So good morning, ladies and gentlemen, and a very warm welcome to Anglo American's 2018 results. I'm Stuart Chambers, the Chairman, and it's my pleasure to do so. Just wanted to talk about 2 things before I hand over to Mark. Firstly, Board changes. So Philip Hampton retired in December of last year, so he stepped down after 9 years of fantastic service.
He was our Senior Independent Director, and that role has been passed on to Byron Groat. And secondly, Jack Thompson. He attended his last Board earlier this week and will be stepping down before the ATM, and therefore, won't be seeking reelection, also after 9 years of fantastic service. Jack is one of our 2 nonexec directors with extensive mining experience, operationally and on technical side. That's something we're very keen to replace.
We're towards the end of our process to do so, and we are expecting to announce something before the AGM in terms of the replacement. Those are the Board changes. The only other subject I wanted to touch on, not understandably, is safety. Very encouraging and very reassuring. You'll hear from Mark how we've improved our safety performance again last year to a new record level, 16% better on recordables than the year before, which was itself a record, very encouraging.
However,
as
many of you, if not all of you know, 5 people lost their lives in our operations last year. And it has to stop, obviously. So we launched our Elimination of Fatalities task force last year. The design of that, of course, is to penetrate the whole of the organization, every nook and cranny and under discover essentially what underpins these fatal incidents, the fundamental underlying issues. We've done that.
We've got the program. The program is underway, and we're in the middle of executing that, and it's key. And I think if you add to that the tragedy last month where one of our industries one of the industries' tailings dams failed, which you'll all know very much about, That just serves to underpin yet again for all of us. Safety has to be our number one priority. And the only goal that makes any sense in this is 0 harm.
So it's a constant vigil. I think with that, let me hand over to Mark to kick off our presentation.
Thanks very much, Stuart, ladies and gentlemen. We're pleased to be here today, and thank you for joining us. Like Stuart, I think it's important to acknowledge the recent Brazilian tragedy. The one thing I would like to say is all of us in the industry are connecting and talking about how we can all play a part in finding solutions for the industry. I'll talk about that a little bit further.
But again, I thought it was appropriate just to acknowledge our colleagues and their losses. And on a broader basis, the need or reemphasize the need to continue to take steps to make sure that we can create a 0 harm workplace, and that includes 0 harm to both employees and local communities. And I think that's our most pressing and important priority as an industry. In terms of our results for the year, the key theme that we'll be talking to is unlocking our full potential. Consistent with our theme, you'll see that we have a photo of a copper mine with some interesting diagrams on it.
That was Tony Ann O'Neill's attempt to show that we've become a modern miner. And it is actually a photo of El Sadano. And the reason that's important is El Sadado will be the first site where we're commissioning our new bulk ore sorters. And by the end of the year, we'll be commissioning our coarse particle flotation units as well. So for us, whilst that photo may not look that interesting for a mining engineer knowing the background to it, it's an extremely attractive photo.
So in terms of results, I think the important point to make is we're continuing to deliver on what we said we'd do. While 2018 wasn't without its challenges, obviously the Ministry of Pipeline being a key issue, We've been able and we've seen step ups from a number of key areas in the business to try and cover that event across the business and the numbers are respectable, I think, in the context of what we had to do with during the course of the year. The volumes were up, most notably from copper. Duncan and the team really did do a great job. And the feedback that we had from the analyst visit in the last quarter of the year, I think reflected on how much progress I think both the copper team have done and how I think we've done as a broader organization.
EBIT margins continue to improve to 42%, up from 40% last year. That reflects both ongoing focus on productivity improvements, I'll talk to that a little bit later, and cost controls across the business and the marketing contribution. Peter and the guys have done a good job in continuing to improve our realized prices against the value in use metric that we use and again making a good contribution. Free cash flow was strong. Return on capital employed was a healthy 19%.
And so I think we're continuing to build a solid foundation for future performance. And I've just pressed the wrong button. We're almost panic stations. So in pulling apart the performance, we always talk to safety, health and environment. As Stuart reflected in terms of safety, 5 fatal incidents.
For us, it doesn't matter how good the results are. No year is a good year if you have a fatal incident or if you've lost a colleague. And so for us, we do take the time to reflect, try and understand and the elimination of fatalities task teamwork is along with our tailings work, they are the 2 most pressing projects or important projects for us to continue to work on. And for us and every one of us in the organization, we're committed to delivering a zero harm workplace. And yes, we've made good progress.
Again, best performance in 100 years, 16% lower injury frequency rate, but at the same time, again, nothing to celebrate when you lose a colleague. In terms of the health front, again, for us, it's an important issue for our industry, making sure that we're creating workplaces that do no harm. We've got some work to do on Musco skeletal injuries, that is people doing work where there's a degenerative condition. So we've got to do some redesign in those workplaces, and that's an important project for us. And then finally, on the environmental side, again, the Brazilian incident cast a shadow over the industry.
In our case, we had 2 pipeline leaks at Minas Rio that we reported in the Q1, and I've already talked about those at the half year. I guess the positive side there is we commissioned or recommissioned Minas Rio in December as we forecast at the time. In the 1st 2 months, the operation has gone very well. We're up to capacity. And so the forecast that we talked about for the full year production appear to be on track.
Again, I'll talk a little bit more about the Ministry of Airlaid tailings dam because we've had a few inbound questions. But if I could make a simple observation. In engineering terms, we have what we call an upstream lift where the dam walls are built tailings on tailings. You then have a downstream lift where you've got a more purpose built containment structure. Then you've got a water containing facility, which is another level of engineering above downstream construction.
Minas Rio is a water containing engineered facility. So we think whilst there will be debates about tailings dams in Brazil, the Minas Rio construction is 2 levels above in terms of its engineering approach. And again, happy to answer more questions, but I think we're in the right place in terms of those conversations and in terms of what we've built at the site. To be more specific about our current processes, and again, I want to reemphasize there's been a lot of discussion around what will we do and how will we engage in the conversations around tailings dams for the industry. We will participate and collaborate with all of our colleagues because this is an industry issue.
When I talk about Anglo American, if I can describe it in the most succinct way possible, we have our staff on-site that monitor and are responsible for the placement of tailings and the management of water on a daily basis. We have at each site an engineer or a competent person that has a background in either geomechanics, geosoil mechanics or geotechnical background that is classed our competent person that is responsible for the engineering of and the correct management of the tailings facility on a daily, weekly, monthly basis. We have an engineer of record that was with us at the start that helped us design the facility, design the process to manage the facility and we have them involved in monitoring our practices and processes during the course of deposition and at least on a quarterly basis giving us feedback in terms of what they're seeing, what we're doing and how we're operating. Now because they've become part and parcel of the design and the process, we don't count them as independent in terms of managing the facility. So we have a central role reporting to Tony O'Neill outside the line that does regular checks on all of our facilities and with his team, making sure that everything we should be doing is in place.
And then on top of that, we have in each commodity grouping a tailings risk committee that looks at all the tailings facilities and ensures that the correct processes are being applied. And then on top of that, we have an independent review that's done on an annual basis by another consultant outside the group. So from our point of view, those standards were developed in 2014. The development of the ICMM standards came in 2016 and they drew from our standards as part of their design. So what we're organizations may not be able to have that level of internal discipline and process, how do we as an industry create some sort of process or resource that can help us make sure that all tailings in the industry are safe.
It's not simply a single company issue. It's an industry problem. And from our point of view, how do we play our part in finding an industry solution? And I think that's very important, and that's the important message that we want to deliver you with today. In terms of the operations, we continue to make progress in terms of performance.
Over the course of the last 12 months, our productivity has continued to improve. So going back to our 2012 benchmark, we've almost doubled productivity across the group, as you can see with the 98% number. Overall production is 10% above where we were in 2012 with around 50% less assets. Each asset that we retained and we've been working with is now on average doing 30% or is delivering 30% more production than it was 5 years ago. And in the mine, that's been done through operating improvements, process improvements, incremental debottlenecking and generally running the asset better than we were 5 years ago.
As a consequence, our real costs are down 43% or, as you can see there, 26% in nominal terms. And that's been a key driver in terms of our business improvement and margin growth over the last 5 years where we've gone from around a 30% industrial margin, EBITDA margin to 42%, and that's despite a 10% drop in our basket price receipt. And so from our point of view, we believe the progress has been solid, but there's still a lot more we can achieve because we are not universally or across the board best in class. We're certainly competitive today compared to where we were, but we're not yet best in class. And so there's a lot more opportunity.
If you take the numbers and we've used an independent report at the half year and we've tried to look through public numbers to see where we rate against our competitors. And I might just explain this chart again because I'd have a few questions where I'm not sure everybody understands where we come from on these numbers. I'm going to walk across to the chart. If you look at Anglo American back in 2012, our average cost position, and we take quality into account, so we call it leading margin curve price and we do that for for our competitors' products as well. It's mainly in met coal and iron ore that you make that adjustment.
The other numbers are pretty easy to take into the charts. We're at about the midpoint on the cost curve, the 49th percentile. In the last 5 years, we've improved our relative position across all of our commodities and it's actually revenue weighted. So we're trying to give you a weighted position. We're at this 37th percentile.
So we're mid Q2 on average. So that suggests that we've improved our costs quicker than many of our competitors. I think that's the important point. Everybody is getting better. What we've got to do is get better quicker.
And yes, we had probably had, in some cases, a lower base to work from. But doing that across the board and doing it in a consistent way is the big challenge. And so far, we've made good progress. Now against our peers, 27% to 38%, 36% to 45 percent. Pier 3, doing better.
Some new assets making a real difference. So we've been competitive in or against our major diversified competitors. At the end of the day, there's always a little bit of noise in the numbers. From our perspective, we believe we can continue to improve our position, and that's going to be important part of the focus in terms of our presentation today. But so we've made good progress, but there's a lot more we think we can do to continue to improve that position because I've got no doubt everybody's in the same conversation about how do we get better.
So in stepping back and looking at the journey we've been on in the last 3 years, there are 3 key points we wanted to make. Firstly, in terms of operating leverage, that is how good are you on the cost curve, we've moved to the bottom of the range. So from a competitive position, we think we're well placed. It doesn't mean you stop. There's a lot more work to be done.
In terms of financial leverage, and Stephen will unpack the numbers, and we've still got a little more work to do to make sure we've got our balance sheet where we want it. We're certainly in the right area and looking very strong in terms of our balance sheet and what we can do from here in terms of driving the business and doing the things that we need to do to make sure we're delivering value for shareholders. 3rd is inside the portfolio, and we talk about Quellaveco being a key driver of profitable growth of the business over the next 5 years, it represents about 50% of that incremental growth. The thing and Stephen will use the word balance in his conversation and more than simply about the balance sheet, he'll use the word balance in that we've got Keyuveka as a large scale project that we're executing on. We've also got a number of small scale quick return projects, Moranbah Grovan are debottlenecking, a ship in a new ship in Namibia.
Chris has got a range of opportunities he can see, particularly around Mogalakwena, and he's doing that work now. Bruce is working on things inside his business as he does the transition through Venetia. We've got a number of small scale rapid payback projects that gives us a nice portfolio of business improvement opportunities. And again, Stephen will unpick that. But for us, it's starting to give us a real balance in the portfolio in terms of what we're doing today, what we can improve and where we can continue to enhance the portfolio.
To sort of put a bit more shape behind that, if I talk to what we've been doing in the last 5 years, We talk about the operating model. In some ways, it ends up being a grab bag of a whole range of conversations. But it is about doing things differently and making sure that the conversation I'm having here is no different to the conversation that frontline supervisors are having with the people that really do deliver the results, but it has to be in the context that's meaningful then. So how do we translate that through the organization and make sure that planned work, the objectives we set get delivered. That's really the guts of what we're doing and how we're improving the business.
We're also now starting to transition into a different type of improvement over the next 5 years that we think doesn't deliver a lower result. It delivers continuing improvement, but in a different shape. And it then starts to focus on P101. So when I talked about our operating practices, let's say we were in the bottom half of the performance in terms of equipment. So I'll give you an example.
Shovel, a 4,100 shovel, the best in class was 45,000,000 tonne a year. The Anglo American average from its fleet of 4,100 shovels was around 22,000,000 dollars 23,000,000 tonnes a year. Our best was around 30,000,000 tonnes. 12 months ago, we set the challenge P101, how do we have each part of or each major piece of mining equipment or processing plant delivering top quartile performance? And so we said, okay, the benchmark for the shovel, 45,000,000 tonne a year.
Every one of our operators who was running our 4,100 shovel said we will achieve that number within 3 years. In 12 months Dawson was hitting 50,000,000 tonnes a year rate of around a 28,000,000 tonne starting position. So looking at how we set the places up, how we run those assets and that type of improvement is being replicated across the portfolio. It looks different in different places, different baselines, different skill sets, but that's the approach. And we're doing that with all of our critical plant and equipment.
P101, 100 being best in class, the objective is let's how do we go beyond best in class? So that's where the P101 came from. As Stephen said, a typical engineer's title for a project that should be a lot sexier than 2101 indicates. And on future smart mining, it's around new innovation. How do we re configure traditional processes to drive step changes in our performance?
And when I talk sustainability, I'll show you what we think that transformation of our process looks like in the longer term. So P101 in the business, we think copper processing, the Venetia acceleration, so Bruce is in the room, PGM shovels and productivities, longwall performance are all areas of the business where we see potential for significant change. And Miramar is a good example where we've doubled productivity over the last 3 years. And the question is, how do you go another 30% over the next 3 years? And then in terms of the future smart mining, bulk sorting, as I said, El Sadado is the first unit.
We've got a unit going into Barro Alto and into Mogalakwena. Coarse particle flotation will have its first unit installed this year. Data analytics underlying the way we think about the business and the way we pull apart the data and think how we can improve the business. So for us, the journey from 30% to 42% margin was all about fundamental business improvement, the things we could see on the ground that we could get at, things that we could change, reconfiguring the pit, turning session around 90 degrees, all of those types of changes have helped us get to 42%, including the marketing work and the change in the marketing model. To get from 42% to 45% to 50%, P101, the innovation work and the projects that we're developing across the business, both Keyavacou and the incremental improvements are all designed to put us in this sort of territory.
So from where we are today, a 20% to 25% growth in the operations and at the same time, improving the quality of the business expressed through our EBITDA margin is where we're taking the business. And that's on an apples for apples basis. So that's what we're all about. That's what we're trying to achieve. And with that, I'll pass across to Stephen.
Thanks, Mark.
Thanks, Mark. I'll get this out of your way.
Now Mark got to speak about his picture on his slides. I figure it's only fair that I speak about my picture on mine. I just wanted to squash any rumors that that's what I eat for breakfast. It's a bowl of palladium grain. And as Chris would tell me, I probably couldn't afford it these days with the price of palladium anyway.
So let's turn to the numbers. As Mark said, a really strong set of results and very consistent with what we've presented sort of period on period. And that's something that we really are striving to achieve with the business. It's that sort of run rate, the rhythm, building on strong fundamentals and whether that's the operating model or a strong balance sheet. It's that consistent base that gives us that ability to sort of grow and continue the journey in the business.
So EBITDA obviously increased year on year despite the suspension at Minas Rio that flowed into EPS of $2.55 per share and obviously the 40% payout ratio into the dividend and returning to shareholders. £3,200,000,000 of free cash flow and CapEx at £2,800,000,000 was in line with our guidance. Turning to EBITDA and just the drivers of that. Obviously, a 4% increase from £8,800,000,000 to £9,200,000,000 across the year, again despite the headwind in Minas Rio. You can see there the benefit of prices, currency offset by inflation in Minas Rio almost offset one another.
Now turning to the cost and volume. We've set ourselves a target of £800,000,000 for the year and we achieved £400,000,000 of that. A little bit disappointed with our progress there. We did in fact achieve improvements of £800,000,000 but they were offset by headwinds. In particular, we had above CPI increase in oil price through that March to September time frame, a few other little costs particularly in South Africa slightly above CPI and we had a little bit of inventory build which should itself release itself through the first half of twenty nineteen.
So not making any excuses. It is our job to deliver that target and we do intend to do so. Turning to the balance sheet. Again, the same sort of messages that we have delivered over the last couple of years. We have spoken about this window that we have this opportunity to fundamentally reset the balance sheet up until the middle of 2019.
And that's the point when we start contributing our cash flow to the Quellaveco CapEx in particular. So very pleased with our journey to date. Net debt down to $2,800,000,000 And as we've said, we're pleased with the transformation of the balance sheet. That's some $10,000,000,000 that we've reduced net debt by over the last 4 years. Clearly, across all of the metrics, we're in a very strong position as I say and really pleased with the progress there.
Just a couple of small little footnotes. So obviously, at end of December, we're still sitting on about $500,000,000 of cash we received from Mitsubishi. So sort of pro form a debt, you could say, is closer to that $3,400,000,000 And during 2019, with the change in accounting standard, you'll see some of the operating leases come onto the balance sheet and that's also about $400,000,000 to $500,000,000 So again, we'll take you on that journey with us as we work through the year. In terms of returns to shareholders, obviously, the 40% payout ratio, again, we've done exactly what we said we would do. 40% payout on underlying earnings resulted in a $0.51 dividend for the second half, and that takes dividends for the full year up to $1 per share.
Again, that's just over $2,600,000,000 that will take us to in terms of returns to shareholders since we reinstated the dividend about 18 months ago. Obviously, as well as the debt reduction of in excess of £10,000,000,000 over the years, we've invested back in the business in addition to the returns to shareholders. And over that same sort of time frame since 2015, we've invested some $10,000,000,000 plus back into the business. And again, that's important in terms of building and sustaining the future as we go forward. So how have we done?
This is a slide I like because we all talk a good game in terms of capital allocation, but how are we going in terms of the scorecard? So in terms of the scorecard for us for the year, attributable free cash flow prior to discretionary capital of £3,800,000,000 so again quite pleased with that outcome. How did we use that? We reduced debt by £1,700,000,000 paid cash dividends in the year of £1,300,000,000 and then obviously £500,000,000 in terms of that discretionary allocation. That does include things like exploration, evaluation, CapEx across a number of small projects, etcetera.
You will see that increase as we go forward, particularly in terms of Quellaveco, and we'll feed into that growth number as we go forward. I'm going to touch on CapEx now. And you'll see in the presentation, we've given you some additional guidance in the outer years. And I just want to talk that through a little bit so that we're understanding the value in particular that that drives. So in terms of staying business, sustaining CapEx, we flagged in December that we would see that tick up a little bit in the next couple of years in particular.
And part of our priorities as management team is to not only preserve but also enhance the value of the portfolio of operations that we have and that's exactly what we intend to do. Those opportunities present themselves in a number of ways and that can be cost opportunities, efficiency, productivity and it could be some brownfield expansion sort of programs or from life some life extensions. But as we realize that higher production rate and generate value, that comes with an increase in the absolute number of sustaining staying capital as we grow the base, we grow the portfolio and we grow production. A good example of that is the one that Mark mentioned earlier in terms of the longwalls at Moranbah Grosvenor. Obviously, with the production and productivity improvements that we've had there, that means you work through your mine development areas quicker, you're into the next longwall move quicker.
And therefore, in just a snapshot of time, obviously, your absolute number looks a little bit higher, but it's for the right reasons. It's generating increased production, generating increased value, generating increased cash flow. And that's really what we're all about. So as a result of that and obviously given that we've got things like Quellaveco coming on in 2022, the Moranbah Grove production that I've spoken about, Minas Rio coming back to full production. We upped our guidance in terms of that sustaining capital of that 2.8% to 3.1% in terms of a longer term number that you should then guide to, again, for all the right reasons in terms of generating value.
In particular, and I'll touch on this in a slide or 2, the sort of projects and the sort of productivity improvements that we're working on generate really good margins, very attractive margins, very attractive returns. And that adds to that margin journey that Mark spoke about moving from 42% towards 50% and obviously in terms of the cash flow that it generates. So the big test for us and this is something I wanted to spend a bit of time on this morning is have we spent the money well? Because I know that's sort of a question that came from the December update call that we did. And I'm pleased to say, yes, we have.
So we're seeing exactly the same efficiencies that we've seen on the operating side of the business in the capital spend measured as dollar of sustaining capital per copper equivalent production. And you can pick holes in the calculation if you want to. The level of improvement is so significant that it's hard to ignore. So that's 30% on nominal terms and closer to 40% in terms of real terms. So a really good journey.
Shouldn't be a surprise because some of our sustaining CapEx and mine development is using the same diggers, the same fleet that we're using from an operating point of view. So it's the same sort of influence that's feeding into our capital spend. Obviously, as I say, as the portfolio increases, we will look to maintain that efficiency. We'll have slightly higher sustaining CapEx in the next year or 2. So you may see that just bubble around a little bit, but we're very confident on the journey that we're on from that capital spend and efficiency.
Ultimately, measure us on return on capital employed rather than trying to break it down and pull bits of capital out. And that again has been a great journey as we've moved from 9%, 11% up to 19%. Sorry, no pun on those words intended. And that's been a great journey for us, that return on capital employed. And again, something that we're pleased with the journey and pride ourselves on.
So turning to growth CapEx. Again, that will increase a little over the next year but over the next couple of years, but no surprises. Our spend on Quellaveco in particular is probably the main driver. As you can see on the slide, we do have a number of incredibly attractive brownfield relatively small scale individually opportunities ahead of us. Again, the main message is here, they'll be assessed and studied with the same sort of discipline that you've seen in the past.
They happen over time, right? And again, relatively small in nature. So they'll come up for approval over time. The capital spend will be over time and obviously always subject to market conditions and assessment. So just coming back to the cost and volume improvement that Mark touched on earlier in terms of some of the detail and the drivers of that.
Obviously, a big focus on P101 and the technology development. We remain absolutely committed to that GBP 3,000,000,000 to GBP 4,000,000,000 target by the end of 2022. So that's the start of 2018 to 2022. We're GBP 900,000,000 into that if you take last year's actual and then this year's target. I just want to make sure it's clear that that $500,000,000 for 2019 doesn't include the Minas Rio turnaround.
As we've done this year, shall we pulling that out separately? We'll show the turnaround of that separately next year as well. So this GBP 500,000,000 would be on top of that in terms of an EBITDA driver. As we flagged, I think it was at the half year, some of this will be a little bit back ended in that time frame. Some of the investment we're making in the technology development, the P101, will just take a little bit of time to flow itself into EBITDA and cash flow.
But that's okay. It's planned. There's programs in place deliver those initiatives. And Mark touched on some of the things that start to go live through this year, particularly at El Soldado. In terms of this year's number, probably one of the bigger influences is some of that productivity increase that we're expected to see out of Moranbah Grosvenor from the Queensland met coal operations.
So just to wrap it up for me, where does this all take us? I think steady but meaningful production growth over that next 4 to 5 years. And I think that is something, as we might mention, I love to talk about the word balance at the moment, but it is a balance for us. It's a balance about what we've done with the balance sheet, continue to focus on that, make sure we're building from strong foundations. The P101 initiatives should drive margins and cash flow again.
Again, it enables us to continue to do what we want to do. Again, built on sound operating practice. So a lot of you did attend the copper visit back at the end of last year. You can see the benefits of the operating model flow through and a lot of the other sites are going on exactly the same journey and obviously built off a strong balance sheet at the end of the day. Thank you.
Thanks, Just while I'm setting up my notes, you can look at another one of Tony's very exciting technology slides. Projects, we kick away with Minas Rio. So as I mentioned earlier, we have recommissioned Minas Rio. All the key parameters that we were looking to deliver have been delivered in terms of the start up. We did upgrade the guidance in December on the basis of getting the earlier license for mining than we thought 6 months ahead of schedule.
So that allows us to open the pit up so we can blend ores, so the delivery of an improved product to port as an important part of that process. And the unit cost FAB is around $21 the range we expect $28 to $31 At full rate, we'd expect it to be closer to $25 a tonne, maybe with inflation somewhere near $26 Our breakeven cost at full rate still looks like about $35 a tonne is what we're targeting for the product. It's a 67% product, low deleterious elements. And if you've got some really tough questions, Ruben's actually in the audience today, so we can cover off anything you may want to hear about. And on the tailings side, we have an existing tailings dam that's used and as I described it, basically a water containing facility.
We're actually we've got the license to install, so we're actually lifting the next level. And the last approval required will be then the license to operate when it's completed. We would expect to have that license mid year, but we are making sure that we could close to the authorities. The federal authorities have already talked to and publicized the new standard. That has no issues for us at all.
We would expect that Mini Giras will come out with some comments on new standards in the next couple of months. Again, we don't expect that to impact us given the nature of the installation we have. If I could say it this way, if there were to be something that were to impact Minas Rio, given the nature of the dam, it would literally stop all mining across the country if they came anywhere near what we've built. So we don't expect that to be an issue. But at the same time, we'll work with the authorities just to make sure that we've got all the key points covered.
So we're still forecasting mid year. As I said, it might the conversation might go for another month or 2, but beyond that, we think we're in pretty good shape. On Quellaveco, again, not much additional to report post December other than good progress continues. The dam, which was built as part of the river diversion has gone well. Earthworks are going well.
And when we characterized the project last year, I said that the next 12 to 18 months was critical. Big earthworks projects and lots of concrete. So once we get through that phase, which I think is the real critical path program, once we get out of the ground and you start seeing metal being erected, I think we'll have navigated the toughest part of the program and we're very pleased with the progress so far. So at this stage, the 44 month schedule looks very good. Costs tight, but still in good shape, particularly on the schedule with the schedule being in good shape as well.
So we're pretty happy with where we are. And the 1.3% to 1.5% estimate for this year for us will be mainly back end loaded at a 100 percent basis of 1.3 to 1.5. Our share would be somewhere between 4,600,000 in the second half, given we've got the Mitsubishi funds we're drawing down for the first half of the year. I will continue to keep an exploration slide in the pack because as we speak, John and the guys are starting to show some interesting opportunities emerge. In Brazil, I can confirm or I will confirm that, yes, we intersected copper mineralization.
Yes, the grades are at or above in a number of those intersections above mineable grades that we would think on a larger scale lower grade top deposit would be mineable. The inter sections are in some cases above 100 meters, but I've got to stress that we've got some interesting intersections. That's all we have at the moment. As a consequence of those intersections, we stopped ore drilling after 6 holes. We secured 37,000 square kilometers of tenements.
We've overflown the tenements and we've got 3 or 4 prospects that we've identified from the AeroMag surveys. So we're following those up. And during the course of the next 12 months, we'll work out what we've actually got. If I could say this, at the moment, it's interesting. It's not anything that we could call a resource.
It's an interesting position that will take a little bit of time to unpack. And I expect this time next year, we'll give you a much better scope and be able to paint a much better picture of what we have or what we may not have. But I think it's important to let you know that the things we've talked about have been confirmed. And it's interesting. It's not yet exciting.
So somebody described me as being excited. I said, no, I'm interested. I'm not yet excited. And so I just want to make sure we've got that conversation in balance. We've also been doing some work across the portfolio and in Mogalakwena.
The work at Mogalakwena has been interesting. We're looking at extensions to the ore body. The key points to make here is to the grades maybe a little bit better and the material maybe a little shallower. So I think Chris is not yet excited, but he's getting close. So we're encouraged.
A lot of work to be done. And Chris and the team are doing feasibility work on potential options. We are watching the market very carefully as well. So anything we do will be with an eye to the market and an eye on what's right for our shareholders in the long term. So we're just measuring our pace and the work we're doing.
But the results there are also very encouraging. On sustainability, and really, sustainability is part of everything we do. It's part of any conversation we're in, starting with safety right the way through to social performance. So it remains a key part of all of our dialogues. If you look at our portfolio, from our point of view, we think that the commodities that we have as a consequence of the quality assets.
Remember, we're about a quality asset portfolio. So what drives us forward and where we focus our efforts is having the best mining assets in the world. Yes, we take into account the markets that we're selling into and geographies, but it's about quality assets. As a consequence of that focus on quality assets, the major commodity positions that we're in, diamonds, copper, PGMs, bulks, we think plays into the macro trends around growing middle class consumer world, the focus on the environment, long term, a greener world and an electrified world. Now some people thought that I was talking about a Watford supporter, where we talked about electrified and exciting.
But in terms of the big trends
If I cut,
just to keep the target. I shouldn't have said anything, do I? It's all about next year. In terms of the products and in each case, we're building the portfolio. Bruce focusing, guiding the business up to 37,000,000 carats with the transition at Venetia.
In the copper business, we talk about Koyluwase. We talk about, obviously, Quellaveco and the longer term opportunities at Los Bronzes, in particular, the underground potential is significant. PGMs, as I said, Mogalakwena. I think a really important piece of work for the Platinum team is obviously the turnaround at Amandelbult. I was there with Chris for a couple of days about 3 months ago and very excited with the work, but still a lot of work to be done, but making good progress and in the bulks.
2 great positions or 3 great positions in terms of quality and cost competitive position, More work to be done to improve our competitive position. But again, we've got a good portfolio across the globe. People have asked, and so I'll preempt the question on thermal coal. We've actually halved our footprint in thermal coal in the last 3 years. And as we said, we talked to adjust transition, so our position hasn't changed.
And so we're looking at all the moving parts in making sure we're positioning ourselves to have the right type of portfolio that investors want to invest in for the long term. When we look at and if I connect the operating model, the innovation work, the changes we're delivering, we talk to sustainability in the same conversation. And as a consequence of the competitive work we're doing, we're looking at delivering a 30% improvement in energy efficiency by 2,030. So that helps us drive down the cost curve. In terms of reduction of water, water plays 2 parts.
Yes, it's a cost, but also it's a constraint on the development of our assets, particularly in the long term desert climates. And so it provides us a double whammy in terms of improving the performance of the portfolio. So that's a critical piece of work for us. And greenhouse gas emissions is about the climate change debate and how we play our part in making sure the world achieves its targets. If I go back to the strategy around trusted corporate leader, I think the conversation for all of us in the industry today is about tailings.
I think we've all got to play a part. And as we said, whatever we can do to help the industry lift tailings standards, then we'll be involved in all of those conversations. And what do we need to do with our colleagues to improve, I think, is right in terms of the industry. Thriving communities, the people most affected by our operations are our partners in those local communities. And I think over a long period time, we haven't done a good job with local communities and we certainly changed our approach over the last few years.
And we know we've got a lot more work to do. And for those familiar with the courageous conversations that are occurring in South Africa with the Archbishop, that's the type of approach in terms of engaging with communities that we think is very novel and different and certainly creating a new dialogue and healthy environment. So how do we make sure that we're doing all things right in terms of the environment? Are we doing the best we can do with tailings and all those other areas that potentially impact on communities is where our focus is and we've been doing a lot of work and our tailings work was done in 2014 as part of that program. So in terms of the business, what we look at and how we think about the future in terms of margins driving cash flow.
Cash flow for us as a team is we think the effectiveness measure shareholders are looking for in terms of our ability to return today, tomorrow and through the long term. So margins is a real focus. Getting ourselves to 45% to 50% is a critical focus for us because the cash flow then comes as a consequence. Return on capital employed measures the efficiency, that is how well did you generate that cash flow. It's easy to generate cash flow in this industry over short periods of time.
The real measure of your long term sustainability and the deliverability or the repeatability of that cash flow look for your return on capital employed. Did you use the capital well? And will the shareholders support you continuing to use capital? It comes back to this number. We believe that we can deliver better than 20% through the cycle with the quality of the assets and the work we're doing inside the business.
And asset life, the one thing I would say that over the next few years, this number will move around a little bit because if we increase our production another 25%, it's never quite linear how that number moves. But at 30 years, we're right out there in terms of life of asset. And so what I want you to know, what I want you to take away from today is we look at these metrics and we drive all of these metrics in making sure we've got a sustainable business that is cash flow, returns and long term continuity in terms of the business. And in our industry, they're a pretty tough set of metrics to deliver on consistently. And certainly, that's where we're focused.
Finally, in terms of the investment proposition, we've been talking to this for a couple 2 or 3 years now, Paul. I noticed a few others are starting to talk to the same sorts of slides. Maybe I'll just focus on capabilities today. You know about the asset story and how we've tried to position the portfolio and what we're doing in terms of return. I think Stephen's done a good job explaining our position there.
For us, the operating model is about creating a culture inside Anglo American that's about being the best. In the end, I'll say today we're not the best. I can point to many examples where players are doing better than us on an individual basis. But as a team, we're determined to continue to take every step to catch and overtake those that we see as best. In some areas of the business, for example, I think in the longwalls, we are probably right up there.
Platinum, I think, again, we're right up there in De Beers, again. But there are far more places that we're behind further than we should be, and we're not going to stay there. We're going to keep improving, and we're going to keep improving quicker than anyone else. In terms of future of smart mining, we can't continue to mine as we've mined for 100 years. You can't just keep building bigger trucks.
We've got to think laterally. We've got out there and think differently. And so the changes that we're making to the flow sheet is about the changes that will drive the next 100 years of mining. We want to be on the forefront of that because those that lead those changes will be the outperformance in the industry. And 3rd, we make sure that every product we produce, whatever commodity it may be and remembering that diamonds aren't a commodity, we sell dreams in the diamond industry.
We have to make sure that every product is that right, Bruce? He was getting a bit worried there. Every product we produce, we have to get the best price we can. And that means understanding your customers, making sure you've got a relationship and making sure that we're creating value for them to ensure that we get the value reflected back in the price that we're paid for our products. And so with that, more than happy to take questions.
Dan LeFranc, Cairn.
Dominic O'Kane, JPMorgan. Three quick questions. The first, it's a bit churlish maybe to criticize the company for doing what they said they were going to do. But 40% payout, given the strength of the balance sheet, does look a little bit skinny versus some of your peers. So can we just maybe map out how we should think about excess capital returns when, what's appropriate?
Is a 40% payout the appropriate payout ratio for this business? And are there any constraints around preferred mechanism for excess capital returns? Is it special dividends, share buybacks, any constraints around that? 2nd question, in terms of thinking about long term capital planning, the industry has had a very poor track record long term well, very poor track record in stress testing the downside. So with respect to diamonds, could you maybe just give us some thoughts around how you think about the risks posed by synthetics?
What's your base case? How do you stress test that into the long term capital allocation for the diamonds business? And again, maybe some comments on what's going on at Lightbox at the moment. And then final question. Obviously, big moves in iron ore prices.
There's a sort of structural premium now embedded into high grade iron ore. How does that affect your long term planning for Kumba? So central for long dated mine life extensions and maybe long term exploration there.
Given that we didn't expect to get a question on dividends, I'll hand straight across to Stephen to let him deal with the first one and then I'll pick up the other 3.
You sure you don't want to go first, mate? Mate? Thanks for the question, Dominique. Where we set the 40% payout ratio, we did it with a view over time, And again, I'll come back to that balance where we knew we were probably likely to approve Quellaveco. We have a view of what's in front of us in terms of capital spend, balance sheet journey, etcetera.
And so we factor that into our thinking in terms of that 40% payout ratio. One point I do want to emphasize, we will constantly assess where we are. I mean that is our job to do and we will absolutely do that in terms of considering additional returns. We have maybe tracked to where we are perhaps 6 months ahead of what we thought given the strength in prices. If you recall when I speak about that window we have to reset the balance sheet to the mid year, I'd said we'll probably likely have a 3 in front of it.
I'd love to think we'd have a 2 in front of it. And we probably got there a little bit quicker than what I thought. But I would just come back to the pro form a sort of concept of debt as well that I mentioned. We have got about £500,000,000 of the cash from the sale down to Mitsubishi on the balance sheet. We know that's going to be spent by half year.
We know we're going to start our contributions thereafter. So the approach that we really do want to take and we will run a more conservative balance sheet than we have. Clearly, we are sitting very well in terms of all of the balance sheet metrics. We'll actively consider it, but we probably are almost at the low point today as we look forward that we will actively consider it. We'll consider all forms of returns to shareholders.
We'll probably stick with a 40% base dividend. We will stick with that. But if we do consider any excess returns, then we'll consider the buybacks, the additional dividends, etcetera, as you would expect.
I think the point to reinforce is the careful consideration of these things. We don't want to flip flop and jump around in terms of the way we go. And I think the issue is getting due attention at the board as you would expect it to be, and it's the right type of conversation. We want to make sure that the calls are right and it's being appropriately considered and it's being appropriately considered and discussed as you would expect. In terms of capital planning, I'll make one comment and then I'll get Bruce to say a few words.
Firstly, in terms of our capital allocation across the portfolio, the diamond assets, and I say assets first, and the business in terms of we think it's a good place to be. We think medium term, the market will go into deficit. And we think the way Bruce has positioned the business for success both short and long term is right. And therefore, he'll get his allocation of capital on how he shows he can manage our competitive positions. And I think we're in good shape.
But I'll let Bruce speak for both where he is in terms of Venetia in the business and also to pick up Lightbox. Bruce, so if you cover both?
Let's start with Lightbox. Let's just go back a step and remind people why we launched Lightbox. You'll remember we said that the current synthetic offering doesn't differentiate synthetics from the natural product and that consumers told us that wasn't right, but that they were confused by the offering. So we see there's a perfectly legitimate place for a laboratory grown diamond offering, but we don't think it's the same as the natural business. And that's really why we launched Lightbox.
We announced Lightbox in June and we sold our first diamond at the end of September and we'll only sell 20,000 carats in total by the end of 2019 before our facility in Oregon comes on stream. Since we've started, the lightbox offering has had a tremendously positive impact on price from a lab grown diamond point of view. At the wholesale level, prices have come down of the competitive product between 30% 60%, which is extraordinary given how little we've sold. So I think there is already evidence that the positioning of the product as to what it should be, which is not a natural diamond, is already starting to be successful. We'll carry on working on that.
But I think on the other side of the question in relation to how do we stress test projects going forward, a couple of things. As Mark said, we think supply has probably just about peaked in 2018. And we think that's good provided we can continue to grow demand. So as long as we can keep growing demand for the natural, there should be a positive outcome there. And secondly, as Mark was at pains, I think, to point out in relation to the asset quality, we have overall the highest quality assets and the highest margin assets in the diamond business.
So our ability to withstand price fluctuations is, I think, considerably higher than other people. So I think in the round of those three points is we feel positive about the projects going forward. Of course, we stress test different scenarios on the upside and the downside in relation to all projects, but we are comfortably, we think, within any range of concerns there.
I think also the positioning on Lightbox, I think, probably tells you a little bit about remains the best diamond to make sure this is and remains the best diamond business in the world. And that in of itself has to be is. It's a brand, it's a luxury brand, It's a very special case, and we want to make sure we keep it there and take it further. So an important part of the business. In terms of structural, the issues with respect to capital in the longer term, I think and I tried to say it maybe not as well as I could, we've got Quellaveco as a material step change in the business.
One of the things I think and I talk about this is one of the damages or the damage that Minas Rio did to us as a business was not only the project in of itself, it also robbed the rest of the business of the incremental capital you need to continue to improve your business. So I think the damage was twofold. We're not going to make that mistake again. So when I talk about Quellaveco making a 50% contribution to the quality and growth in the business, Those other incremental projects, in my view, are just as important. So you're spreading the risk.
So you're actually changing and lowering the risk profile and you're improving the quality of all parts of the portfolio. And I think taking that balanced approach in terms of capital allocation is critical. And I think, again, reinforcing the point through the syndication exercise in Quellaveta, it's a very different company and a very different company approach in terms of capital as well. Sorry, I don't know it's true. I apologize.
It's a fellow North American, so he can share it up.
Just looking at it in a way the journey is pretty remarkable, Mark. I mean you've gone from £2 to £20 of balance sheet deleveraging. I guess as you start to look to this P101, is there a risk that the business starts to run out of momentum? I mean, they said they talk about low hanging fruit. Arguably, this was the worst run of the big mining companies when you came on board and it's not anymore.
So does it get a lot harder for the organization from here?
So you weren't going to say the best run, but I'll give you that. Jason, I think well, the way we think about the business is if you look at the operating teams, the business leaders, we look at the things we can improve today and some of those have got a 1, 2, 3 year lead. Our job, let's say, with Chris and Bruce is to think 5, 10, so that whilst they're delivering the execution on the things we see in front of us, we're thinking about together, thinking about the next step and the next step so that the improvement continues. And I think getting the jobs right and getting ourselves thinking about the right time frames and sequencing the business is as critical, if not more critical, than delivering today's improvements. So I think what we're trying to present today is we've done the basics you would have expected us to do.
We've thought about the next level improvement at the operating level with P101. We've thought about the next level improvement with the innovation strategies and targets to change our position against our competitors. And we're building a portfolio through our capital allocation on even better projects again. So today, it's a 4 tier strategy that's timed over the next 10 to 20 years that we think will position this company for the long term. So I hope that sort of scratches at the Kooi question.
It's never smurter. There'll be a couple of bumps. As I said, this year will be a little bit not flat, but as a launching pad for 2021 because the innovation stuff that we're putting in place next year will start to deliver in 2021, 2022, 2023. So it's never smooth, but making sure you're sequencing the improvements to drive continuous improvement and outrun your competitors is the
key. Tyler Brode from RBC. Just two quick questions from me as well. I just want to follow-up with Stephen on Don's question. But just in terms of Minas Rio, could you just walk through what happens if there is for whatever reason some delay, say that you don't get that operating license, how long do you operate for?
Can you give some color around that? And then secondly, just with the news overnight, the coal ban in China, the dallian ports from Australian coal. What are your marketing people hearing on the ground there about what's happening? And then just Stephen, just to follow-up. With the improvement in the company's margins and now being sort of in line or better than peers, does that change at all your view around having a balance sheet with no cash?
Is there a risk that Anglo runs too lazy of a balance sheet, which is quite an ironic question
considering where we've come from?
Well, let me go. I'll do the first two and give Stephen a minute to tell you what he wants to say. On Minas Rio, the current dam in its current configuration has around 12 months ahead of it. We would expect to see the licensing done by mid year. And that's on the assumption that it will take the Minas Gerais authorities a couple of months to form a final view in terms of the dam, in terms of their legislative requirements.
We don't think the Minas Rio dam, given its construction, would likely have any material changes given the engineering aspects of the business. We think they will be more focused on other dams and other constructions. And certainly, that's what we've seen at the federal level. So we're pretty confident we're in the right place. Now at the same time, we're in conversations with governments.
We've got at least 6 to 8 months, we think, breathing space in terms of anything we do. And the conversations have been positive. And we've got 95% local community support. And when we delivered the operating license for the mining business, that came 6 months early. And the fact that we had 90% to 95% support from the community was a pretty important factor, I think, in making sure we got the support to go forward.
So I think we've got good support from the local communities. They've been fantastic with us even when the spill. In fact, our popularity with the community went up after we had the first spill. And what they said is your reaction to the spill was as good as we could have expected. So I'm not saying we're happy, but certainly, I think we've done all the right things.
And Ruben and the team have done a great job. Ruben, is there anything you'd like to add to what I just said there?
Yes. Exactly, Mark. One thing that I would like to add is, it's about the process that the public prosecutors put in place to follow-up our construction dam, the raising of the first raising. They selected the Sao Paulo Institute of Technology to follow-up the whole process since we granted the LPLI, which is the installation license in January last year. And they have been following the process together with us.
So we have this confidence and this confidence that they will approve the construction. And of course, depending on the legislation, we have probably to add some monitoring system, but it's very it's things that we can do in 1 month or 2. So we don't expect any big delay in this sense. So Mark is right. I think we have to be close with them to understand what is coming.
But in terms of technical solutions or any other big change, it's not there.
Highly unlikely. On the coal ban in China, look, we've heard press reports. We've spoken to our people in China. They're suggesting that, well, certainly, we're not seeing any impact on our material. There is some question about the validity of what's being reported, but I don't know if it's right or wrong.
So we remain open just to see what it is. Remember, most of our coal, we don't have a major proportion of our product going into China. So it's obviously an important market, but it's not significant. But at this stage, it's a little bit scratchy. And certainly, we haven't seen any direct impact at this stage, but we'll watch that very closely.
And that's after talking to people in Shanghai this morning.
Just to come to Tyler's follow-up question on the lazy balance sheet. It's hard to believe we're talking about that so quickly given the journey that we've had. So as I mentioned earlier, we're probably at the low point in that balance sheet journey and have probably got there a little bit quicker than what we might have thought. If prices stay up where they are, then clearly we'll be generating very healthy cash flows and that would feed into our active consideration of additional returns. So again, not telling you anything that you wouldn't think is right.
If prices continue where they are today, they're probably above our base assumptions. And so yes, that would probably generate additional cash flow. Obviously, feeding off the margins and the work we're doing, that feeds into cash flow, feeds into less volatility, less sensitivity to movements in price and it does give you confidence then about how you run your balance sheet. So yes, that feeds into that thinking as well. And as Mark spoke about the portfolio of it from an asset point of view, we also have been able to think more strategically about our capital structure and again lift the vision.
You'll see there's a slide in there on the debt portfolio. The work we've done there over the last few years also helps derisk any volatility and movement in prices as well because we have very little maturing now in the next 1, 2 3 years. So all of those things feed into our thinking. Absolutely, as I say, pleased with where we are. It will remain under active consideration.
Right, Paul?
Just a couple of questions. The first of which is given what's happened to the sort of PGM basket price, I was just wondering whether or not there is any flexibility in your mine plans in the existing operations to change the focus of which PGMs you're actually sort of targeting platinum versus, for example, the price we're seeing in rhodium at the moment and whether or not there's any flexibility there. Following on from that question mark about sort of Mogalakwena, it's not in the sort of CapEx figures that you sort of put out there on the board. And just sort of again thinking about what the longer term or sort of medium term thinking might be for that operation given the sort of margins that it's generating at the moment? And then the third question was just around on the diamond space.
I mean, talking about the sort of downdraft that the introduction of Lightbox has had on synthetics, Has that had any impact on the price for natural stones? Or are you seeing sort of are you still seeing a differentiation enough of a differentiation there that it's not sort of cannibalizing your existing offering? Thanks very much.
Okay. Let me pick up the 2 PGM questions. Firstly, and I'll ask Chris to make a comment as well. But in terms of rhodium and palladium, obviously, from our point of view, I think Chris now, palladium actually is a bigger revenue generator than platinum for us across the portfolio, about the same, okay. And rhodium has been very good.
We have a little bit of flexibility, but basically, we're in pretty good shape. What's the proportion now, Chris?
So revenue wise, platinum, dollars 39,000,000,000 palladium, dollars 30,000,000 but rhodium has gone from 5% to 13%, so very nice improvement in rhodium. But I think Mark is right is that the assets themselves are quite nicely differentiated. So Mandelbult is where we get the majority of rhodium from. And clearly, our biggest prill split palladium wise is Mogalakwena. Whilst we don't have an opportunity to chop and change, actually as it stands now, we've got quite nice balance to the metals that are increasing in price quite substantially.
And MOGs, you keep going with MOGs in terms of what you're doing with the feasibility study or the pre FEED?
Yes. We keep trying to get MOG to put the Mogalakwena project on his list. But we are in the study phase right now. So perhaps we're doing the study, and there's actually nothing we can do now. And if we had ZAR1 1,000,000,000 in the middle of the room, we don't know what to do with it.
So we are doing the study. My team and Tony's teams are working very closely together. Think we'll have a better understanding by the end of the year, but probably by the end of next year, we'll be in good shape to decide what to do. And then clearly, it's got to compete for capital like any other project.
I think the key thing is we're trying to make sure that we act responsibly in the market. This is an industry that has traditionally overproduced. And so being balanced, balancing the quality of the and it's a great project. I mean, it's the world's best precious metals mine. Making sure that we're looking at both sides of the equation, I think, is critical.
And I think the guys are going through that process the appropriate way and also looking at the resource development options given what we see longer term. I am or I will knock back the rumour that the reason maybe there were no coal going through China was that they're buying rhodium and palladium and don't have cash to pay for coal. I don't think that's right. But we're certainly impressed with the prices. But we're always a bit nervous when it goes too far because what you don't want is switching either.
So we keep an eye on both sides of the equation. I think that's very important. In terms of diamond price natural impact, again, Bruce, do you want to just make that point regarding
So Paul, we see no evidence at all of any impact of lightbox or synthetics on natural diamond prices. It's no secret that the sub-one hundred dollars goods in the natural world have battled a bit in the last part of last year, but that's for a series of reasons that don't relate to anything structural in our view. It's really a combination of oversupply, very significant ForEx volatility with the Indian rupee and all of these goods cut and polished in India and difficulties in smaller businesses in the midstream accessing finance. And interestingly, the early evidence from the U. S.
Over the Christmas season is that the sub $500 goods did particularly well. So we have no reason to believe there's any structural issues going on in the diamond industry and the lower value goods.
Does that answer your question, Paul?
Okay. Myles Alsop, UBS. Just first of all, could you provide a bit more color on cost inflation in South Africa? Obviously, there's some big power cost numbers being thrown around 16% per year for the next 3 years. Labor costs, obviously, class of negotiations this year.
Are we seeing a meaningful pickup now in cost inflation? Maybe for Mark as well, the spot free cash flow after full CapEx, what are we looking at for 2019 at the moment? And then maybe for Chris as well, I was just wondering on the palladium, rhodium. I mean, how it feels that prices are being pushed by speculative activity. How long do you think before prices crash?
Chris, I think the answer is 10 years. Is that My comment, Chris, and I'll pick up those.
So I mean clearly rhodium did double last year and there was a very substantial pickup in palladium price. But the palladium price is structural and has been coming for a number of years now. So you'll recall that we've been talking about a deficit in the palladium market for many years now. I mean, clearly everyone as it was being supplied palladium from aboveground stock, everyone said, well, we'll believe it when actually the aboveground stock runs out. At the end of 2016, for the first time, we really started seeing the structural deficit and the fact that there wasn't material around.
You'll recall in 2016, we had that shutdown in our precious metal refinery. We needed to go back into the market to buy metal. And then we started finding it actually was very difficult to buy palladium. Towards the end of 2016, we started seeing the price move for the first time. 2017 2018 over the last 3 years, we've seen 1,500,000 ounces of palladium ETFs being redeemed.
And this is what's been supplying the market. And over the last 2 years, you haven't been able to get that. So we went down about 600,000 ounces in palladium. Last year, the Johnson Matthey numbers looked like they were in deficit. It required the Russians to sell 300,000 ounces from their stock and 600,000 ounces from ETFs just to get to that balance number.
So the point is actually the structural deficit in palladium with very low above ground stocks is what's driving the price. So is there about to be a crash? We don't think so. There's also remember in a year's time you're starting to see China 6, which is the loadings about a gram per vehicle extra, and 700,000 to 1,000,000 ounces extra of palladium that's going to be needed. So if you look at where that can come from, it can only come from platinum switching.
So we don't think that there's any likelihood anytime soon that you see a palladium crash. I think there's much more likely that palladium really runs hard and it drags rhodium with it. Rhodium is still less than twice the palladium price. Rhodium is cheap at these prices. There's been some speculation in rhodium we think, but actually generally is still underlying basis for rhodium demand.
We know the Chinese have been buying additional rhodium as they've been putting extra rhodium onto their catalysts. So I don't hold your breath for, so Mark, 10 years maybe, maybe a bit longer. Rhodium, palladium still look good and there has to be some substitution from platinum back into palladium. We don't think that happens anytime soon. We still think that's 2 years out.
And the reason for that is because the carmakers at the moment are trying to deal with real world driving issues. And that's why they're not substituting yet. So I think you can expect to see basket price for PGMs remaining good. Stephen?
I think the key point that we took, we had a very good strategy session and a lot of good questions from the Board regarding understand the markets in PGMs. And you've got to look at rhodium, palladium and platinum on a continuum. And the basket price is really important to understand because producers of different products, catalysts can move across that continuum at any particular time. But then the what is required to then switch between the 2 is quite an administrative exercise. And I'm talking to people in the last few months about what does that entail.
And so it's not a continuous movement. It's a bit lumpy. But the basket price gives you a sense of what funds are being allocated into PGMs in terms of industrial applications. And I think that's the more important number to focus on because those uses are actually they're quite substitutable, but the administration process to make the change is quite significant. So over the long term, we look at them as a continuum.
In the short term, where they go, it provides us with a bit of flexibility in terms of our short term capital allocation, but we take the long view on the big projects. And that's why we think very hard about in the Halukwena in the longer term context as well. We don't know what it'll do in the short term. None of us know how quickly substitution may occur. But we think the underlying fundamentals are very strong, particularly with the potential for the hydrogen economy, the greener economy.
I think we're very well positioned in a business with great assets in what we think is a long term high potential business.
Mark, I'll just touch on inflation quickly. So just to put it in context for us, the above CPI inflation for the year 2018, well, the impact of that was $200,000,000 Now most of that was oil or energy or energy tariff related as that fed through, particularly through that March to September period. So that was the main drivers for us in the current year. Mark can speak more knowledgeably than I about Eskom and just where that's heading in a moment. In terms of spot free cash flow, obviously, that depends on your price assumptions.
What Paul has set out in the pack is a pretty good ready rec net table in terms of EBITDA sort of reconciliation and calculation. So hopefully, you can model Anglo in about 5 lines as you go forward just to make your life a little bit simpler in today's world. I would expect our as we've discussed, again, depending on your price assumptions, we've set up a nice rhythm in the business. So there's no reason we wouldn't be generating the same sort of free cash flow next year as we did this year. Obviously, if prices are higher, you'd expect some of that to flow through to net cash.
I think the other question there in the middle there was $2.19 CapEx and deployment. Did I get that right? Or has Steven answered that question? Yes. Okay.
Okay. Good.
Sylvain Brunet with Exane, BNP Paribas. Two quick questions. First, maybe on the momentum of improvement. Kumba has been on a pretty impressive journey on productivity. What is left in the tank?
My second question is on diamonds. If production globally has generally peaked, how can we explain we're not seeing better traction in prices? What does that tell us in terms of inventory
across inventory?
Diamonds. Diamonds. Diamonds. Diamonds. Diamonds.
Diamonds. Diamonds. Yes.
What does
it tell us in terms of inventory? Thanks.
Okay. All right. On Kumba, timber and the guys have taken the breakeven delivered cost into China from $77 a tonne to around $42 and we got down to a low of $30 depending on lump and quality premium. At these sort of numbers, we're probably in the 35 to 40 range, which is impressive. Themba and the guys have been talking about a $10 a tonne improvement potential on their base operating costs.
He won't get that in a year. It's about over the next 3 years. So that would put him ahead of inflation. So some of that will be given back to inflation. But on a real basis, that's the sort of number he's pushing at based on the P101 programs and some work on the DMS plant.
So, dollars 10 over 3 years, that's what his objective is. He'll give probably half of that back to inflation pulp. It's about that range. And he gets some incremental improvements through the DMS plant. So beyond that, some of the bigger innovation issues need to kick in more solidly, but it's already extended life to 20 years.
So we're pretty pleased with the work that's been done. But there's still more to be we can still see a lot more to come. On the diamond side, Bruce, do you want to again make a comment on pricing and where to from here?
So it's a complicated question. I think if you look for a start at the growth in diamond jewelry consumption in the U. S. In the last 4 or 5 years, you'll find it actually has gone up year on year. So at a consumer level, there has been increased demand in the main market.
Outside of the U. S, it's a little bit more mixed, but it's very much ForEx driven, for example, because ultimately diamonds are priced in dollars. And if you live in a non dollar country, that can be quite difficult to for a retailer to match a dollar price increase. If you also look at supply over the last 3 or 4 years, there has been a reasonable increase of supply over the same period. Now not necessarily of higher quality goods, but there has been an increase of supply, so there have been more carats available to be sold.
We think that peak is about now, it may be in a few months' time, but it's not years out. Clearly, where there have been difficulties in this period is in the midstream. So the midstream has battled, as we said before, to access enough finance on a sustainable basis to become more efficient. And I think there's more work to be done there. But I don't think there's evidence that there hasn't been demand for diamond jewelry over the last 4 years in the main market.
And so we're hopeful that and we believe very strongly actually that as long as we can continue to drive demand, which is a big thing, but we're very good at that, that the tailing off or the leveling of supply for the next few years should be helpful for us.
Yes. I think Bruce is probably a bit too polite. Heaven forbid. I think if you look at our goal, for example, I'm just using this as a for example, and it's not a criticism, it's just a statement of fact. Our goal is in the last 2 or 3 years of its life.
It's winding down the clock. The average price per carat about $20 So there's a lot of volume coming out of Argyle at the moment, but that winds off pretty quickly. And certainly not a commentary on what they're doing. I think as they get to end of life, they've got to run it hard to try and hold a margin. And that is impacting the small stone the small carats, I shouldn't say stone.
The small carats, so that's having the impact. So as that comes out of the system and you'd be able to model that, I would expect, in your models. And I think that's been part of the story as well. Okay. One more?
Two very short questions. Diamonds also. South Africa last year performed not very well in terms of pricing. I think there was about 15% decline in realized price. And this is the area where you are investing heavily.
I wonder just what was the reason behind that? Is it some structural change? Or should we expect pricing to improve over the medium term? And second question, this Slide 30 where you are showing your capability in terms of production by individual commodities, Is this something that we should think about achievable, say, by 2023, which is kind of the
Run rate type numbers. Run rate as in run rate type numbers. Yes, I think that's about the right number, Paul. Yes, 2023. First, yes, just on the South African side.
I think
the South Africa question, I mean, those are not that's not data that we have that supports
that question.
We certainly had less production in South Africa in the course of 2018, and that was caused to an extent by a stoppage at Venetia following a very unfortunate fatality. So the volumes are certainly down in South Africa, but our average index price for rough diamonds for De Beers across the group for the year was up 1%. And Venetia's average production is kind of in the middle of the average range. So actually, there was no significant decline in rough prices for Venetia. There was a decline in volume in South Africa.
Is that we can talk later if there's some difference in the numbers, but we can help you see where they are. Okay. All right, Gus. Thank you very much for the questions. Much appreciated.
Thank you for joining us, and have a great day.