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Operating profit
(2008: $1,078 m)

$721m

Share of Group operating
profit
(2008: 11%)

15%

EBITDA
(2008: $1,200m)

$875m

Underlying demand remains relatively strong, supported by economic growth in the Asia-Pacific region.

Thermal Coal Map

Thermal Coal

$ million (unless otherwise stated) 2009 2008
     
Operating profit 721 1,078
South Africa 442 736
South America 305 375
Projects and corporate (26) (33)
EBITDA 875 1,200
Net operating assets 1,707 1,018
Capital expenditure 400 365
     
Share of Group operating profit 15% 11%
Share of Group net operating assets 4% 3%

In South Africa, Thermal Coal owns and operates nine mines and has a 50% interest in the Mafube colliery and Phola washing plant. Five of the mines together supply 22 Mtpa of thermal coal to both export and local markets. New Vaal, New Denmark and Kriel collieries are domestic product operations supplying 32 Mtpa of thermal coal to Eskom, the state-owned power utility. Isibonelo mine produces 5 Mtpa of thermal coal for Sasol Synthetic Fuels, the coal to liquids producer, under a 20 year supply contract.

Anglo Inyosi Coal, a broad-based black economic empowerment (BBBEE) company valued at approximately $1 billion, is 73% held by Anglo American, with the remaining 27% held by Inyosi, a BEE consortium led by the Pamodzi and Lithemba consortia (66%), with the Women's Development Bank and a community trust holding the remaining equity. Anglo Inyosi Coal, in turn, holds Kriel colliery, the new Zibulo multi-product project (previously known as the Zondagsfontein project) and the greenfield projects of Elders, New Largo and Heidelberg. The outstanding conditions precedent to the Anglo Inyosi Coal transaction are expected to be fulfilled in the first half of 2010, following which the transaction will complete.

Thermal Coal's South African operations currently route all export thermal coal through the Richards Bay Coal Terminal (RBCT), in which it has a 27% shareholding, to customers throughout the Med-Atlantic and Asia-Pacific regions. Within South Africa, 61% of total sales are made to Eskom on long term (i.e. life of mine) cost-plus contracts. A further 9% is sold to Sasol and 3% to industrial sector consumers. The remaining 27% is exported through RBCT.

In South America, Anglo American has a 33.3% shareholding in Cerrejón, a 32 Mtpa capacity (10.7 Mtpa attributable) opencast operation in Colombia. Cerrejón owns and operates its own rail and deep water port facilities and sells into the export thermal and PCI coal markets.

Coal is the most abundant source of fossil fuel energy in the world, considerably exceeding known reserves of oil and gas. The bulk of coal produced worldwide is thermal coal, which is used as a fuel for power generation and other industries, notably the cement sector. The seaborne thermal coal market comprises nearly 700 Mt and is supplied from a large number of countries, with coal producers operating in a highly competitive global marketplace.

Thermal coal usage is driven by the demand for electricity and is influenced by the price of competing fuels, such as oil and gas and, increasingly, the cost of carbon. Global thermal coal demand is also affected by the availability of alternative generating technologies, including gas, nuclear, hydroelectricity and renewables. The market for export thermal coal is further impacted by the varying degrees of privatisation and deregulation in electricity markets, with customers focused on securing the lowest cost fuel supply in order to produce power at a competitive price. This has resulted in a move away from longer term contracts towards shorter term contracts priced against various coal price indices, which has given rise to the development of an increasingly active financial market for hedging and derivative instruments. The extent to which these pricing instruments are used, however, varies from region to region.

Thermal Coal's strategy is focused on serving the power generation and industrial sectors from large, low cost coal basins. The business unit has a diverse, high quality asset portfolio in South Africa and South America and aims to be a long term, reliable supplier. It also strives to be an industry leader in the pursuit of cleaner coal solutions to the world's energy needs.

Thermal Coal is focused on expanding its strong standing in the export market, while maintaining a significant position in the domestic market in South Africa. This strategy will be delivered through its extensive portfolio of expansion projects, supported by targeted acquisitions. In addition, it has substantially completed a major programme of investment, which includes expansions at Cerrejón and the development of Zibulo. The business unit is in the process of completing its pre-feasibility study on New Largo, which has been identified by Eskom as a primary coal supplier to its Kusile power station which is under construction. Kusile's first units are scheduled to be operating in 2013 and Thermal Coal is confident that it will be able to deliver coal on time.

India is an ever growing market for South African-sourced coal, with 2009 showing a pronounced swing from the Med-Atlantic to the Asia-Pacific market. For the year as a whole, 29% of South Africa's coal exports, and a similar proportion of Thermal Coal's own exports, through the RBCT were destined for India. Thermal Coal is evaluating opportunities to increase its exports to India by producing lower quality products suitable for the Indian market to supplement the higher grade product currently being sold to the country.

At Cerrejón, the growth strategy encompasses multiple options based on the capital investment for expansion that will be required by the port and logistics chain and thereafter for pit expansion and reserve access. Expansions such as the P40 (targeting 40 Mtpa) and P500 (targeting 50-60 Mtpa) projects are currently under consideration by the operation's shareholders.

Although Thermal Coal continues to develop operations in its existing geographies, it is also continually evaluating potential opportunities in new regions. Following the establishment of an office in Gaborone to manage its coal bed methane (CBM) exploration programme in Botswana in 2008, the business unit spent $20 million in 2009 on exploration and new business development activities, investigating thermal and coking coal and CBM resources mainly in southern Africa.

Thermal Coal continues to pursue business development opportunities on a range of projects that offer potential exposure to the broader energy markets, while building on the business's core capability in coal, namely CBM exploration in South Africa and Botswana. Although these projects remain at an early stage and have demanding economics, they ensure that Thermal Coal is equipped with a diverse range of options to meet changing market demands over the long term.

Thermal Coal generated an operating profit of $721 million, a 33% decrease, predominantly as a result of lower thermal coal prices, mitigated in part by the benefits of tighter cost discipline across the business.

Markets

Anglo American weighted average achieved FOB prices ($/tonne) 2009 2008
RSA export thermal 64.46 84.54
RSA domestic thermal 18.48 20.41
South American export thermal 72.98 81.33
Attributable sales volumes (thousand tonnes) 2009 2008
RSA export thermal 15,857 15,916
RSA domestic thermal 6,251 7,046
South American export thermal 10,854 11,568

2009 saw considerable price and market trend changes compared with 2008. The average 2009 FOB index price for South African thermal coal exports (API4) was $65 per tonne, compared with $120 per tonne in 2008.

Driven by a suppressed industrial sector, European power demand in 2009 decreased significantly. The softer oil price and an abundance of cheap gas contributed to lower demand for imported coal, resulting in increased stockpiles. In contrast, the Pacific market continued to see growth, with increasing demand for imported thermal coal. As China was able to accommodate large volumes of Indonesian and Australian exports, India turned to South Africa to meet its escalating demand for thermal coal. The proportion of South African coal exports shipped to Asia in 2009 was 41%, compared with 18% in 2008, with 29% going to India. In the absence of European demand, this ability to deploy coal eastwards gave support to both South African export volumes and prices. With the Pacific market driving the API4 price as 2009 progressed, the flow of coal away from the Atlantic became increasingly evident. Colombian and US exports were generally not as competitive in the Asian markets as in the Atlantic market due to comparatively higher freight costs during the year.

Operating performance

South Africa

Attributable production (thousand tonnes) 2009 2008
RSA thermal 22,186 22,287
RSA Eskom 36,225 36,158

Operating profit from South African sourced coal decreased by 40% to $442 million, mainly due to the 24% decrease in export prices, coupled with lower sales volumes and rand strength. Domestic sales prices were 2% lower. Despite the economic downturn, annual production remained steady at some 59 Mt, driven mainly by higher output at Mafube as it reached full capacity during 2009, offset by lower production at New Denmark, where major geological challenges suspended the longwall operations. A new longwall has been commissioned during the first quarter of 2010 and is ramping up.

South America

Attributable production (thousand tonnes) 2009 2008
South American export thermal 10,190 10,410

Operating profit from Cerrejón decreased by 19% to $305 million, driven primarily by less favourable market conditions as average sales prices decreased by 8% and total sales volumes by 4%. The impact of the $98 million decrease in turnover was partly offset by reduced input costs arising from lower fuel prices and price associated royalties, as well as cost control measures. Although significant improvements in 2009 coal recovery rates continued to reflect positively in all aspects of the operation, saleable production was reduced in response to Cerrejón's perception of a weaker market.

Projects

In South Africa, the $512 million, 6.6 Mtpa Zibulo project is under construction, including the building of a 50:50 joint venture coal washing plant with BHP Billiton Energy Coal South Africa. The project is on schedule, with first coal produced during the third quarter of 2009 and it will continue to ramp up during the course of 2010, reaching full production in 2012.

In Colombia, the $130 million expansion at Cerrejón to 32 Mtpa was completed and full production was achieved early in 2009. Feasibility studies are under way to expand the operation to around 40 Mtpa.

Outlook

Underlying demand remains relatively strong, supported by economic growth in the Asia-Pacific region, in particular from India and China, the steady increase in the oil price and the cold European and Asian winter. A significant portion of 2010 sales is exposed to market pricing. Potential exists for market prices to increase during the first quarter and for the remainder of 2010, with current forward prices trending significantly above those seen in 2009.

Seaborne thermal coal demand
Miners discuss plant operations at Greenside colliery.

Miners discuss plant operations at Greenside colliery, which mined 3.3 Mt of thermal coal in 2009, predominantly destined for the export market.

Norman Mbazima
CEO Thermal Coal

Norman Mbazima Group current and future thermal coalproduction (Mt) Internationally traded thermal coal export production by company (2009) (%) Life of thermal Coal Reserve and Resources

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Annual Report 2009