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Glencore announces 2019 half year report

Aug 07, 2019 (MarketLine via COMTEX) --

Glencore has provided 2019 half-year report.

Glencore's Chief Executive Officer, Ivan Glasenberg, commented: "Our performance in the first half reflected a challenging economic backdrop for our commodity mix, as well as operating and cost setbacks within our ramp-up/development assets. Adjusted EBITDA declined 32% to $5.6 billion. "The rest of our business, however, remained strong and performed well. Excluding our African copper assets and Koniambo, our metals and coal industrial assets delivered robust Adjusted EBITDA mining margins◊ of 39%. In particular, our copper business, excluding African copper, recorded an EBITDA mining margin of 52% and a full unit cash cost of 72c/lb, while our coal business again generated margins in excess of $30/t, basis a $46/t thermal unit cash cost. Similarly, our marketing business is tracking towards the middle of our full year Adjusted EBIT guidance range of $2.2-$3.2 billion, after adjusting for some $350 million of non-cash cobalt losses reported in the first half.

"However, our African copper business did not meet expected operational performance. We have moved to address the challenges at Katanga and Mopani with several management changes as well as overseeing a detailed operational review, targeting multiple improvements to achieve consistent, cost-efficient production at design capacity. Our teams have identified a credible roadmap towards delivering on the significant cashflow generation potential of these assets, at targeted steady state production levels. At Mutanda, we are planning to transition the operation to temporary care and maintenance by year end, reflecting its reduced economic viability in the current market environment, primarily in response to low cobalt prices. We continue to progress studies on the sulphide project, having the potential to extend operations for many years, and anticipate being able to provide an update at our Investor Day in December.

"Looking ahead, we are confident that commodity fundamentals will move in our favour and that our diverse commodity portfolio will continue to play a key role in global growth and the transition to a low-carbon economy. Our asset teams are focussed on delivering the full potential of our business, which together with our promising range of commodities, should see us well positioned for the future. Through continued constructive collaboration, we remain focussed on creating sustainable long-term value for all stakeholders."

Healthy cash generation despite significantly lower commodity prices

- H1 2019 Adjusted EBITDA of $5.6 billion, down 32% ($5.9 billion, pre $350 million non-cash cobalt loss)

- Net income attributable to equity holders down to $0.2 billion, mainly driven by lower average period-over-period commodity prices and impairment charges in our Chad oil and African copper portfolios

- Cash generated by operating activities before working capital changes of $5.4 billion, down 21%

- Net purchase and sale of property, plant and equipment of $2.2 billion, up 7%

- Our ramp-up/development assets, comprising Copper Africa and Koniambo, weighed on earnings in H1 2019, with negative Adjusted EBITDA of $0.4 billion. These assets offer significant upside at steady state production levels.

Industry leading cost positions

- First-half operational unit cash cost performance in our key commodities: copper (excluding African copper) 72c/lb, zinc 3c/lb (40c/lb ex-gold), nickel (excluding Koniambo) 329c/lb and thermal coal $46/t at a $32/t margin

Marketing a diversified earnings driver

- Marketing Adjusted EBIT of $1.0 billion, down 35%, but only 13%, excluding a cobalt related loss on an 'involuntary' long cobalt position, against a particularly strong base period

Full year outlook factors…

- On an annualised basis, pre-cobalt Marketing Adjusted EBIT of $1.3 billion tracking towards the middle of our $2.2-$3.2 billion long-term guidance range

- Expected Industrial production weighted towards H2 for each of Copper, Zinc, Nickel, Coal and Oil

- Extensive operational and cost improvement initiatives being undertaken at African Copper and Koniambo

…and balance sheet in strong shape for the medium term

- Debt facilities renewed in March/April. Bond maturities continue to be capped at ~$3 billion in any given year

- Although Net debt of $16.3 billion is at the upper end of our target range, on account of a new lease accounting standard, $1.1 billion of new lease liabilities were recognised during H1 2019, that previously would have been treated as operating leases

- Conservative 1.24x Net debt/Adjusted EBITDA ratio. Intend to manage the balance sheet over the next 6-12 months towards our target of around 1x, in the current uncertain economic cycle backdrop

Chief Executive Officer’s Review

A challenging operating environment

Heightened global trade policy tensions, US dollar strength and volatile interest rate curves, again proved to be the central influences on markets during the half. While US equity markets tested fresh highs, in the absence of other specific drivers, commodity markets struggled amidst increasing fears that actual and potential new tariffs would harm global manufacturing and consumer sentiment, resulting behaviour and with it, global growth expectations.

Our key commodity average price benchmarks were all lower period on period; copper -11%, zinc -16%, lead -20%, nickel -11%, cobalt-58% and GC NEWC coal -14%. Particularly weak were cobalt, with the market in current oversupply, and the Atlantic steam coal market, impacted by weaker European demand and low gas prices. We believe that for most of our commodities, the H1 2019 price moves are not representative of underlying supportive fundamentals. Visible metal stocks in key industrial metals, including copper, zinc and nickel are at relatively low levels, while demand growth is in positive territory and mine supply is underperforming. Furthermore, coal demand in Asian markets continues to be strong.

Corporate governance and sustainability

Year to date, there were tragically eleven fatalities, resulting from eight incidents at Glencore’s managed operations. We acknowledge that this performance is unacceptable and have recently restructured our HSEC+HR teams to review our group-wide approach to safety. Where we have identified weakness in approach, we are putting in place the appropriate changes to culture, processes and training to deliver a step change in our performance. The steps we are taking include reviewing and upgrading operating standards, processes and equipment to deliver a consistent approach group-wide and increasing our verification activities to confirm compliance with required operating standards. We remain committed in prioritising safety in our operations and believe that every work-related injury is preventable; our ambition continues to be having fatality and injury-free workplaces at all of our assets.

One of Glencore’s key strategic priorities is the integration of sustainability throughout our business. We recognise that only through behaving as a responsible operator and delivering long-term, sustainable benefits to all our stakeholders, can we achieve meaningful success. We act on this commitment through transparently reporting our performance and progress across the broad range of sustainability topics through a number of Group publications. We are pleased to report that we have published, for the first time this year, and in response to increasing interest from stakeholders, standalone human rights and water reports, in addition to our annual sustainability and payments to government reports and modern slavery statement. In February, we published our climate change position statement, ‘Furthering our commitment to the transition to a low-carbon economy’. This statement acknowledges the role that our commodities are playing in the transition to a lower carbon economy and commits the company to reporting on how our material capital expenditure and investments align with the Paris Goals. 2019 First-Half Financial Scorecard Against a background of lower commodity prices and operational/cost challenges in our African copper portfolio, Adjusted 

EBITDA declined 32% to $5.6 billion. Similarly, Net income attributable to equity holders declined from $2.8 billion in H1 2018 to $0.2 billion in H1 2019, reflecting the lower Adjusted EBITDA and $0.9 billion of impairment charges related to our Chad oil and African copper assets.

The decline in Adjusted Marketing EBIT was amplified by an ‘involuntary’ cobalt long position of c.10kt internally-sourced cobalt (from our own mines), accumulated in the Marketing segment in 2018, that remained broadly the same as at 30 June 2019. Accordingly, a 50% reduction in cobalt prices over the first half of 2019, together with a significant decline in hydroxide payabilities, generated cobalt-related Marketing EBIT losses of c.$350 million on this position. Excluding the impact of these effectively non-cash losses in 2019, Marketing Adjusted EBIT was around $1.3 billion, which on an annualised basis is tracking towards the middle of our $2.2 to $3.2 billion long-term guidance range. Supportive physical market conditions were evident for most of our commodities, particularly in oil, while the weak Atlantic coal market presented challenges for our coal business. Industrial Adjusted EBITDA decreased by $2.2 billion period over period to $4.5 billion, primarily driven by lower commodity prices.

The benefit of a stronger U.S. Dollar against many of our key producer currencies during the period was offset by operational and cost challenges in our African copper business and changes to the accounting categorisation of Koniambo on the achievement of ‘commercial’ production, whereby costs are now expensed (previously capitalised), notwithstanding that it is still in an optimisation phase.

While these copper and nickel assets are in a ramp-up/development phase, with a roadmap towards a materially improved future contribution, to ensure enhanced understanding of results, we have also separately highlighted the balance of our copper and nickel businesses’ underlying performance. Indeed, on such basis, our copper assets, excluding Africa, recorded an Industrial EBITDA mining margin of 52% and full unit cash cost of 72c/lb during H1 2019, while our overall Industrial Adjusted EBITDA mining margin in Metals and minerals and Coal assets was 39% for both, compared to 43% and 41% respectively during H1 2018 (27% for Metals and minerals, including the ramp-up/development assets).

Our Net funding and Net debt increased by $1.1 billion and $1.6 billion respectively during H1 2019 to $33.2 billion and $16.3 billion respectively. The majority of the net increase can be attributed to adoption of the new lease accounting standard on 1 January, which resulted, as at 30 June 2019, in the reporting of $1.1 billion of leases as debt, that previously would have been classified as operating leases. In the current uncertain environment, we are targeting Net debt / Adjusted EBITDA around 1x and therefore plan to manage the business from its current reported ratio (last 12 months’ basis) of 1.24x towards 1x within the next 6 to 12 months.

African copper

Our African copper business did not meet its planned operational performance for the period. We have quickly moved to address Katanga’s operational, cost and product quality challenges, with several management changes, as well as overseeing a detailed operational review, targeting multiple improvements to achieve consistent, cost-efficient production at design capacity. At the nearby Mutanda operation, we are planning to transition the facility to temporary care and maintenance by the end of 2019, reflecting reduced economic viability in the current market environment, most notably cobalt related. Mutanda will continue to evaluate its operations and will recommence once economic conditions sufficiently improve. We will continue to progress our studies on the Mutanda sulphide project, which has the potential to provide a long-term life of mine. In Zambia, we are nearing the end of our multi-year site transformation projects, including planned commissioning of a new copper concentrator towards the middle of 2020 and the development of three major new mining shafts. Completion of repairs to Mopani’s smelter is expected by the end of 2019. Our African copper assets retain significant potential and are expected to play a key role in the transition to a low carbon economy.

Shareholder returns

In addition to the $2.7 billion base distribution being paid in 2019, we continue to progress the $2 billion buyback announced at the full year results in February, with some $900 million currently remaining. Outside of our base distribution policy, for the balance of equity cash flows, we currently favour buybacks, however any further potential remains subject to currently managing the balance sheet towards a Net debt / Adjusted EBITDA ratio of around 1x, while maintaining RMI at broadly current levels and Net debt within the guidance range of c.$10-$16 billion.

Outlook

Looking ahead, we are confident that our commodity basket’s fundamentals will move in our favour and that our diverse portfolio will continue to play a key role in the global economy, with attractive shareholder returns on offer. Through continued constructive collaboration, we strive to create sustainable long-term value for all stakeholders.

Financial and Operational Review

Basis of presentation

The financial information in the Financial and Operational Review is on a segmental measurement basis, including all references to revenue and has been prepared on the basis as outlined in note 2 of the financial statements, with the exception of the accounting treatment applied to relevant material associates and joint ventures for which Glencore’s attributable share of revenues and expenses are presented. In addition, the Peruvian listed Volcan, while a subsidiary of the Group, is accounted for under the equity method for internal reporting and analysis due to the relatively low economic interest (23%) held by the Group. During the period, key members of the Group’s Metals and minerals, Energy products and Agricultural products segments retired and a new position with oversight and responsibility for all of Glencore’s industrial assets (Head of Industrial Assets) was created. Internal reporting lines and organisational structures were amended such that Glencore’s industrial activities report to the Head of Industrial Assets and all of its marketing activities report to the Head of Marketing (being the Group CEO). The change in oversight and responsibility for the two differing parts of our business (marketing and industrial) and associated remuneration has resulted in a change in the ‘chief operating decision makers’ reporting and accountability structures and, with it, our reportable segments.

Aligning with the new executive structure and respective operational oversight and responsibility, the new reportable segments are

– ‘Industrial’ and ‘Marketing’ activities. Comparative 2018 information has been restated for the change in reportable segments. The Group’s results are presented on an “adjusted” basis, using alternative performance measures (APMs) which are not defined or specified under the requirements of IFRS, but are derived from the financial statements, prepared in accordance with IFRS, reflecting how Glencore’s management assess the performance of the Group. The APMs are used to improve the comparability of information between reporting periods and segments and to aid in the understanding of the activities taking place across the Group by adjusting for Significant items by aggregating or disaggregating (notably in the case of relevant material Associates accounted for on an equity basis) certain IFRS measures. APMs are also used to approximate the underlying operating cash flow generation of the operations (Adjusted EBITDA). Significant items are items of income and expense, which, due to their variable financial impact or the expected infrequency of the events giving rise to them, are separated for internal reporting, and analysis of Glencore’s results. 

Financial results

Net income attributable to equity holders decreased from $2,776 million in H1 2018 to $226 million in H1 2019 and EPS decreased from $0.19 per share to $0.02 per share, driven by lower average period-over-period commodity prices (notably cobalt and thermal coal) and impairment charges in our Chad oil and African copper portfolios, owing to the expiration of certain oil exploration licenses and revisions to the Mutanda mine plan as a result of lower cobalt prices. Adjusted EBITDA was $5,582 million and Adjusted EBIT was $2,229 million over H1 2019, decreases of 32% and 56% respectively compared to H1 2018, mainly driven by lower commodity prices, including a material cobalt reported loss within marketing (refer to page 13), partially offset by a strengthening U.S. Dollar (on average) against many of our key producer country currencies, as noted in the tables above. In addition to these net negative macro influences, Adjusted EBITDA/EBIT was further impacted by the continuing operational challenges in our African copper portfolio and that, relative to the comparative period where the ramp-up costs at Koniambo nickel were being capitalised, as of 1 January 2019, such operational costs are now expensed, notwithstanding that it is still in ramp-up mode with significantly higher costs than eventual steady state. Reflecting these particulars, Adjusted EBITDA mining margins were 27% (39%, excluding African Copper and Koniambo) in our metal operations and 40% in our energy operations, compared to 42% and 41% respectively during H1 2018.

Marketing activities

Marketing Adjusted EBITDA and EBIT decreased by 29% and 35% to $1,083 million and $969 million respectively. Excluding the recorded cobalt losses on previously sourced internal Group production of some $350 million, Marketing Adjusted EBITDA and EBIT decreased by a more respectable 6% and 12% to $1,433 million and $1,319 million, respectively. Apart from cobalt, most metals’ commodity departments delivered sound results (against a strong H1 2018 base period), whilst the challenges from escalating trade tensions remain. In Energy products, oil delivered a particularly strong result, on the back of supportive physical commodity marketing conditions, comfortably offsetting a lower coal contribution, given its weaker dynamics during the period, particularly in the Atlantic steam coal market.

Industrial activities

Industrial Adjusted EBITDA decreased by 32% to $4,499 million (Adjusted EBIT was $1,260 million, compared to $3,591 million in 2018). As noted above, the decrease was primarily driven by weaker average period-over-period commodity prices and production / operational / cost challenges in our African copper portfolio - Mutanda’s copper production was 47% lower compared to the prior period as it re-optimised its mine plan according to updated resource modelling, Katanga, although recording higher cobalt production, had limited sales as it manages through a period of excess uranium content, and Mopani’s copper metal production was 31% lower as, in June, it accelerated its major triennial smelter shut down (from the 2020 schedule) and earlier in H1, brought forward various planned maintenance activities by 6 months to address safety-related issues and operational outages (mining and processing). 

Significant items

Significant items are items of income and expense, which, due to their variable financial impact or the expected infrequency of the events giving rise to them, are separated for internal reporting, and analysis of Glencore’s results to provide a better understanding and comparative basis of the underlying financial performance.

In 2019, Glencore recognised a net expense of $1,077 million (2018: $517 million) in significant items comprised primarily of:

• Expenses of $85 million (2018: $Nil) relating to Glencore’s share of significant expenses recognised directly by our associates.

• Loss on disposals and investments of $19 million (2018: gain of $19 million) see note 5. In 2019, the loss primarily relates to the revaluation of the existing interest prior to acquisition of a controlling interest in Polymet. In 2018, the gain primarily relates to the disposal of the Tahmoor coal mine in Australia.

• Income tax expense of $467 million (2018: $212 million) –

• Other expenses – net expenses of $122 million (2018: $270 million) see note 6. Balance primarily comprises:

– $16 million (2018: gain of $54 million) of mark-to-market losses on equity investments / derivative positions accounted for as held for trading.

– $56 million loss (2018: gain of $19 million) of net foreign exchange movements.

– $Nil (2018: $248 million) relating to the costs incurred in settling Katanga’s capital deficiency and various historical commercial disputes with Gécamines. The recapitalisation of KCC concluded with the conversion of $5.6 billion of intercompany debt into equity, with $1.4 billion of that share capital passed on to Gécamines to maintain its 25% interest in KCC. Also see note 26.

– $Nil (2018: $56 million) of acquisition related expenses incurred in connection with the acquisition of HVO (see note 20). The expenses are primarily stamp duty / property transfer related taxes.

• Impairments of $888 million (2018: $80 million), see note 7. The 2019 charge primarily relates to writing-off the historical cost allocation to certain oil exploration licences in Chad upon the acquisition of Caracal in 2014, which have recently expired ($538 million) and revisions to Mutanda’s mine plan ($300 million). The 2018 charge related mainly to various assets where it was determined that their utilisation is no longer required or projects will not be progressed due to changes in production and development plans.

Net finance costs

Net finance costs were $862 million during H1 2019, a 16% increase compared to $746 million in the comparable reporting period, primarily attributable to higher average base rates (mainly US$ Libor) and additional finance lease interest costs, following the introduction of the new lease accounting standard on 1 January 2019. Interest expense for 2019 was $988 million, up 16% over H1 2018 and interest income was $126 million, up 22% over H1 2019.

Income taxes

An income tax expense of $677 million was recognised during H1 2019, compared to $1,144 million during H1 2018. Adjusting for a $467 million (2018: $212 million) income tax expense related to significant items (primarily impairments, tax losses not recognised and unutilised tax losses), the H1 2019 pre-significant items income tax expense was $210 million (2018: $932 million). The 2019 effective tax rate, pre-significant items, was 28.5%, consistent with the 28.2%, over the comparable period. Statement of financial position Current and non-current assets

Total assets were $127,183 million as at 30 June 2019, compared to $128,672 million as at 31 December 2018. Current assets decreased from $44,268 million to $41,674 million, due to a reduction in fair values of our derivatives / hedging instruments (other financial assets), on account of movements in commodity prices and foreign exchange rates, as well as settlement of the Astron exchangeable loan, following the closing of this acquisition in April 2019. Non-current assets increased from $84,404 million to $85,509 million, primarily due the acquisition of Astron Energy (see note 20), capitalisation of lease assets as a result of the adoption of IFRS 16 and mark-to-market adjustments with respect to our investments carried at fair value through other comprehensive income (see note 11). This increase was offset by impairments to property, plant and equipment and intangible assets of $888 million.

Other comprehensive income/(expense)

An income of $212 million was recognised during H1 2019, compared to an expense of $1,131 million during H1 2018, primarily relating to mark-to-market adjustments with respect to our investment in EN+ and Russneft (see note 11) and exchange gains on translation of foreign operations.

Net funding as at 30 June 2019 increased by $1.1 billion to $33,238 million and net debt (net funding less readily marketable inventories) increased by $1.6 billion over the period to $16,308 million. The major contributor to the increase in both metrics was the adoption of the new lease accounting standard on 1 January 2019, which resulted in $865 million of new lease liabilities being recognised, while $228 million of additional new leases were booked as capital expenditures and debt in H1 2019, that previously would have been classified as operating leases. Funds from operations was down 37% compared to H1 2018, owing in large part to the reduction in commodity prices and operational challenges in the African copper operations as noted above, as well as the lag / mismatch effect of higher corporate taxes paid in H1 2019 in respect of 2018 earnings. Despite such macro and other effects, funds from operations comfortably covered the $2,193 mi1lion of net capital expenditure (including the $228 million of lease additions) and $77 million of net acquisitions of subsidiaries and investments, the remainder covering a significant portion of the distributions to shareholders and non-controlling interests. Business and investment acquisitions and disposals

Net outflows from business acquisitions were $77 million (2018: $1,164 million) over the period, comprising primarily the acquisitions of an additional 10% and 2.7% interest in the Ulan and Hail Creek coal operations. The net outflow in 2018 was primarily due to the acquisition of a 49% interest in the HVO coal mine, an operation neighbouring many of our existing New South Wales operations.

Liquidity and funding activities

In 2019, the following significant financing activities took place:

• In March 2019 (effective May 2019), Glencore signed new one-year revolving credit facilities of $9,775 million, refinancing the $9,085 million one-year revolving facilities signed in March 2018. Funds drawn under the facilities bear interest at US$LIBOR plus a margin of 40 basis points. Glencore also voluntarily reduced the medium term facility size from $5,115 million to $4,650 million, extended the facility to five-years, and replaced the two one-year extension options.

As at 30 June 2019, the facilities comprise:

– a $9,775 million one year revolving credit facility with a 12 month borrower’s term-out option (to May 2021) and a one-year extension option; and

– a $4,650 million medium-term revolving credit facility (to May 2024), with two one-year extension options.

• In March 2019, issued a 5 year $1,000 million, 4.125% coupon bond

• In March 2019, issued a 10 year $750 million, 4.875% coupon bond

• In March 2019, issued a 7 year GBP 500 million 3.125% coupon bond

• In April 2019, issued a 7 year EUR 500 million 1.50% coupon bond

Going concern

As at 30 June 2019, Glencore had available committed undrawn credit facilities and cash amounting to $10.1 billion. 

Based on these available capital resources and the Group’s financial forecasts and projections, which take into account expected purchases and sales of assets, reasonable possible changes in performance and consideration of the principal risks and uncertainties noted below, the Directors believe the Group can continue as a going concern for the foreseeable future, a period not less than 12 months from the date of this report. Credit ratings In light of the Group’s extensive funding activities, maintaining investment grade credit rating status is a financial priority. The Group’s credit ratings are currently Baa1 (stable outlook) from Moody’s and BBB+ (stable) from Standard & Poor’s. Glencore’s publicly stated objective, as part of its overall financial policy package, is to seek and maintain strong Baa/BBB credit ratings from Moody’s and Standard & Poor’s respectively. In support thereof, Glencore targets a maximum 2x Net debt/Adjusted EBITDA ratio through the cycle, augmented by an upper Net debt cap of c.$16 billion. As noted earlier in the year, in the current uncertain economic cycle backdrop, Glencore aims to limit the Net debt/Adjusted EBITDA ratio to around one times, which, given the last 12 months’ calculated ratio is 1.24x as of June, will require some targeted management over the next 6-12 months to get this ratio back closer to 1x. It should be noted that June’s 1.24x ratio would have been 1.17x, excluding the effect of some $1.1 billion of new debt and lease assets having being recorded as at 30 June 2019 , since the adoption of the new leasing standard on 1 January 2019

Value at risk One of the tools used by Glencore to monitor and limit its primary market risk exposure, namely commodity price risk related to its physical marketing activities, is the use of a value at risk (VaR) computation. VaR is a risk measurement technique, which estimates the potential loss that could occur on risk positions as a result of movements in risk factors over a specified time horizon, given a specific level of confidence. The VaR methodology is a statistically defined, probability based approach that takes into account market volatilities, as well as risk diversification by recognising offsetting positions and correlations between commodities and markets. In this way, risks can be measured consistently across all markets and commodities and risk measures can be aggregated to derive a single risk value. Glencore has set a consolidated VaR limit (1 day 95%) of $100 million representing some 0.2% of equity, which was not exceeded during the period. Glencore uses a VaR approach based on Monte Carlo simulations and is either a one-day or one-week time horizon computed at a 95% confidence level with a weighted data history.

Average market risk VaR (1 day 95%) during the first half of 2019 was $32 million, representing less than 0.1% of equity. Average equivalent VaR during the first half of 2018 was $33 million.

Distributions

Earlier in 2019 and approved at the Company’s AGM, the Directors recommended a cash distribution, in respect of the 2018 financial year, of $0.20 per share amounting to $2.7 billion, excluding any distribution on own shares and ignoring any attribution of shares that may take place prior to the record dates. The first tranche of the distribution of $0.10 per ordinary share amounting to $1,368 million was paid on 23 May 2019. The second tranche of $0.10 per ordinary share is due in September 2019, in accordance with the Company’s announcement of the 2019 Distribution timetable made on 20 February 2019. The distribution is to be effected as a reduction of the capital contribution reserves of the Company. As such, this distribution would be exempt from Swiss withholding tax. As at 30 June 2019, Glencore plc had CHF 30 billion of such capital contribution reserves in its statutory accounts.

Principal risks and uncertainties

The Group is exposed to a number of risks and uncertainties which exist in its business and which may have an impact on the ability to execute its strategy effectively in the remaining six months of the financial year and could cause the actual results to differ materially from expected and/or historical results. \

External risks:

• Supply, demand and prices of commodities

• Currency exchange rates

• Geopolitical, permits and licences to operate

• Laws and enforcement

• Liquidity

Business risks:

• Counterparty credit and performance

• Operating

• Cyber

Sustainable development risks:

• Climate change

• Community relations and human rights

• Health, Safety, Environment

Marketing activities

Highlights

Marketing Adjusted EBITDA and EBIT decreased by 29% and 35% to $1,083 million and $969 million, respectively, compared to H1 2018. Excluding the recorded cobalt losses on previously sourced internal Group production of some $350 million, Marketing Adjusted EBITDA and EBIT decreased by a more respectable 6% and 12% to $1,433 million and $1,319 million, respectively. Apart from cobalt, most metals’ commodity departments delivered sound results (against a strong H1 2018 base period), whilst the challenges from escalating trade tensions remain. In Energy Products, oil delivered a particularly strong result, on the back of supportive physical commodity marketing conditions, comfortably offsetting a lower coal contribution, given its weaker dynamics during the period, particularly in the Atlantic steam coal market. As flagged at our Investor Update in December 2018 and discussed again alongside our 2018 full year results in February, our Marketing segment has cobalt purchase commitments from the Group’s own mines (primarily in the DRC), against which price risk cannot be perfectly matched, due to the illiquid / immature hedging tools available and / or inadequate depth of the physical forward market. Reflecting our overall Group risk tolerance and appetite, our target cobalt price exposure (within Marketing) is minimal. During any period of market oversupply, however, we could build some ‘involuntary’ cobalt price exposure, which is what occurred through 2018. In this regard, from a Group perspective, there remains an unrealised profit lag (effectively between our Industrial and Marketing segments) until the final sale of product to an external counterparty. Our net cobalt price exposure was broadly unchanged from 31 December 2018 to 30 June 2019, reflecting a period of solid sales volumes. Based on our carried internally sourced cobalt price exposure of 10.3kt of cobalt, with the Metal Bulletin cobalt price falling 50% during H1 2019 and a significant decline in hydroxide payabilities, a negative net realisable value adjustment of around $350 million was recognised during H1 2019. It is important to note that such reported loss in H1 2019 was principally non-cash, as funding in respect of building the position occurred predominantly in 2018.

treatment and refining charges declined to levels last seen in 2013. Looking forward, it is expected that mine supply growth will continue to be constrained by the limited pipeline of projects available and with a generally positive demand outlook for copper, notwithstanding trade and tariffs disputes, a sustained period of supply deficits for the copper market could continue. Cobalt The cobalt price decline experienced in H2 2018 continued during H1 2019. As with other commodities, the negative macro sentiment took hold, which, together with an oversupplied cobalt intermediary market and ample stocks, pushed cobalt prices lower. Metal prices ended H1 around the $30,000/t level, a 50% decline from the beginning of the year, notwithstanding a healthy demand increase due to higher electric vehicle penetration rates. The recent weak cobalt prices are pressuring margins across the cobalt mining and refining complex, with many operations currently uneconomic. Amongst the first indications of a supply response to lower prices, were a reduction in artisanal sourced cobalt and some industrial projects being delayed. Within our own operations, due to various factors including the weak cobalt prices, Mutanda will transition to temporary care and maintenance at the end of 2019. Ultimately, cobalt medium and long-term fundamentals remain well underpinned by the expected strong structural demand growth arising from electric vehicles.

Zinc

In H2 2018, the zinc price reduced to $2,575 on average, as the market anticipated global mine supply increases in 2019. In practice, a combination of slower than expected rate of metal production pick up and stable zinc metal demand led to a price recovery in H12019 to $2,732 on average. The lower than expected metal production growth was partly driven by environmental controls in China, which limited smelter production in the early part of the year. Metal production in China was slightly lower year-over-year (-0.6% Jan-May, though picking up in June as previously idled capacity was restored), resulting in a 20% increase in imported metal. Rest of the World (“RoW”) metal growth also declined by -0.5% from Jan-May 19, with supply disruptions affecting smelters in North America and India, resulting in spot TCs (basis CIF China) jumping on average to $254/dmt over H1 2019 vs $24/dmt over H1 2018. Combined with stable demand and limited metal supply growth, visible global zinc metal inventories remain low, at just over a week of global consumption in June 2019 vs two weeks in June 2018. The low level of LME stocks resulted in backwardated markets as the market anticipates eventual normalization of prices and stocks, with an average cash to 3-months spread of $67/t during H1 2019, the highest level seen in the last decade. This still failed to attract a significant amount of new metal into LME warehouses, another sign that most non-visible metal stocks have been drawn down. Looking ahead, as mined supply availability increases in RoW and as Chinese smelters increase capacity utilisation, metal production is expected to increase. As the zinc market has been in a sizeable deficit since 2016, these additional metal units are necessary to balance the market even under conservative demand growth assumptions. In the case of lead, both mined and metal production have increased in both China and RoW. Spot TCs have remained low ($20/dmt basis CIF China in H1 2019 vs $27/dmt in H1 2018), but such additional production has put pressure on the price. Nickel Despite prevalent macro-economic uncertainty, nickel demand during H1 2019 remained positive, primarily driven by strong stainless steel production growth and surging battery market offtake. Of note, advances in China’s stainless steel output exceeded 10% and production of higher nickel content 300-series stainless was particularly strong. Meanwhile, electrification in the automotive sector resulted in significant advances in Li-ion battery materials production, supporting accelerating nickel demand in China, Japan and Korea. On the supply side, a faster than expected increase of nickel pig iron (“NPI”) output from Indonesia and China has been partially offset by the widespread underperformance of traditional nickel suppliers, which consistently missed their production targets for H1 2019.

Regardless of a significant increase in our global NPI supply projections for the year, we expect the nickel market to remain in deficit and stocks will continue to be drawn down – albeit at a reduced pace compared to last year. This outlook is underpinned by solid end-use demand for austenitic stainless and the continuing strong growth of nickel usage in batteries. However, if a US-China trade resolution is indefinitely put on hold, there is a downside risk to global growth and nickel offtake.

Ferroalloys

Rising South African chrome ore exports supported record Chinese ferrochrome production during H1 2019. South African ferrochrome exports also increased. Despite strong demand from the stainless steel sector, these increases in ferrochrome supply led to weaker prices during the period. Stainless steel melt rates are expected to remain strong during H2 2019, but macroeconomic headwinds combined with current ferrochrome oversupply are expected to result in challenging market conditions in the near term.

Vanadium prices declined in H1 2019 as the implementation of the new rebar standard in China was below expectation, coupled with continued niobium substitution.

Alumina/Aluminium

After a turbulent 2018, H1 2019 brought a return to a more familiar and stable market environment for both aluminium and alumina.

The aluminium market had seemingly priced in the eventual lifting of US sanctions on the largest ex-China aluminium producer, Rusal, which occurred in January, and with no further news disrupting the market, LME prices traded within a narrow $200/t range averaging around $1,850/t. The main driver for price movements was macro-economic concerns over a US/China trade war, which is weighing on demand. Nevertheless, the Western aluminium market was still in deficit for a sixth consecutive year, causing LME stocks to drop below 1Mt at the end of June.

In May, the 50% production embargo on the largest ex-China alumina refinery, Alunorte, was lifted, and over the six-month period,

FOB Australia alumina prices had fallen by over $70/t to end at $323/t. Due to the lagged pricing nature of most alumina term contracts, smelters will not find immediate reprieve from the price drop.

Instead, margins continue to be pressured by relatively low aluminium prices and high alumina input costs, leading to heightened risk for non-integrated and non-diversified producers at the higher end of the cost curve. Iron ore Following the Brumadinho dam failure and a series of unprecedented supply disruptions across the globe, the iron ore market has gone into deficit. Prices spiked and as steel profitability declined, quality premiums/discounts narrowed. Following large inventory drawdowns in Q2 the market is starting to settle down, with prices stabilising around $120/t in early July. Coal Global seaborne thermal coal demand for H1 2019 is estimated to have grown around 6.3% versus H1 2018 with ongoing strength in Pacific demand growth of 6% or 23Mt, more than offsetting a 6% or 5Mt demand decline in the smaller Atlantic market. Supply growth has come from Russia, Australia and Indonesia, with reductions seen from Colombia, South Africa and USA. For H1 2019, the highest growth market was India, with imported thermal coal volumes increasing 17% or 14Mt YoY. In the same period, thermal supply to Vietnam was up 113% or 7.3Mt YoY and Japan was up 7.7% or 4.5Mt YoY. During 2018-19, Vietnam will commission 2.3GW of imported coal fired generation capacity and a further 1.8GW is in construction for commissioning by 2021. In Japan, 1.2GW of new capacity is expected to be commissioned by end 2019, with a further 3.9GW by 2021. Elsewhere, ramping up of new coal units in Malaysia and Philippines has contributed to Asian demand growth. In South Korea and Taiwan, coal fired generation plant maintenance and operational restrictions reduced H1 coal import demand, however, with these units having now returned to normal service, H2 coal demand is expected to return to 2018 levels. During Q1 2019, the Chinese government imposed restrictions on certain end users for the purchase of Australian thermal coal. For H1 2019, these restrictions reduced the flow of Australian thermal coal to China by 14% versus H1 2018. Overall, Chinese customs show total coal imports up 6.2% YoY, with thermal trending flat YoY and Indonesian volumes up 7.3%. In contrast to the healthy Asian demand story, the increase in European CO2 pricing and lower global LNG prices contributed to a 10% reduction in Europe’s import thermal coal demand versus H1 2018, thereby diverting coal from Colombia and USA 

East Coast producers towards Pacific markets and leading to API2 prices falling by 43% from the high at the beginning of 2019 to 30 June 2019. High quality South African coal prices as measured by the API4 index fell 32% and the GC Newcastle index by 31% over the same period. Prices for Australian high ash coals at the close of H1 2019 were 16% below their January peak, in strong contrast to the essentially flat Chinese domestic prices and reflecting the impact of import controls. With coking coal, data to the end of May shows global pig iron production up 5.2% YoY, with China up 9%. The metallurgical coal import countries excluding China reported a 0.2% reduction in pig iron production with declines in Europe (-2.2%), South America (- 0.3%) and Japan (-4.7%) offsetting growth in India (1.1%), Korea (3.4%) and Taiwan (9.1%). While coal demand in these countries remained broadly flat, Chinese coking coal imports YTD May were up 25% or 3.1Mt, reflecting an increasing need for imported high coke strength, low sulphur coking coals. Reflecting the above, spot HCC prices rose through Q1 but softened slightly at the end of Q2, with spot prices ending the period in line with January at the mid $190/t levels. Oil Oil prices staged a strong recovery at the start of the year, following lows of $50/bbl for Brent in late December, and this strength carried through to April to reach almost $75/bbl. The rally was driven by an improvement in market sentiment across most asset classes and amidst growing optimism that US-China trade talks may result in a deal. Further impetus for oil prices came in the form of tightening global oil supply with numerous planned and unplanned outages, a high rate of compliance by Opec+ on the production cut agreements, initial signs of lower US drilling activity and drawing inventories. Expectations were building for improving global refinery throughput in Q2 and Q3 to meet oil demand during the summer season.

However, midway through Q2, markets hit turbulence fuelled by intensifying trade tensions between the US and China, and other nations, with resulting uncertainty about the world economy, all of which caused the oil bulls to question prospects for global oil demand outlook. Speculators’ length unwound rapidly and Brent dropped to below $60 per barrel. Oil implied volatility, which had gradually declined since the start of the year, suddenly spiked in June, with near-dated Brent implied volatility over 40%. In terms of the oil curve structure, the supply tightness caused the curve to flip from contango into backwardation and the latter continued to strengthen for crude and most product segments as prices rallied. Refining margins recovered from the lows registered in late 2018, buoyed largely by a strong recovery in gasoline cracks. However, in Q2 product cracks moved in a particularly uncoordinated fashion, with naphtha suffering from low petrochemical demand, fuel oil strengthening on lower crude prices and gasoline and middle distillates cracks diverging regionally. Refining margins were generally weaker, especially in Asia where bearish sentiments developed from China granting quotas for sizeable exports of fuel onto the international market, as well as expectations for massive regional refinery capacity expansions coming online in H2.

Highlights

Industrial Adjusted EBITDA decreased by $2.2 billion period over period, primarily driven by lower commodity prices, partially offset by a strengthening U.S. Dollar (on average) against many of our key producer country currencies. In addition to these net negative macro influences, Adjusted EBITDA/EBIT was further impacted by the continuing operational challenges in our African copper portfolio, which recorded an Adjusted EBITDA of negative $319 million, a significant drop compared to the $817 million contribution over H1 2018 (drop in cobalt price was the key driver, however material negative volume and cost variances also prevailed).

Mutanda’s copper production was 47% lower than H1 2018, as it re-optimised its mine plan, Katanga, although reporting higher cobalt production, had limited sales as it manages through a period of excess uranium content, and Mopani’s copper metal production was 31% lower as, in June, it accelerated the major triennial smelter shut down (from 2020 schedule) and earlier in H1, brought forward various planned maintenance activities by 6 months to address safety related issues and operational outages (mining and processing).

In addition, Nickel’s contribution was down $351 million over the comparable period, owing in large part to the near 60% decrease in the average cobalt prices over the period (impacting primarily Australia) and, relative to the comparative period, where the ongoing ramp-up costs at the Koniambo nickel operations were being capitalised, as of 1 January 2019, such operational costs are now expensed as a traditional production enterprise, notwithstanding that it is still in ramp-up mode with significantly higher costs than eventual steady state. Contribution from the Energy products assets was $2.1 billion, consistent with H1 2018 as a generally weaker H1 2019 coal price environment was offset by increased production from the interests in the HVO and Hail Creek operations, acquired in late H1 2018 and H2 2018, respectively.

Reflecting the above challenges, Adjusted EBITDA mining margins were 27% in our metals operations (but 39%, excluding African Copper and Koniambo) and 40% in our energy operations, down from 42% and in line at 41%, respectively, in H1 2018.

Capex at $2.3 billion was up 10% over the comparable period reflective of the ongoing growth projects (Kazzinc’s Zhairem and INO Nickel), the incremental capex from the HVO, Hail Creek and Astron acquisitions and the impact of the new leasing standard.

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