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Iron Ore Manganese Map

Iron Ore and Manganese

$ million (unless otherwise stated) 2009 2008
     
Operating profit 1,489 2,554
Kumba Iron Ore 1,487 1,583
Iron Ore Brazil (141) (9)
Samancor 143 980
EBITDA 1,593 2,625
Net operating assets 10,370 10,457
Capital expenditure 1,044 783
     
Share of Group operating profit 30% 25%
Share of Group net operating assets 27% 32%

Iron Ore includes a 62.76% shareholding in Kumba Iron Ore in South Africa. Iron Ore Brazil has a 100% interest in the Minas Rio iron ore project, a 49% shareholding in LLX Minas Rio, which owns the port of Açu (currently under construction) from which iron ore from the Minas Rio project will be exported, and a 70% interest in the Amapá iron ore system.

Kumba, listed on the Johannesburg Stock Exchange, operates two mines - Sishen in the Northern Cape, which produced 39.3 Mt of iron ore in 2009, and Thabazimbi in Limpopo, which had a production of 2.6 Mt in 2009. Kumba is a leading supplier of seaborne iron ore, and exported more than 80% of its total iron ore sales volumes in 2009, with 75% of these exports destined for China and the remainder to Europe, Japan and South Korea.

The Minas Rio iron ore project is located in the states of Minas Gerais and Rio de Janeiro and will include open pit mines and a beneficiation plant in Minas Gerais producing high grade pellet feed. The completion of phase 1 will see transportation of ore through a slurry pipeline more than 500 kilometres to the port of Açu in Rio de Janeiro state. Amapá, located in Amapá state in northern Brazil, is in the process of ramping up its pellet feed and sinter feed production and expects to produce 4.0 Mt in 2010. Amapá production could increase to 6.5 Mtpa with further capital investment.

Manganese comprises a 40% shareholding in Samancor Holdings, which owns Hotazel Manganese Mines and Metalloys, both situated in South Africa, and a 40% shareholding in each of the Australian-based operations Groote Eylandt Mining Company (GEMCO) and Tasmanian Electro Metallurgical Company (TEMCO), with BHP Billiton owning 60% and having management control. Samancor is the world's largest producer of seaborne manganese ore and is among the top three global producers of manganese alloy. Its operations produce a combination of ores, alloys and metal from sites in South Africa and Australia. In July 2009, Samancor sold 26% of Hotazel Manganese Mines in a series of transactions designed to comply with South Africa's black economic empowerment requirements.

Steel is the most widely used of all metals. In 2009, despite the world economic slowdown, world crude steel production reached 1.2 billion tonnes, a decrease of only 8% on 2008, as China, the world's principal steelmaker, ratcheted up crude steel production on the back of the Chinese government's substantial fiscal stimulus package. Chinese crude steel output for 2009 was 567.8 Mt, an increase of 67.5 Mt or 13.5% year on year.

In response to returning demand, steel producers across the industry began bringing dormant production capacity online, with multiple blast furnace restarts being reported in the second half of the year. Global steel capacity utilisation reflected these trends, rising from a low of 58.3% in December 2008 to 71.5% in December 2009 - though still significantly below the peaks of over 90% recorded in early 2008.

In 2009, total seaborne iron ore supply increased by 3% from 797 Mt to 819 Mt, largely driven by strong Chinese steel production, with Chinese imports showing a 41% year-on-year rise to 628 Mt. In the early part of the year, Chinese domestic steel production dropped off drastically for a time when spot prices were insufficient to support the high cost, low quality output, but recovered in the second half of the year on the back of higher iron ore prices.

Spot iron ore fines prices recovered from their lows of late 2008 and early 2009. Prices reached their highest 2009 levels in December 2009 of $112/t (for cost and freight (CFR) 63.5% Fe delivered China), thus applying upward pressure on the pending 2010 benchmark price negotiations.

As 96% of manganese ore is smelted to produce manganese ferroalloys (such as ferromanganese and silicomanganese), which are used in steel alloying applications, the performance of the manganese alloy industry is the key determinant of ore demand. The early part of 2009 was characterised by significant demand contraction with underlying demand trends masked by stocking and destocking activities across the value chain. Market conditions progressively recovered during the third quarter and continued to improve as global steel production maintained an upward trend. Manganese ore and alloy prices declined significantly during the first half of the year, but increased progressively in the third and fourth quarter owing to improved market conditions, allied with the restocking phase. Manganese alloy prices, however, will be influenced by supply responses resulting from latent capacity in the industry, and both ore and alloy prices will be influenced by steel production trends and the stocking and destocking cycles.

The core strategy of the business is to grow Anglo American's position in iron ore and to supply premium, high quality iron ore products in the face of the declining quality of global iron ore supplies. Anglo American has a unique iron ore resource footprint, with large, high quality resource bases in South Africa and Brazil.

Kumba produces a leading quality lump and is well positioned to supply the high growth Asia-Pacific and Middle East markets. It is also geographically well positioned to supply European steel markets in the light of an expected decline in lump supplies from other sources. Minas Rio will capture a significant part of the high growth pellet feed market with its premium product featuring high iron content and low impurities.

Significant future growth will come from the expansion projects at Minas Rio and Kolomela (previously Sishen South). Minas Rio phase 1 will produce 26.5 Mtpa, with first production scheduled for the second half of 2012, and has the potential to be expanded to up to 80 Mtpa. Resources have increased from 1.2 billion tonnes in 2007 to 5.0 billion tonnes (Measured, Indicated and Inferred) in 2009, with further resource potential. Studies for the expansion of the project have continued to be evaluated during 2009. The Kolomela project is expected to produce 9 Mtpa of iron ore, with initial production scheduled for the first half of 2012 and ramping up to full capacity in 2013.

The manganese strategy is to focus on upstream resources businesses, despite their low-cost alloy smelters having been significant contributors to profit in recent years. In addition, alloy smelters add value to the overall manganese business as they enable Samancor to access markets with an optimal mix of ore and alloy, to optimise production to best suit market conditions and provide ongoing information on the performance of their ores in the smelting process.

Iron Ore and Manganese generated an operating profit of $1,489 million, some 42% lower than 2008. This was as a result of lower iron ore prices, partly offset by higher iron ore sales volumes, and lower manganese ore and alloy volumes and prices.

Markets

World crude steel production continued to increase during the second half of 2009 compared with both the first half of 2009 and the second half of 2008, with most major steel producing countries posting an increase in output. World crude steel production of 1.2 billion tonnes was, however, markedly lower than the 1.3 billion tonnes produced in 2008. Steel production in China in 2009 increased by 13.5% to 568 Mt. China's economic growth continues to be robust on the back of strong domestic focused consumption and infrastructure-based stimulus spending. The increase in steel production, coupled with lower Chinese domestic iron ore production, resulted in record seaborne iron ore imports into China. In the second half of 2009, the European, Japanese and South Korean markets saw a tentative recovery, with an improvement in iron ore demand following some production increases and restocking by the steel industry.

The manganese ore and alloy market reflected the decline in world crude steel production. The market was characterised by uncertainty in ore and alloy demand, masked by stocking and destocking activities and, consequently, prices for ore and alloy declined significantly during the year. Supply cutbacks swept the manganese sector in an effort to match the reduced levels of demand, which were maintained into the third quarter of 2009. Demand began to improve during the second half of the year, when producers responded to the improved order levels by announcing furnace restarts.

Operating performance

Kumba Iron Ore's strong financial performance for the year was underpinned by a solid operational performance. The company reported operating profit of $1,487 million, a decrease of 6%, mainly as a result of lower average export sales prices, mostly offset by higher export sales volumes. Despite lower benchmark iron ore export prices, which decreased on average by 40% for the 2009-10 iron ore year, Kumba maintained a strong operating profit margin of 53%. Total sales volumes increased by 21% from 33.0 Mt to 40.0 Mt. Export sales volumes from Sishen Mine increased by 37% from 24.9 Mt to 34.2 Mt as volumes ramped up from the jig plant (Sishen expansion), the successful introduction of a new blended fines product and an increase in demand from China. Total domestic sales volumes decreased by 28%, or 2.3 Mt, owing to lower demand from ArcelorMittal SA.

Total production at Sishen Mine increased by 16% from 34.0 Mt to 39.4 Mt, principally as a result of the continued ramp up of the jig plant which achieved production of 10.4 Mt in 2009 and remains on schedule to achieve approximately 13 Mt during 2010.

The Amapá iron ore system produced 2.7 Mt during the year, compared with 1.2 Mt in 2008 (of which 712 kt was produced after the Group's acquisition in August 2008). The production rate ramped up during the second half of the year and, in the fourth quarter, monthly average production was 314 kt.

Amapá was acquired in 2008 as an operating asset as part of the acquisition of the Minas Rio project. During 2009, Amapá experienced significant operational challenges across its mine, plant and logistics chain, producing 2.7 Mt compared with the design capacity of 6.5 Mtpa. Management's focus has been, and remains, on seeking to markedly improve performance from the existing operations, rather than investing to expand the operation. The Amapá system is currently believed to have capacity to increase production to 5 Mtpa without significant further capital expenditure. Due to the focus on improving operational performance and preserving cash, limited exploration drilling has been undertaken in 2009 and the anticipated growth potential of surrounding licence areas remains untested. Given these operational difficulties and delays in increasing production, the Group has recorded an impairment charge of $1.5 billion (after tax and minority interest) against the carrying value of the asset.

Samancor achieved an operating profit of $143 million, an 85% decrease, due to lower manganese ore and alloy sales volumes and prices following the decline in global steel demand.

Projects

The development of the 9 Mtpa Kolomela mine continues and remains on budget and on schedule to deliver first production during the first half of 2012, ramping up to full capacity in 2013. Mining operations commenced during the year, with the first blast carried out on 17 September 2009. To date, 4 Mt of material has been moved. Since the start of construction activities on the project in 2008, capital expenditure has totalled $367 million, of which $290 million was incurred during 2009.

The pace of construction and project expenditure at Minas Rio is, in large part, dependent upon receiving a number of environmental licences and other permits. A total of 21 licences and permits were granted in the year, key among these were the first part of the Mine and Beneficiation Plant Installation Licence (granted in December), the federal permit for land clearance at the mine and the approvals of specific permits for the port road modifications. The second part of the Installation Licence is expected to be approved during the early part of 2010. Anglo American continues to work with local, state and federal authorities and landowners to ensure that the timing of licence and permit receipts and land acquisitions does not further impact the overall timing of the project.

Project development on the plant and pipeline in 2009 has been focused on the areas of earthworks and civil works. Filtration plant ground improvement works were commenced. At the port, offshore works have continued with the construction of the main trestle, now 2.5 km in length, and dredging works, while the temporary jetty for breakwater construction is nearing completion. Onshore, the quarry for production of the breakwater rock is operational and the quarry-to-port road modifications and construction are progressing. First iron ore production is scheduled for the second half of 2012, with a planned annual capacity in the first phase of 26.5 Mtpa of iron ore pellet feed.

Anglo American's forecast attributable share of the post-acquisition capital expenditure for the first phase of the project has increased by $1.1 billion, from $2.7 billion to $3.8 billion owing to scoping changes at the mine, pipeline and port, as well as foreign exchange movements.

Studies for the expansion of the Minas Rio project continued during 2009. The latest resource statement resulting from geological work, provides a total resource volume (Measured, Indicated and Inferred) of 5.0 billion tonnes, with further upside potential supporting the envisaged expansion of the project.

Outlook

Analyst forecasts indicate that global steel consumption should grow in excess of 5% per annum over the next three years, which would lead to increasing iron ore demand. Chinese demand for iron ore is expected to grow by at least 5% during 2010. With recovery beyond China expected during 2010, the supply pressures on seaborne iron ore continue to increase. Overall, the global seaborne iron ore market remains structurally tight.

Kumba expects to further increase production volumes during 2010. Export sales volumes into China are expected to normalise at around 60% of the geographical sales mix. Although global steel demand is expected to return to growth in 2010, this is likely to be moderate and the sustainability of the increase in demand from developed countries remains uncertain. Domestic sales volumes remain dependent upon ArcelorMittal SA's offtake requirements, which declined in 2009.

The market for manganese ore and alloys is dependent upon the carbon steel industry. Improvements in demand and prices will be underpinned by strengthening steel production trends, the rate of furnace restarts and the level of Chinese exports.

World seaborne iron ore demand by product
The product screening facility at Kumba Iron Ore's Kolomela project

The product screening facility under construction at Kumba Iron Ore's Kolomela project. The mine is on schedule to start production in the first half of 2012, ramping up to full capacity of 9 Mtpa in 2013.

Chris Griffith
CEO Kumba Iron Ore

Chris Griffith

Stephan Weber
CEO Iron Ore Brazil

Stephan Weber Group potential iron ore production

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Annual Report 2009