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Operating profit
(2008: $1,110m)

$451m

Share of Group operating
profit
(2008: 11%)

9%

EBITDA
(2008: $1,319m)

$706m

The second half of the year saw a significant increase in demand.

Metallurgical Map

Metallurgical Coal

$ million (unless otherwise stated) 2009 2008
     
Operating profit 451 1,110
Australia 474 1,144
Projects and corporate (23) (34)
EBITDA 706 1,319
Net operating assets 3,407 2,669
Capital expenditure 96 467
     
Share of Group operating profit 9% 11%
Share of Group net operating assets 9% 8%

Metallurgical Coal is Australia's fourth biggest producer of coal and its number three exporter of metallurgical coal.

The company's operations are based relatively close to the country's east coast, from where it serves a range of customers throughout Asia and as far as Europe and South America.

Metallurgical Coal operates six mines, one wholly owned and five in which it has a controlling interest. Five of the mines are located in Queensland's Bowen Basin: Moranbah North (metallurgical coal), Capcoal (metallurgical and thermal coal), Foxleigh (metallurgical coal), Dawson (metallurgical and thermal coal) and Callide (thermal coal). Drayton mine (thermal coal) is in the Hunter Valley in New South Wales.

All of the mines are in well established locations and have direct access to rail and port facilities at Dalrymple Bay, Gladstone or Newcastle.

Moranbah North is an underground longwall mining operation with a mining lease covering 100 square kilometres. Coal is mined from the Goonyella Middle Seam, approximately 200 metres below the surface. The mine produced 2.6 Mt (attributable) of high fluidity, hard coking coal for steel manufacturers in 2009. Metallurgical Coal recently commissioned a coal seam methane power station at Moranbah North that will reduce its carbon dioxide (CO2) emissions by around 1.3 Mtpa.

Capcoal operates two longwall underground mines and an open cut mine. Together, these mines produce around 4.6 Mt (attributable) annually of prime quality hard coking coal, pulverised coal injection (PCI) and thermal coal. Capcoal supplies methane-rich seam gas to Energy Developments Limited's waste coal mine gas power station, eliminating 1 Mt of CO2 emissions per annum.

Foxleigh is an open cut operation with an annual output exceeding 1.6 Mt (attributable) of high quality PCI coal. Its operations will be debottlenecked to increase production to 2.2 Mtpa over the next three years.

Dawson is an open cut operation that produced 7.4 Mt in total (3.8 Mt attributable) of hard and soft coking coal and thermal coal in 2009.

Metallurgical Coal owns an effective 23% interest in the Jellinbah mine in Queensland which produces metallurgical coal.

In 2009, excluding Jellinbah, Metallurgical Coal's mines produced 12.6 Mt (attributable) of metallurgical coal, all of which was exported, and 14.1 Mt (attributable) of thermal coal, of which 42% was exported.

Metallurgical Coal's resource base totals some 3.4 billion tonnes of coal. These include high quality greenfield metallurgical coal reserves that are close to existing infrastructure.

Metallurgical coal is a key raw material for 70% of the world's steel industry.

Each year, the world produces over 5 billion tonnes of hard coal, most of which is used in the country of origin. A small volume is traded across land borders such as those between the US and Canada or between the countries of the former Soviet Union. The international seaborne metallurgical coal market comprises some 200 Mt of metallurgical coal.

Produced in a relatively limited number of countries, metallurgical coal is primarily used in the steelmaking industry and includes hard coking coal, semi-soft coking coal and PCI coal. The chemical composition of the coal is fundamental to the steel producers' raw material mix and product quality. The market for metallurgical coal has a bigger proportion of longer term, annually priced contracts, though increasingly, some steel companies are using short term contracts to meet the balance of their requirements. Demand in the sector is fundamentally driven by economic, industrial and steel demand growth. Price negotiations between Australian suppliers and Japanese steel producers have traditionally, though not always, set the trend that influences settlements throughout the market. Metallurgical Coal is a significant supplier to virtually all the world's major steel producing groups.

Metallurgical Coal's strategy is to be a large, low cost, reliable exporter of quality coal to steel producers worldwide from Queensland's well established Bowen Basin.

Operational excellence is driven through a structured programme of asset optimisation that benchmarks performance for key activities to drive performance across the business to best practice standards.

Growth is driven both from optimising output from existing mines and from the ongoing development of a project pipeline underpinned by a comprehensive exploration and planning process.

Key to securing Metallurgical Coal's future is the development of long term relationships with major customers in order to cultivate a stable market for its products. These relationships proved their worth during a period of uncertain demand in early 2009 when Metallurgical Coal's product continued to be ordered in preference to that of a number of other producers.

Anglo American is committed to reducing the Group's carbon emissions by supporting world leading technologies. As an example of this, Metallurgical Coal recently became a cornerstone investor in Australian based MBD Energy, acquiring a 29% shareholding in the business. MBD Energy will soon commence trials of its leading-edge carbon capture and conversion technology, using algal synthesisers at three of Australia's largest greenhouse gas emitting, coal fired power plants.

Metallurgical Coal delivered an operating profit of $451 million, a 59% decrease, primarily due to lower prices as a result of weaker demand conditions, partially offset by lower mining costs.

Markets

Anglo American weighted average achieved FOB prices ($/tonne) 2009 2008
Export metallurgical 141.04 187.36
Export thermal 73.82 83.22
Domestic thermal 26.75 20.75
Attributable sales volumes (thousand tonnes) 2009 2008
Export metallurgical 11,542 13,147
Export thermal 6,239 5,780
Domestic thermal 8,604 9,682

Following a year of tight market conditions and record prices in 2008, demand for coal was severely constrained in the first quarter as steelmaker inventories were wound down, particularly impacting the PCI coal market. Benchmark metallurgical coal prices retreated from their c.$300 per tonne peak in 2008 by up to 60%, reducing the average selling price for the year by 22%.

Metallurgical coal markets improved in the second quarter owing to significant buying from China, initially of hard coking coal and subsequently a wider range of metallurgical coals, including PCI, thereby underpinning traditional benchmark prices at levels second only to those seen in 2008. The second half of the year saw a significant increase in demand from traditional customers in Japan, South Korea, India and Europe as steel industry production units ramped up.

Operating performance

Attributable production (thousand tonnes) 2009 2008
Export metallurgical 12,623 13,145
Thermal 14,052 14,696

Metallurgical coal production of 12.6 Mt was 4% lower than in 2008 in response to weaker demand from steel customers. However, the business was well positioned to weather the volatile market due to its diversified product positioning across all market segments and its strong long term relationships with key customers, enabling market share to be gained during the period. Total attributable coal production was 26.7 Mt, a 4% decrease.

In response to the market downturn in late 2008, Metallurgical Coal acted swiftly to restructure its operations and reduce its cost base while continuing development of key strategic projects. Marginal activities were closed, headcount was reduced by 20%, a new streamlined organisational model was implemented and significant reductions were made in maintenance and supply costs. These initiatives resulted in significantly lower unit costs, by more than $10 per tonne, compared with the cost base in the second half of 2008, and a 24% productivity increase over 2008.

In recent years, logistics constraints in the rail to port chain have hindered business performance. The co-ordinated three year programme to expand system capacity at Dalrymple Bay Coal Terminal has proceeded well, with the port expansion complete, the track expansion to be completed by March 2010 and the last of the rolling stock to be delivered by mid-2010. This action has improved capacity in the logistics system. Metallurgical Coal continues to manage the port queuing challenges by building flexibility into its logistics planning.

The initiatives taken across the business, including through asset optimisation and a 50% reduction in required stay in business capital, resulted in a more competitive cost position for the business and position it well to capitalise on the more buoyant market conditions expected in 2010.

Projects

Production from the brownfield expansion projects at Dawson and Capcoal (Lake Lindsay) mines will continue to increase over the next two to three years as equipment productivity is raised to benchmark standards.

Significant greenfield projects continue to be studied at Grosvenor, Moranbah South and Dartbrook to meet expectations for growing demand for both metallurgical and thermal coal over the next decade.

It is expected that a first stage approval decision in relation to the approval and development of the 4.3 Mtpa Grosvenor metallurgical coal project in Australia will be taken during 2010.

Outlook

The positive trend seen from the steel industry in both China and the traditional markets during the second half of 2009 is expected to continue in 2010, with a return to 2008 steel production levels providing positive momentum for metallurgical coal prices.

Seaborne metallurgical coal demand

Global crude steel production
feature

Capcoal - Exploration and Development - Surveyor Nigel Atkinson and trainee surveyor Shannon Coppard review plans. Great care is exercised in early stage exploration programmes to ensure that areas of cultural significance are not disturbed.

Seamus French
CEO Metallurgical Coal

Seamus French Metallurgical Coal attributable production Life of mine and Reserves and Resources

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Annual Report 2009