FULL TEXT OF A PRESENTATION BY BOBBY GODSELL, CEO, ANGLOGOLD AT THE DENVER MINING INVESTMENT FORUM 2000 WEDNESDAY, 4 OCTOBER 2000
Date: Thursday, October 05, 2000
Bobby Godsell, CEO of AngloGold.
Click here to download the above pic of Bobby Godsell.
CREATING VALUE, MANAGING RISK
I will address in this presentation the objectives we set out to achieve when we created AngloGold almost three years ago. In doing so, I'll reflect on how we have done thus far against our own expectations, and I'll also indicate what we hope to achieve in the next three years. Given that the weight of our production is still in South Africa, and that the country has recently been in the news, I will make particular mention of the impact of this country on our value objectives and management of risk.
AngloGold was created out of almost exclusively South African mining companies. In the last three years we have pursued the following objectives:
re-focussing on value through modernising the production machine;
pursuing return and risk enhancing organic and acquisition based growth;
developing and innovating markets for our product.
These three objectives remain in place today.
VALUE
When AngloGold was created it was the largest gold producer by volume. But volume is only a measure of wealth creation if it enhances value, so the first challenge was to re-examine our volume in this regard. We reviewed our production in the light of the prevailing gold price and the cost structure of ore bodies. It soon became clear that we would enhance the value creation capacity of the company by reducing its high cost gold production. Over the past three years we have reduced annual gold production from the South African assets by 900,000 ounces, or 15%. This has involved the sale or closure of 24 of 38 South African shafts.
In the remaining 14 South African operations we commenced a programme to reduce costs through enhancing labour productivity. This programme, which is by no means complete, has produced results, with both volume and value labour productivity indexes improving from 3,62 m2/employee and 164 grams/employee in the first quarter of 1998, to 4,43 m2/employee and 192 grams/employee in the second quarter of this year. These advances have come from a combination of getting rid of high cost ounces, reducing our reliance on workers who only perform unskilled work and upgrading the skills of production workers. While this process has shown us the complexity of the challenge of continuing to achieve step changes in productivity in our South African operations, it has also demonstrated the upside that exists in labour productivity in South Africa.
The objective of course was to achieve competitive levels of value creation for the company. The chart indicates the track record on return on capital employed and shareholder equity over this period. Going forward, we seek to continue to target a minimum 15% return on equity and, at least, a 10% real return on capital.
GROWTH
The second challenge was to ensure the capacity of the company to produce competitive earnings tomorrow as well as today. AngloGold's new structure enabled us to look for gold production opportunities world-wide. This in turn enabled us to enhance the risk profile of our production machine in geological and geographic terms.
Over the last three years the company has been able to acquire two million low cost annual production ounces in North and South America, Australia and West and East Africa. Almost one third of our production now comes from surface and shallow operations, and 12 of our 26 operations are outside South Africa.
We seek a balanced strategy which combines acquisitive and organic growth.
In South Africa itself we have four major organic growth projects which will produce some 25 million ounces of gold over 15 years at a projected cash cost of $175 an ounce. In West and East Africa the new Yatela mine, and potential increased production from Geita and Morila should add approximately 2.8 million ounces at cash costs of $170 an ounce. Here in Colorado, we have just successfully permitted the significant increase of the heap leach capacity of the Cripple Creek and Victor join venture , which (conditional upon Board approval) will produce 1.4 million additional attributable ounces, at a cash cost of $175 per ounce over the next 14 years In Australia work has commenced on the expansion of the Sunrise Dam mine which will add 1.5 million ounces over the life of this mine at a cash cost of $189 per ounce- this we dealt with in detail at our lunch yesterday. The development of the Wandoo project at the joint venture Boddington mine is also currently the subject of a feasibility study. In South America, the Cerro Vanguardia mine was commissioned in October 1997, with attributable production over the mine's life of 1.3 million ounces at a cost of $167 per ounce. In total then over the three years we have added some 32 million ounces through organic growth activities, every ounce of which continues to take the company down the cost curve.
AngloGold also has a major exploration program, and has spent $127 million on greenfield and near-mine exploration over the past three years generating approximately 5 million attributable additional resource ounces.
The funding of our internal growth will see something of a cash squeeze over the next two years, before we derive the full benefits of our new acquisitions and major capital projects, and as we continue to close out several of our end-of-life South African operations.
MARKETS
From AngloGold's birth it has been very clear to the Board and the Management that growing value through growing markets would be key to this company's success. Key areas of activity here have included the following:
AngloGold and its predecessors have been enthusiastic members of the World Gold Council. Indeed over the last three years we have contributed $26.5 million to the council. We remain supportive of the activities of this body in both the physical and monetary markets for gold. One of the Council's more successful campaigns has been its market liberalisation activities in Turkey, Dubai, India and now China - activities which we have actively supported.
Often in association with the World Gold Council we have worked to encourage design excellence and product innovation in gold jewellery, which remains by far the largest market application of gold. Here we have sponsored or co-sponsored gold jewellery design and promotion activities in South Africa, Turkey, Dubai, India, Asia and earlier this year Gold Virtuosi, the first ever global gold jewellery competition. In September, we co-presented the Africa Designs collection at the prestigious New York Fashion Week - a first, I think, for a gold producer. In this unique project, we combined with African fashion designers to promote the use of gold in fabrics, as well as gold jewellery and accessories. This project was different to the gold jewellery design competitions we have sponsored around the world in the past two years, in that for the first time we used product largely manufactured by our OroAfrica manufacturing partner, in the context of a real dialogue between the fashion industry and buyers seeking to stock North America's major fashion outlets with the Spring 2001 collections. While we can claim no credit for the way in which western fashion designers have embraced gold as a "warm colour" this year, we are excited that our own marketing efforts are coinciding with a return to gold in the West.
Thus while we have worked with fellow producers on collaborative efforts, we have also begun in the last year to develop our own marketing agenda, one which is driven by commercial logic, in a quest to capture additional value for the AngloGold shareholder.
Earlier this year we announced GoldAvenue, an e-commerce venture in partnership with the Swiss precious metals refiner, PAMP and J P Morgan. The development of this exciting business remains firmly on track.
I have already touched on our $8 million investment in South Africa's largest jewellery manufacturer, OroAfrica, a company with important strategic alliances to Italian manufacturing and with a growing product presence in North America .
In addition to these jewellery promotion, manufacturing and retail initiatives, we also have recognised the need to investigate new industrial applications for our product in order to further grow demand and off-take. Together with Mintek, South Africa's national metallurgical research institution, AngloGold has launched the AuTek project, whose aim is to investigate, in particular, catalytic and fuel cell applications for gold.
So much for the past. What of the future?
VALUE
Major challenges lie ahead in regard to modernising our gold production, especially in South Africa. For the next three years our effort will be focussed on completing the major adult education programme, which will ensure our entire workforce are functionally literate and numerate in an industrial language. We will also complete the transition to the multi-skilled work team across our South African operations. While none of this will be new to you, we are now at a stage in the transformation of our South African production machine where we are better equipped to identify the obstacles to enhanced productivity and performance improvement. Like many things in life, this particular road has been a tough one to walk down. We have had a disappointing first six months in our South African operations this year and we'll take much of the rest of the year to overcome our difficulties, but I believe we are now better equipped to achieve the objective of world class operational efficiencies on these assets.
At our lunch yesterday we outlined in greater detail our new focus on the broad implementation of new technologies such as the drill rig, rock splitter and new transportation technologies, which we believe can transform deep level hard rock mining. Building on the use of these new technologies, we need to substantially redesign both work structure and remuneration practices in our South African operations. The literacy and multi-skilling training programs we have underway are part of this strategy.
Our efforts in both these areas will be pioneered by what is, in effect, a new mine, which will seek the concentrated application of all new technologies and new work practices, located in the Kopanang Mine. The project has a time frame of three years. AngloGold is investing some $14 million in this project, which is expected to generate the investment returns the company would expect from any investment, and which is projected to achieve a 50% improvement in labour productivity.
This new project mine will be the beachhead and benchmark for value generation through our 14 South African mines.
We have also embarked on a review of all elements of cost, especially those incurred at regional and corporate level, and expect to be able to report significant cost savings from this exercise in the near future.
Equally significant challenges await us in ensuring that we have the right suite of assets - those generating higher margin production ounces - to support our return on capital and equity goals. This will require us continually to assess our existing operations on the basis of the value that they add, and to dispose of or close those that don't make the cut. It also means that we will continue to look for opportunities to expand our diversified reserves through astute M&A ventures and a focused exploration programme.
Continuing with this theme of shareholder value, we at AngloGold increasingly favour mergers as an attractive asset acquiring alternative to acquisitions which carry significant premiums to market capitalisation. If consolidation in the industry (which now appears to be accepted as desirable) is to succeed, we believe that it will need to be based on corporate mergers, which are attractive because of the inherent shareholder value of the combined entity, in preference to the premiums realised by shareholders who dispose of their equity after the transaction.
RISK
Mining is a business activity blessed with more than its fair share of risks. In AngloGold, from our South African base, we have developed a track record of managing through times of uncertainty and challenge. In the last three years this has included reducing our workforce by almost 50% without one day of lost time through industrial action, at a time when South Africa was experiencing the birth pains of a new democracy. As I look forward, amongst the many challenges we face in continuing to derive value from our South African assets, let me reflect on two that constitute both risk and opportunity: AIDS and the impact of domicile on our growth objectives.
As AIDS is not a notifiable disease and given that compulsory testing is not permissible under South African law, no reliable data exists as to the real extent of the disease within the national or company populations that may be affected. Both available research, and the changing pattern of disease being experienced are, however, evidence enough that AIDS (together with TB) constitute a major healthcare challenge facing Southern Africa.
In AngloGold we have organised a comprehensive two-part response to meet this challenge.
In respect of responding to those already affected, our comprehensive staff model medical service is putting in place wellness clinics that can offer those who are now HIV positive with both affordable and effective therapies that will extend life and health.
There has been much public debate about drug therapies for HIV positive patients. Effective treatment requires drug therapies adapted to individual patient and country needs, and administered in the context of effective medical surveillance and treatment. As experience grows with treatments, effective and affordable generic treatment protocols can be developed. AngloGold, with the largest private employer-funded and provided non-profit medical service in the world, is in a position to offer treatment on a research basis, to measure its efficacy and so produce such protocols. The company is in discussion with international drug companies to develop a drug therapy appropriate to the circumstances of a developing country.
The promise of treatment, which can extend health and life, provides a meaningful positive inducement for at risk individuals to undergo testing on a voluntary and confidential basis. In this regard, AngloGold is close to finalising a voluntary counselling and testing service available to all employees in Southern Africa, with links to the wellness programme.
For the last three years we have been engaged in a programme to extend a meaningful medical benefit to rurally-based dependants of our employees. An important building block of this programme has been to give each of our rurally-based employees in South Africa, Mozambique, Lesotho and Swaziland an "address". This is an exact longitude and latitude position determined by field workers using handheld geopositional satellite tracking devices. Coupled with an analysis of safe drinking water and sanitation in each of these rural communities, we are now in a position to develop a preventative and curative healthcare programme in areas where we have large concentrations of employees and their dependants. This general healthcare platform will also enable us to offer treatment and support to HIV positive employees and their dependants.
This is the first such programme of its kind in a developing country context, and while it may sound like a far cry from optimising an ore body, it is about managing risk and ensuring that our workers and their families enjoy equitable health benefits.
As a second thrust to this initiative, we continue to work to restrict the spread of AIDS. For over a decade we have conducted AIDS education programmes amongst our employees. In recent times the focus of these programmes has been broadened to include the community as well as the employee. Through our medical research organisation, AURUM, we are hoping to be selected as the African site for HIV vaccine research in conjunction with the Johns Hopkins University. We have also recently commissioned research to examine what differentiates those parts of our Southern African workforce that have remained HIV negative for long periods of time from those who have become positive. The pattern of infection is clearly uneven globally and even within the context of developing countries. We hope that in the light of this research we will be able to make our AIDS awareness programmes more effective.
Two responses to AIDS are clearly wrong and unhelpful. The first is to deny the extent and magnitude of the challenge which AIDS poses to a society like South Africa. The second is to become defeatist and engage in apocalyptic predictions of disaster. The management of AngloGold are both determined and confident of achieving success against AIDS and its impact on our workforce.
I now turn briefly to the question of domicile, a subject which has recently achieved some prominence following the Gold Fields/ Franco Nevada news. In August 1998, AngloGold listed its shares on the New York Stock Exchange as a fully sponsored ADR. While our primary listing remains in Johannesburg and although the share is traded on four other exchanges, New York is our most important exchange, with the daily trade in our ADR often exceeding trade in the ordinary share in Johannesburg on a one-for-one basis. Outside of Anglo American's holding in AngloGold, close to 50% of our shareholding is North American. This is a very important market for us, one which we have grown with our feet planted firmly in Africa. Working within South African exchange control regulations, over the last two years we have successfully completed four major transactions, using both cash and paper payments, to acquire value enhancing assets with an aggregate value of over $1.3 billion. While I welcome the day South African exchange control is fully lifted, I believe that this system will not limit AngloGold's capacity to continue to diversify mining and country risk through new acquisitions. As with each of our transactions to date, the South African authorities will apply the test of whether this is good for our shareholders and the country in which we are domiciled. Obviously the test of this belief will lie in our next acquisition - I am confident that should the opportunity present itself - AngloGold will make it work.
Thus as I look forward, I see this company continuing to energetically pursue growth opportunities through exploration, organic growth and acquisition. As we have done so far, we will continue to apply strict economic metrics to each new opportunity. We are not in the business of growing production for production's sake. We are, however, in the business of growing shareholder returns and seeking to capture value from the global gold business, be that in exploration, mining, manufacturing or modernising consumption, and I'm committed to making AngloGold the global gold equity of choice.
Thank you.
Denver, CO
Wednesday, 4 October 2000
Disclaimer
Except for the historical information which may be contained herein, there maybe matters discussed in this news release that are forward-looking statements. Such statements are only predictions and actual events or results may differ materially. For a discussion of important factors including, but not limited to, development of the Company's business, the economic outlook in the gold mining industry, expectations regarding gold prices and production, and other factors, which could cause actual results to differ materially from such forward-looking statements, refer to the Company's annual report on the Form 20-F for the year ended December 31, 1998 which was filed with the Securities and Exchange Commission on March 30, 1999.
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