Xstrata Plc Adr (XSRAY.PK)
Xstrata Plc Investor Seminar London 2011 Conference Call
December 06, 2011 06:00 AM ET
Thras Moraitis – Executive General Manager Group Strategy
Trevor Reid – Chief Financial Officer
Ian Pearce – Chief Executive Xstrata Nickel
Peet Nienaber – Chief Executive Xstrata Alloys
Charlie Sartain – Chief Executive Xstrata Copper
Peter Freyberg – Chief Executive Xstrata Coal
Andrew Fikkers – Marketing Manager
Mark Eames – Chief Operating Officer Xstrata Iron Ore
Mick Davis – Chief Executive Officer
Rob Clifford - Deutsche Bank
Jason Fairclough - Bank of America Merrill Lynch
Myles Allsop – UBS
Rob Clifford – Deutsche Bank
Andrew Keen – HSBC
Nick Arch – RBS
Nick Pascalla – Hermes Fund Managers
Cam Gilles – Deutsche Bank
Unidentified Analyst – Barclays Capital
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Ladies and Gentlemen, good morning. It’s wonderful to be amongst friends again to reflect on Xstrata’s year which has been prolific year for Xstrata in particular on the organic growth side. So I will be looking forward to sharing with you what’s been achieved over the last year.
Before we do that, I just want to run through the program quickly. The next person up after me is going to be Trevor Reid, our CFO. He is going to talk to you about obviously financial matters and how he set up the balance sheet in a way to deliver the organic strategy and then we are going to move into each of the business unit CEOs and they’ll talk about their businesses specifically and leave sometime for Q&A after each of their sessions. We will break for lunch at about quarter to one and then we’ll have a tea break at around quarter past three, and then we’ll conclude with Mick Davis, who will come in and give us some concluding remarks on Xstrata and how it moves forward.
Before we get Trevor Reid up here to talk to us about how we refinancing all of these interesting things that are going on in the business, I thought it would be appropriate given that we are now into our tenth anniversary as Xstrata under the current management team and under Mick Davis’ leadership. In fact, that occurred in October of this year. The tenth anniversary of Xstrata as a London listed company is in March next year. And it seems like an appropriate time to reflect upon what brought us here, what are the elements of that and how that feeds into where we are moving forward.
As many of you have known, Xstrata has grown over the last 10 years from a $500 million Market Cap company to around a $50 billion. Our EBITDA has grown from $400 million to $10 billion last year. Our revenues have grown 15 times over that period of time. And this growth was built really on a couple of convictions. The first of course, was the conviction around the secular change in demand for commodities which today seems like an obvious thing, but I can assure you 10 years or 11 years ago was not something that was commonly agreed on. Secondly, that the supply side which was underinvested in since about 1989 up to that period of time would struggle to meet that demand. And so that was one of the fundamental convictions around which Xstrata was built.
Interesting, as I stand here today 10 years later, we have the same conviction. In despite the fact that we are now 10 years into this massive industrialization and 10 years into significant investment by many of the mining companies, our conviction remains exactly the same.
The second aspect of our strategic conviction was that really we wanted to build a mining company, a major leading diversified mining company based on three pillars of a stool. The first was diversity. We believe strongly in diversification and the power of diversity to deliver more stable and de-risked cash flows. Secondly, on a belief in scale. We believe that scale is absolutely imperative in an industry where as we now beginning to see building multiple, multibillion dollar projects requires one to be sufficiently large not only to finance them, but also to resource them in terms of skills. And finally optionality. And this is something that is very much in the DNA of every Xstrata executive and employee which is constantly seeing optionality in everything we do and certainly in our early phase, we continue to seek optionality through the acquisitions that we were doing.
So this prolific growth really was based and is based on three elements of our strategic evolution. The first by definition and by necessity was M&A Lead. First of all five years. Prolific M&A, three major transforming transactions, the acquisition of NX which coincided with the IPO. The acquisition of MIM in Australia in 2003 and then finally the $20 billion acquisition of Falcon Bridge in 2006. In addition to those three, there being some 40 other transactions that are being done by Xstrata over the last 10 years. So the first phase by necessity was a phase driven by M&A. The second phase of our strategic evolution was operational excellence and this is something that is continuous and will never wane in Xstrata, and in every Xstrata person’s agenda. Every single day we seek to improve the value of our assets in a small way, in small increments and in large increments.
And the operational excellence phase I think is worth reflecting on because what that has done is taken some of the assets that we’ve acquired, we acquired many great assets, but we are also acquired along the way through the portfolios that we acquired a number of assets which perhaps were not Tier 1 assets. And our operating teams, I think it is fair to say – certainly I can say since I am not in the business units, have done a miraculous job of taking a series of assets and moving them down the cost curve, extending their lives, extending their resources, improving NPV on a year-by-year basis to the point where we now, all of our operating businesses are operating in the bottom half of their cost curves. Many Tier 1 assets in our portfolio, cost reduction which is structural in the sense that the fundamental change in the nature of these businesses.
So the new cost structures are baked into the operations moving forward. And in addition to that as you know we are the only major who has managed to reduce their cost in real terms successively every one of our last nine years of operations. In addition to that on the sustainability side which is absolutely central and crucial to our strategy, we’ve reduced safety incidences by 80% since the new management team took over under Mick Davis and we have won the Dow Jones
amongst other awards, we’ve won the very prestigious Dow Jones award for Super Sector leader in sustainability for five of our short 10 years and this is something we are extremely proud of and very keen to sustain going forward.
So the second phase of our strategic evolution was and here is continuous to be operational excellence. Now, what we really going to talk to you about today is the third phase which is now well in its stride and that’s the organic growth phase. Through the acquisition of the assets that we made in the first five years, we acquired a series of organic growth options which are now beginning to bloom and our prolific and promise to deliver industry leading growth, 50% growth in volumes over 2009 on a Copper equivalent basis by the end of 2014. We are still on track to deliver that returns in excess of 20% of IOR, a reduction in real costs by around 20% and these are very important reductions in real cost because by bringing on lower cost operations, you are structurally reducing your costs. So reducing our cost even further from where we are today relative to our competitions. So our fundamental transformation of Xstrata’s portfolio yet again for the third time in a way that is sustainable and improves our relative competitive position.
And importantly, we’ve been focusing on putting the building blocks together to make sure that we can deliver against the strategy almost in an uninterrupted fashion irrespective of what happens in the macroeconomics or any other external environment and that includes making sure we have the financial strategy to deliver against that and the human asset strategy to deliver against that growth.
So I think in summary what I’d like to say is that the organic growth strategy is something you’ve heard about I guess repeatedly over the last three years. It is now upon us and by the second half of next year, we will start to see significant and sustained growth in volumes and this is something that is exciting to the Xstrata executive team significantly.
And with that I’d like to handover to Trevor. Thank you.
Thanks, Thras and good morning Ladies and Gentlemen. Yesterday I was in Switzerland presenting our budget and plan which is a budget for 2012 and then a plan for the following two years. And the key strategic thrusts of those plans was to develop a set of operating plans and financing plans that would ensure that we could deliver on our promise that we made to investors two years ago of delivering the 50% growth that Thras has spoken about. And secondly, to ensure that we had a financing plan that could achieve three things. One, finance the growth platform that we’ve spoken. Two, ensure that we can continue to meet our commitment to our shareholders in respect of progressive dividends and three, to do all of this in a way which manage the financial risks and ensure that we continue to operate within our strong investment grade ratings.
I am pleased to say that I think we developed a very credible plan and that our budget and forecast is well in place to achieve those two strategic objectives.
Before I get on to a snapshot of what our growth profile looks like and give some more color on our balance sheet, I just want to reiterate a point that I think we’ve made in the past, but I think is not yet fully appreciated by our shareholders and by the investment community. Although we have predominantly been seen as an M&A driven company and we had to be given that we started with very few assets. I think behind the glare the M&A spotlight, people have perhaps lost sight of the fact that we actually have got a very strong record of project delivery. And since the IPO 10 years ago, we’ve actually delivered 19 projects to the capital spend of $17 billion. Now looking at those you will soon realize that there are no major jumbo projects there like Koniambo. But if you do look at those projects you’ll see that there is a broad range of different types of projects, there are underground mines, there are open pit mines, there’s associated infrastructure and there are a number of complex processing plants.
And I think the other thing which we are particularly proud of is that with the exception of one of our coal projects in South Africa, the GGV project which had a time overrun because of extreme weather, all of those projects were delivered on time and on budget.
Now let’s look at the progress that we’ve in 2001. The progress has been significant. Firstly, we commissioned five projects. These include three major coal mines, the ATCOM mines in South Africa which is the second of our big open pit mega mine complexes, the Newlands underground and the Mangoola mine. And as of Mangoola a couple of weeks ago for the opening and is a truly incredible project, we are already running of [inaudible] 3:15 capacity well ahead of schedule and we are already planning expansions of that mine which can easily be expanded subject only to environmental approvals.
In Canada, we took another step forward with the optimization of our Raglan operation with the commissioning of the Kikialik underground mine and I am sure Ian Pearce, will give some color as to we are – the rate at which we are moving that Raglan forward to an optimization which could at some point reach 40,000 tons of nickel and we successful commissioned the restart of Falcondo.
We approved five new projects including the Cerrejon expansion to 40 million tons, Tweefontein in South Africa, this an optimization project which will complete the third of our mega mine complexes and will see us transitioning to a point where 90% of our coal in South Africa will be produced from three big open pit complexes. And we are commissioning the Lady Loretta mine in Australia which although it’s a small mine, it’s very high grade, it will the Mount Isa infrastructure and consequently it will lower our cash costs and provide very good returns.
I should also note that of the 21 projects that we now have approved, four are already in the process of commissioning and will start to add significant volume in the second half of next year.
Our pipeline remains long and deep and we have 11 projects which are now at the feasibility stage and we are expecting that those 11 projects will be brought forward to the board for approval in the near term.
Now, one of the features of our budget and plan is the dramatic acceleration that we start to see in volumes and revenues from the middle of next year as numerous projects start to commission. As I mentioned, we have four projects that are currently commissioning. The Antamina expansion, the Eland underground, Santiago’s Black Star Deeps project and Handlebar Hill project.
And then in next year, we start to see the delivery of our first real mega project with the Antapaccay project in Southern Peru, which is the first of our Southern Peru project and will largely replace the Tintaya output and then of course Koniambo.
And I was at Koniambo two weeks ago and I have to say you cannot help but be struck by the enthusiasm and excitement that is so evident in the workforce there. Productivity levels have improved dramatically, the mine is substantially complete, the conveyor system is being commissioned, we’ll start delivering ore from the Massif to the plant in early part of next year and I am entirely convinced that this project is going to live up to its potential and I am sure Ian will be giving you more details on that when he talks in.
So really, the message here is that we have been through a long period of sowing, but I can really feel that it’s time to start reaping and that in the beginning of next year we will start the harvest.
Another feature of this project pipeline is not only that it delivers growth, but it delivers growth at significantly lower costs. If I look at the cost savings included in our forecast, we are expecting significant cost savings in 2012, ’13 and ’14 as we start to deliver these increased volumes of low cost product. It’s largely a result of the fact that numerous of these projects are Brown Field projects which by their nature are lower in cost and also that the number of our Green Field projects start with significantly higher grades which will given immediate impact onto our cost structure of our Coal, Copper and Nickel divisions.
I also would like to point out that in our budget and plan and we are not talking about them today, we have a number of mega unapproved projects including the Wandoan project in Australia, which is a very substantial coal project and a number of Copper projects.
It is our policy to give guidance at this meeting as to the future capital spend and will be guiding the analysts to the capital budget of just under $20 billion over the next three years. The peak spending is in 2012. Big components of that spend will be the completion of Koniambo, the completion of Antapaccay and start of the high spend period at Las Bambas. The sustaining capital numbers is not included in this, sustaining capital is expected to run at somewhere between $2 billion and $2.5 billion, and I just want to now move on to how we are financing it.
Our net debt at the end of the year is expected to be around about $9 billion, giving us a gearing of 16%. This is below our sort of traditional target area but clearly with such a large capital spend coming down the pipe, it was absolutely imperative that we enter this period with a very conservatively finance balance sheet.
We are a very alive to the uncertainties in global markets at the moment and in particular the uncertainty in Europe could have a dramatic knock on the financial markets in that area and consequently we did not want to wait till the middle of the next year when our major revolver matures. And in October, we refinanced all our bank facilities and it was a very successful refinancing, I think it evidences the strong relationships we have with our core banking group and a number of them are here today and I really want to thank them for their ongoing support. We managed to secure a $6 billion revolver. It has a term of five years which we can extend at the end of the first year and second year by another year. So effectively its seven year money. The pricing was extremely competitive, it remains without any covenant and as is our policy, it remains undrawn at the – it will be undrawn at the end of this year.
We also took the opportunity to opportunistically tap the bond markets in November. We were looking for $2 billion of bonds and given the uncertainty in the market, our advisers were warning us on the day that we launched, that it might be difficult even to secure $1 billion. But nevertheless, we launched. We had a very strong reception, I think evidencing the fact that Xstrata is seen as a very good credit. Eventually the book billed to $10 billion and so we took $3 billion of bonds, they spread over maturity from three years to thirty years on a blended average maturity of 10 years at a blended rate of 4 ¼%. So I think again, a very successful result.
So with a balance sheet where we have $6 billion of undrawn bank headroom, we have gearing at 16%, we have an average maturity on all our facilities of eight years. We have no covenants on our bank debt; I think we have a very strong balance sheet with which to take on this capital program.
So with that as a backdrop and sort of a group overview of where we are going, its now time to look at the individual business units. First up is Zinc. Now when I first met Santiago Zaldumbide
there, it was almost 10 years to the day ago, and he explained to as business at that time which at that point was a single stranded smelter in Spain, which it was a very low cost smelter, but it had none of its own feed because its mine was closing down and it was essentially stranded. If we look at the Zinc business now, we are looking at an integrated business almost a million tons of production. Santiago has relentlessly driven it down the cost curve to the point now where it is one of the most competitive integrated Zinc businesses in the world. He’s done that by the application of what I can only describe and it is unusual for a finance director to say this, but only describe as miserly amounts of capital and it’s just a fantastic story. So I hope you will enjoy hearing how he’s done it from the man himself and I welcome Santiago to come and talk to you.
Thank you, Trevor. So let me have another attempt of drawing your attention. I have failed most of the times but I am going to try again today. So I am going to first of all show you – well, we are going to cover market, we are going to cover the growth and I will conclude with our main goals.
We are established right now in seven countries as you can see there, in Europe, in Australia, South America, North America. Well, taking from what Trevor was saying, I want to spend a little bit of time on what has been the effort to get the vertical integration that we have achieved today. Many of you cover some other companies in the same sector. And you know very well that I know achieving a vertical integration is fundamental point number one, is difficult. There are different ways of trying to get that. If you want to do it very quickly, you will have to acquire assets and in many cases acquiring assets is expensive and doing that – well, gives you vertical integration but at a relatively high cost and then while you return some capital employed present from that.
Well, obviously in my opinion the best way to do it is to do it through organic growth, extending, expanding already existing operations. This normally gives you the same or better results but at a much lower cost. And this is what can allow you to have a return on capital employed which is good. We have done it both ways. We have done it as you can see in this slide partially through acquisition and partially through organic growth. But I want to say here as I did mention in September, well, when we acquire for instance MIM, we didn’t acquire MIM for the same assets for sure. They are saying assets were in a very poor condition, they were just about to be divested or closed. So is true that we got some assets through an acquisition, but believe me those assets were in very poor condition and had to be transformed completely. We did transform them and as we will see later.