogalakwena and Der Brochen have moved to the next phases of study in the first 6 months.

On the right-hand side, the market development continues to be a key strategic investment. We continue to think about this as an investment, not a cost. We've made further substantial progress in the first 6 months, including with the introduction of a new partner into the AP Venture fund. Now we have 4 partners, 2 additional to ourselves and the PIC. This latest partner is Toyota's Mirai Creation Fund.

We've also launched very recently the Lion Battery Technologies with PGM to accelerate the development of PGM-containing battery technology. We've also launched new project -- products in both the jewelry through the PGI and new strategic partnerships through the World Platinum Investment Council.

This slide highlights some of the work that we've been progressing on P101 and utilizing FutureSmart technology to ensure that we achieve and beat world best practice across our operations. You will recall in February this year, the annual results presentation, we started sharing some of the thinking about where we saw potential. Now we're highlighting how some of these technologies could potentially benefit our organization. You can see that a considerable amount of work has taken place on the development of these new technologies. And you can see across both mining and processing some of the progress that's been made in the last 6 months.

So you'll recall this slide that we shared at our results presentation in February. At that time, I said that I could see or we could see a further EBITDA value uplift based on 2018 prices of a following 5% to 8% increase in EBITDA by 2023. And you can see from that chart, it excludes any capital investment from expansions.

So turning now to our guidance and also our conclusion of the first half's results. We are maintaining all the guidance that we gave to you in the beginning of the year. Firstly, for produced, refined and sales volumes, all of which, as you recall, exclude the toll refining of 4E ounces for Sibanye. Firstly, PGM production. That remains between 4.2 million to 4.5 million ounces. Refined PGM ounces, you'll see, remains above what we produced for this year, only as we have some of the benefit from 2018 material flowing over and therefore are expected to produce -- to refine 4.6 million to 4.9 million ounces. And likewise, we will be selling between 4.6 million and 4.9 million ounces.

As Craig mentioned that our -- as we've previously guided, our capital expenditure will remain between ZAR 5.7 billion to ZAR 6.3 billion. And also, as Craig promised, cost performance, which has been higher so far this year than input cost inflation of 7.5%, we believe that we can limit the unit cost increases to between probably at the upper end of the range of between ZAR 21,000 to ZAR 22,000 per platinum ounce.

I think it is important, just to caution, though, that there are potential headwinds in the second half of the year with wage negotiations, and as we come through the winter period, potential disruptions at Eskom.

So to conclude, Anglo Platinum has delivered another strong set of results. We've had 0 fatalities at our managed operations in the period, and we continue to see safety improvements. Our ESG performance is receiving global recognition. We've had a relatively steady production performance with a second half production performance increase expected. Robust market fundamentals for PGMs have led to a strong rand basket price. The company's in a strong financial position, which is now enabling us to increase returns to shareholders. And we have a strategy in execution for the next phase of value at Anglo American Plat.

So ladies and gentlemen, I'm really pleased at what the company -- I'm pleased with the performance of the company and what the company has been able to deliver. And of course, I'd like to take this opportunity to thank the Board for their support, but also to my management team and to every single employee at Anglo Platinum for their incredible hard -- their incredibly hard work and their amazing contribution to the results that we've been able to present on their behalf today.

So thank you very much. Both myself and Craig and also my management team are happy to take any questions that you may have. Thank you.

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Questions and Answers

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René Carlo Hochreiter, NOAH Capital Markets (Pty) Ltd - Mining Analyst [1]

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It's René Hochreiter from NOAH Capital. Well done again on your results. I just have a question on the dividends. You -- a 40% -- a rate of 40% of EPS. Do you have any ambition of maybe increasing that to 50% or 60%? Because my guestimate for the rest of the -- for forward dividend yield is about 3% for you. Internationally, that's pretty low for a resource company when times are good.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [2]

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You want to take that, Craig?

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Craig Miller, Anglo American Platinum Limited - Finance Director & Director [3]

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Yes. René, thanks very much for the question. So a couple of observations. I mean, in February, the company increased its dividend payout ratio to 40% and so really reflecting today, paying out the ZAR 11 per share. So the total that we'll pay out this year is about ZAR 5 billion. And as I articulated, in terms of the capital allocation that we did go through, we do assess the various principles around that in terms of, first of all, priority, maintaining the integrity of our assets, making sure that we do pay out that base dividend and then looking to what we do with any extra cash. And so we do look at it constantly, and we did look at it in June. And have we -- we do need to just point out, that with the customer feed prepayments at ZAR 7.4 billion, we are in a net debt position. And with ZAR 1.4 billion, and that is something that we take into consideration. But considering some of the headwinds that Chris spoke about, we will take those into account as we look out for the rest of the year, and we'll continuously assess it.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [4]

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This is going to be easy to me.

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Unidentified Analyst, [5]

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So -- okay. Congratulations on a good set of numbers. My one question is on cost control, and I just want to know how big a challenge do you expect it to be going forward, considering that in terms of production profile that remains very much flat. I'm of course asking for 17,000 per month increase.

And then in terms of Eskom, double-digit increases are probably inevitable from where we stand. So my second question, I would like to get a bit of an update on wage negotiations, if you can.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [6]

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Craig, should I start? And then feel free to add the pearls of wisdom. I mean, look, for the last number of years, probably the last 4 or 5 years, we've been materially outperforming unit costs, mining input cost inflation. I guess, at some point in time, that was going to catch up, and I think then we were going to be, I guess, fighting against mining input cost inflation, so -- but we still think that we can beat that. Our guidance -- at the top end of our guidance, we mean that we would have a 6% increase this year, and that would mean that we are still outperforming mining input cost inflation. As Craig mentioned, that is currently standing at 7.5%, so the highest delta above normal inflation that we've seen for a number of years.

In the meantime, whilst we've had the strikes at Mototolo, whilst we're trying to equip the phases and generate the new mining phases at Amandelbult, all of those are going add additional costs. And then it didn't help at Mogalakwena this 6 months that we were putting down in ore stockpiles.

But having said all that, we still believe that we can return to beating mining input cost inflation. Certainly, that's still our ambition this year. But look, it's certainly not helping that we've got higher fuel prices and higher electricity prices. And clearly, wages above inflation continues to put additional inflation pressure on the company. But the management team are focused. We plan to get that below that rate of rise above mining input cost inflation.

On the wage negotiations, that have just commenced, so there is nothing really that I can add that -- other than we've had exploratory discussions with the unions, but we haven't yet put our foot forward. We haven't put our offer on the table. What we are being very careful about is making sure we don't embed any unsustainable cost increases. So whilst it will be difficult wage negotiations, of course, as prices go up, they also come down. And what we want to be very careful about is we don't embed unsustainable cost inflation that when prices come down through the cycle, that we then have to start retrenching again. So Amandelbult, I guess, is our biggest challenge where we have 60% of the costs, at that kind of mining, are still related to labor and contractors. Any unsustainable increase will put pressure on that operation where the majority of -- and crew members and where the majority of the members of this company are. So in addition, perhaps what we haven't flagged as well is that we have been paying some ones-off benefits. Last year, we paid ZAR 9,000 cash ESOP to our employees. This year, we'll be paying ZAR 4,000 and ZAR 4,000 in shares and likewise next year. So there are some payments that are going to employees. And I think we'd rather look at some sources of settlement like that to ensure that we don't embed, as I mentioned, unsustainable wage increases to the base.

Craig, do you want to add anything to it?

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Craig Miller, Anglo American Platinum Limited - Finance Director & Director [7]

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I think, Chris, it's a complement, obviously, and cost control is a key area that we are focused around. And Chris, also expect a bit to -- what we're looking at for in terms of P101 and FutureSmart technology, with the expectation that, that will help in the future sort of maintain those cost increases longer term and sort of driving some of that 5% to 8% EBITDA improvement.

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Christopher Nicholson, Morgan Stanley, Research Division - Research Analyst [8]

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It's Chris Nicholson from RMB Morgan Stanley. You built up more inventory again in the first half of this year, and I think that comes on top of a build of around 300,000 PGM ounces last year. and none of your peers have to across the industry. I know Johnson Matthey on the smelting side, though, has had some issues going into the first part of this year, and you may recall, have this fire last month.

So assuming Eskom plays its part, I think it's maybe fair to assume the amount of metal coming into the market over the next 6 to 12 months is probably higher than the last 6 to 12 months. Is there anything that you see going -- looking into the market that maybe is of concern through supplying greater amounts of metal just given the softer global demand conditions? And then also, given your balance sheet is now a lot stronger, would you manage that to some degree if prices or demand soft -- you got a bit more capacity to hold back metal if necessary?

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [9]

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So Chris, I think 2 points I'd make around -- I mean, generally, the first half of the year is weaker than the second -- weaker than the second half. And that's just generally the market over -- as long as I've been in the business. So expecting a higher output in the second half of the year is not overly concerning to us. Generally, for example, we will try do smelter rebuilds and all the big smelter works in the first half of the year. So just generally, that type of cycle is not abnormal to us.

Also, what we've started seeing is already some of that material that you spoke about and some of our competitors and some of the fabricators coming back in the first half. So I don't, again, we're overly concerned that too much metal is going to be a huge bump of metal into the final half? So that's not worrying us. And generally, given the deficit of metal that we have around for palladium and rhodium, it's not in our interest to stockpile metal. Number one, we don't do that to try and pretend to be smarter than the market. That we -- we don't stockpile metals. The market needs the metal. And certainly, we'll continue producing that metal. And with platinum forecast to be a little bit in deficit this year, again, we're not overly concerned that there's too much metal coming to the market. And you will find some of that sort of abnormal flows, but it's still going to be based on the underlying production. And if you look at the underlying production both in platinum and palladium, there's actually very little increase scheduled over the next couple of years.

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Emma Chapman, Anglo American Platinum Limited - Head of IR [10]

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Can we take some questions from the line.

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Operator [11]

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Yes. We have a question from Johann Steyn of Citigroup.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [12]

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Chris, I've got 2 questions. The first is just with regard to the prepayments. Would it be possible to describe a little bit more detail behind those prepayments, whether that's happened at premiums or discounts, and also on which metals, whether that be the bump in palladium or rhodium? And that's the first question. Maybe deal with that one first, and then I'll come to my second one, please.

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Craig Miller, Anglo American Platinum Limited - Finance Director & Director [13]

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Okay. So the prepayment is to our customer. It is on the 4E and metals, and that sort of gets revalued on a monthly basis. And then in terms of the premium, also on the contracts and components of those, I'm not at liberty to disclose those to you at the moment. That's part of the agreement with the customer.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [14]

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But Johann, I can confirm that there's no discount, no commission that is paid. And it also comes at 0 cost to the company, so it's a source of capital to the company, 4- or 5-year period, at 0 cost to us, but also no discount or commission. And Craig is correct. It comes on all 4 metals, and it's supplied to one particular customer.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [15]

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Okay. And the second question is regarding Mogalakwena and the work that you're doing on the expansion. How is the support from Anglo American with regards to further capital commitments at Mogalakwena in South Africa? And I guess you wouldn't know specifically at this point, but have you received -- I just want to know if kind of Anglo American -- is this seen as an Anglo American priority? Or do you think that's not being certain further down the line?

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [16]

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So Johann, thanks for that question. The -- this project is no different to any other project in the Anglo business. Number one, yes, it will compete for capital in the Anglo business. We've never got to a position, for example, that our Board has wanted to support something and Anglo American hasn't. If a project is good enough to go for our Board, where we have in any event a number of Anglo directors, if it's good enough to go at our Board, it will be good enough to go with an Anglo American Board. At this point in time, the Anglo Group is supporting us in going through the -- a normal disciplined capital allocation process doing the project studies. And as we go through each of the project studies, we take both Anglo American along, but also our Board. And Anglo, just like our Board, has supported the next phase of projects, so the underlying project is good enough to continue with its project development. And so there's no South Africa overlay to that decision process. If a project can stand on its own feet, it would be good enough to invest capital that any shareholder wants us to invest in. We've got a number of both qualitative and quantitative criteria that we follow. That's all very transparent. And as I said, there is no other overlay to whether or not that project will proceed or not.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [17]

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And maybe one last one. Again, Mogalakwena. When would you know for sure what direction you're going to take on this project? It will start end of this year?

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [18]

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Yes, Johann. So I think we'll go into next year with the project start. I think, by the end of this year, we'll probably have a good feel for what's the nature of that project. As you'll recall, I gave some feedback at the final year results presentation in Feb to say that, actually, as part of doing the project studies, we've come up with quite a few attractive options. And it's not just one option available to us of putting in new concentrator and expanding the open pit. So we're actually working through some of those value options right now. And probably by the end of the year, early next year, we will have decided on the single option that we want to proceed. And then it will probably take summer of next year to develop that final option to its finality and then seek Board approval. I think coming by the end of the year, we'll probably have a better view on the time line to finalize the project studies. But I think it's right there. We'll go into next year, probably early part of next year, we'll have decided on the final option that we can then finally do the final project study on.

Do we have any further questions on the conference call?

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Operator [19]

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There are no further questions from the lines.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [20]

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Thank you. Emma, we can do the webcast questions.

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Emma Chapman, Anglo American Platinum Limited - Head of IR [21]

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They've all actually been addressed. So I guess final questions from the room?

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [22]

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So it's Arnold Van Graan from Nedbank. So you've been doing a lot of work on market development and essentially spearheading that. And you've previously called for bigger support from your peers. So are you seeing that now that basket price is a bit high and their balance sheets are easing, are you seeing a bigger appetite for support? And do you have an initiative to drive that as a collective? Not just for yourselves and the PIC, which accounts for the government part of it, but what we need is your peer group to also step in. So can you just give us a bit more on that?

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [23]

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Yes. Arnold, thanks. Look, so first of all, I think we're very pleased that we were able to make a number of additional announcements in this first half getting additional investment into the AP Venture funds from external third-parties. I've already mentioned that we -- both Mitsubishi now and Toyota, so 2 seriously heavyweight companies joining AP Ventures wanting to expand demand on the industrial side, particularly focused around the green economy and hydrogen energy. That's really, really powerful and really supportive of perhaps a longer-term industrial development for PGMs. So that was really positive.

And then the second, we recently been able to make an announcement around the Lion Technologies. So we think that's really, really exciting. Of course, it's early stages, but what is traditionally being seen as a huge negative for the business, and that is batteries in the electrification of the drivetrain. So what we're now seeing is that we think there is potential to have platinum and palladium into battery technology. We're doing some work, as you will have seen from that announcement, with the university in Florida. So we think that's really positive, and we'll see how that unfolds over the next couple of years. But those are 2 key developments that we're very pleased to have been able to announce in this first 6 months.

We haven't yet seen a big material change for the rest of the industry to support market development investment. We keep trying to get our peers to look at market development as an investment as opposed to a cost. We have -- Impala are really supportive and play their equivalent role. We have a number of smaller players that haven't yet come to the party. And I think it's fair to say that Sibanye are probably trying to find their feet in the space. I mean they've got clear ideas of where they want to spend money. We have an industry sort of market development strategy meeting in the next month. And I think that's really going to provide some guidance as to how the industry is thinking about that. So whilst we haven't yet seen, Arnold, some of that, but what we'd expect is see the industry playing their fair share. We have got a strategy session actually aimed at exactly doing that, to get everyone to support a number of initiatives that we think will move the dial, and in those initiatives, everyone to pay their fairway way. And I think we are looking to that strategy session in -- at the end of next month to play that role.

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Emma Chapman, Anglo American Platinum Limited - Head of IR [24]

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I think we're done.

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Christopher Ivan Griffith, Anglo American Platinum Limited - CEO & Executive Director [25]

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Okay. As Emma says, I think we're done. Thanks very much, ladies and gents, for your time. Much appreciate it. Thank you.