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Edited Transcript of ANG.J earnings conference call or presentation 8-Aug-19 8:00am GMT

Q2 2019 AngloGold Ashanti Ltd Earnings Call (Morning Call)

Johannesburg Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of AngloGold Ashanti Ltd earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graham J. Ehm

AngloGold Ashanti Limited - EVP of Group Planning & Technical

* Kandimathie Christine Ramon

AngloGold Ashanti Limited - CFO & Executive Director

* Kelvin P. M. Dushnisky

AngloGold Ashanti Limited - CEO & Executive Director

* Ludwig Eybers

AngloGold Ashanti Limited - COO of International

* Massoud Massoudi;Senior Vice President Capital Projects

* Sicelo Ntuli

AngloGold Ashanti Limited - COO of Africa

* Stewart Bailey

AngloGold Ashanti Limited - EVP of Corporate Affairs

* Tim Thompson

AngloGold Ashanti Limited - VP of Growth and Exploration

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Conference Call Participants

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* Adrian Spencer Hammond

SBG Securities (Proprietary) Limited, Research Division - Research Analyst

* Dominic O'Kane

JP Morgan Chase & Co, Research Division - Analyst

* James Andrew Keith Bell

RBC Capital Markets, LLC, Research Division - Analyst

* Johann Steyn

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

* Patrick Mann

BofA Merrill Lynch, Research Division - VP & Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the AngloGold Ashanti First Half Results Conference Call. (Operator Instructions) Please note that this call is being recorded.

I would now like to turn the conference over to Stewart Bailey. Please go ahead, sir.

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Stewart Bailey, AngloGold Ashanti Limited - EVP of Corporate Affairs [2]

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Thanks, Irene, and welcome, everybody, to our first half results conference call. Before we carry on, I would like to direct your attention to the safe harbor statement at the beginning of the presentation. It contains important information with respect to forward-looking statements, and I'd urge you to review it.

Kelvin today is going to kick off with a review of the highlights of the first half of the year and the second quarter. Christine will talk to the financials. Our Chief Operating Officers, Ludwig and Sicelo, will speak to their respective areas of responsibility. Graham Ehm will talk to the progress at our major projects. Tim Thompson will talk to exploration before Kelvin wraps up.

Without further ado, I'll hand it over to Kelvin.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [3]

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Thanks, Stewart, and thanks to everybody for joining us this morning. Many of you are familiar with our strategic approach. It guides us in mitigating risks, protecting our balance sheet, managing costs and capital and ensuring that we have a pipeline of options to sustain the business into the future. Maintaining our license to operate is fundamental to the success of the business. We do this through delivering on our ESG objectives, specifically working towards zero harm, sound environmental management and community development. The second quarter has been another encouraging period when it comes to safety. By the end of the quarter, we achieved 449 consecutive fatality-free days. That's a new company record. All other safety measures are also trending in the right direction. While this is an important milestone, there will be no complacency, and our focus remains on ensuring our goal of zero harm.

The South Africa region achieved an all injury frequency rate for the period of 5.28. That's the lowest in its history, benefiting from the new shift arrangements in Mponeng. It's also important to note there were no reportable environmental incidents during the quarter.

As we mentioned in May, 2019 production is back-end weighted. This reflects normal seasonality as well as a slower start to the year at certain of the assets. We expect another small step-up in Q3 before a further lift in production in Q4, with strong performances expected from Brazil, Siguiri and Geita.

Production of 1.55 million ounces for the first half of the year reflected solid contributions from Geita, Iduapriem, Tropicana and Kibali. Iduapriem benefited from improved grade control and higher-grade order from Teberebie Cut 1 and Cut 3. Geita saw strong recovery from the mill maintenance that took place in Q1. Tropicana delivered higher mill throughput, improved head grade and increased metallurgical recoveries. Our cash costs improved by 4% to $792 per ounce. All-in sustaining costs in the first half improved to $1,002 per ounce compared to the same period last year.

EBITDA margins remain healthy and growing despite lower volumes and a lower gold price when compared to the same period last year. Production and cost guidance remains on track.

As this slide indicates, we continue to focus on expanding margins, which are seeing the benefit of prior investments, and we continue to drive operating efficiencies, which will help ensure we capitalize on the current gold price environment.

And with that, I'll hand over to Christine to provide an overview of our financial performance.

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Kandimathie Christine Ramon, AngloGold Ashanti Limited - CFO & Executive Director [4]

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Thanks, Kelvin. Good day, everyone. The operational performance in the first half continues to reflect a strong focus on operational efficiencies and capital discipline. Production from retained operations was down by 2%, mainly due to planned volume and grade reductions at CVSA, lower grades at Sunrise Dam, lower production and feed grades at Siguiri due to the Combination Plant being commissioned and lower production in the South African surface operations. Tropicana, Kibali, Geita and Iduapriem delivered solid improvements in performance, which offset a large portion of the production decline.

Q2 reflected an improving production stream with a 7% increase compared to Q1. All-in sustaining costs also improved by 2% year-on-year, ensuring a healthy all-in sustaining cost margin of 23%. Despite the slightly lower average gold price received, free cash flow improved by $20 million for H1 compared to the prior year. Free cash flow in Q2 was $78 million and is expected to improve in H2 across the majority of our operations. Free cash flow was impacted either by slower cash repatriation from the DRC due to the introduction of the mining code last year and the change in administration. While we have received $31 million from Kibali during H1, free cash flow would have been $121 million higher had the remainder of the Kibali cash been received [previously]. Based on our discussions with our JV partner, Barrick, we are expecting to receive the cash in the near future.

We also saw higher levels of working capital relating to unsold gold and higher ore stockpile levels. Argentina export duties and fleet prepayments for CVSA, which, except for the export duties, will largely unwind in H2. However, prepayments on equipment and preproduction capital for Obuasi are expected to have an impact on working capital in H2.

Overall VAT receivables between Tanzania and the DRC remained largely steady as we continue to offset against corporate taxes. Capital expenditure is 5% lower than the first half in the prior year largely due to South African asset sales, the completion of the Siguiri Combination Plant and lower capital at Sunrise Dam, Iduapriem and Kibali. Capital expenditure is weighted towards H2 in line with past trends and taking the Obuasi growth capital into consideration.

Looking at the cost performance year-on-year. Cash costs improved by 4% to $792. This reflected the advantage provided by weaker currencies, improved grades, favorable stockpile movements and the South African asset disposals. These benefits were partly offset by inflationary pressures, lower silver bar product sales at CVSA and lower volume and efficiencies. We are expecting further operational efficiency improvements in H2 to benefit both cash and all-in sustaining costs, supported by improved production across our operation and the operational excellence program. The $18 an ounce net improvement in all-in sustaining costs year-on-year was supported by lower cash costs and sustaining capital.

Environmental rehabilitation leases, which are noncash in nature, and IFRS 16 finance leases both had negative impact on all-in sustaining costs. However, the impact of the new IFRS 16 accounting standard was neutral when taking the positive impact of cash costs into account.

All-in sustaining costs for Africa operations at $982 an ounce was 5% below the prior year, helped by the 11% lower all-in sustaining costs for the South African business. The focus in South Africa remains on reducing the off-mine legacy costs and improving safety and productivity at the existing operations. Good progress is being made in this regard.

All-in sustaining costs for the international operations was 2% higher for the half year at $974 an ounce, reflecting the lower plant production in Argentina and inflationary pressures in the Americas region, in particular Argentina.

Our balance sheet strategy continues to enforce capital discipline through our decision-making and capital prioritization. Net debt at $1.74 billion reflects a 44% reduction from the peak level in [2018]. Our adjusted net debt-to-EBITDA ratio of 1.2x reflects ample headroom to the 3.5x covenant. Leverage would have been 1.1x had the Kibali cash due been received by the end of June. Liquidity remains strong and continues to provide good flexibility in the current climate. Weaker currencies continue to benefit our costs and provides a natural hedge to inflationary pressures across our portfolio. We remain strongly levered to the higher gold price, and we expect this, together with improved production and efficiencies in H2, to benefit cash generation.

Finally, we now have 2 investment-grade credit ratings with Moody's and Fitch, both with a stable outlook. S&P's credit rating was recently affirmed at 1 notch below investment grade with a stable outlook.

Finally, as Kelvin mentioned, our guidance on all key operating and cost metrics remains intact. In line with past trends, both production and capital is back-weighted to the second half, in particular Q4. We expect to see improved production from Geita, Brazil, Siguiri, Mponeng and Sunrise Dam. In addition, cash costs and all-in sustaining costs are expected to improve on the back half, improved production based on the weaker currency and current commodity price assumptions. This benefit will largely be realized in Q4. Growth capital has been revised down to $330 million to $360 million due to the timing of the Obuasi project capital, which will be skewed to Q4 with the refocusing on the completion of Phase 1. Graham will elaborate a little later.

Phasing of the Obuasi project capital of $545 million in total is now roughly 10% spent last year, 50% to be spent in the current year and the remaining 40% to be incurred in 2020. The balance of this year's growth capital of about $45 million relates to advancing the Quebradona feasibility study, Tropicana, Boston Shaker and the completion of Mponeng Phase 1. Sustaining capital guidance remains unchanged at approximately $160 to $170 an ounce, totaling $520 million to $560 million.

I will now hand over to Sicelo, who will talk about the Africa [growth] projects.

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Sicelo Ntuli, AngloGold Ashanti Limited - COO of Africa [5]

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Thanks, Christine. The Africa region delivered a strong performance in the first half of the year. Production at Geita was up 6% against the same period last year despite the planned maintenance undertaken on the ball mill in the first quarter. Geita continues to transition to a higher proportion from underground operations as planned, with a 20% increase in grade recovered from underground. Cash costs were down 5% on the back of the stronger production.

At Kibali, production was up 12% as underground mining operations reached steady-state performance with the completion of the material handling system ramp-up. Total cash costs were 23% lower at $541 per ounce on the back of higher production, 21% increase in recovered grades and improved cost management.

At Siguiri, the ramp-up on the new combination plant is underway. We saw 12% improvement in gold produced the first quarter, and production is expected to continue ramping up through the second half as the plant continues to be integrated, stabilized and optimized. This is a key area of focus for us.

Iduapriem delivered another strong performance. Production was up 8%, mainly due to a 10% increase in recovered grades from the Teberebie Cut 1 and Cut 2. Cash costs were down 6% on the grade improvement.

Given the seasonality in the first half of the year, we're expecting to see a stronger second half production driven by improved performances from Geita, Iduapriem and Siguiri.

At Mponeng, notwithstanding the fact that production was 4% lower than the first half of 2018, the all-in sustaining costs improved by 9%. The notable improvement in costs is the result of a range of factors: the successful restructuring of both on-mine and off-mine structures as well as the implementation of a new shift arrangement. In less than 8 months since implementation, this is now considered to be the normal way of working at Mponeng, with employees responding positively. We've seen significant benefit across most mining matrices year-on-year, which includes 58% improvement in safety performance, 9% uplift in productivity, 6% increase in sales advance and a 5% rise in ore reserve development, despite fewer shifts in the current calendar.

I'll remind you that production from our surface operations in Q1 was impacted by inclement weather and sporadic power availability. However, we saw a turnaround in Q2, particularly at Mine Waste Solutions due to higher grades and some metallurgical wins. The regional team is working on a number of additional improvements, which we hope to see bear fruit over the balance of the year.

Lastly, an update on the Siguiri brownfields expansion. The Combination Plant has now been completed. Our current focus is on achieving a higher proportion of hard material and the crusher is stabilized to design throughput through feed blending and scalping of fines, which will assist material flow. Improving the overall performance here is a key priority for us.

Now I'll hand over to Ludwig, who cover the Australia and Americas Region.

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Ludwig Eybers, AngloGold Ashanti Limited - COO of International [6]

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Thank you, Sicelo. Tropicana had an impressive performance with production up 18% year-on-year, driven by higher mill throughput, higher head grade and increased metallurgical recoveries. This is on the back of the 6-megawatt ball mill, which I'm pleased to report is outperforming initial expectations. We expect a similar production performance in the second half of the year.

At Sunrise Dam, lower mill feed grades resulted in production of 136,000 ounces. We're expecting an improvement in production in the second half. Recovery and throughput improvements at Sunrise Dam are a key focus. We're doing the work to create mine flexibility in the Vogue ore body, which will give us the ability to increase feed grade. Looking ahead, Tropicana has committed testing autonomous drilling, which has the potential to lift productivities by about 15% and reduce the number of drills. This technology, which has been successfully applied to roughly 100 drill rigs globally, will allow us to operate with an exclusion zone during blasting, which brings a range of benefits.

At Mineração, we saw flat production year-on-year. Higher costs resulting from the investment in dry stacking equipment for our mines. This extra cost was slightly offset by operational excellence initiatives and exchange rate movements. We see production increasing in the second half with an especially strong fourth quarter expected.

At Serra Grande, production was 7% lower due to planned reduction in tonnages. At Cerro Vanguardia, production was down in line with the mine plan, which was mainly grade driven. Cost increased in line with lower production, though this was partially offset by efficiency gains and a favorable exchange rate.

In Cuiabá, upping development rate is critical area of our focus. Our aim is to increase ore body flexibility and confidence by opening up the mine ore grade mining areas. This will also have a cost benefit as we will [fold] spare capacity in the shelf and plant. Development meters at Cuiabá reached a new site record of over 1,400 meters per month during quarter 2. This beats the previous high watermark by more than 30%. This step change was made possible by our operational excellence projects, the increased [jumba] utilization and reliability, thus improving infrastructure and mobilizing a new underground development contractor.

The Boston Shaker underground project was approved this year, in April this year. It's extremely pleasing to note that the first blast took place in early May. And since then, the team achieved about 322 meters of development during the quarter, achieving up to 3 blasts per day. The project remains on track to deliver first gold in the second half of next year.

Looking ahead, we continue to drive operational excellence program, and we'll place a particular emphasis on increasing ore development and resource drilling. We're looking for this initiative to increase production flexibility and dry reserves of our underground mines. This will include sustaining step change in development performance as seen at Cuiabá, identifying additional new surface ore sources at CdS and fast-tracking our exploration of Palmeiras Sul at Serra Grande. At Sunrise Dam, we continue to focus on creating underground mining flexibility, increase reserves and driving down costs. On projects, we expect to progress the feasibility study at Quebradona, continue drilling at Gramalote and maintain the strong momentum at Boston Shaker.

With that, I'll hand over to Graham, who will talk to Obuasi and Quebradona.

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Graham J. Ehm, AngloGold Ashanti Limited - EVP of Group Planning & Technical [7]

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Thanks very much, Ludwig. In regard to Obuasi (inaudible) at 4,000 tonnes per day at the end of 2020. Many of you who have joined us on the call today visited Ghana and Obuasi at the end of May and also met with senior government officials and traditional leaders. Hopefully, this gave you a good sense of the project and how it is being managed as well as a good feel for the positive working relationship we have established with our host government and our key stakeholders.

As communicated previously, the schedule to achieve our interim milestone of first gold at the end of this year remains very tight. The schedule requires extremely close management, and there's no room now for slippage. Buildup of the bacteria for the BIOX circuit is on the critical path. This is a slow process, and we are arranging to purchase suitable sulphide concentrate to enable the bacteria growth to occur in parallel with plant refurbishment and construction.

The electrical contractor has also commenced and will work day shifts and night shifts to help expedite the schedule. This will help us achieve first gold on schedule and be in ramp-up to the planned 2,000 tonnes per day production rate for next year.

As we have progressed with Phase 1 refurbishment, we have had a few surprises which have increased the refurbishment scope and the scope of procurement. Some steelwork required more extensive rebuild. The thickener gearboxes, and MCCs and variable speed drives are obsolete now and no longer have OEM support, and new equipment is being purchased. We are managing these changes within the project contingency and the capital cost range as previously provided.

In terms of progress with the plant required for Phase 1, structural steelwork is almost complete on the crushing, milling, flotation, BIOX module 1 and CIL circuits. Minor refurbishment work remains to be completed on the BIOX CCV circuit. We are focused on expediting equipment to site and installing electrical control systems.

The new jaw crusher and grizzly feeder were delivered to site. The new MCC switchboards are in transit. The cooling tower has been shipped and is expected to arrive at the end of this month.

In regard to Phase 2, this is progressing well. Engineering is close to completion and will be wrapped up in quarter 3. Procurement is also close to completion. Demolition has been completed. The SAG/ball mills have been stripped to their shells. Civil work has commenced, and the current structural and mechanical piping contractor and electrical instrumentation contractors will roll into the Phase 2 works. Major packages for supply of structural steel and platework has been awarded to local contractors, and the piping package tender is currently in the market. The paste fill plant contract has been awarded. The underground shafts, materials handling and pump stage and tenders have been closed and will be awarded shortly.

In regard to operational readiness work, this is on track and cumulative progress now is approaching 50%. Underground mine development is on track with 3,080 meters completed so far. Development to achieve first stoping, the vent shaft and access to the KRS shaft is on schedule and the new GCVS vent shaft raise bore contract has just been awarded. Underground geological drilling commenced and 4 rigs are now operating.

Recruitment has progressed well, and we're into the second phase of operator roles in processing, engineering and mining. You will also recall that a key agreement for Obuasi's redevelopment is the Reclamation Security Agreement. In accordance with that agreement, we have formed the mine closure and rehabilitation community consultative committee. The committee comprises representatives of the community and the regulators. And in line with our commitments, rehabilitation of the old treatment plant and shaft area in the north has commenced.

Ghanaian participation has also been a key commitment, and we have made very good progress in this area through contracting, procurement and employment. Even so, expectations for local employment are very high and exceed the requirements of the project. And to facilitate transparency and manage expectations, we've established a local employment procedure and engaging with the various community groups. In addition, a comprehensive social management plan, which is aligned to the Ghanaian development goals, that has been rolled out and has been socialized with the community.

So I'll move on to Quebradona. On the Quebradona feasibility study, the selected firms, hatch, the plant and infrastructure and [boulder] for tailings to the water commenced the FS engineering during the quarter. Both these firms are based in Santiago. Detailed design of the sublevel caving is progressing well. The tradeoff study on tunnel boring versus conventional development has narrowed the cost and time differences, and conventional development has now been selected.

New technologies in automation and mobile miners are being analyzed. The licensing process will begin in the second half of 2019. The team is also very focused on the social and political enablement program, engagement with the community, regulatory groups, and the leadership is active. Polling results are showing that social support for the project is advancing.

Thanks, and I'll hand over to Tim.

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Tim Thompson, AngloGold Ashanti Limited - VP of Growth and Exploration [8]

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Our greenfield generative exploration hubs in the Australian and United States continue to identify and advance projects through the portfolio pipeline, with fieldwork followed by stage-gated drilling programs. Our drilling programs are front-end loaded during the year to provide the best opportunity to have the results available for budgeting and reserves declaration process. About 40,500 meters were drilled in the first half of our generative program this year, which is up 19% year-on-year. At our mine site exploration programs, we've drilled about 417,000 meters in H1, which is 23% more than last year and nearly double the levels that we were achieving 4 to 5 years ago. We're taking advantage of the opportunity to unlock ore reserve addition linked to better ore reserve development advance rates in our underground operations to produce stable year-on-year replacement in growth. This will support our planning process and allow better operational flexibility for the mine site portfolio.

A few highlighted mine site exploration programs are shown here in the next slide. $114 million is budgeted toward our brownfields mine site drilling programs. The brownfield exploration budget for the year is planned to provide stable delivery of production, ore reserve addition and new mineral resource development projects across the portfolio. We have a specific focus on maintaining and increasing the reserve base as ore reserve development unlocks drilling platforms at our large mines, either at established underground sites such as Sunrise Dam and Cuiabá or those such as Geita that are transitioning to underground operation.

2019 has seen an active start to the year across our greenfields generative exploration portfolio. As I mentioned earlier, our meters drilled in 2019 have increased significantly compared to year-on-year.

A few of the highlighted programs are shown here with a $30 million budget allocated to generative exploration in 2019. Our focus remains firmly committed to advancing projects in our Australia and North America exploration hubs and identify new projects in our West Africa and Brazil target focus generation areas where we've leveraged synergies with our existing operations.

And with that, back to you, Kelvin.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [9]

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Thanks, Tim. To wrap up, we're pleased with our sustainability performance for the quarter. But that said, we won't become complacent and we can always improve. As Tim discussed, our exploration and operational teams are working to increase reserve conversion. This will also support long-term planning. Beginning next year, we'll see a drop in our care and maintenance costs, particularly when Obuasi comes back into production. The process to streamline our portfolio is progressing, and we expect to provide an update on this before the end of the year.

For the more recently announced South African assets, there's very strong interest. Parties are in the data room, and management presentations are underway, with a view to receiving indicative proposals as the next step.

Obuasi is another important deliverable. While the project remains on schedule, albeit tight for year-end gold pour, we'll be careful in getting there prudently. No shortcuts. As you've heard from Graham, we have more flexibility in the schedule for the ramp-up from 2,000 tonnes a day to 4,000 tonnes a day in 2020. Last, but not least, we'll continue to keep a tight rein on cost and capital. Keeping a close eye on margins we'll ensure that investors see the leverage they invest in us for. Our vision is clear, to be a solid predictable business that delivers value through the cycle.

And with that, let's open it up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Johann Steyn of Citibank.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [2]

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Firstly, on the safety performance, congratulations for that. It's really outstanding. Well done. I've got a few questions here, and the first is on your South African asset sales. You've mentioned that you received quite a bit of interest. Can you perhaps give us an indication of local versus international interest?

And then secondly, the timing that you would expect for this to close. Is this something that you expect to close end of this year or into next year? That's the first set of questions.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [3]

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Well, first of all, Johann, thanks for your comment regarding safety. It is our #1 priority, and we're very proud of our performance. And again, we're never going to be complacent in that regard, but thank you very much. As far as the South African process, look, I can't divulge much in terms of detail. I can say, as indicated, we opened the data room in last month, and we've been making management presentations since then and they're continuing over the next few weeks. So the level of interest has been very high. Credible bidders in the data room, and so -- potential bidders in the data room. So from that perspective, we're very pleased. Timing, I really don't want to handicap that. Level of interest has been very strong, but these things, they have a natural course and so we'll go through diligence and we'll be very thorough in the process. So I can't really give an indication of timing at this point. But as we kind of move through the -- move through this quarter and into next quarter, we'll be able to give more updates as we go along. Importantly, as we've always said, no fire sales. We're going to be very disciplined as we go through this process and the others. So I can't give you more detail than that.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [4]

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Okay. Understand, yes, understand. Regarding the -- you've mentioned before, Kelvin, the potential for listing in London once you've sold the South African assets, et cetera. Again, ideally, when would you like to see something like that happening? And then in addition to that, what do you think are the kind of regulatory administrative hurdles due to effective phasing to prevent you or allow you to get that done? And something like reserve bank approvals, all of these kind of things, how do you guys think about that?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [5]

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First of all, I've been asked the question about a change in primary listing, and my response has been that nothing's off the table if it improves shareholder value. So we would certainly consider it. Our primary focus at the moment, though, is executing on all the things we have in front of us. We've got a lot of work to do. I'm very pleased with our progress, but that's really our primary focus. And at some point in time, if it makes sense for us to consider a shift in primary listing, we think of it. We'll always, of course, in any event maintain our listing on Johannesburg, and we'll kind of cross that bridge if there's a point in time when it makes sense to.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [6]

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Okay. Then hedging. With gold having rallied the way it has, are you guys considering any short-dated hedges at this level? Or would you like to remain unhedged completely?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [7]

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Yes. Look, on our going-forward basis, our view is we're not hedgers. And so nobody is happier than us to see the rise in gold price. We have great leverage to it, but you shouldn't expect a change in our position in that regard.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [8]

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And then lastly, normally, Kelvin, when you see gold doing what it is currently doing, a lot of companies, gold companies, soon after something like this, tend to announce high capital budgets, high exploration budgets, cutoff grades are dropped, unit costs start to escalate. What comfort can investors have that in a year's time from now, we don't look back at AngloGold and saying we've seen this before? What kind of discipline are you instilling in the organization?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [9]

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Look, I agree with you entirely and we've had this discussion before. I said watch and see which companies hold their discipline as we go through a higher gold price environment, which we're delighted to see. Look, from our -- we can only speak from our own perspective, but we can promise you this. One, as you know, we price our reserves at $1,100 an ounce, which is generally conservative to peer group. That's not changing. We're not changing cutoff grades. Our budget -- we're going through the budgeting process for 2020 now, but I anticipate that the $1,200 an ounce budget we use this year with the objective to be plus or minus free cash flow breakeven, I expect that will stay. The only thing, our hurdle rate remains the same as well, 15% after-tax return at a $1,200 gold price. We're not deviating from it. We've indicated our leverage ratio and our objective to move back toward a 1x net debt-to-EBITDA ratio. And I'm pleased to see at the end of the quarter we're moving back down to 1.2. And as we move through the year, if everything works according to plan, that will continue to come down.

I think the one other -- the one area that I will mention, though, is that we're going to hold our budgeting the way we have. As we look into 2020, one of the things we've been discussing, and again don't hold us to this because we're going through the budgeting process now, but we may decide to spend some additional funds on drilling, particularly on reserve conversion because we'll find a disproportionate uplift in some of our key assets where we think that -- and part of it is tied to -- the timing is tied to underground development so we can drill off platforms underground, but we think we could see a disproportionate benefit or uplift in value by increasing some of the reserves where there's a perception around some of the mines, that the mine life is more limited than we know it is. And so that's something we may target. But if we do, that's going to have to follow the exact same capital allocation criteria. We'll have to see that -- have been persuaded that it meets the hurdle rate. My sense and our internal thinking is it will do more than meet our hurdle rate, but it's going to have to pass the exact same test. And that by the way is irrespective of gold price. We were having that discussion earlier in the year when we were less than the $1,500 we're at now. So it's not -- it isn't relying on gold price, although again we're happy to see it.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [10]

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One last one, if I may. You've mentioned to me before that one of your big aims would be to get yourself into position to be able to invest countercyclically. Now given the fact that gold is rising as it is, one might argue that we're effectively in a strong up cycle now. Does that mean you'd like to operate well below your through-the-cycle net debt-to-EBITDA number of 1? Should we expect you to continue to delever the level of 1x net debt-to-EBITDA level if gold continues to be where it is?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [11]

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Yes. Well, look, it is -- it's relatively early days in the gold price run, which again we're happy to see. But ideally, yes. We've indicated that continuing to chip away at the balance sheet is a top priority. So if things continue to way they are, we would like to continue to move down. And at some point, could you see us reduce our net debt-to-EBITDA target below 1? Yes, but we'll take things as they come, and we've got lots on our plate to work through. But in terms of direction of travel, is that somewhere we'd like to go? Then yes, the answer is yes.

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Operator [12]

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Our next question is from Dominic O'Kane of JPMorgan.

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Dominic O'Kane, JP Morgan Chase & Co, Research Division - Analyst [13]

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Just 3 quick questions from me. On Obuasi, so reading between the lines, it seems as though you're flagging what seems like upside risk to the total project CapEx. So can you just maybe talk to how comfortable you think you are on being able to deliver within the budget?

Second question on Geita. I've seen Geita is one of the assets where there is potential upside on resource to reserve, can benefit from future explorations then. Could you just maybe talk to us about the long-term outlook for Geita? When do you think we can sort of model this mine to? What is the potential of the underground that you're seeing?

And then finally, I wonder if you could give us a -- your forecast for a mark-to-market EBITDA at $1,500 an ounce, ZAR 15 gold price environment maybe for 2020.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [14]

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Okay. Look, thanks, Dominic. Let me start with Obuasi and be crystal clear and categorical. No, this is not about an increase in capital budget. Crystal clear on that. And I'm going to just come back to Graham in a second to elaborate on that. We also have our Project Director, Massoud, available too. So very clear on that. No change, and we're not telegraphing anything like a capital increase at Obuasi.

At Geita, I'm going to have Tim discuss the reserve -- sorry, resource-to-reserve conversion, which we are very positive about. But while we're on the topic of Obuasi, let's finish with that. And Graham, if you can -- if you heard the question, maybe you can just comment on the capital budget.

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Graham J. Ehm, AngloGold Ashanti Limited - EVP of Group Planning & Technical [15]

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Okay. Thanks, Kelvin. We're tracking the trends for the Obuasi refurbishment and the overall project very closely, something like 50 or 60 trends being tracked, both for procurements for the extended work in refurbishment and the prices we're receiving on all the contracts. Normal sort of project procedures, a little bit more difficult in the case of Obuasi. In terms of the overall project, we're still within the capital range. We're not seeing any blowout at all, but I can ask Massoud. He's the Project Director. Would you like commenting?

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Massoud Massoudi;Senior Vice President Capital Projects, [16]

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This is Massoud. The only comment that I have here is there is some small budget shift with regard to the nature of the work that we are doing that is more refurbishment. The refurbishment, to some extent, is you have some surprises. But reality from the capital point of view and total capital costs, we have no changes and we can -- at this point, we will deliver on our budget.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [17]

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Thanks for that, Massoud and Graham. Dominic, I'll ask Tim Thompson, who's with us, to talk about Geita.

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Tim Thompson, AngloGold Ashanti Limited - VP of Growth and Exploration [18]

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Dominic, when you look at our 2018 results, we replaced reserves ahead of depletion, and we're expecting to have similar results in this next year. This is mainly coming from the opportunity that we've had to get our development in place at Star & Comet underground and then to also make the same sort of advances and development at Nyankanga underground. Those will be the main areas where we unlock value over the course of the next year as we continue to do the drilling from those platforms.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [19]

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And then the last question, Dominic, I'll ask Christine to respond to related to mark-to-market and our net debt-to-EBITDA at a higher gold price.

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Kandimathie Christine Ramon, AngloGold Ashanti Limited - CFO & Executive Director [20]

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Yes, I think your specific question is related to 2020. So I think, as you know, we don't actually give guidance in that regard. But certainly, we would expect good improvement in free cash flow generation, which is going to reduce your net debt-to-EBITDA ratio. So the best guidance I can give you is that it would be lower.

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Dominic O'Kane, JP Morgan Chase & Co, Research Division - Analyst [21]

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Could I just come back on Geita Underground? So again, what's your thinking around increased drilling? What -- where do you think the potential of that mine life is on? Mine life, sorry.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [22]

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Yes. We have to be a little careful, I think, Dominic, in terms of giving too specific a guidance. But maybe, Tim, maybe you can comment, generally speaking, on what you would anticipate at Geita.

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Tim Thompson, AngloGold Ashanti Limited - VP of Growth and Exploration [23]

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Yes. Geita, as it stands, is going to be one of those properties that will behave in a very similar way to most of our other undergrounds. You'll see a reserve base that's in that 3 to 5 sort of year reserve base, but you're going to see that 3 to 5 years extend over 8, 10 years, somewhere in that range, as we continue to have that extension of the reserves on a year-on-year basis.

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Operator [24]

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Our next question is from Adrian Hammond of Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [25]

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Three questions from me, please. Firstly, would you consider selling Mponeng but keep Mine Waste Solutions?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [26]

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No. At this point, Adrian, we're looking at all permutations. Our expectation is that we wouldn't be in a position to make that decision given what we've seen so far in terms of a strong level of interest. Nothing is off the table. We don't think that would be a likely scenario, but we'll just wait and see as we go through the process.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [27]

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Secondly, just looking at your focus on exploration, you haven't built a new mine for some 6 years now. Do you think that you have enough gold from brownfield projects to sustain the portfolio? Or is there a serious concern that you need to step up of exploration and we should see exploration spend like we have in the past of around $0.5 billion?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [28]

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Well, Adrian, a couple of things. First of all, you need to consider the fact that we're bringing Obuasi into production this year and through next year. So in terms of new projects, we're kind of looking at Obuasi in that context, new ounces, lower cost long-life ounces coming into the portfolio.

As far as the overall exploration budget, I'm generally pleased with it. The results have been what we expect. I talked about the kind of uptick that we may allocate next year based on what we see as the ability to add reserves around some key assets. As we've been having these discussions, we're also moving forward with our partner, B2Gold, at Gramalote. We're pleased with some of the drilling results last year and the uptick to grade that we've seen. We're moving Quebradona along as well through feasibility study. Been pleased with the exploration that I've seen coming out of Nevada and Tim can certainly talk more to that. So generally speaking, I don't think there's need for any kind of mass overhaul. I think the results have been positive and I think that we're in good shape going forward. Again, maybe some tweaking around the edges, but I don't think there's need for any material change.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [29]

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And thirdly, it's not unforeseeable you will rapidly degear [spot]. Would you consider changing the dividend policy or pay special dividends in the future?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [30]

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Well, with the existing policy, some of you are familiar, 10% free cash flow before growth capital, we will see with a higher gold price, as we manage margins, we will, by definition, see increased dividends, if it all holds according to plan. So that's positive. And the Board does look at the dividend policy on an annual basis, and the consensus view is with time, as we degear, we would like to see increasing dividends as we move forward. And our focus is on returning value to shareholders 100%. But we want to make sure we're going to manage everything that's in front of us first. We want to bring Obuasi in. We're going to continue with the delevering. So we'd like to get there, but we're going to be prudent in how we do get there.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [31]

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And do you think that -- I mean this talks, I guess, to your conservative approach, your opportunity to reduce finance costs given an upcoming maturity on your one bond. Do you see there's scope to materially reduce those costs? And to what sort of level can we think about for next year?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [32]

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I'll let Christine respond to that specifically, Adrian. Thanks.

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Kandimathie Christine Ramon, AngloGold Ashanti Limited - CFO & Executive Director [33]

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Look, as regards to the April 2020 bond, which is what you're referring to, I think certainly there's the opportunity to reduce hardened debt in the group. We would look at refinancing. However, for the time being, we are keeping optionality on that. And then refinancing the bond, we will be looking at this stage as doing it at much lower levels. So at this point in time bridging it and then deciding how to proceed with the level of refinancing of the 2020 bond. So clearly, from there, you can actually see our average cost of debt in the group is around 5%. So I expect that on the hardened debt of the group it's going to remain, the year will be [rebound]. So with the RCF facilities that we have in place, it is a lower cost of financing. So that certainly will keep things in perspective.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [34]

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Good. And on that note, Christine, does the recent addition of Fitch's rating substantially change the sort of level of borrowing costs you can appreciate given you have 2 investment-grade ratings now as opposed to one?

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Kandimathie Christine Ramon, AngloGold Ashanti Limited - CFO & Executive Director [35]

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Yes. I think, certainly, it helps with the pricing of refinancing for a new bond, and 2 investment grades does help, but I guess it does depend on market conditions at that point in time.

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Operator [36]

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Our next question is from James Bell of RBC Capital Markets.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [37]

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Just on the cost save, more generally. Obviously, at the higher gold prices, you're looking at potentially quite expanded margins into the second half. I just wondered if you could talk about if there are any cost inflationary pressures which you're watching which might compress those margins slightly?

And then secondly, just a little bit more detail on Obuasi. I think when we were there in May, there was some talk of the plant starting up in September to produce concentrate and allow the BIOX process to get towards the Q4 gold pours. So I just wondered if you could give some comments on what we should be looking for when you guys update us at Q3 in terms of the progress of Obuasi.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [38]

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Sure. Well, let me start with your comment regarding inflationary pressures. We haven't seen massive uptick in that respect. I mean we've seen -- you're right. The gold price rising as it has, we have to be vigilant because you often see the inflation pressures move with it. We've also had the benefit of decreasing currencies, so there's an offset there. But maybe I'll let Ludwig and Sicelo just talk a little bit more specifically to that from an operating perspective. And then regarding Obuasi, Graham or Massoud will jump in. But maybe start, Ludwig and Sicelo, what we're seeing in terms of inflation.

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Ludwig Eybers, AngloGold Ashanti Limited - COO of International [39]

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All right then. So quickly, overall, like Kelvin said, we haven't seen the real uptick. We've seen some areas in Argentina where we actually saw a tick up on that. And that still is offset by the exchange rate. Our operations international are more local based, more exposed to the local currencies. And in Australia, about 60%, 70% is mostly levered to the local currency and we haven't seen that. We've seen typically 2% to 3% that's likely U.S. inflation, but we see it through the operations. But what I can say is that we anticipated increase in commodity prices, specifically in chemicals, fuel. And we're doing the work and we've locked in a lot of our contractors and a lot of our suppliers in that regard. So that's now in the foreseeable future that will help us and benefit us.

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Sicelo Ntuli, AngloGold Ashanti Limited - COO of Africa [40]

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Maybe if I can add a bit of color to what Ludwig has already said. In particular in South Africa, we have seen finance particularly is where we're seeing cost pressures as we move towards contract renewal. But in general, most of our contracts in Africa are locked in. We tend -- for the bigger contracts, we tend to lock them in for 5 years, especially the mining contracts. And then the commodity contracts are locked in for 2 years in general, and we are not seeing any major contract renewals in the foreseeable future, which does give us a bit of cover in the current environment.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [41]

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Thanks, Sicelo. James, I apologize. You had asked a question about Obuasi and I just -- it slipped me. What was the question on Obuasi?

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [42]

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Yes. Just I know when we were on site in May, there was some talk of the plant switch-on being in September and that being needed to produce the concentrate for the BIOX process. I just wondered, when we get to Q3, what should we be looking out for if you're still on track for your Q4 gold pour?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [43]

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Sure. James, look, because he's in the room, maybe I'll ask Massoud to respond to that.

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Massoud Massoudi;Senior Vice President Capital Projects, [44]

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Yes, James. If you look at when you were on site and we were discussing actually the growth of the bacteria, we require about 3 months for the growth of bacteria to get to the full production and full operation. And for that purpose, we should start actually the growth of bacteria when have some concentrate to feed the bacteria by approximately, in our schedule, middle of September, to be achieved by middle of December, and then we pour the gold at the end of December. So doing that, we are a bit tight. It doesn't mean that we cannot actually achieve it in the time frame. We are -- that is a bit tight. And because of that, we are actually looking at options on buying some concentrate from [a neighbour's] mine that is very close to Obuasi. Doing that, we need approximately about 10 tonnes. That is a very small amount. That will give us a float of 4 weeks to 6 weeks that we start the cultures and we will start the growth and it gives us some time. And therefore, this is our backup plan to be able to grow the bacteria. For doing that -- while doing that, it gives us, as I said, middle of October, end of October, that we can bring the plant back if we are late in any way.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [45]

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Does that answer the question?

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [46]

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Yes. That's very useful color. Just one more, if I may. Obviously, the progress for the feasibility study at Quebradona sounds like it's going well. Do you expect to have all of the social aspects around the project in place for a development decision next year?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [47]

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Well, James, I'll comment and then ask Ludwig to give a little bit more background on the CdS feasibility study. The work is ongoing in relation to community consultation, local engagement, stakeholders and so on and so forth. It's going well. But it's one of the areas where we discussed there's a natural cadence to these things. And so we don't want to press it. I think it's really important we have all the license to operate, conditions in place, and then we'll make a decision on going forward. So that progress is going well. I've been kind of watching that very carefully. It's going well. But we'll see how things move through this year and into next year, and we'll just keep kind of evaluating as we go. So I don't want to lock in specific timing on that. But it is a key part of the feasibility work. And so far, so good as far as the traction we've been getting. Ludwig, do you want to comment any more on the feasibility?

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Ludwig Eybers, AngloGold Ashanti Limited - COO of International [48]

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Just maybe we're looking at licensing this project during -- sometime during next year. And we've got a real good team on the ground, in my view, one of the best I've seen. They actually do all the stakeholder management. And we do continuous surveys to actually measure ourselves with the community. And what we've seen over the last couple of quarters, we see, I think, every quarter. So we're making progress on that. And obviously, like Kelvin said, we will focus very much on this. This is a big focus for our licensing project. We don't want to do projects where we're not totally welcomed. But we'll keep on doing this work until we go through the licensing process.

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Operator [49]

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Our next question is from Patrick Mann of Merrill Lynch.

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Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [50]

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I just want to sort of tie in 2 of the earlier questions around the refinancing and the balance sheet. So if you're building up a cash pile now and looking at refinancing the April 2020 bond, but then also thinking about the development cost of Quebradona, so how do you think about refinancing when you've got this potential project, which sounds like it could be relatively soon could kick off?

And then secondly, you were saying we shouldn't be surprised if you bring in a partner for the development of Quebradona, both to derisk the project from a sort of total capital spend perspective and also to possibly bring in some copper mining experience. Is that still seen as the best option given that the gold price is so high and presumably the balance sheet is deleveraging quicker than expected? Or should we not be surprised if you keep 100% of it at this stage?

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [51]

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Good question. Thank you. I'll work kind of backwards on it and then ask Christine to wade in when we talk about the financing the bond and our balance sheet. Look, as far as Quebradona goes, we're very pleased with what we're seeing from the initial stages of the feasibility work. And so we're going to let that play out. My comment before about bringing in -- potentially bringing in a partner, that hasn't changed. I mean we do like the idea potentially of derisking by bringing in a partner and sharing in that respect and potentially bringing in copper expertise. But having said so, it's just an option. We also like the asset a lot and so we'll see. But at the end of the day, we think the best time to be having that discussion is following a feasibility study, and I think we unlock value most effectively that way. And so we're going to follow that process. And Patrick, the other thing to keep in mind is the guardrails that we put in place regarding capital allocation and our focus on the leverage ratio, that doesn't change. Again, we're -- we couldn't be happier to see the commodity pricing. We're very pleased with the project, but we're going to maintain that discipline in our decision-making all the way, and there will be a right point in time to think about how we finance that project, but we'll unlock value in it first. With respect to the refinancing, Christine, and the balance sheet?

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Kandimathie Christine Ramon, AngloGold Ashanti Limited - CFO & Executive Director [52]

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Yes. Thanks, Kelvin. And I think my comment was in respect to refinancing the 2020 bond and I said we'd like to keep flexibility around the timing of that and so that still holds. I think the other important point is that we would like for our hardened debt in the group to be reduced. So that certainly helped with reducing the cost of financing in the group. And I'd like to keep flexibility on that. I think it's a recent phenomenon that gold has gone through $1,500. And I've got -- we've got to see that it holds. Clearly, we'd like to be positive about that, but I think they're all caveats to this depending on where the footholds going forward, but we're certainly expecting these debt levels to reduce by the end of the year and certainly going into next year. I think, certainly, when one looks at 2020, bear in mind that we've still got the remainder of Obuasi capital spend. So 40% of the capital spend will still need to be self-funded next year. So that certainly was in the plan. I think as we're thinking about financing options around Quebradona, I think we're looking at various alternatives, including project financing, and that will be firmed up when -- so we're assessing it now through the feasibility study, but there's various options around that, including project financing and other forms of financing, and depending on whether we bring in a partner, I think certainly that will reduce the capital from our side. So I think let's keep flexibility on that.

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Kelvin P. M. Dushnisky, AngloGold Ashanti Limited - CEO & Executive Director [53]

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I think that's probably it for the calls, and we're at the end of our time. I know everyone has got a really busy day. So I want to conclude by thanking everybody for joining us on the call, and we look forward to updating you next with our Q3 results. So thank you very much.

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Operator [54]

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Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.