Okay. Well, thank you for joining us, gentlemen and a couple of ladies. I think we're going to do a little bit about diversity guys in this group. Welcome, thanks for joining us this morning. I would like to acknowledge a few of my colleagues this morning before I start.
Chairman, Tim Chambers, welcome Stuart. My colleagues on the management committee sprinkled through the audience. And we've also got Tom McCulley, who is the project executive for Quellaveca. He's joining us today. I think he's hopping off the plane tonight to Peru.
And Ruben Fernandez, Ruben's fresh from Minas Rare where he's been cleaning the pipeline, so I'm sure he'd be happy to have a chat with a couple of you during the course of the morning. And a few of my other colleagues, I see Craig Miller is here as well. So can I encourage all of you to take advantage of having a few people around? You can ask whatever questions you want. Hopefully, we can provide you the insights you need to help understand where we are, where we've come from and where we're going.
Today, we'll stick pretty well with the format. I'll talk about business performance just briefly, give an overview, talk about where we've come in terms of the last 5 years, some of the work we've done and positions of the business. Stephen will talk about the financial results and unpack the numbers, which I think is very important. So there are a few moving parts here in this set of results that need to be explained. I'll pick up again on capital allocation.
Obviously, the conversation around Quellaveco is an important part of that conversation and really does reflect our focus and a different approach to the way we allocate capital. And then just pick up some details on the foundations that we've created and why we believe we've set ourselves up for the next 5 years, it will look quite different to where we've been. Most importantly though, I think talking about the lessons we've learned over the last 5 years and how those lessons are being applied into how we think about and how we'll execute the continuing improvement journey that we're focused on over the next 5 years. And with that, we'll kick straight into performance. From an operating performance point of view, continuing improvement in the operations performance, Our $400,000,000 improvement in the first half reflects that half of that $800,000,000 commitment for the full year.
Again, Stephen will unpack those numbers just to help you understand where we've got that from. Earnings and cash flow reflect continuing improvement in the business. Our EBITDA is up 11%. Attributable free cash flow, when you pull apart the one offs compared to last year is pretty solid, but we need to continue to improve. On margins and returns, we've improved our EBITDA margin to 40 percent and our return on capital employed is 19%.
So it's a solid set of results, more we can do and certainly we're focused on continuing the trends to improve and make sure that we've got a business that can deliver consistently. On safety, health and environment, important place for us to start. Unfortunately, we've reported 2 fatalities in the first half And in fact, we have a 3rd fatal incident in July. So still a lot of work to be done. We have improved, but from my point of view, these aren't a good set of results until we're at 0.
And so that continues, the elimination of Vitality's task work force work is starting to gather real momentum. So I think we're in the middle of impacting that performance And certainly, a 31% improvement in the total frequency rate for the half is encouraging, but nowhere near where we want to be. So encouragement, but a lot more work to be done. Health, the numbers are good. We continue to focus on a broad range of issues with our workforce.
On the environmental side, again, a solid set of results, but I would say the disappointment, obviously, Minas Rio. Of the 4 incidents that we reported in the first half, the Minas Rio Lakes were 2 of those incidents. A lot of work going on now. As we stand today, we are in the middle of the process of inspecting the pipe. We are setting up to replace around 4 kilometers of pipe.
So that's been ordered, all being done. The preparation work's being done. We're working with the authorities to make sure that we've got appropriate independent advice and that we're connecting to the authorities so that the appropriate regulatory approvals move through fairly quickly. So we're still on track to start producing again by the end of the year, but there's still a bit of work to be done and to make sure that we fully understand the mechanism. We believe we do, but I want to wait until all of the inspections are done to make sure we got every angle covered.
So a lot of work going on. And again, both Seamus and Ruben are here if you'd like to understand a little bit more after our sessions. You're more than welcome to chat to the guys. On productivity and improvement generally through the operations, as you know, productivity continues to improve. For us, volumes are up 8% over the last 5 years and the key number obviously, number of assets.
So when we either took fairly drastic action in either closing or selling assets, we pulled out about 15% to 17% of our productive capacity. So the fact that we're up 8% reflects improved performance from the existing assets. And on average, it's about 30% uplift in performance across the existing asset or the current asset suite. We've also had a couple of contributions from assets coming into the mix, Grosvenor for example, but they're still not yet at full capacity. So our productivity should continue to improve over the course of the next 18 months and for us that's very important because we want to continue to improve our operating costs and our competitive positions.
On numbers, in terms of people, there has been a significant reduction. We've gone from around $160,000 down to 95,000. We will continue to tighten the cost structure up within the business, so those numbers will continue to reduce. But we're making sure that we do that with all of our employees, but that's where the focus is, to continue to improve our cost position. I just wanted to give a little bit of sense or to give you a little sense of what does an average 30% improvement look like across the business.
So this slide is a slide around Mogalakwena. It could easily be Sichuan, it could be Murrenbast, it could be grass tree, it could be colomella, it could be Los Bronces, you get the picture. So at Mogalakwena, on mining, our shovel productivities have gone from 1700 to 2,300. There is still a long way to improve. The last 5 years were up 5%, 34%, sorry.
And we still see significant performance potential in the assets, but that's been encouraging in terms of the underlying mixed product shovel productivities across the group. On track utilization, we're up 20%, almost 20%, so actually at 20% now. We've gone from 5,400 hours per truck to 6,500 hours per truck. So it also helps explain why our sustaining capital numbers have been improving as well. So we're getting more out of the assets we have.
In terms of the concentrators and tonnes processed, we're up 35%. And so whilst we've improved the North concentrator and the South concentrator, we did add some incremental volumes with Boavad. But overall the underlying efficiency improvements in our operations is north of 20%. Again, that's very important and not $1 of capital is being spent on any of those improvements. At the same time, we've gone from 74% recovery of payable material to 80% recovery.
So the volumes are up and without putting new storage or other capacity in, we've been able to improve our underlying recoveries by 8%. So that's straight to the bottom line. So that's been significant. So we're improving both the volumes and the quality of the work that's being done. As a consequence of that improvement and with the way we set the pit up and if you can recall 3 or 4 years ago, we talked about rescheduling the pit over the next 15 years.
We've got some improvements in grade. And when you add all of that up together, we've seen 60% increase in production of precious metals. So we're now at or around 1,000,000 ounces of precious metals. We talk about platinum, but for us it's about all the payables and it's north of 1,000,000 ounces payable. Today, our margin is 45%, even though the equivalent platinum cost, we've gone from $9.94 back in 2012 to $2.50 an ounce.
So Chris' target of 0 platinum cost is alive and well. There's still a lot of potential and we think we can get there. Obviously, grade will play some part in that. But from our point of view, 75% reduction or if you want to talk margins, we've gone from a 40% margin to a 45% margin despite a 30% reduction in the price of the products we produce. And that's really a big part of the story in terms of getting from net $1,500,000,000 debt to a net cash position at the half year, so in a pretty strong place.
And so very pleased with that. And again that's a number of assets that I could talk to in those same terms. So Sissen, Colomela, the full portfolio. Importantly, it's improving our competitive position across our commodities. So in 2013, the best data we had for De Beers is 2014.
But if you look at the positions across the quartile cost curves, these are the positions by commodity that we occupied back in 2013, 2014. So as a consequence of portfolio, operating efficiencies and sort of the new innovation stuff that we're starting to tinker with and introduce into the operation which become a much bigger part of the story in the next 5 years, we've started to see improvements in our relative position. So this means we're moving quicker in those areas where you assume we're going to the right in terms of cost positions relative to competitors. So copper has gone from 71% to the 50 7 percentile. Quellaveco being Q1 will take us mid Q2.
So again, a very important addition to the portfolio in terms of the quality of the copper business. Met Coal, Moranbah in particular, Grosvenor will start to make a significant contribution and Grass Tree has taken us to the top of the league table in terms of longwall operations, moving us again to the left. So it's showing us the team who's done a great job in the Met Coal business. In De Beers, general focus on costs, Gaucho Kwa is making good contribution. So again, moving to the left with more to be done.
In platinum, you know the Mogalakwena story, but we are improving other assets including Amandelbell, a lot more to be done in those assets and a lot more potential still at Mogalakwena, but a good shift to the left. In nickel Barro Alto, we've got the furnaces sorted out. From what we can judge in the nickel business, Barro Alto now is the one of the very few major new nickel assets that are actually hit their design capacity. And if you remember the problems we had with the furnaces, we redid the furnaces and now we're at full rate. And again, Ruben has been the leader of the business for some years now and is probably the best in control asset that we've got across the group and we've got lots of success stories.
But in terms of nickel, those furnaces are really starting to set the trend and the benchmark for us as a business to follow in terms of running an asset well. In thermal coal, story not as positive. We pulled up capital in Serrahan with our partners on the basis that we didn't think it was the right time or we weren't spending that capital as well as could. So we've pulled a bit to the right. We've also got 2 assets getting close to end of life.
So that's impacted the costs. Over the next 3 to 4 years, they will start to come out of the system. So we'll move again to the left, but there's more work to be done on productivity and Seamus can talk about some of the things he's working on at the moment in thermal coal, in particular in South Africa. In iron ore, you guys know the story pretty well. A lot of new capacity in the Pilbara and in Brazil has been built.
So the curves shunted to the right. In our case, we've more than halved our controllable costs at Kumba. But even with that, we've not been able to compete at this level, but we've closed the gap to the Pilbara and Brazil. And in fact, I think 3 of the months last year towards the end of the year, where premium quality premiums and lot premiums were pretty good, we're actually middle Q2. So for us, the target is $10 a tonne either through premiums and cost that would give us a 35 breakeven landed in China gets us in this range.
So Seamus and the guys and timber know what has to be done in the next 3 to 5 years. That's we're in pursuit of trying to get ourselves on the bottom half of the cost curve. Minas Rio at full rate is mid Q2 as well based on quality and cost around $35,000,000 landed in China. So there's work to be done. We know what we've got to do, but there's still more to be done to get ourselves to the left hand side of the cost curve.
So today, 2018, we've moved from 52 percentile to 46 percentile. We have a view on we've done against our competitors. We've done well, we think. But it's a constant analysis from our point of view because we've got to keep driving ourselves to the left. So in each of those businesses, we know what we've got to do to get ourselves to the left.
We've got to try and get there quicker than our competitors. And that's the imperative. That's the focus. And that's what I'll talk about when I talk about things a little bit later in terms of the 5 years. So today, if you remember, we were predominantly here.
We moved a lot of the businesses into the 2nd quartile, but we still got more work to do. And certainly, we know how to get there in copper. And Seamus and the guys are very focused on getting us there in iron ore as well. As a consequence, from 2012, we're up to 41% margin. That is against a lower price deck for our commodities.
So our 23% reduction in costs, which is the nominal number or about 30% real has helped us move up the margin curve. And we know and that includes sorry, I should say, also includes the marketing work that Peter and the team have been doing. So that's been important in terms of our margins. Over the next 5 years, 3 to 5 years, we'll continue with the efficiency work. Our innovation and technology work is set to make a more significant contribution in the 3 to 5 year range.
And again, Tony can describe some of the things that we've got going. And with obviously with Quellaveca and the smaller projects that we're starting to put under the launching pad, there's a real push to head us towards the 50% type margin. Clearly subject to price, but on an apples for apples basis, we know where we've got to go and what we're driving towards. So with that, I'll hand across to Stephen. He will unpack the numbers.
Thanks, Stephen.
Thanks, Mark. Thanks, Mark, and good morning, everyone. So the theme this morning for the numbers section is the journey continues. So it's a really good set of numbers, it's a clean set of numbers. Importantly, it sort of simply shows where we're focusing our efforts as we run the business and as we prioritize the things that we want to do internally.
And those priorities really continue around a balanced approach. So it's a balanced approach around returns to shareholders, capital allocation and ongoing focus on the balance sheet. And the same themes that you saw in the last 6 months, the 6 months prior, you're seeing in this 6 months and you'll see again in the next 6 months. The journey continues. We'll also unpack a little bit about the EBITDA drivers and we'll finish on the report card that we talked to.
So we speak a lot about our focus on costs and volume. And the reason we do that is because we know from time to time at different parts of the cycle, we will come under pressure from inflation and other sort of cost increases. This half we delivered CAD400 1,000,000 of the $800,000,000 target that we've set for this year. And that $400,000,000 takes us to $4,600,000,000 since 2012. What have we seen in terms of some of those cost increases and we touched on this theme a little bit at the full year results, so increased diesel price given the higher oil price, but that's the same for everyone really across the industry.
Seeing increased energy prices, particularly say down in South Africa and that can reflect itself either in electricity prices or in infrastructure charges if those things also use energy. And we've also seen a little bit of wages and salary growth again South Africa, South America in particular. That's the reason why we stay focused on these cost and volume improvements, so we stay ahead of the curve. So let's have a quick talk at this slide, so we'll move across left to right. So in terms of prices, PGM is up largely driven by palladium and rhodium.
Copper, thermal coal also up. In terms of currency, a little bit of a mixed bag in terms of currencies, probably the most noticeable one was strengthening of the ZAR through the half, so the South African ran through the half, but that softened right towards the end of June 30. Inflation I've touched on, Minas Rio will highlight separately for you through the year so that you can just clearly understand the impact that has first and second half. The good news is we are on track in terms of the inspection and repair work, guidance unchanged in terms of coming on at the end of the Q4 and really as we look forward to 'nineteen a little bit of positive momentum into earnings as that comes back on stream. I just want to step away for a moment from this half's numbers and just look a little bit forward as we look at the sort of cost and volume improvement journey that's ahead of us.
So you recall that the full year we outlined our target over the next 5 years from the start of 'eighteen to the end of 'twenty two, dollars 3,000,000,000 to $4,000,000,000 improvement that we're looking for. There's really 3 broad buckets, so I just want to give you a touch of a little more detail to help you understand where the focus is. So the first bucket is operational efficiency. You'll hear us talk internally and probably a little more externally about P101 And it's the sort of the catchphrase that we have internally that really talks about getting to benchmark and beyond. Right.
So full potential plus is sort of another phrase of how we explain it. And even though we've had a great journey in some of the assets and Mark spoke about Mogalakwena before, there is still a real opportunity in front of us. And we've improved Mogalakwena, we've improved Cision and we've improved cutting rates and things in Muhanberg Rovna, but we still have real opportunity in front of us to get to benchmark and beyond and really sort of set the trend for the industry. And that's across all the diggers, all the trucks, processing plant, recovery, it's everywhere, we've got that same mentality as we look for those improvement opportunities. When you do start to approach P101, you've got to start to make some choices.
How do you take that benefit? Do you take that benefit in terms of cost out? Do you park up trucks? Do you park up diggers? Do you take that benefit in terms of increased production?
If you can get it to market down infrastructure or is it some combination of both? Is it a focus on grade and quality product so that you're maximizing your margin of what you earn for each time? So they're the sort of choices that we have to make as we go forward. Great choices and great opportunities to have to think through. It's a really, really great challenge as we look and think about the business all the way from mine to market and think about how we maximize that value equation.
2nd bucket is around technology and innovation. And here I suppose I want to give you a sense that we're moving out of the lab and into the field. All right. So we really have a quite a neat schedule as we roll out some of these production test units across some of our operations. So in the concentrated mine, it's about bulk sorting.
What is that? It's about more precisely getting the cutoff grade right by separating prior to the main processing plant, the lower grade element of what we're about to put through the plant. So the aim there is a 10% to 20% increase in feed grade through the processing plant. We're about to put the first of those units into El Soldado, should be in about end of August, September, Tony, I think that's due in. And then early next year, it would be at Barra Alto and Mogalakwena.
So those things really starting to go live and roll out across the operations. In copper, we're probably more certain of the benefit, our platinum still doing some earlier phase work make sure that we're going to get those sorts of benefits. On coarse particle flotation, so remember that sort of course a grinding so that we use less energy. So the target there is 30% more throughput, a smaller recovery loss, maybe 3% and that should get us a 20% less energy, 30% less water. Again copper will be the 1st roll out of that at El Soldado and that will really be through the early half of twenty nineteen.
The 3rd bucket is really about project delivery and Mark's touched on some of those things we've spoken about them before Moranbah Road and debottlenecking potentially an extra vessel in Dead Marine, Quebec coming in at the end of the 2022 period. So lots of opportunities in front of us. Again, the commitment across the whole organization to chase these things really quite exciting for us at the moment, the momentum and the enthusiasm that we've got across all of the operations. Okay, so back to some of today's results. The main message here is really about stability of earnings and effectiveness of capital allocation.
So from a stability of earnings point of view, 3% increase in EPS, 6% increase in return on capital employed to 19%. Cash flow, if I can get this to work. You able to someone able to move the screen for me or is that hang on, here we go. We're right, thank you. Looking at cash flow, so we did have a really strong 2017.
So we did have a number of sort of one offs benefits that flow through 2017, which you're now seeing a more normalized level of sort of cash flow on a half by half basis. So last time around some of the one offs, we had slightly lower cash tax. We just restarted the dividend post the half year, so we had less minority leakage. We had lower CapEx. We had a bit of a working capital release in the first half of last year.
So a more normalized state this time around. If you normalize for those things, a good increase period on period, a strong cash flow for the half. Turning to the balance sheet, focus on net debt reductions continued further $500,000,000 down to 4,000,000,000 dollars It remains a priority for us, as I said earlier, and we're determined still to take advantage of this window of opportunity that we have before we have to put our hand in our pocket for CapEx on Quellaveco. At GBP4 billion, we're probably really at the low end of where we're very, very comfortable with where the debt sits for this part of the cycle. So remember I spoke last time around about the way I look at the balance sheet across 3 key metrics.
So absolute net debt level, obviously strength of the balance sheet. Net debt to EBITDA, strength of the underlying cash flow, although that can obviously move with volatility in commodity prices and obviously net gearing on net leverage ratios really goes to the heart of the strength of the balance sheet even through those cycles. We will remain focused on all three. Our guidance for the net debt to EBITDA ratio is at 1 to 1.5 times. We don't want to exceed that for any long period through the lows of the cycle.
Obviously, we're at incredibly attractive levels, but as we should be for this part of the cycle. Now ideally, we want to set this balance sheet up so that we can become cyclical if opportunities emerge in the years ahead.
So in
terms of returns to shareholders, we're committed to the payout policy, 40% of underlying earnings per share, dollars 0.49 for the period, slightly nudged up from where we were in the prior half. So with this dividend that takes our returns to shareholders to $1,900,000,000 since we restated the dividend this time last year. That's about a 4% yield just to tick over I think on today's prices. So just to wrap it up then, how do we go in terms of report card? So prior to discretionary capital, dollars 1,800,000,000 of cash flow.
What did we do with it? Net debt down $500,000,000 final dividend of $700,000,000 in terms of returns to shareholders in a few other bits and pieces. Discretionary capital, dollars 200,000,000 for the half. Obviously, that will tick up a little bit through the second half of twenty nineteen. So as I say, continued journey, continued trends, a good journey that we're on.
Mark, back to you.
I was just thinking, if this thing wasn't working, it's probably a lithium battery. Should be nickel, shouldn't it? Okay. I'll move on. Thanks, Steve.
People ask me about the ship in terms of capital discipline. When I look at Bruce, if I could just make a simple point, one of those incremental improvements that we've got available to us is to build and put on the water a new ship represents a 1 year payback. That's what we're about. Efficiency of capital, getting good returns and that typifies or exemplifies our perfect project, twelveone paving. For us, when we look at the business, we talk about the commodity positions.
I'd like to stress the point that the positions we have by commodity are a function of our focus on quality assets. It's our focus on quality assets that determines where we put our capital and where we develop. The good news for us in copper, the fundamentals are strong. We've got a great position and we're able to convert that opportunity in something very real with Quellaveco and many are pursuing copper in the industry. We've got some great internal options both from a greenfields perspective, a brownfields perspective and longer term we think our exploration work will position us even further in terms of the industry.
So it's a great position to be in. In terms of sorry, just finish the story. In terms of diamonds, we continue to supply to demand. And as we see demand growing, we've got the ability to deflect. We are transitioning in a couple of parts of the business, obviously Venetia going from open cut to underground.
So that's a transition story at the moment. Gatcha, Kwa hitting its straps and certainly continuing improvements, obviously, Debmarie and Juaneng important contributors in terms of the business. And certainly the prognosis looks pretty good going forward, certainly very encouraging. On PGN, big focus on Mogalakwena and its ability to make continuing improvements and a major or significantly improved contribution. But in particular, for us right at the moment, a lot more work to be done at Amandelbult.
And so still continuing our journey down the cost curve, a lot of work to be done, very focused. Chris and his team are very focused there. And clearly, the big contribution for bulks, if you look at the numbers from bulks over the last couple of years, they've been exceptional. Moranbah, the grove and the ramp up continues. So from our point of view, lots of incremental opportunities in that business to improve that contribution.
And certainly, the contribution in the last 2 years has been significant and will continue to be strong given the improving performance across the business. For us, the potential or the focus on portfolio upgrading has continued. Obviously, we'll talk about Quellaveco in a couple of minutes. PGMs, Union Mine, we've completed the SARB. BRPM SARB continues our focus on really focusing on those assets that can move the dial for us.
The Mototolo acquisition should be really thought about, firstly, we know the asset, we know the resource. The purchase position with Glencore is about extending from a 5 year life to a 30 year life with the connection to De Brocen. That doesn't mean we're going to go out and do anything significant today. What it does do is provide us a long term option in terms of the business. It's not the right time in the market to go and spend something new in terms of the asset, but positioning ourselves very important in terms of quality assets for the long term and we see this as a good move.
Thermal coal, you're aware of the completion of the transactions on the Tide mines along with New Largo and in De Beers. We haven't been standing with our feet in the mud. Lightbox, a very important step in terms of the business. And again, Bruce is here if you'd like a bit more insight into that, happy to answer any questions. And obviously, the offer for Peregrine flags an approach for us that's very important in the world is short diamonds that will be significant shortfall by 2022.
So we're positioning ourselves with options in terms of going into the market. But again, it's market led making sure that we're doing the right things and spending our money in a smart way. Quellaveco, some have observed that the photo does indicate that we have been active in the last 2 or 3 years. The actual number, Jason, is about $500,000,000 in terms of investment in value in the ground in keeping the option open. But I think it's been money well invested in terms of understanding the geotechnical issues, understanding the big issues that you don't know about before you make these big commitments.
And most importantly, it's been an investment in the community and the commitments that we've made to the community. So in terms of those relationships, absolutely critical in a place like Peru and we've certainly got the support of the local community. So it's been an important part of the work. On Quellaveco itself, obviously returns, key focus for us, making sure that we get the discipline right. Internal rate of return works off the mid point of the range that we talked about in terms of the capital, the $5,000,000 to $5,300,000 Return on capital employed is north of 20% when we hit that full production rate and through the 1st 10 years.
And our payback post first production is 4 years. So for us, very important metrics. And if you look at the key hurdles that we set ourselves in terms of our capital allocation processes 4 years ago. It ticks each one of those boxes. In terms of the asset itself, low cost, and I'll unpack why the costs are as low as they are.
Long life, obviously, the resource is significant. We do see significant long term potential beyond the 30 years. And I think the address in terms of who's next to us tells you there's a good story or good potential story there in the long term. Capital discipline, the commitment to the syndication and the partnership with Mitsubishi was very important. And as Stephen indicated, we won't be required to put our hand in our pocket in funding our share until well into 2019.
So that's an important point to make in terms of the balance sheet and our continuing journey in reducing our debt. In terms of being execution ready, it's permitted. The social credentials is where we have been investing and working very hard with the local community, very strong. And from the dialogue table in 2012, it's been a real success story in terms of the conversations. Interestingly, the Governor that chaired the roundtable in 2012 is now the President of the country.
And so I think he is probably more excited than we are in terms of the commitment and we'll be standing with him next week talking about that in the context of Perusso. Very strong support from the government right the way through to local community, which is something that's very important in all of our jurisdictions and particularly Peru. Again, execution ready in terms of the community support. We've actually committed through the life of the project $300,000,000 in community investment programs And it's not the investment programs that we think they should have. They are the investment programs that they've asked us to help them with in being a true partner in the community.
And it is different. It's a different approach. It's a different conversation. And we think critical to ensure continuity and cost competitiveness of the project, you need your local community in there as a partner. Our key permits are in place.
The construction program is as good as I've seen in my 42 years in the industry. Clearly, we've had a long time to bake this cake. And we've done a lot of the pre work and we've applied all the lessons that we could plus some out of our previous adventures or misadventures in some cases. So I think it's well set up and we're well set up for success. Tom's here to lead the project but Duncan, Tony, all of the GMC members have been active participants in making sure that we've looked at this from every angle.
The syndication, I think, was an important message to everyone that we're serious about thinking about a different investment model for the industry. Yes, it borrows somewhat from the oil and gas sector in terms of sharing that risk. We've got a good partnership with Mitsubishi. We know them well, they know us well. And certainly from our point of view, we think it's a win win for both of us as an organization.
And when I talk about returns, the fact that we've been able to book a profit on some of the investments we've made has actually helped us return a little bit better IRR return than we're reporting at the project level. So the good news is it actually enhances our returns as well. And we think that's smart to do in putting a little bit of that profit back in our pocket and using that to help fund the early parts of the progress and keep our balance sheet in good shape and able to support the continued improvements across other parts of the portfolio. So again, we think it's a win win for and for all parts of our business. The returns, very important.
You've seen the headline numbers I've talked about. I think the EBITDA margin and we talked about that 50% target for us as a group. This helps us achieve that type of improvement in our margins. The construction capital and this is our share post syndication in the range $2,500,000 to $2,700,000 So I think that's important to focus on as well in terms of Anglo American's financial commitment to building the project. And from our point of view, in 2018, our share will be around $400,000,000,000 so it will be fully funded from the proceeds that we've received from Mitsubishi and that goes well into 'nineteen as well.
Unit operating costs for the 1st 10 years, dollars 1.5 in fact, with the softer material in the 1st 5 years, it's a bit below that. The structural cost advantages are important for people to understand. It's low strip ratio below 1. Secondly, for the 1st 10 years, most of the haul is downhill. So you've got low cost haulage costs and the labor costs and the energy costs are very competitive.
They are not a pittance, as some would be aware, in other parts of the world. In Peru, it's a developed country, it's a progressive country. The productivity is good, the pace are good, but more competitive than some of the other jurisdictions. So from our point of view, the structural cost base is very good. Hydropower is also an advantage in terms of the energy side.
So it's a good mix and we're making a good contribution in terms of the organization. And it's also sustainable because the pay rates are very competitive on a broader basis. Production, 300,000 tonne a year for the 1st 10 years, maybe a bit higher than that in the first five, again as a consequence of the softer material going through the plant very quickly. Cost position, as we said, we will improve our cost position as a consequence of Quellaveco. It will move solidly into Q2, if you remember the copper position on the top curve.
So that's an important step for us. Again, a continuing focus on improving the portfolio. Can you give us a kick on the slide? Thank you. The start of the resource unit, I think the big thing with, as you know, copper deposits, we're in a great address.
So the 2 Southern Copper assets that flank us have been long term assets, very successful assets. And certainly from our point of view, the address is a great address. The mineralization is pretty well known and it's from our point of view, it's open at depth and certainly in one direction. So we would expect beyond the 40 years from the project and if you look at the resource base, obviously significant. We'd like to think that it's beyond 60 years.
A lot of work to be done obviously to prove those sorts of numbers, but significant potential. If you look at history in terms of Los Bronces growth since 2004, same with Koliwasi, We think it's one of those types of deposits that becomes a long term foundation for the group. And so a very important commitment and I think well priced, great returns and for the long term is a changing or is a portfolio changer for us as a group. So on the foundations that we've set or have been setting and with Quellaveco being another step towards building on those foundations. I think it's important to just reflect for a moment that today, if you looked at where we were 5 years ago, our average life of mine was somewhere between 20 25 years.
Today, we're at 30 years across the portfolio. Our thermocol assets have got the shortest life at about 14 years and some assets have got beyond 100, Iaia and Mogalakwena. Our target is in the next 5 years is to make sure we maintain that life as a minimum. There are opportunities to increase the life, which would then ultimately underpin future growth in the asset base, again connected to the markets. But with that type of asset base, we're in a unique position and certainly unique in our industry.
And it gives us the ability to focus on that underlying improvement for the long term. So every time we make an improvement, we've got 30 years to bank the results and that's critical and that is different in our industry to many of our competitors. So we've also got a list of opportunities in each of those commodity positions that provide us with the opportunity to grow and we are forecasting, as Stephen talked about, a 3% growth year over year through to 2022 and we have the options that go well beyond that type of configuration or that time frame. So Sogati, for example, is something that could follow a key of eco market conditions permitting, but it's a smaller asset, low capital base, high margins, great returns. So we've got a number of those types of opportunities across the portfolio.
Something that we'll start to talk about in the next year or 2 is exploration. Through the tough times in 2015 2016, we didn't stop committing to exploration and technical innovation. And I think today we're starting to see the benefits of that commitment in terms of what we're doing on the ground. So in terms of our exploration strategy, Tony and the team redefined our approach to exploration, a step back, big regional positions, think about exploration in a very different way. And so we're focused on key geographies.
The innovation work that we're doing now is being applied to our approach to exploration. And for us, it's all about value. And certainly from our point of view, we think the exploration team is starting to show real value for the commitment that we've shown in the last 2 or 3 years in particular. And today, we've got some really interesting positions for those that have been tracking as you're probably aware that we drilled some holes in Brazil, 6 holes, we've stopped, we've actually pegged out fairly substantial land position. I think it's 5 times the size of Kent, where in Australia, it's Gina, about the size of Gina's backyard.
It is a significant position and certainly from our point of view, it's a very interesting place to be. We think we may be sitting on a porphyry, but there's a lot of work still to be done. Early days, but we'll keep you posted in terms of the process over the next 6 to 18 months. And our brownfields opportunities, we've been doing a lot of drilling around Mogalakwena, Los Bronces, both from an underground potential and extensions to the existing operation and obviously the Quellaveco district. So we're not going to do much more than let you know that this is becoming a very important part of our portfolio and the future options that we have.
Again, focus on asset quality. As a consequence, revenue by product, quite a mixed bag, so that from our point of view, it really is different. And we're providing a different set of options to the marketplace. And in our case, the quality of the assets that underpin those revenue streams are very strong. So from our perspective, we think it's differentiated, it's unique.
Capital employed by geography over time has been balancing pretty well. South Africa at 26%, used to be up near 50%. We're getting the balance right. And certainly from our point of view, we think the risk profile in terms of the revenue base is starting to balance out quite nicely. And that will continue to balance out over the next 3 to 5 years with a commitment to Quellaveco certainly improving that balance across 2 geographies.
I've just turned the thing off, that wasn't helpful. In terms of are we positioned in commodities for the future? We're well positioned in electrification and innovation. A greener world, PGMs in particular, copper is part of that world. In terms of coking coal, the quality of our coking coal and the quality of our iron ore is playing very much into the China environmental story.
We think the premiums on those products will certainly remain as China and other locations focus on quality and making sure there's both efficiency and clean production from those sources. So we think that's important. And growing middle class, platinum jewelry, diamonds, those other products are all playing into those sectors. So again, as a consequence of our differentiation across the portfolio, we're playing into the right market segments in terms of use of raw materials and product. And finally, for us, again, it's about assets.
We're building the capabilities inside the organization to take advantage of the quality we have inside the asset base. And for us, it's about cash flow. It's about the efficiency of those cash flows as measured in return on capital. And it's about being sustainable from safety all the way through to the social contract we have with the partners in developing new opportunities in the business absolutely critical and that's the Anglo American story. So very happy to take questions.
Yes. I'll come across.
Dominic O'Kane, JPMorgan. Just three questions. Firstly, on Calabeco. Could you maybe help us understand the CapEx profile over the next few years? Obviously, that has implications for the group balance sheet and free cash flow.
Yes.
Then moving on from that, the dividend policy 40%. Whilst obviously positive that you've restarted dividend, maybe the range maybe looks a little bit skinny relative to some of your peers. Could you maybe just comment on why, given the strength of the balance sheet, you don't adopt maybe greater flexibility and a higher payout ratio going forward? And then finally, on cost control, copper looked like the one area that stood out as having a reduction in unit costs during the period. Some of that seems to be grade related.
Could you maybe just give us some guidance on how we should think about copper unit costs second half this year and also 2019? And maybe some more detailed guidance on grades.
So let me deal with the last one first, and then I'll let Stephen get up because I'm sure he's keen to answer all of those questions. On copper, at Los Bronces, the underlying cost reductions that the team have delivered given the increased haul rates and distances is north of 20%. Is that correct, Duncan? The recent kick in copper grade has helped us in the last 12 months reduce our cost. But if you look at the trend over the 5 years, it's north of 20% in real terms.
And Colliwasi has made a significant move down the cost curve as a consequence of improving efficiencies and a little bit of growth. So overwhelmingly, it's been the underlying performance. But certainly in the last 12 months, the costs have improved at Los Bronces with better grades. On the other elements, Stephen, capital, dividend policy.
Yes, I mean just to add to the cost story, so yes it was a great half for copper, currencies and a bit of inflation went against us, but going with us was obviously both the volume increase, grade as you said and some byproduct credits also sort of played into that. So a good outcome and Duncan has assured me he's going to keep delivering for the second half. So that again I'd expect us to come inside our previous guidance. Generally across the other commodities, I suppose the same part of that last theme, so mixed impacts in terms of currency and volumes, great etcetera. But generally we're inside and tracking inside of our full year guidance for most of the commodities.
Coming to your other topic, so Quebec or CapEx, so we were guiding that we will spend CAD400 1,000,000 on a 100% basis for the balance of this $300,000,000 to $400,000,000 for the balance of this calendar year. Now that will be funded from the proceeds from the sell down. Some of those proceeds will then carry on through into next year. And so the first phase largely through that first half will also be funded from those proceeds and it's really then from let's call it mid next year that we'll start to contribute on a sixty-forty basis. So if you recall in the announcement of the sell down, it's about $833,000,000 comes in and that's the $500,000,000 plus gross up comes into the account.
So it's the $834,000,000 that then gets funded on a sixty-forty basis if that's the correct THs and all those sorts of things. We're not guiding at the moment in terms of the exact split, when we come out with capital guidance for 'nineteen we'll give you the better split and those sort of things, But it is a fairly typical sort of project spend profile. So years sort of 'nineteen, obviously years 'twenty, 'twenty one will probably be the largest spends and then it will lease back in 'twenty two as we get to the end. In terms of dividend policy, listen, we're really happy with that 40% sort of guidance and payout ratio. When we struck it and we still think it strikes the right balance, right?
Remember for us it's not about one thing or the other. So it's not about capital returns to shareholders and that's all we've got to do with the money. We think we've struck a really nice balance in terms of appropriate returns to shareholders, sensible capital allocation and investment in the future, whether that be longer term or shorter term type initiatives and de gearing the balance sheet. So we still are priority each of those 3 absolutely unashamedly. I'd love to make progress across the balance sheet still for the next 12 months.
So we think we've got that balance right. Ultimately, we will work our way around that capital allocation wheel and if we find ourselves with excess cash as we've worked around that wheel, then we'll consider how we allocate it back. Right now, I think the 40% really strikes the right balance.
Jason Fairclough, Bank of America Merrill Lynch. Your peer, North Keydrill, had a little incident back in Q1, seems with limited environmental impact and they're still struggling to get permission to restart. Could you discuss a little bit your engagement with the various levels of government and whether you're engaged yet with the public prosecutor? Just walk us through how the path from here to restarting that asset. Sure.
And I guess along with that, Mark, what are your take or pay obligations and your fixed cost base that you have to carry while this thing isn't running?
Okay. So on we know the guys from hydro pretty well, said Richard, the crew. They've got a specific set of issues that are quite different to what we have. So I think it's very different and we do understand the challenges they have. In our case, we've got all of our approvals.
The last license approval required is the license to operate, which comes off the installation. So that's pretty clear. Ruben has been working very closely with the prosecutor's office and other officials. I think he counts them as his first, second and third best friends. And so we know them very well.
There was a conversation around some of the requirements on the licensing that the prosecutor put forward, I think a week ago. That was not considered or it was knocked back on the basis they don't have jurisdiction. But we engage all of the key players. And so we think that the processes we have to go through are pretty straightforward and that we don't anticipate major further disruption, but we'll work through the processes and we're engaged on a daily basis. So we'll wait and see.
But so far, they've been very supportive. The big thing, we've got 95% of the local community saying we want this. When we had the vote, it was 11 out of 12 of the key representatives of the key players. So they know the community wants this project. And I think that's been very helpful in our condition in particular.
And I think the way the issue was handled has been complemented by literally everyone, even the prosecutor's office that you handled it in a very good way. So I think we're maintaining the right dialogue and I think we're in a good place to keep that going forward. Ruben, do you want to add anything?
Maybe just one comment.
Reuben, microphone, Reuben.
We have hired the Technological Institute of Sao Paulo to do the investigation of the root causes, and it's the same institute that the public prosecutors wanted to have investigating the incident. So we have this alignment with them in terms of technical analysis. So this gives us confidence that we have the same kind of approach in understanding the incident and prevailing new ones.
So I've just come back from Brazil. And so the team have taken me through all of the steps and I think they're covering these issues better than anything I've seen in terms of the process. Shamers have just come back as well. So I think we're all comfortable that we're doing all the right things, engaging all the right people. So again, you can never say there's a 100% guarantee, but I think we're doing all the right things and we're in the right conversation.
And Mark, just on the take or pay and financial impacts, yes, that's all included in that $300,000,000 to $400,000,000 that we've guided. In Europe perhaps, yes. That's to the period that we expect to restart it in Q4.
So if this thing drifted?
If it drifted, I'm going to look at Craig Miller, maybe $30,000,000 a month, dollars 20,000,000 $30,000,000 a month, something around that. The $300,000,000 to $400,000,000 includes all the things you'd expect in terms of staying engaged with the workforce and the training and all those sorts of things as well as the repairs and the cleanup and that sort of stuff. So we've tried to be really quite comprehensive. We'll use all of that 300 to 400. Obviously, we'll see how it plays out.
There's still work to be done and things to deliver. But we're pretty comfortable with that scale of guidance that we've got at the moment.
Thanks, Peter. And there's a strong sense in the community and I've been in these communities with the guys. They want it operating. So I think we've got lots of support in the community, which I think is very important. Yes, ma'am?
Thanks. It's Menno at Morrissemi. Just sticking with Minas Rio. I'm a little bit puzzled. The technical review is underway.
The results are not in, but remedial construction has started, and you hope to be back on the Q4. But how do you know that you're back in the Q4 if the remedial technical review is still underway? So these things seem to clash a little bit. And it's still clear to me what the implications are for license number 3 because clearly, Ministerio Publico has said, let's remove this. And yes, they don't have jurisdiction, but again, go to the can go to the courts and stop the whole process.
And they've proven to be big defenders of the general accout in the last 18 months after Samarco. So a bit more detail on that, please. Secondly, now that Bruce is here. Clearly, Bruce, you set the you let a cat out of the bag and said catamans and pigeons or whatever the expressions are. But Livebox seems exciting but also quite risky.
Can you just detail what the thinking behind this? You have the Botswana government on board. What's the response in the midstream? I appreciate you did a presentation last week in Antwerp. How is the feedback on that?
And finally, Mark, you seem very excited about Brazil despite its issues and the 19,000 square meters or square kilometers, I think, that you picketed. So could you tell us a bit more what you found? And you said 18 months for more data, but it seems like you almost want to talk about it now. So I'm laying this
up for you.
Even the Chelsea forward can't miss it.
But a Watford Ford could. Very nice. We sold our Ford. Good, love it. Okay.
Firstly, on the pipeline, we understand we believe we understand the key issue with respect to the technical issue, deterioration on a weld. We have tracked a poor batch of pipes and we know exactly where every one of those pipes is. So the 4 kilometers is based on our understanding and knowledge of what we've seen so far. The most important thing, Meno, is to make sure we confirm that that is in fact the issue and the only issue. There's a deep technical analysis that the guys took me through over the full 12 hours.
And so I'm happy that I think we've covered every angle. And as part of the resolution, monitoring the pipe for changed ambient conditions is very important because these things don't fail catastrophically. There may be a fatigue, small leak over a period of time and it gathers pace. The key thing will be to monitor by temperature, by moisture, by sound and by vibration and we'll have an early indication. We're making sure that those technologies are part of the fix.
So that's why it's taking a bit longer, making sure that we understand it and that the fix covers not only the integrity of the pipeline, but also providing early warnings if we have any issues so that we're in full control of the pipeline and making sure it works. Now the Samarco pipeline ran 6 years without a leak. So we're also understanding those technologies. We've got a few of the Samarco team actually working with us. So we've got experience with us working through those potential issues as well.
So again, the right technical expertise right across the board is being applied and we're using the advisors to the prosecutor and the government. And I think again the prosecutors appreciate the fact that we've got that type of expertise on the job. Yes, they have in some ways appointed themselves as the protectorate for the community. But having said that, we're in a very constructive dialogue with the guys. And so from our point of view, they will continue to do their job.
Our job is to give them comfort that we've got the issues covered. And I think we're well down that pathway. It's not there yet. There are still a couple of operating processes we have to go through. But I think the guys are doing everything that they should be doing and certainly the feedback has been very positive from all of the key players.
Go to Bruce on Lightbox. We go to Bruce on Lightbox.
Yes. Bruce, would you like to say something?
Thanks. Firstly, on the engagement, I'm very comfortable that all of our producer governments are very comfortable with Lightbox. I personally spoke to President Karma before he left, President Masisi, President Ramaphosa and President Gheingold and each of their cabinets. I can see the cabinet in South Africa and they are all enthusiastic supporters. So a lot of engagement, but I think very good alignment for now producing countries.
I think we should remember, we launched Lifebox in relation to consumer research, which came back to us, which is consumers in America say, they do see that there's a place for a fun fashion accessible product in laboratory grown diamonds, but they don't think they're the same as the natural. I don't think they have any emotional attachment in purchases and they were confused by the current offering. So we didn't do this for any other reason. We did it in response to the consumer demand out there for what they think the product should be. A very important part of it are color, lots of color in our offering because fashion is color, blue and pink in particular and very important is that the pricing is all binary.
So 1 carat cost twice what a half a carat costs and laboratory growing because it takes you twice as long to grow it in a lab. And that's very different in the natural business. The response so far anyway has been much better than thought, particularly in the U. S, which is where we aim this. So all of the retailers in the U.
S, and we speak to all of them, understand why we're doing it, support it and completely get why we're doing it. We also wanted funders to think twice about funding more production given that the margins seem to us unsustainable in the current offering and there's quite a lot of anecdotal evidence that that's already happening. We probably didn't engage as much as we might have in places like India or Antwerp, but that's not where the current problem is. So we spent much of our engagement in America. I'm very comfortable
last question on Brazil. As Menno said, I can't help but talk about it. Look, both Tony and I are Fellows of the Australian Institute of Mining and Metallurgy. So our ability to talk to what we've got is constrained by those requirements and they're appropriate. There is obviously lots of chatter in Brazil.
People know that we've put a hole through something. We are making sure we understand what that is. But there's a lot of work to be done. And we've both been around long enough, 40 odd years. He's been around a bit longer than me, that you got to be careful with stuff because it may not be what we hope it is.
And so in the next 6 months, we'll do all the anomaly tests, we will do additional drilling. I think we'll have something more sensible to say at the end of the year. We should wait for that. But again, I'm also aware of the chatter in Brazil. So it would look rather odd not to say something given where we are.
We'd prefer to wait the 6 months and be clear about what we may or may not have. But it's encouraging. Does that help? But anyway, it's encouraging. And certainly from our point of view, the existence of porphyry in Brazil was something that is certainly a different type of conversation than what we've been told in the past.
And certainly, I think it validates the commitment we've made to our exploration team. So we'll see where that goes. Okay.
Good morning, Helane. It's Patrick from Deutsche. Two more questions on MENAS. Just to understand the process, given the length of the pipeline and given how new the asset is, how do you plan to give the public and all the various stakeholders the comfort that they need? I mean, should we expect that there'll be a publicly available report at some stage on what you found and what the remedies are?
And secondly, if we take an optimistic view that it does restart at the
end of this year, can
you give us a rough idea on the sort of volumes we could see in 2019 2020? And thirdly and finally, just on Diamonds, on your Synthetics business, do you plan to disclose this separately going forward? Thank you.
Firstly, on the comfort point, the technical work and we're very open to share the technical reports when the work is done. We're very transparent. We think that's appropriate. We'll do that with the authorities and we'll do that with anyone that has an interest. From our point of view, we think the evidence is pretty strong, but we want to make sure that we haven't missed anything.
So we're working through that process. The 4 kilometers is specific and relates to a batch of pipes that we know were problematic or potentially problematic. And we're in the process of understanding the exact failure mechanism. As you can appreciate, we just want to make sure we've got those issues covered. In terms of comfort, it's not an optimistic start.
It's what we think is probably is the right balance in terms of getting the operation up by the end of the year. Clearly, the regulatory approvals, which are normal as part of this sort of process, we expect to be able to navigate those. If there are any other issues that pop out, it might take a little bit longer. But at this stage, based on all the stuff we've done so far, we're pretty sure we know what the issue is. But again, we want to make sure we've got every angle reasonably covered.
And so we're being prudent, I think, in what we're saying, but at the same time, realistic in that there are still a few things to navigate as part of the process. In terms of going forward, again, we're a transparent company. We believe in sharing those things that people should be aware of and we'll do that in an appropriate way. But certainly, the feedback and the support we've had in the community, the fact we've been there from the first minute, explained every step to the community, the prosecutor and all the key players, I think they've appreciated how open we are. And they've been surprised, I think, how open we are.
And in fact, I know a couple of competitors are now using Ruben's work on crisis management as an example of how something should be handled. So it's a great credit to Ruben and the team in terms of how they handled a difficult situation at the time. And I think that's helping us in terms of our dialogues with the community. Shams, do you want to add something?
Sorry, Matt. You just need a microphone. We've got people on the
conference call.
The pipeline inspection gauge technology, just 3 different sets of gauges being run down. Cumulatively, they allow us to detect cracks down to 1 millimeter. So, when we talk about confidence, we're talking about being able to detect cracks in the pipe down to a depth of 1 millimeter. We won't so the restart is based on replacing 4 kilometers. And then go back to Meta's question, how do we know that 4 kilometers has to be replaced?
We don't. We've risk assessed the pipeline. We looked at all the contributing factors to the leaks. And based on that assessment, we believe if there are any issues, those issues will be in the 4 kilometer immediately after the second pump station. So it's anticipatory replacement, but we obviously won't restart until we have all the results back from all the pipeline inspection gauge runs.
We've vandalized those. We've assessed the condition of the pipelines, but we're anticipating that we won't have to replace pipes except in that 4 kilometers.
Mark, just to answer the other parts of the question that Liam had. So we'll update the guidance towards the end of the calendar year as we do always for all of the business units. So we'll have a much better idea exactly when it's coming on and how it will come back on as we get to that normal guidance stage for 2019. In terms of synthetic separate disclosure, no, not at this point in time. Just to give you a sense of materiality, we're investing about $100,000,000 in this initiative.
We invest multi $1,000,000,000 in our main stream mines, particularly through South anytime soon that would warrant separate disclosure. Nonetheless, we just know how the initiative is going in terms of its rollout and take up.
I'm going to answer one more question, which is the how will we report Lightbox. From our point of view Sorry,
that wasn't the answer, Mike. That was the answer. Obviously, sorry.
I was anticipating the next question.
Ian Rousseau from Barclays. Just on Quellaveco, you in that diagram, you showed your 2 neighbors on either side. I just wanted to get an idea if you've had any discussions with them on sharing infrastructure or and to what extent do you think that can improve the returns of the project?
We had early conversations, but it was pretty clear that the terms they were looking for weren't suitable for us and certainly didn't help us in terms of returns. But we remain open to any conversation that would help enhance the project returns. So we're very open, but there's no current conversations. But we've got a good relationship. And so if there's a possibility, we'd be very open to a conversation.
Okay, thanks.
And then I'll come
Sylvain Brunet with Exane BNP Paribas. Two questions. First on diamonds. First to give us a bit more color behind the softness in sales year on year, which were 3% lower in volumes. Is India the only weak spot?
And the other question on diamonds is on your discussion with Botswana. In anticipation of the renewal of the 2020 agreement. These talks assume start early. Have you had an indication of what the request would be? And my third question is on Vulcan, whether you have been approached in any way and if you see any value for your shareholders in exploring any tie up with South African activities there?
Thank you.
Okay. So firstly, on the sales differential, remember last year, we saw a fairly significant clearance of the lower value products. So there's a big inventory clean out. So the sales actually this year have been pretty good adjusted for that number. So we're very happy with what we've seen so far.
Demand in the U. S. Looks pretty solid. China has certainly been growing. So generally very happy with where the market is.
But the difference is really the inventory change that we kicked away early last year. I think that's the main difference.
1st and second site cleared it out last year, correct? Yes.
So very happy with what we've seen from a SaaS perspective. Certainly, the sentiment has been very solid. And we had a recent innovation seminar that we have each year with all of our site holders and they're very, very positive. And certainly from our point of view, the refusals are very low. So that's usually a very good indicator.
Secondly, from a Botswana perspective, we never stop talking to the Botswana government about what we're doing, how we're working together. I think it would be fair to say that we've come on a journey together. And it is a
very positive relationship. They've been very
supportive of everything we've done. And as you conversation to make sure we get it framed right. But for us, long term commitments on stripping, they understand that we're there for the long haul. So we'll find the right outcomes. It's getting tighter for us obviously and them in terms of value.
So it's really about consolidating the relationship and making sure that we're both 110% committed and I think we're going the right way in those conversations. Bruce, did you want to add anything to that? That's fine. And third, on Vulcan, firstly, Mr. Agarwal has been a very supportive shareholder.
He's made it very clear from everything we've said or seen in the press and in his conversation to us that he likes our strategy. He's supportive of what we've prefers not to sell prefers not to sell any further assets. We haven't been in that process for 2 years. So I think that's a positive. Beyond that, you need to ask him, but we're certainly not in any other conversations.
The conversations we have with the team, with Mr. Agarwal is consistent with the conversation we have with all of our shareholders. And so there's nothing else at play or no other conversations in place. Anything further from their perspective, you should ask them. And we're very respectful of that relationship.
Thank you.
Hi. It's Alon Olshar from Macquarie. Just two questions. Firstly, on costs. Inflation hasn't really come up much, which is interesting.
1 of your other peers, which mainly produces iron ore in Australia has been at pains to emphasize that inflation really is picking up. But from your comments, it seems to be fairly benign. So is that your view? Are we kind of experiencing fairly kind of normalized inflation at this point in the cycle? Or are there any kind of emerging signs of inflation picking up in certain areas?
And then just the second question relates to legislation in South Africa, new draft mining charter out, a significant improvement on the old charter or the old draft. Are there still any of those issues in that new draft that you want to resolve with government? And then the carbon tax bill in South Africa, where are we on that? And have you guys ever looked at that and the impact it could have on your business?
Steve, do you want to pick up inflation? Yes, sure. So without getting sort of too detailed, we average CPI across the jurisdictions that we operate in averages at about 3.6%. And that's that $200,000,000 that you see on that left hand side of the graph. We do see a little bit of above CPI inflation.
The way we show that is we net that in our cost and volume benefits, right, because it's our job to sort of drive out above CPI impacts across the business. And so that's how we disclose it. Are we seeing increases? Yes, I suppose I touched on them things like diesel obviously offer $70 oil price, diesel is up, shipping fuel is up. So you're seeing some of those things naturally feed through your cost structure.
Apart from that, nothing what I'd say terribly untoward remembering that we operate in jurisdictions that have probably higher than average sort of inflation impacts anyway. So for us it's a little bit business as usual and that that's why we've got to drive those cost and volume improvements, that's why we're so committed to that cost out journey because we do see those things coming through. But that was the same the year before and the same year before that. I spoke a little bit at the full year, it's probably a little newer for Australia particularly in WA and particularly in the Pilbara, they probably had a 5 or 6 year period of deflation, particularly through mining services where people had spent a lot of capital, there was a lot of capacity there and they were desperately keen just to cover some of their costs to keep the doors open to get through to the next cycle. As those people need to reinvest in the next cycle capital and capital availability, they need returns on that capital.
And so I think that's what you're starting to see through some of those jurisdictions. Europe's probably been a little bit higher just off the back of better growth and up until recently maybe the U. S. And we're starting to bubble a little bit too. So it's probably in countries where people haven't seen it.
It's emerging. For us, I suppose it's a regular part of our business.
They've also got catch up capital there, they're spending, so they've got a little bit more exposure from a cash point of view as well. Whereas for us, we've been living in those jurisdictions, as Stephen said. So we're a little more used to working hard and productivities and all of those things. So it's become more of a way of working and understanding that it's a continuous improvement journey. On the mining charter, I think the best way to characterize our conversations and thoughts, The new charter or the new version is certainly, I think, very helpful in providing us with certainty on our existing assets and operations and that's a big tick.
That's a big positive and very pleased for us. And so from our perspective, very pleased with the certainty that it provides us. There's still a couple of things that need to be cleaned up, but much happier and certainly gives us the confidence to continue driving and investing in our existing business. In terms of the new parameters, I think there's some real challenges in there in terms of free carry, trickle dividend, these other pieces. We've made that very clear.
So I think there's a lot of work on both sides of the fence to try and land something that will encourage foreign direct divestment. We've made that point pretty clear, the chambers in those conversations. We're certainly in problem solving mode with the government. We are optimistic in terms of the long term in South Africa. We want to be part of that future.
So we want to make sure that we have a charter on a go forward basis that encourages investment, but there's still a bit of work to do on that front. So happy with key parts that give us confidence in terms of where we are, but some more work to be done on the look forward stuff. And I think there's a lot of work still to be done on that front. In terms of the carbon tax, do you have got the enough numbers that I can give a rough breakdown? Specifically,
South Africa? Yes. No, we haven't got the exact numbers with you.
Craig, I think it was somewhere between $10,000,000 $15,000,000 impact on a full year basis across all of our assets in South Africa. It was in that range. And that's still a conversation at the moment in relation to the new dispensation with Mr. Ramaphosa.
Yes.
But it's it has an impact, but it's not that significant. But we have said that given what you're trying to do, the $100,000,000,000 that Mr. Ramaphosa wants to encourage, one of the things we'd be sad is to just have a look at that and consider whether that's the right thing to do. But that's a dialogue that we're in at the moment through Norman and the South African team.
Miles? It's Mark
Bose, also BBS. Three quick questions. First, just continuing the sort of South Africa conversation. The NPRDA amendment bill was pretty toxic, and that's still floating around. Does that mean that the uncertainty in South Africa is going to continue for at least 12, 18 months beyond the charter kind of being promulgated?
Secondly, just on the M and A side, obviously, a couple of small acquisitions. Just can you give us a sense as to how you as a management team are thinking about M and A going forward? Is it just kind of tacking on small opportunities? Or are you going to get bolder? And then certainly, the capital allocation going back to the original very first question on dividends.
How should we think about when the balance sheet is at a point when there is really excess cash? Are we looking at the wrong net debt number? Should it be the net debt outside of South Africa? Was it $7,000,000,000 Has that got to get down to $4,000,000,000 before you'll consider lifting the payout? Or I mean that, I think, is the area of maybe slight disappointment with these results.
So I'll come back. I'll ask Stephen to get the fine points on his answer regarding the capital. But on the NPRDA, it's been floating around ever since I've been working in South Africa, that's 10 years in one form or another. It's complex. You've got the traditional leaders having input, I'll arrange a place, I still think it's got a long way to go.
For me, it doesn't worry me. I think the mining charter conversation captures the essence of the nature of the relationship between the two parties. And that commitment to not jeopardize existing operations and investments, I think, is absolutely critical. And I think that's the key sentiment we should hold on to because I think the NPAT has probably still got a fair way to go. And the focus on the charter going forward, I think, is the other critical element.
I think they will then look at harmonizing the 2 and that will take time. So again, it's not something I worry about. If you look across the world, the certainty we have in South Africa is certainly pretty robust compared to many jurisdictions as some of our colleagues are finding in the industry in a range of places around the world. So we can make South Africa better and we're committed to being part of that dialogue. On M and A, look, we've always kept our eye on the market as we should.
But the good news is and Stephen picked up 3 points and I want to reiterate those three points. Firstly, our growth going forward will come from internal efficiencies. The efficiencies I talked about on that in the Hola Quanta slide are available to us in every part of the business and that's the real focus. And Tony and his team with Seamus and all the operations guys, Bruce, the rest of the team, Doug and everyone is focused on getting the best out of the business and there's still a lot more to be had. So that's the first point.
2nd point, innovation and step changes. We invested in investment or in innovation and technology because we knew that was the best pathway to growth and effective growth in terms of returns on capital and we're still committed and Tony and the guys have helped us see a lot more opportunity that provides step opportunities in terms of improvement. And 3, the internal project pipeline, a Quellaveco is the obviously the large scale step, but we've got incremental opportunities across the business. So the first thing we need to do is get the best out of the capital assets we have. That's the first, second and third priority.
At the same time, we can see opportunities that make sense for us through Peregrine, the Mototolo conversion. And we see some smaller opportunities that make sense and provide us with the ability to continue to improve our performance across the organization. And again, our focus on exploration provides us, we think, with a pathway of very value accretive growth. So it fits as part of an overall strategy, but we think we're in a better position than most because we've got those internal opportunities. If there's something out there that makes sense, we will follow it up.
We can convert it. We've demonstrated we can. But when you've got the opportunities we've got, why would you chase stuff that has a higher level of risk? But not saying we won't, but it's got to make sense and it's got to compete with all of those great opportunities we've got inside the portfolio.
To answer the second part of your question on dividends, maybe let's just focus on this half result first of all. So I think generally most numbers that I saw were pretty spot on in terms of EBITDA. There was a little bit of a variance across EPS given 2 things. 1 was effective tax rate, it was probably a little bit higher than what people were assuming and that's largely a profit mix thing. So we had sort of higher profits continuing through Australia and South America with slightly higher effective tax rates in the half.
So that's why you saw that effective tax rate a little bit higher than average. And the other one was depreciation where people were just a little bit off on and that's we have had new assets commence and we've had increased volumes come through. So the combination of those 2 I think with a 100 to 200 perhaps that a few people missing on depreciation. That flowed through to maybe a different expectation on the cents number of earnings, underlying earnings and therefore dividend. But for a couple of really sensible reasons, we are committed to that 40% payout policy.
So in the near term, I think that's what you should put in your spreadsheets and that's what you should expect. Ultimately, we will always work our way around that capital allocation wheel. And as you get towards the sort of the end of that consideration, one of them is additional returns to shareholders. But as a priority, I would say the balance sheet still outweighs that in terms of just making sure it's absolutely rock solid as we come into more of an investment phase for the company. So I think it's absolutely the right thing for us to stay focused on.
Yes, net debt, consolidated net debt is one view, I should point out the rest of the world debt I would love to get that a little bit closer and a little bit more aligned right across the balance sheet. That is part of the reason why we remain focused on de gearing.
Well, we have time for one more question and Tyler has the microphone.
Tyler Brodeau, RBC Capital Markets. Yes, two questions, well, 1.5. But question number 1 is, so for Diamonds you are matching the production to the pricing environment. It sounds like things are starting to get a bit better in the diamond industry. Venetia is going through the transition.
Sort of would you be able to give a guide for where you could get production up to say over the next 2 years if the market supported it in terms of volumes? And then question 1b is on thermal coal. In terms of the looking at the group structure as you walk through those charts on cost curve positioning, the one thing that struck me is interesting is that thermal coal sort of seems a bit different than a lot of your other assets, the shorter mine life, you're getting towards the end of life at a couple of the assets, more weighted to the SA. It's got the CSR that's coming up on thermal coal these days. I guess the question is that with the rest of your portfolio having improved as much as it has, does thermal coal still fit?
Okay. In diamonds we are very sensitive to make sure that we're not running ahead of the market. So we're very happy with what we're seeing and we're supplying to the market and we have a little bit of flex in terms of what we can do. But as we go through the transition at Venetia and we're making other changes, we don't want to stress that system in the next couple of years. We want to make sure that we're focused on getting our efficiencies right, getting our margins right and not putting more product out there that we might otherwise do better in 2 or 3 years' time in getting that balance right.
So Bruce and the guys are watching that very carefully. If they had to kick up 1,000,000 carats, I think we've got that capacity depending on where we are and what we're doing. Longer term, we head closer to the 37,000,000 carats towards the 4 5 year period. But again, that's based on the transition that we go through for Venetia and making sure that we're getting the best out of the other assets. So we've got the potential there.
But at the same time we're trying to match that to the market so that we keep the margins in a healthy place. Bruce, do you want to talk about that? On thermal coal, Seamus did a very good speech a few weeks back to the staff and if I can borrow on how he presented the story, which I think is exactly the right way to present it. We've got very good assets in thermal coal, very good cost positions, we're low quartile or right on the cusp and we can improve with our productivity. So there have been significant, what a 40%, 50% productivity improvement in South Africa in the last about 3, 3.5 years.
We've got 14 years life on average. And from our point of view, it makes sense to continue to run those quality assets through that process and we're making sensible capital allocations on incremental life extensions. It would certainly be a lot harder for us to justify a big investment in thermal coal that goes beyond a 7 year lifetime on the basis that there are questions about the value that you will see in thermal coal relative to oil, gas and the whole fossil fuel question. So we think committing our capital to Acayaveco and other incremental projects make sense, but we won't start the business of capital, we'll make sensible decisions. When we talk about a transition, we've halved our footprint in thermal coal in the last 5 years and we call it a just transition.
We're connecting with our communities. We're making sure they understand what we're doing in those local communities. The governments and the customers that we work for understand exactly how we're going. And we're making incremental investments. But it would be a lot tougher for us to justify a big investment for a long term development position in thermal coal, given the uncertainties in the price environment.
So it would have to be a very special case. So carefully considered, measured as we go and we'll keep the market and everyone else informed because the CSR conversation is a very important one to us and one that we're very cognizant of. But at the same time, we're not going to bail out tomorrow. And many of the CSR stakeholders are very appreciative of the fact that we haven't run, that we have been clear about a transition. And they said we'd prefer that because we understand the importance of your local communities.
We understand the importance of those industries to the big power stations. And it's better to have a responsible operator like you transitioning with those assets than having some other characters running those assets in a way that might not be as sensitive as the way you guys will run it. So we're trying to get that balance right.