Ladies and gentlemen, and welcome to the Glencoe Investor Update 2018 Conference Call. At this time, all participants are in listen only mode. To follow the presentation, we ask that you navigate the slide as directed by Glengrow's Management. There will be a question and answer session to follow. Today's conference is being recorded.
I will now turn the conference over to Mr. Ivan Glassenberg, Chief Executive Officer. Please go ahead, sir.
Thank you. Good afternoon. Thanks for taking the time to attend our investor call. And I'll start off with the highlights and Steve will take you through more of the detailed numbers later on. Looking at the first slide, as you are aware, trade China macro fears have impacted the financial sentiment of the market.
However, the commodity sector has not been bad, and we have seen certain reasons for this. Number 1 is the amount of reinvestment into the sector has been limited. Demand even in China, even though there's been negative talk is still very solid. And inventories are low and likely to fall even further if we look at the demand supply going forward. Glencore, we got a very diversified portfolio.
As you can see, we're transitioning to low carbon economy, while we provide access to very affordable energy. Our copper nickel and cobalt helps underpin the technologies that enable the looming energy and mobility transformation, which we see occurring across the world. We also have very affordable, high quality, high energy thermal coal, which continues to help support the ongoing economic development, which we see happening in Asia and the increase for coal demand in various countries in Asia. Our business is extremely cash generative. As you'll see, we've got a very resilient marketing business and low cost industrial assets, which underpin us through the cycle where we have very strong free cash flow between $5,000,000,000 to $10,000,000,000 based on the low if you look at the lower end of the cycle or the high end it's still extremely resilient.
If we utilize spot commodity prices today, our free cash flow generation is right about $7,500,000,000 that's based upon an EBITDA of $17,100,000,000 So as you can see, with current spot prices, we generate an extremely large amount of cash going forward. Capital allocation, we have very good confidence in our own business prospects and our current shares are trading at low levels whereby we believe we can continue focusing on deleveraging the company and shareholder returns or buybacks as we've done in the past. As you'll see in 2018, we announced $5,200,000,000 which were distributed either by the way of dividends or buybacks over the period. 2019 equity cash flow post our base distribution dividend will be prioritized between buybacks and deleveraging continuing to deleverage the balance sheet. The financial policy, as we've always said, we have commitment to strong BBB, BAA investment grade ratings and we continue targeting a maximum 2 times net debt to adjusted EBITDA through cycle and this is augmented by a net debt keeping the maximum net debt of $16,000,000,000 Turning to the next slide, talking about the commodity market and what we have with the China with the trade agreements, China fears, macro fears, it can be seen there's been a lot of uncertainty as displayed by the chart on the right showing the Global Economic Policy Uncertainty Index, large variability there.
We've also seen the manufacturing PMI indexes come down, especially in the Eurozone. However, in places like China, it's come down, but not at great demand. So we do see a bit of uncertainty around the world. However, if you look at the commodity sector and you turn to the next slide, why are commodities holding and why do we believe they should be sustained and should be positive going forward. If you look at the sector reinvestment, it still remains limited.
We don't see massive capital investment across the board. And as you can see in 20 sixteen-seventeen, very limited capital investment. And going forward, still limited capital investment with about the industry $37,000,000 moving down to $32,000,000,000 planned before 2018. However, even with the uptick of commodity prices in 2018, the capital expenditure of the mining companies has not increased much and the slide shows in 2018 only an extra $1,000,000,000 and $3,000,000,000 to $4,000,000,000 added to the CapEx of the mining industry going forward even with the recent uptick of commodity prices. So clearly, displays, if you look at past capital expenditure spent by the mining industry as compared to today, limited new production and a lot of this is sustaining and non expansionary CapEx and therefore not allowing new commodities into the market.
Demand growth, looking at the slide on the right, as you can see, has been very solid even in 2018. Even with the uncertainty around the world, which I mentioned earlier, demand has been very strong. Looking at the slide, even if you look at the average of 2013 2017 CAGR as opposed to the 2018, growth in 2018 in most commodities besides zinc and aluminum has been higher than we've seen over the past 5 years. So that gives you an idea. Copper, we're up at 3% growth in 2018.
And looking at nickel, you're up at 7% growth between 2017 'eighteen. So demand is clearly being relatively solid across all commodities during 2018. A very important slide, which we look at all the time is looking at Slide 6. If we look on the left hand slide, it shows you if you look at inventories, whether we look at Chevy, we look at bonded warehouse in China, we look at LME, we look at Comex, we look at off LME, off warrant type material, it shows you the inventory levels across the board have come off considerably between December 15 to June 2018 have come down considerably. And today, if you look at the days amount of held inventory in the various commodities, I believe in most of these commodities, we are at record lows.
Copper, we have 12 day supply. Zinc, we have 7 day supply. And nickel, we have 66 day supply. And looking that as opposed to the average over the past that period, over the period between December 15 to June 2018, we will below those levels and we are at record low levels. So what does that mean going into 2019 and what do we see happening in 2019?
If you look at the slide on the right, what we've tried to display is even if you look at the new supply coming into the market in 2019, and for example, if you taking one of the commodities, if we talk about copper there, you'll see copper, the tonnage that's being produced in the world in 2018 was roundabout 23,500,000 tons, 24,000,000 tons, while consumption has been pretty similar, not that much of that figure, maybe consumption a little bit higher. So we had a little, we believe, a bit of a deficit in 2018. With the new supply coming in the world in 2019, potentially about another 250,000 tonnes new supply, that is a new mines coming in, less the other mines which are reducing tonnages. So total new supply coming into the market in copper, we believe is around I think WoodMac also saying around about 250,000 tons, I think that's the WoodMac figure. So if you take that WoodMac figure, you require only 0.67% demand growth of copper in 2019 before you start eating into these 20, I think copper we said 7 day stockpile, you start digging into the 7 day stockpile, if you have a look at the sorry, 12 day stockpile, the graph on the right, once we only get 0.7% growth.
Now if you look at copper during, as I said earlier, during 2018, you had 3.1% growth. So if you get that 3.1% growth, you're going to have to dig deeply into your inventory levels, which are only 12 days in copper and that looks like it's going to happen if you get anything in excess of 0.7% growth. Even worse though, if you look at nickel, nickel, we look at nickel what has happened in 2019, 2018, we really believe there was a shortfall of nickel in 2018 and there was an inventory drawdown of around 200,000 tons in 2018. So you had supply of 2,200,000 tons, but demand was 2,400,000 tonnes and we saw the drawdown of 200,000 tonnes in 2018. What happens going into 2019?
The same story, like I said, of copper. If you start if you look at all the increases of nickel, which is occurring in 2019, you go from about, I think, 2,200,000 tons to about 2,400,000 tons. So you maybe get growth of about 200,000 tons coming in nickel in 2019. However, you're already consuming 2,400 tons of nickel in 2018. So even with this increased supply, you're going to have to have a drop of 1% of your nickel consumption from your 2.4 level before you start digging into inventories.
So it's clear nickel, we're going to have to reduce the inventory level, which is around about 66 days, which will occur during 2019. So that's an extremely important graph to try display with limited demand growth in all these commodities and in fact nickel you got to have negative and the only way you're going to be drawing into inventories next year unless something drastic happens in the market. So that definitely bodes well for 2019 commodity prices based on those figures. We give more detailed explanations in appendix to show how we've got to these figures to show supply demand. I think it's in the later part of the appendix.
And so on Page 31, Page 31 where we display 31, 32 and 33, where we show these different commodities and how we see demand supply going forward. Turning to next page, our ESG update. Once again, safety, we've had poor fatalities during 2018. We've had 12 fatalities from 11 incidents across the board. Certain of these fatalities occurred at our focused assets.
As we said, we got it's Kazakhstan, it's Africa, certain assets in Africa and the other ones have occurred at operations which are not our focused assets. So a lot of work still has to be spent in this area. Commitment to transparency, we displayed during 20 17, we paid $4,500,000,000 to governments and we continue publishing the amounts which we are paying to governments on project by project basis to enable greater transparency in this area. The other area we talk about is our diversified our portfolio, which is enabling us to transition to a low carbon economy while providing access to affordable energy and that is displayed by where we produce a lot of commodities for the battery industry and our copper nickel cobalt help to underpin the energy efficiencies and technologies that enable the looming energy and mobility transformation, which we see occurring with electric vehicles and the battery industry. So Glencore produces a large amount of commodities in that area.
And once again, we supply a very affordable premium quality high energy thermal coal, which will continue supporting this economic development that we see occurring in Asia. And looking at our portfolio mix, we really have a nice mix of commodities there across the different spheres of these areas. So with that, I'll hand over to Steve to talk more about the financial position of the company.
Thanks, Ivan. Good morning or good evening to all of you on the call wherever you may be sitting at the moment. The next 6 or 7 pages before I hand back to Ivan is really providing many of the economic and financial building blocks as we've been used to and accustomed to doing over the last 4 or 5 reporting periods. So you can think about some of the cash flows and the sensitivities and some of the capital allocation process as we go forward in the next year or so. Page 9 is just a snapshot, and we'll get to more detailed pages for copper, cobalt, zinc, nickel and coal.
But you're seeing expected production growth over that 3 or 4 year period, 2018 to 2021 in copper, we're looking at 5%. Cobalt is up 74% from 39% or so this year to 68% if we look out in the 2020 year. Zinc as well, up 28% over that period. There's a page on that. Lead, 30%, nickel, 10% and the likes as well.
The 3 that we don't have specific pages on in lead and ferrochrome in oil have all got recent upgrades to production volume expectations from those that we provided 12 months ago. So if we move on to Page 10 and drilling into some of the details through that process, we can see the copper and the cobalt, where this year we still maintaining the 1,465,000 tonnes plusminus15 on the copper side. That's exactly where we guided to 12 months ago. So that's all been proceeding well, including Katanga's ramp up throughout the year of their Line 1, which was the 150,000 tonnes of copper, 11,000 tonnes of cobalt. And they released quite a comprehensive report or an update, it would have been in the last hour or so.
So feel free to grab that off the Katanga website or the Canadian Stock Exchange, which goes into a bit more detail. And they've reguided to or confirmed the successful commissioning of the Phase 2 now of the hollow leach projects with full capacity expected both on the copper and the cobalt circuits by the end of Q1 2019. If we look at copper generally, we've seen some modest reductions overall for copper throughout the 2019 to 21 years. The reflection there is a slightly slow ramp up at Mopane. It's about 20,000 per year before the ultimate commissioning of quite a comprehensive upgrade of shafts and concentrated development there.
There's a small operation, you might seen an announcement of that a few a month ago or so, Punitaki down in Chile, between 8,000, 10000 there and some changes across, Mtanda, which we've currently put across the outlook period. Just focusing on Muthunda, we have seen recent extensive drilling work down at that operation, has seen it's identified a faster than expected transition to sulfides. As you all know, we're currently processing the copper through the oxide ores, through the SX EW facilities that we have there. The long term expansion potential there was always potentially development around some sulfide resources. As I've said, there is a faster than expected acceleration.
There's a lot of work now ongoing down at site around the economics of the developing of that sulphide resource base. Of course, we take into account the full financial aspects, CapEx, operating costs, the regulatory regime, tax royalties, etcetera, that apply or expected to apply within DRC. When we do release the updated reserve resource report February with our Q4 production report, there's expected to be a material upgrade of Mutanda's resource base as well. We showed the 2017 figures there. So that's on the copper side generally.
Katanga, as we've said, there is quite an extensive press release that they've put out and guidance continues to be around the full target level of 300,000 tonnes of copper within our own numbers. As you can see on the earlier pages, we put 285,000 plusminus 15,000 to reflect a range around the 300,000 tonnes of copper. But certainly, at site, there's confidence and everything's working well and the copper increases to set record levels of production as they're going through commissioning of the Line 2 at the moment. In terms of cobalt, so for 2018 2018, generally copper and cobalt is where we said it would be. 2020 cobalt to 63,000 tonnes is also where we said it would be last year.
We've taken down 2019 on cobalt by 8,000 tonnes to 26 at Katanga, very much just reflecting some ramp up of the various cobalt plant commissioning and debottlenecking that's due to occur by the end of Q1 2019 and just reflecting associated shorter term recoveries and the likes as they build up to an average life of mine that they still maintain a Katanga of the 30,000 tons of cobalt per annum life of mine. You can see in some years, as we've shown on the previous page, the operation can do close to 40,000 tons, which is where they expect to be in 2021. We've put 38,000 plusminus2. So that's on the copper cobalt side. You can see on 11, there's just a snapshot on Katanga itself with a photograph as you can see on the right hand side with cobalt now being harvested out of the recently completed Elektra winning house down there.
That's the new Phase II, which looks as good as you'd see at any operation around in the world of how that's now been set up. The just repeating what they've now said, there's the progressive ramp up, as I've said, with a view to full capacity by the end of Q1 2019. The guidance reflects that $150,011 this year and then moving to the $285,000 plusminus $15,000 and the cobalt to work around their plans is plusminus 2,000 tons cobalt is to bring in a certain range around ongoing potential variability, particularly in the Rampa phase. Also announced by Katanga, there's a big asset plant being built there as well, being able to then process and produce their own asset for consumption within the business. That will be progressing during 2019.
First asset expected quarter 1 2020, which is expected to have a materially positive impact on their consumable cost as they go forward as well. On cobalt exports, which was announced last month, you would have seen temporary suspension following the appearance of uranium in the cobalt hydroxide. Long term solution could be in the form of an ion exchange plant currently being reviewed. And we're working with Jacobins to find solutions around potential interim solutions as well around cobalt as well. If we go into Page 12, you can see the coal profile over the next 3 or 4 years.
This year was really a function of some M and A, which brought HBO into the stable in May and it brought Hale Creek, which closed in August 2018. If we just look at some of the outer years, 2019, 2020, 2021, there's a net about 3,000,000 ton increase against previous guidance from last year. That's essentially Hell Creek because HVO, we'd already considered that into the numbers last year. Hell Creek's come in, we've got 80% of $10,000,000 So we've added 8,000,000 dollars less. There's an operation in South Africa called Vonderfontein, which we had to deconsolidate for accounting purposes during the early stages of this year.
There was no economic net economic impact, but it's it was around a fifty-fifty operation we used to consolidate. We no longer do. There was 3,000,000 tonnes that dropped there. And we sold the Tamar smaller coking coal operation down in Australia. That was about 2,000,000 tons.
So net net, that was the increase of the 3 odd 1000000 tonnes, which has hit the outer years of 2019 to 2021. We've already identified quite significant savings at Hell Creek for those of you that were on the coal site visit a month ago. In the Hunter Valley, we spoke about the progress that was being made both at Hell Creek and at HBO, and we've shown some of the savings relative to historic those operations, which are really quite material. Prodeco has been the one operation this year, which has been somewhat in a transition, where we would have lost around 5,000,000 tonnes of product through focusing and prioritization of the operation towards overburden removal, an investment that was required ultimately to deliver the long term life of mine model at about 17,000,000 to 18,000,000 tonnes. So they would trend to those levels from 2019 onwards.
This year, there was a volume impact of about 5,000,000 tonnes across the coal business, which has been previously discussed. Onto zinc as well on Page 13. Our slight upgrades to where we were last year's guidance, plus 35,000 in 2019 and across the guidance period primarily this year. We said 10.90 at the beginning of the year. That's still a number that we're maintaining.
So solid performance across the zinc business. McArthur River received its EIS approval, a big milestone for that particular business, quite an extensive process that allows production of 300,000 tonnes a year from 2019. If you roll that back, we're only around 210,000 in 2017. This year should be around 250,000 tons zinc contained out of McArthur River. So that's a positive this year, which would have offset somewhat the later than initially expected restart of Lady Loretta.
But that's now up and running, full capacity expected from 2019, which is the main contributor to the 105,000 net increase as we look at 10.90 to 11.95 of zinc next year and the step up from 2019 to 2020, which we discussed last year is the Zayrem project within our Kazink subsidiary, which has got an initial 14 year mine life, good returns, generating 160,000 tonnes contains zinc, quite significant lead as well out of that operation, 1st production expected from 2020. Just as an aside, of course, within the Volcan business down in Peru, which don't include these numbers, there's been an integration focus during the last 12 months, as we've said, around safety, mine efficiencies, organizational structure. But it is a business that has high exploration and production potential over the long term, and the focus is clearly on delivering on some of that potential as we move forward. If we move just quickly onto nickel and the various production shape of nickel and projections over the next 3 or 4 years. This year, we have seen about a 6,000 tonne reduction against projections at the start of the year.
It was about fifty-fifty of that, so 3,000 tonnes, call it, each, reflecting the timing of own use own unit feed processing at INO. So there was a slight favoring and prioritizing or economics towards third party material that was processed, which comes at the expense of producing our own nickel. That should all catch up as we move forward and a slightly slower ramp up at Kness. So that's where we're at 1 26 plusminus2 as opposed to 132. All the following years then is as we were pretty much from 12 months ago, 138 and then 142 as we move forward.
Conniambo is sort of grinding forward. It was around it was 17,500 last year in 2018. This year, we are looking to pick up at around about 10,000 tonnes onto that, which is reflected in these numbers. And then it picks up again to in the mid-30s from 2019 with ultimately a full capacity by 2021, 2022. And as you can see later on, the cost impact of now bringing Conyamba into the fold, but still being recognized at a business that from 2019 is still quite subscale relative to where we expected from 2021.
The big projects, the big investment, the big refresh is happening across the I and O business. We discussed last year the $1,200,000,000 CapEx over 7 years. That's all on track for 2021, 2022. That's across one of the depth and few phases over at Raglan. Discussions also some upside potential at Norman West within our existing stable plus some coordination and some work with Vale around nickel room depth, which we hope they can be a framework going forward there.
So that's on the nickel side. If you look at 2,000 on Page 15, our cost structures, these are the key ingredients, if you like, from which to build up our spot EBITDA calculations, which we'll see later on. So this ultimately makes the sense of all the numbers and you'd be familiar with these charts as well. So robust unit cost and margin outlooks, particularly the 2 largest industrial businesses, copper and coal. Nicole, I'll explain below, is now blended in for the achievements of what we call commercial production at Conyamba, which is primarily an accounting term, and I'll refer to that as well in due course.
But focusing on copper, we're looking at a $2,019.92 a pound all in cash build up across that business. And as we've said, that is a fully loaded allowing for the generation of spot or generated EBITDA within that business. So it accounts for all the cash costs less the credits, smelting earnings and realizations that would be part of that business as well. So $0.92 a tick down from this year's guided $1.03 at the half year results. In fact, all the numbers for 2018 were those numbers that were guided and discussed back in August.
If we look at copper, we're due to reduction. You've got extra cobalt volumes, which I mentioned, particularly at Katanga, more than offsetting some lower byproduct pricing for 2019. On a spot basis, we've got lower byproducts into the copper business coming out of zinc, cobalt, gold and silver. Spot FX assumptions are also supportive as well as we move through the $0.92 I would just highlight there's some conservatism that's been built in, which we've assumed some level of sales not matching production, which would otherwise hold back the EBITDA position for that business. So there is built into that number.
Obviously, production sales was equal to production across that business. We'd expect a further downward pressure on costs. We built in some working capital build there. On the zinc side, you've seen an increase reflected by various factors. Of course, we got higher volumes from Lady Loretta in particular, more than offset by some lower smelter contributions, which is being estimated, assumptions around TCRCs recoveries, but also higher energy costs.
In the Spanish business, we have in the Italy business, there has been some increases across energy prices, electricity within Europe. There's also the averaging effect, while still profitable and cash generating overall to the business and incrementally positive, we have added McArthur River tonnage to the business, which is higher than the average cost across the whole portfolio taking account byproducts. So there would be a mathematical increasing of bringing in the McArthur River expansion from 200,000 last year up towards the 300,000 as we move forward. Within nickel, the chart you can see bottom left, it's sort of resetting that business, if you like, from the 1st January 2019. We are expected to do traditional accounting for that operation.
Up until now, it's been in pre commercial phase where all the costs and all the CapEx has been capitalized less whatever revenues are able to be generated. We will be reporting the traditional EBITDA, less sustaining CapEx or other CapEx that goes through within that business. So that, of course, at these sort of levels that we spoke about on the previous slide, while still being subscale and being is relatively high cost at the moment and has averaged up what were fairly low cost assets, particularly our nickel business out of INO with their byproducts currently that they have as well. So there is an averaging effect during this particular period as Koniamba moves towards the $40,000 we'd expect to be negative EBITDA potentially coming out of that business. So you have had that averaging effect, but now it's all baked into the numbers.
And the nickel team, of course, is tasked with enhancing and managing those sort of cash flow generation into the future. But light at the end of the tunnel there. In terms of coal, we've got a strong margin position across our coal business for 2019 across the full production of the $145,000,000 So we've got $40 a tonne. In fact, a reduction in cost $52 to $48 a tonne. There's some portfolio effect across the different businesses that we've acquired against some of those which have been deconsolidated or sold.
But in particular, we have highlighted an extensive multiyear project to focus in a lot of detail on cost out margin out processes and various initiatives. We went through some of those with you all last month. We have delivered $450,000,000 of recurring benefits. So if you look, that's about $3 to $4 a tonne or so has come through that. On CapEx, as we move through the economic building blocks, we're looking at an uplift of about 0 point $3,000,000,000 just under $300,000,000 for the next 3 years to average $4,800,000,000 A lot of the increment, which I'll go through below, it's been fully provided in terms of some of the differences now against last year's guidance of around $4,500,000,000 There is some reinvestment, as we said, in some fast payback and high returning acquisitions, brownfield extension options.
The first one we would highlight, which we've assumed in these projections, but it's still yet to be fully sanctioned. And some of you were on Anglo Americans' copper visit down to South America last year and at the Calawasi project, they would have shown you one of the quick brownfield expansions, which has been permitted, but he's still going through some other approvals. That operation could 100 can go to 160,000 up to 170,000 tonnes per day of mill processing. That would bring our share about 18,000 tonnes of copper, 40,000, I think at the 100 percent level with a greater than 30 percent IRR. That's $200,000,000 We've baked that CapEx into these assumptions already, although that project is yet to be sanctioned.
We feel that it's highly likely that, that's going to go ahead. Across the oil business, just a couple projects to highlight. In Equatorial Guinea, there's Alen Gas and a Cameroon 1 field development in partnership with Perenco within Cameroon $150,000,000 combined. The Alen gas 1, we've it was previously a liquid and continues to be a liquid extraction. There is significant gas reserves there as well.
The plan going forward there, there is a nearby gas plant that's going to be in a few years' time, it's going to be in need of gas supply. And the project going forward is potentially have the pipeline built. It's relatively close to be able to supply that plant with its needs over a reasonably lengthy period of time. We expect both those projects also within Cameroon to have less than 3 year paybacks at current oil price as well. Of course, Hale Creek wasn't known last year, so that's kicked in $200,000,000 CapEx over the period.
And there is a little bit of CapEx also to be spent to turn that operation around as we look to make those annualized savings of around $140,000,000 Mount Owen Life Extension, dollars 220,000,000 across the period. This one's an interesting one in that I mean apart from the economics, we're expecting 1st production 2021 greater than 30% IRR there. This historically within our portfolio was the only one where it was a full contract mining operation going back to the BHB days when it was bought in 19 sort of 'eighty eight or so or 1998. And we're now looking as part of the expansion to transition away from the contract mining into an owner operator mine that would require us to then invest in and buy a new fleet. What we will see there is the commensurate OpEx reduction that will flow through that business.
So that of itself is going to have a positive OpEx. We have the CapEx side and you take away the contracted margin that goes into this business. So again, that's gone into the planning. That's not an approved project, but we put it in as a likely project as we move forward. We've got Integra extension.
It was a smallish operation over in Australia when it was acquired, fairly short life. We've discovered or we've found the ability to access and mine an additional 5 extra coking coal longwall blocks. That's $70,000,000 of development. That will be a greater than 40% IRR. In Spain, at the Asturiana de Zinc smelter.
We're looking at an updated jumbo cell house that will have 25% returns around some better efficiency and lower operating costs when that's up and running. And we've spoken to general inflation, which I didn't mention so much in the OpEx side, but it is certainly relevant here as well as that we've had an around 2% and 2.5% general CPI rebasing on account of inflation across what was some expected CapEx figures. Last year, you roll it 12 months on, there has been some tick up in general CPI across consumables, energy, steel and the likes as we move forward. You aggregate all those numbers, you will account for the full variance. If we just focus on marketing now, Page 17, we're looking at this year a full year 2,700,000,000 dollars plusminus $100,000,000 That's against a guidance to be in the top half of the range.
I would highlight 2 factors that have occurred in the last at least in the second half and largely in the last 2 or 3 months, none of which would come as too much of a surprise around where we might have been a couple of $100,000,000 higher, one of which is in alumina. And there was a recent other aluminum producer that highlighted this fact in an aluminum update that it did last month or so. Our exposure is much smaller and it would reduce significantly from 2019. So it should be a non event going forward. But there were a few legacy contracts, sales contracts that were a percentage of LME linked.
This is on the alumina side, of course, having to be covered from index based alumina sourcing. There is basis risk there historically. You've seen a huge deviation, a rally in alumina without the corresponding movement in the metal proxy hedging that occurred there. So we've had to absorb some of that basis risk, and it's been an industry feature. Our exposure to some of these legacy sales contracts, because you certainly wouldn't sign up for these the way that the aluminum market has developed in the last 3 years, 3 to 4 years, as I said, reduces significantly into 2019.
If we just look at cobalt, we've seen some customer contractual nonperformance in a weaker H2 pricing market for cobalt, which has fallen from, obviously, quite high levels in the first half. It's come off at least 20% to 30% during that period. There's also the marketing impact, which is important to understand how it affects business, how it affects Glencore. There's the marketing impact of the time lag, if you like, from some of our internal group purchase commitments, and that is DLC. So when Glencore buys the cobalt from Katanga and Muthanda, it has purchase commitments to buy that those cobalt at the market price at the time based on some benchmarks.
As and when those operations produce, it gets transferred to Glencore. So Glencore is not otherwise able to immediately back to back it or hedge it, which is almost impossible in the cobalt market in terms of derivative markets there, We're having to continue to look at the physical sales of those particular commodities and the pricing and how we'd look to run that business going forward. But you will have a potential lag effect if you're not otherwise covered through a matched or a back to back sale within the Glencore book, you could have some exposure going forward, some mark to market exposure. From a group perspective, there is no exposure because it was some of our other businesses, we may not have sold that immediately from the industrial operation up until Glencore. It might have sat there until there was the buyers for those.
But just under these various offtake agreements, it immediately comes into our business. So there's, if you like, an opportunity gain that's being realized with the industrial business, even though there may not have been a sale done yet. And some of the exposure on that will then be picked up within the Glencore business. So we try and manage that as best we can, but there is some sort of inherent lag and timing that could exist, and we would try to keep the position within Glencore to such a level that was, of course, manageable, but it is unavoidable that we may have some cobalt exposure within Glencore by virtue of those purchase commitments. And we would look to highlight that going forward.
I'm just flagging it now because it could be a feature as we go through particularly the next couple of years on cobalt where there may be some potential oversupply. In the long run, we, of course, expect those markets to be very resilient, and there'll be no issue in place in Cobalt 20 fourseven. So those two factors are part of our marketing business. The other factor that I would mention on the agricultural side, which is something that you need to spend an hour just reprogramming some of your models down there is that we would within agricultural products, we closed this sale of 50% of that to the Canadians a couple of years ago, now end of 2016. With their increasing independence, all the guarantees are now removed, governance and standalone capital structure has been fully set aside.
We'll no longer be proportionally consolidating GAG, which will go at the 50% and we'll just leave it in favor of retaining its associate accounting. So we'll just be picking up our share of net income. There's no, obviously, change at the net income level, but there is a change at the EBIT level through the difference between a share of net income and what otherwise would have been the proportionate booking of their EBIT level at the 50%, and then we would have worked through line by line their depreciation, interest and tax, if you like. We provided an extensive appendix, Slide 26, where you can see line by line what the new reporting presentation for Blanco Agricultural is going to be. We've shown both at a 2017 year end and the H1 2018 at the EBIT level this year is projected to be around $100,000,000 And if we look at if you just look at Page 26 just for a minute or so, just from the capital structure, the net debt level, not much of a change, but you will see, let's say, if we take H1, 2018 18 on Page 26, right at the bottom, you'll see we will have a net debt reduction by going to associate a non proportionate net debt reduction of $255,000,000 That's because agricultural, we picked up 50% of their net funding, which is $1,860,000,000 and 50% of their RMI was $1,600,000,000 But at the moment, clearly from a Glencore PLC, there's further and further ring fencing around whatever happens within the Glencore agricultural and they are fully independent now and standalone from a capital structure perspective.
If we then just go on to Page 18, again, marketing guidance. We are maintaining the GBP 2,200,000,000 to GBP 3,200,000,000 which is a combination of some factoring in additional business and volume opportunities from recent M and A. We spoke about some oil and coal in particular with all those expected to offset the accounting impact from the on EBIT from the discontinuation of the proportionate consolidation of the Glencoe Agricultural Products. So like for like, we would have potentially taken agriculture because of agricultural products, we may have taken down a bit. We're saying we're not going to do that because of some of the capital and the growth opportunities that we see within that business.
At this point in time, in the absence of further clarity around how 2019 is looking more from a macro perspective, we would just look to a guide to the around the midpoint of the $2,200,000,000 to $3,200,000,000 which is $2,700,000,000 of course during 2019, we can provide more clarity and color of how that's performing. Slide 19 just quickly is one that would be very familiar. That's the EBITDA buildup of Glencore at the spot prices given the volume and cost assumptions that we just went through in the last few slides for 2019. Illustrative spot at prices as of last Friday was $17,100,000,000 or $7,500,000,000 of free cash flow. If we have to cut it sort of as of now, but of course, mark to market is a futus exercise in these long term businesses.
But clearly, prices even in the last weekend have responded metals and coal. So we'd be a few $100,000,000 higher just today if we were to cut those numbers. I think an interesting slide, Slide 20, if you just look at that, so we're trying to demonstrate or graphically present that through the cycle free cash flow for Glencore what it might look like $5,000,000,000 to $10,000,000,000 is what we've put down as a potential through the cycle free cash flow, taking into account a whole range of cyclical and macro events as we've seen in the last 3 to 4 years. So our spot is 7.5. If we look at Page 28, highlight for you what our assumptions that we've gone into, what a trough cash flow generation was, and that was the average of Q1 2016, which was quite a somber period, clearly within the commodity world.
So on Page 28, you can see coal price was down $51,000,000 average copper and zinc, you were $4,600,000 $1600,000 or so. But we were still materially free cash flow generative during that particular period of time with $3,600,000,000 of CapEx. So we put that aside and said that's your trough. The downside, we've said what was the average for 2016 when you had some sort of recovery from those unsustainable levels? We're up to about $5,000,000,000 What could an upside look like, which we put as $10,000,000,000 The upside is where we've been, frankly, in the last 12 months.
Again, if you look at prices, everything we've pretty much touched those in the last 12 months. That's 7,000 copper, 3,200, zinc, nickel, 15,000, coal 120, all those numbers would look very familiar if you look back through your models. And we've just put a super cycle case just for having another case out there, which shows the potential of the business as well, which again, those prices have all been seen before, maybe not in recent times, but 10,000 copper, 37,000, 25,000, etcetera. So we put a super cycle case just to put the range, but we put the green spot sort of $5,000,000,000 to $10,000,000,000 I think it's a nice slide. On Page 27, we provided you with the various sensitivities to a 'nineteen EBITDA around changes on our various prices as well.
So just to finish up before I hand back to Ivan. So our capital allocation framework is pretty well known today around maintain strong BBB, VAA. We are there. Net debt maximum of 10 to 16 through the cycle, maximum 2 times net debt EBITDA, we're comfortably in those levels. So we are in a position now having bouncing around the bottom of that level in a position to materially increase shareholder distributions, which is what we have done through 2018, dollars 5,200,000,000 basis the base distribution, Verus announced buyback programs, which we largely through.
Ivan spoke about confidence in the owned business, pointing and current share price levels pointing towards the prioritization of shareholder returns as well, which of where value can be most constructively deployed at the moment. Just one just on the balance of the 2.19 equity cash flows at the bottom consistently target levels below $20,000,000,000 We were about on a pro form a with the Ags business, we would have been around $21,000,000,000 or so. So as a minimum, we'd be looking to reduce it down to down $1,000,000,000 or so plans are in place for that and look to target levels around that. So that's something that is a new focus that's been put down this particular presentation. On also from a capital allocation or just financial thing, it's worth noting just on Slide 30, we've given for you the new share count, which is updated daily at least for the buybacks.
But this would be the relevant number of shares for purposes of EPS, DPS and value assumptions, which obviously had has been reducing quite significantly as we go through. And I think another slide before I hand over to Ivan that's just worth having also in the back of the fall or front of the fall, frankly, on Page 29 is as we showed many of the some of the listed entity stakes and valuations and selected other assets that we do currently have. Very little, if any, contribution to EBITDA. Some are mark to market, some are other structures is going through their own portfolios, but you would find very little of it coming through any of the other cash generating that we're obviously talking about. We would look to try and our in our share valuation.
There might be 1 or 2 areas there that could be non core, so you could see some monetization of that also during the course of 2019, including a couple selected other non listed. So with that in mind, I'll hand back to Ivan just to wrap it up.
Thanks, Steve. Yes, if you look to Page 23, our management structure, as I've always said, we have an experienced management team with a proven track record of value creation. And as you're aware, we've created the value of this company over the past few years. It's not decades of years, but over a relatively short period of time. But the management have grown from within the company and most of the senior executives have been in the company between 15 25 years.
What we've decided now to change the structure a little in the company, and as you'll see on the slide, we've appointed Peter Freyberg as Head of the Industrial Mining Assets. This is a newly created position with oversight and responsibility for all Glencore's industrial mining assets. Peter has a significant experience in Glencore in successfully managing our core portfolio over the last few years. Before that he was in Colombia and South Africa. And Glencore's business has continued to transition over the last number of years to the extent that as you've seen from the presentation by Steve, the majority of our earnings now come from our industrial assets and not the pure trading part of the business.
So we believe that the business requires a Head of Industrial Mining Assets to work alongside me and the rest of the senior management team who can focus his attention on coordinating better aspects of the mining assets and delivering on our goals of productivity, safety and sustainability. So Peter will be moving into this role early next year and working alongside me to managing all the industrial mining assets. Naturally, we need replacement for Peter Freyberg and Gary Nagel will replace him as Head of the Coal Assets and Japi Fullard will be taking over Gary's job as the Head of the ferroalloysters. Gary has significant experience in the coal industry, having been Head of Prodeko for a number of years, and he has managed our ferroalloy industrial assets successfully over the last 5 years after moving from Colombia back to South Africa. Jarpy Fullard has been with our coal and ferroalloy division since 1988.
He's been head of the mining division in the business since 2008 and has extensive knowledge of these operations. We also have 2 of our long standing heads of departments retiring at the end of the year, both Telus Mesikidis and Stuart Cutler. Both have been in this company for a period of 20 to 25 years, and both of them have decided to retire at the end of this year. TELUS will be succeeded by Nico Paraskivis and Stuart by Jason Kluck and Ruan van Scholke. They've both been both TELUS and Stuart have been as I said earlier, they've been with the company since 1990 3 and 1995 respectively and have been instrumental in building the development and growth of the business into leading ferrochrome and copper producers in the short period of time, as I mentioned earlier.
Nico, Jason and Ruan have also been in the company for many years. I think both all three of them have been in the company for 10 to 15 years and have a deep knowledge of their markets and have worked within these particular divisions over this period of time and I believe will be a great succession for these departments. Kellis and Stuart will assist with the transition of their responsibility of these responsibilities to their successors, and therefore, I think it should be a very smooth transition, noting that all these parties have worked in these divisions in the past. So I'm looking forward to working with them. And I think having the new generation and starting to move into the new generation of the company, it should bode well for the future, the way we structured it and continue creating value for the company.
So as I say, turning to the next slide in a summary, Steve has mentioned most of the points. I've mentioned them earlier. And as I say, we've got a great diversified portfolio enabling a transition to low carbon economy, while providing access to affordable energy through our coal division. And as we say, we will continue to see more coal burnt in Asia, and this coal will be required for the future. The commodity fundamentals are still extremely positive.
As I said earlier, the sector reinvestment remains extremely limited. We don't see new big mines being built around the world, very few limited amount of mines being planned for the future, and it's still getting more and more difficult for people to find reserves in countries where it's easier to obtain this product. Demand is still solid, as we said. Even with the uncertainty around the world, the fundamental demand is solid. And as displayed in those slides I mentioned earlier, where you had copper growing 3% in 2018, you had nickel demand growing 7%, and we believe this demand will continue going into the future.
Inventories are extremely low and we brought we showed those particular slides showing that with limited demand increase in most of these commodities, there will be no alternative but to draw down inventories. And as inventories are extremely low as displayed in that earlier slide, it is definitely going to bode well with the limited inventories and you have a continued reduction of inventories around the world, should start pushing prices higher. So if you look at those various slides and especially the ones which are mentioned earlier in the appendix, which clearly show the demand supply fundamentals and the growth over the years and percentage growth on Slide 31, 32 and 33, this really gives a clear example of what can potentially take place going forward, which should prove strong for commodity prices moving into next year. As Steve clearly said, it's an extremely cash generative business model and even if you stress test it to the levels which he gave those various diagrams showing at extremely low levels, we still generate a vast amount of cash and at spot levels, as I said earlier, we should be generating at least $7,500,000,000 of free cash with an EBITDA of about $17,100,000,000 As we said and Steve's last slide gave an idea, we have confidence in our own business prospects versus current share price levels.
So after with this amount of free cash flow coming in round about $7,500,000,000 post base distribution, we'll continue prioritizing on buybacks and deleveraging the company. So that gives you an idea how we look going forward. And with current commodity prices, the company is in extremely strong position. And I think with that, we're open to calls. Thank you.
Thank
Thank you. We will now take our first question from Liam Fitzpatrick from Deutsche Bank.
Afternoon. Two questions for you. Firstly, on cash returns. I mean, there is some disappointment in the market that you haven't provided some sort of figure or guidance for 2019. So is there a specific reason behind that?
And are you able to give us a cash return range as a percentage of free cash flows for 2019? And then secondly, just on the deconsolidation of ag, what drove this? Is this the accountants calling the shots? Or is this more a management decision? And is this still a business that you're committed to longer term?
Thank you.
Thanks, Liam. The first one in terms of cash returns, we've said job done on the balance sheet repositioning. We are towards the bottom end of the range as far as I'm concerned. And obviously, I'll be at one vote and others might have some other votes, but I'm I would say we pay 100% of free cash flow. So that's the range.
I mean, I would be saying for as long as we've got our debt down and the world looks sort of healthy enough and one doesn't have to otherwise be thinking about some scenarios which we don't foresee, then I think we should look towards 100%. So there's the base distribution. And it would be a continuation of our buybacks, which we've announced up until now. So there was the $1,000,000,000 and that was done, and we the other $1,000,000,000 that will run until February or so next year. So sort of $7,500,000,000 sort of free cash flow if the base is $3 ish or so, so $1,000,000,000 a quarter seems to work mathematically.
It's pretty precise, Liam.
That's how one can think about. 100%. As far as okay. As far as deconsolidation, there was nothing to do with accountants. There was purely our own internal sort of reporting and management sort of financial internal?
Are you supposed to do the reporting segment or all that stuff in terms of how one looks at those business and the degree of integration or link between the businesses. And as I've said, you've had a business now that's been that over 2 years, maybe over the 1st of a year or 2, you've had some training wheels there for a while and they've all now been taken off and the business is functioning fully independent. People's transactions with them are much less than they were on the 2nd December, certainly 20 16. So they are a fully fledged now sort of independent company with its own structure and would be running its own strategy and investments around its board, which is represented by ourselves and the Canadian partners there. And if Ivan wants to around our commitment to the business, it certainly remains as strong as ever.
We'd like to see the see that business grow and develop as we would have historically done under an Xstrata World or as we would do under Century. These are some of the material associates if you think that we do own as a significant reference shareholder.
Yes, Liam, I think Steve is correct there. We still see it as an important part of our business. We have strong partners there. We would like to grow our business. And exactly as Steve said, if we do want to grow in the Ag business, that will be the vehicle.
We have a strong partner. If we wish to raise equity, we can do it by that vehicle, but we wait and see where opportunities exist if and when we want to grow that business.
Okay, very clear. Thank you.
Thank you. We will take our next question from Paul Gait from Bernstein.
Hi, Steve, Ivan. Thanks very much. Just a couple of quick questions. The first of which around TELUS. Given obviously a huge amount of experience that he has in the markets, will he be having or will he be retaining any sort of advisory role sort of from here on forward?
And what is the sort of path to sort of transitioning sort of the handover of his responsibilities here? So will he sort of have any kind of role going forward? Then the second is also just wondering about the sort of cobalt situation. Yesterday, there was news coming out of the Congo about a potential sort of audit of the cobalt and uranium in the cobalt. It wasn't entirely clear to me what that actually meant.
And I'm wondering if you can provide some information on exactly what an audit of that supply chain might look like. And then just finally, a very sort of minor point, but the $200,000,000 that you mentioned for the Coyoassie 170,000 ton per day expansion, is that that's the Glencore attributable share, I take it? Thanks very much.
Yes, TELUS, as I said, will help with the transition until the end of the year. Nico has a lot of experience and Nico has been in the business for many years working under TELUS and I'm very comfortable Nico will do a good job having been tutored by TELUS over the years. So I'm sure we should have no hiccup in that area. Agreed, TELUS has a lot of experience, but Nico has and has worked with him and the transition has been taking place over the years. None of us expect to stay here forever.
And TELUS has been structuring his department for the day that he leaves. Like I've always said, the same goes for me and any other heads of department. We're all going to go one day, but we've got to make sure we set up a good transition process in place that the guy who takes over is fully updated and can take over pretty swiftly. So I think that's how all the departments are being run-in this company and will continue to be run-in that manner that transition and new people taking over will come from within, they're not outsiders, they're people who understand the business and that will continue on that basis. Your second question regarding the cobalt and the order that the government intends doing, Yes, they're going to look at how this material was exported out of the country, but it has been checked.
I understand it was audited by the government agency that checks for cobalt checks for uranium content and it seems that it wasn't picked up during that process and it was picked up while the material was stored in South Africa. So we're trying to review that, but I'm sure that so the government audit will just check, I would imagine, to see how the material got out and was it government check by the agency for uranium exports. Your third question
Paul? Yes, Paul, I think it was around whether the CapEx for Calawasi was just our share, which yes, the $200,000,000 is just our share.
Brilliant. Thank you.
Okay.
Thank you. We will take our next question from Jason from Bank of America Merrill Lynch.
Yes. Good afternoon, gents. Thanks for the call. Just, I guess, simple questions. There's 2 big overhangs for your stock this year.
One is the uncertainty surrounding the DRC, including the mining code flux and your ability to make payments to your former business partner. And then I guess the other one is the DOJ investigation. I'm just wondering if you can give us any updates on either of these. I think I know the answer on the second.
Yes. The second, you know the answer, so I don't need to comment. In respect of the DRC, are we getting full valuation of the DRC? I think, yes, there's a bit of uncertainty on the mining code. We are now paying, as you are aware, 3.5% royalty on both cobalt and copper.
We are still trying to have constructive discussions with the government regarding the new mining code. So not much we can really comment there except we are now paying the new royalty which the government has put in place.
So Ivan, if I could just follow-up if that's okay. I mean, I'm looking at your €7,500,000,000 in free cash flow. So that's an implied 14% free cash flow yield and on spot we're probably actually a little higher than that. So the market is looking at your shares at your business and saying Glencore deserves to trade at a low multiple or a high implied free cash flow yield. And I'm just wondering what are your thoughts?
Do you think the management team can do to drive the rating higher? Today, it seems like you're presenting business as usual. And I'm wondering, would you do anything more drastic to release value in the business? People talk about a breakup at Anglo. Would you consider a full breakup
of Anglo? Yes. No, I think you've got a good point. Why are we trading at a 14 I think at spot of 14.5% free cash flow yield as opposed to some of our mining colleagues. I don't want to state which ones are trading at roundabout 5% or 6% free cash flow yield.
Why are we there? I mean, you most probably know that better than us when you do look at your reports and that's just why are we there? I believe two reasons, maybe wrong or right. Like you, we talk to investors. I think we're not getting full value on the coal business.
As you can see, the coal business is giving us $1,000,000,000 EBITDA roundabout there. What multiple should we trade at? Is it a 6 multiple? Are we getting a $36,000,000,000 value on our coal business? So I think people don't believe yourselves included if I read some of your reports that the coal price will stay like this for the next few years.
People believe it's coming down to I think I've seen future coal forecast around about $80, dollars 85 going forward. So if you take it down there and you're not using your $103,000,000 I think we've used in our model for Newcastle, dollars 92, dollars 93 for South Africa, people are not using that in their forward projections. So we just need time, I think, nothing we got to do. I don't think any unbundling or anything like that. We just got to prove and as people move along and hopefully when we get through halfway during 2019 and people see coal prices continue to hold those levels, maybe they will give us a $6,000,000,000 EBITDA and give us a multiple on that and value our coal business at $35,000,000,000 So I think that's the one thing.
Coal is people don't see these numbers going forward. 2nd thing, as you say, DRC, what is our DRC business going to give us? I think we're at about EBITDA $2,000,000,000 I think we're right about there, Steve. Are they valuing our business at $6,000,000,000 $12,000,000,000 EBITDA valuation? Maybe not.
As you say, with all the noise around DRC, they're putting a limited value.
So I
think these if anything, so I think these are things there's nothing we can do about it. We just got to sit tight, generate this amount of free cash flow, generate $7,500,000,000 of free cash flow, use it to pay the $3,000,000,000 dividend that Steve talks about and the rest $3,000,000,000 $3,500,000,000 dividend and $4,000,000,000 of buybacks. And I think the share price will slowly take care of itself with this free cash flow. So I think that's all we can do, heads down, generate this cash, run the business efficiently, buy back shares and the market will take care of itself.
Okay. All right. Thanks very much.
Thank you. We'll take our next question from Sam Catalano.
Yes, good afternoon. Two questions. Firstly, just on Pete Frauberg's promotion or change of position. I guess just pushing a little more on what was the catalyst for that newly created position. Obviously, the coal business had a pretty good operational track record and there have been some problems in some of the other industrial parts of the business.
Is this an attempt to, I guess, replicate some of your successes in coal across the business? And secondly, for Steve, probably, is just looking at your cost guidance for 2018 for this year, Obviously, at the half year, you spent a bit of time explaining to us how the spot byproduct prices changed your net cash cost guidance, Given that your numbers around change for 2018, I'm assuming you haven't run through spot byproduct prices into your cost guidance for 2018 at this point. Thank you.
Yes. Thanks, Sam. I think regarding Peter Freyberg's promotion, and yes, it is a promotion. Yes, I think Peter has proved himself. I've worked with Peter for many, many years.
He first joined us when he was running Deco Coal in South Africa. We were employed him at the time to join us there. He came from Rio Tinto. And Pete has done a great job. As you saw in the recent visit to the mines in Australia, you saw even mines we bought from some of our competitors, how we can turn them around.
So as Pete has proved himself over the years, we've also grown as a company. As I said earlier in the presentation, we very much have a lot of mines and a large amount of our profits are generated from the mining side of our business. And there's come a time in his career where he can add value in managing all the mining assets. He can bring his experience. It's not because we've had problems.
Of course, you always have problems with certain assets and other assets. Peter has also had some problems with some of his coal assets. So that's not the reason we do it. All assets have their problems. It's just we now have a person with vast experience who can do that job.
It's time for him to take over. We're also fortunate to have someone such as Gary Nagel, who has now had enough experience at asset levels where he can take over one of the bigger asset groups in the department. So the time is just right for that. It makes my job easier that I don't have to have all these asset adds reporting directly into me. Peter can work alongside me.
He can also work very closely with sustainability, the health safety side of the business. We can coordinate that part. So it just helps bit in the coordination of the business and it was just time.
Sam, just to your point number 2, I mean we have obviously run spot. We have looked at it and we've concluded that there's no reason to do any update on the basis they're still sort of materially valid for where Dow reckon
Okay, right. So not enough material change to change the guidance numbers effectively? Correct.
Correct.
Okay. Thanks, Jens.
Thanks,
Ed.
Thank you. We'll take our next question from Ian Brozil.
Hi, guys. Thank you. Just two questions from me. Just on MUTAMDA, would it be possible just to give us a sense, I mean, I know that production profile is under review, but just how much oxide reserves you have left in terms of mine life to give us a sense of what the production profile would look like over the next sort of 3 to 5 years? And then just secondly on the sort of cash returns and your obviously, you were saying earlier, Steve, around the intention to return 100% of free cash flow.
Could you maybe just sort of put that in context of your net debt target and why you still have the topping of the guidance range 16% because it sort of suggests that you want to keep options open to actually employ cash elsewhere in the business or for maybe inorganic opportunities? And then just following up on that, just the ORMI reduction and then also you mentioned some of the monetizing some of these minority stakes. Can you just confirm that any sort of upside from a cash flow perspective would be used for additional cash returns? Thanks.
Okay. Yes. And a few different topics there. Mutanda, if you'll just bear with us and wait till February, we'll give the update when we do the resource reserve updates that will obviously then be at a final stage, which to look at oxides and sulfides and you'll see everything you'll need there because that's still in a work in progress preliminary, but work's obviously going on and that's the timing that you'll get some progress on that. In terms of net debt, I think having a cap is useful still, just for people wanting to anyone that may want to run some what if scenarios, just what could a theoretical capital structure look like.
I think it's more for the it's as much for the credit side of the balance sheet as it is for the equity. I would imagine it's more for that side as they look to sort of understand a range of scenarios. So that's also what we've communicated vis a vis the credit side agencies, banks and the likes as they look to look about sort of probability of outcomes around any reinvestment or the like. So clearly, there's no from a sort of materiality perspective, you will not see some large cash funded M and A that obviously fits into that framework. So I think it's still useful.
I wouldn't be looking to go 10% to 16 from which to relever to make distributions. It would only have that degree of range there is only around the sort of M and A potential. But it's as obviously as Ivan said in the capital allocation story generally now is such that there has been some sort of deprioritization deemphasizing in as much as the opportunity set and the value to be extracted from buying back our own stock at the moment. So that's just to provide those sort of outcomes looking at all the different stakeholders around Glencore's capital structure, which is I think is clearly important. In the RMI reduction, what was the whether that will go to cash returns?
Well, RMI is in the minority. Just whether if there is additional upside on the cash flow side from these, whether that will go to cash returns?
Well, RMI less so because it's obviously already doesn't change the net debt, at least in terms of the way we reported and where we see the range of the 10. Now to the extent that some people may have some other sort of assume other debt levels and or take certain net funding or some things into their own economics, then the release of the RMI release of any RMI should clearly go towards equity value to the extent of the loan.
Yes. In the net funding, do you sorry to interrupt. So do you plan to bring the net funding down by an equal amount then?
Yes. That's what would happen. Yes, it has to. So if you were on a note, let's say, just 32, 22, 10, you'd now be 30, 20, 10. That would be the consequences mathematically how that sort of worked its way out.
So for those that were taking an overall gross funding and looking at applications thereon compared to a net funding and there may be a different philosophies out there on that and that should be an equity rerating across that side without any, by the way, material impact on the marketing. There's been no change in guidance or anything around the fact that, that's a level at which we're trying to consistently manage business around that. And if you do look at the at that page that had some of those sort of the $3,000,000,000 or so of some of the other investments. Yes, if there's anything that would be released there, it could be clearly added on and amalgamated and considered towards capital returns given of itself. It's just another pathway to what's like free cash flow at the moment in terms of debt reduction.
So I would definitely consider that, yes.
Sorry, can I just push you on the Matanda? I mean, could you maybe just say what the old plan was? When do you need to start to build the sulfide sort of plant or expansion to sustain production? Just to give us some reference for your previous plans, not the new ones under review.
Yes. That would really be the most sort of beneficial, I think, at this stage just to wait until the February update and everything can be I mean, it wasn't the oxides clearly historically was more limited clearly in terms of its life and you had a bigger resource base. Now if you think conceptually around the split, there's obviously some reserve or resources move between A and B. So that would have had the margin cut down some life on the oxide and some work is underway around the resource base of the sulfide. And we'll have a lot more information to be able to come, I think, the 1st week in February an update on all
that. We'll take our next question from Menno Sardis from Morgan Stanley.
Yes, good afternoon. Just on the debt market conditions in general, clearly the balance sheet is a lot better, but things have got a little bit tighter in terms of corporate credit spreads, etcetera. Steve, can you just help us understand what we need to think about with respect to Glencore in this area for 2019? And secondly, on structure and management changes, I appreciate this is often an ongoing thematic, but is this a structure in place now for next, say, 2 to 3 years, Ivan, or do you foresee further changes?
Okay, I think I'll answer the first, Steve, you answer the second. Yes, the management changes for the next 2 to 3 years. Look, I've always said, you will have senior executives. We've all been the management's been here a long time since the IPO, even though people thought since 2011, a lot of the senior executives would leave. They haven't and they will be like we've seen with Stuart, like TELUS, it comes a time where the younger generation needs to take over.
Now whether it will happen in the next 2 to 3 years, I don't know in every division where it could happen or couldn't happen. Some guys may want to stay longer, others don't or the younger generation. As I've always said, it's their time and they wish to take over. So it will happen over time. I've always said in my position, it will be 3 to 5 years.
I don't know, but we're not here forever. So 65, I've always said that's time when hopefully I will find a successor by then. And I think the other departments, they already each department, the other guys are working on successes. We train successes. There's a great bench of people behind each head of the department as we proved with Stuart, as we proved with TELUS, as we proved before with aluminum division is a very good bench of people ready to take over.
So over the next 2 to 3 years, you may not get another change, but you may also get 1 or 2 changes. I don't know. We'll see as time evolves and when people wish to retire. But the great thing in this company, we grow from within. And as you've seen with these two departments, the next generation are people from within.
Then I'll just on sort of debt market conditions at the moment. I think you're right to have flagged that obviously debt market conditions have been sort of not as attractive generally in the last sort of month or 2. Certainly for people that have needed to access those markets, we're not in that position. We've always managed this balance sheet such that we will we effectively would never need to fund this business for at least a 2 year period. And we would say we want to fund when we need to fund I mean, when we want to fund as opposed to when we need to fund.
So clearly, in the current environment, we're saying thank you very much. Others can have a go there if they so wish. One of the things we did do a couple of years ago was to proactively and preemptively make sure that we didn't have any more than about 3,000,000,000 dollars of capital markets or notes maturing in any 1 year. We would obviously come into any period with $10,000,000,000 plus of liquidity and you've seen what some of those numbers are backed by some of the more medium term RCFs. It's also a business that generates the positive free cash flow.
Obviously, in your base case, you must assume that's all going to go out towards shareholder returns and that's all perfectly okay. We've reset the business around BBB plus. Our leverage are very strong. And at some point in the next 2 years, I would imagine we'll have blue sky again in the debt capital markets. If we're not, then we have alternate plans as well.
I mean, we have an entirely unencumbered balance sheet as well. Historically, for us, it's been the right balance has been certain from the unsecured, it's been Capital Markets and bank debt across those things. But it's not inconceivable at some point if markets don't allow value to be extracted for a BBB plus We have an entirely unencumbered receivables inventory base as well. I mean, the other most companies in this commodity sector would fund a certain amount of their facilities asset backed or otherwise, which we don't. So we always have that anywhere, I would say, dollars 5,000,000,000, dollars 8,000,000,000 probably in sort of reserve available funding.
But that you would need even a 2 year length of time that was prolonged in terms of having markets that were otherwise unattractive, not open. These markets will always be open. There was a price ultimately, particularly in Dolan. So we're in a pretty comfortable position there.
Okay. Quick follow-up on MUTanda, sorry. The copper and CapEx guidance that the company provided today, does it include the view for MUTanda for next 3 years?
It includes the view for the next 3 years, correct, but not capital that may go towards a sulfide expansion or sulfide extension. And there's various options that you can extract that metal also from sulfide ore and is the work that's obviously happening on-site as well. So that we would obviously have to come at the time and say, here's what it is and here's what the mine life could potentially look like at that point.
Yes. Okay. And then on the sensitivity of the coal volumes, so it's just $480,000,000 of EBITDA and $148,000,000 of volumes. What adjustment does the company make ex the royalties? I appreciate the royalties, but what other adjustments does Glencore make to that sensitivity figure?
Is this the This is the sensitivity that drives.
Yes, yes. The $10 new customer.
It would just be royalty, whether we make any other adjustments.
It's just royalty?
Yes. That's the only revenue linked consideration down there.
We'll take our next question from Milos Alsop from UBS.
Just first of all, on the DRC. Could you give us an update just what the atmosphere is like on the ground going into the elections? Do you think there's a risk that the elections could still be delayed? And maybe first on that. And then secondly, on in terms of management change, is there any lockup around TELUS' stake?
And Ivan, in terms of looking for your successor, what skill set are you looking for? I mean, are you looking someone with a trading background, someone who's been in different divisions? Or just give us a sense as to who should be putting their CVs forward?
Okay. Thanks, Myles. Yes, on the ground, the team we've just had a team on the ground at Katanga just this last week. Things are fine on the ground. No, nothing to be concerned about.
Will the elections take place on the 23rd December? Like you, we hear they will take place. There's nothing to tell us otherwise. So we look forward to with whoever will be voted in as the new President of the country and the new government. So we see nothing on the ground there that concerns us today.
Regarding what the new guy should look like, Hope he looks like me. Hope he has experience, I hope he has experience, knowledge of trading, he has a knowledge of chassis, hope he comes with an all round knowledge of the business And there are many candidates. You just got to look across the board, see people in their current positions. As I've always said, it's going to be a younger generation. I wouldn't like to see the guy taking over.
Some people may ask, is it Peter Freyberg? No, I think he's a bit long in the tooth to take over. He's there managing the industrial assets. So I hopefully when I go, it will be a 45 year old who can take over and run the company for a lengthy period of time. So it will come from that younger generation with an all right knowledge of the business.
And just following up on the DRC as well, do you still intend to push back on the cobalt royalty if it goes up 10% and the super profit tax? What's the so since you're not being charged those at the moment, but it will become an issue post the election, I assume?
Yes. These are issues we don't accept them. Even the current royalty, we're paying under duress. We do have the 2,002 stabilization agreement. As you are aware that if they do, they're very right to change anything in the mining code.
However, from the date they change it, we should have a period of stability from that date on. So yes, we are still paying under protest. If they do are more onerous on us, naturally, we will look at any arbitration routes or something along that process if it becomes unsustainable for us. But we hope we will be in a position to negotiate any further changes with the government, so it will not be onerous on our business.
Great. Thank you.
Regarding lockups, I think you asked about what was your question about the lockups?
On the TELUS and GARI, if there's any kind of lockup as though are they done any commitment to some? One thing on that as well is how much of the equity is held by employees now and post TELUS and Gary Leerink?
Post TELUS and Gary, I would imagine, I'd say 20 30%. I think it's 30% pre them going. So I think it's around about 30%.
And Gary Stange, sorry.
Gary staying. Gary and I hope he's not Gary is not selling his shares And hopefully, I don't know what the other parties will do with their shares, but hopefully, they still love this company.
Yes, we'll put them on
the roadshow schedule. Yes, we've got to go visit them on
the roadshow. I've always said that, when I leave this company, I don't think I'll sell my shares. Hopefully, I'll put a good guy to take over. Does a great
job. Thank you.
Thanks, Miles.
Thank you. We'll take our next question from Silvan Brunette from Exane BNP Paribas.
Good afternoon. First question for me on with Cognian Board changing optically the numbers for what could you give us as the target for the cost at the end of the tunnel, so say 2021? And second question related to nickel on Sudbury. You alluded to some upside potential with Vale in Sudbury. Is there a bigger collaboration we could think of there?
3rd question on marketing and alumina. Steve, you mentioned the impact on 2019 of these contracts would be very limited. If you could give us some sense of the numbers behind that for the volumes basically between 2018 and 2019? And lastly, on management change, could we with Peter looking at other divisions as well, could we imagine more benchmarking across the group? And if you guys have already some ideas or some numbers behind that?
Yes. Can you hear me numbers, Steve?
What? I think you was it looking at a sort of a cost at time of ramp up? I think $450,000,000 to $5,000,000
Yes. Okay. Yes. So $450,000,000 to $5,000,000 there. 4.50 to 5 there.
The Lumina, this differential going into 2019 is very limited tonnage. It should have very small effect on the forward figures. Management changes, will there be a benchmarking across the group? We already do the senior management managers, the asset heads meet regularly. They do coordinate their benchmarking methods across the group.
So we're doing that already. Will it be done in a more constructive manner with Peter hitting that group? Yes. And that is the idea of doing it, that he can benchmark many areas across the group, the various divisions now that he's sitting permanently in that position.
Thank you. And on third, Barlim?
Yes, sorry. Sorry, I could ask. Yes, we are in advanced discussions with Vale, extremely advanced discussions. And hopefully, we should reach an agreement in the not too distant future.
Thank you.
Thanks, Sylvain.
Thank you. We'll take our next question from Sergey Donsky from SocGen.
Yes. Thank you very much. I have 2 small questions on Katanga and one other on Vulcan. On Katanga, should we assume that the suspension of cobalt sales will remain in force for, say, next 12 months? And if that is the case, should we then reduce your EBITDA guidance at spot prices by say $1,100,000,000 to $1,300,000,000 That's first question.
2nd question, you provided some updated guidance on Kanyambo cash cost. Is it possible to provide some update on Ketangu as well, assuming the mine reaches full capacity over the next several years? And lastly, on Vulcan, assuming that zinc and lead prices remain where they are now, what is the probability that you will have to take some write down on your investment in Vulcan?
Okay. So again, let's run through them. In terms of Katanga, I think you would have seen the press release that they put out where they said they're suspending cobalt hydroxide sales near term and would then expect to be able to post upgrades to the plant during by the end of next year. They would look to catch up all the selling in the second half and have all those sales by the end of next year. So that's according to their public disclosure.
They will sell everything by the end of next year. That's what's been produced. So you don't have to make that $1,000,000,000 adjustment, sorry, thank you for the spot illustrative numbers. But we did just generally, by the way, across the copper business, which is copper and cobalt. We did build in, as I said, some general, I wouldn't say expectation, but just some general allowance, if you like, for the fact that maybe sales could be less than production, which has happened from time to time given the depth and breadth of operations we have there across both copper and cobalt.
So we have built in some of that potential working capital build that could happen somewhere in that system, including the smelters. It could happen in a variety of places. And that's something that is reflected in that $0.92 And that's why I said it is conservative. So if we're sitting here in 12 months' time and we're saying that production is equal to sales is equal to production, our number should hopefully be conservative and we'll be adding on to EBITDA and not subtracting. In terms of the Katanga cost, I'll leave that up to I mean, Katanga is obviously its own listed company.
So they will need to separately report that via the Canadian Stock Exchange. And then we're obviously in a position to piggyback off that. I suspect their timing of all that will be also their update of their own technical reports, which they'll have to make through to the Canadian Stock Exchange by the end of March next year. But of course, with this amount of cobalt and this amount of copper, you'd expect it to be a pretty low cost and a good cash generator. And that's obviously even back to a point that Ivan had to cover off originally, there are quite a few moving targets in the DLC under the mining code.
So let's try and get some resolution maybe on some of those also around where potential cost structures or some of the businesses can be down there. Volcan, we're comfortable on the Kering Valley at the moment. Okay. Thank you. Thank you.
Thank you. We'll take our next question from Dominic O'Kane.
Hello. Just three quick questions from my side. On Nico's appointment, will Nico be joining the Board of Katanga? And then on the free cash flow guidance of $7,500,000,000 could you just clarify for us what fiscal assumptions are included within that number for the DRC? And then finally, on marketing, could you just remind us what the effective tax rate guidance is for the next couple of years?
And there's recently been some suggestions of tax changes across various cantons in Switzerland. Is Glencore potentially exposed to any of those changes? Thank you.
Okay. The first question, no, Nico won't go to the Board Katanga. Remember, Nico has been appointed the Head of the Proper Marketing Division and the assets are being run by Mike Chinchillo. Mike Chinchillo is Head of the Assets and he sits on the Katanga Board.
Yes, Dom, on the marketing, tax wise, no change on the I mean, for the purpose of our illustrative spot EBITDA, we assume 15% across the marketing. I would say that's on the conservative end, but that's just the number that we would throw into the interest and tax number as it comes through that $3,500,000,000 or so. So that obviously is a weighted average of where all the marketing earnings and the jurisdictions would naturally occur, which Switzerland is clearly the largest. And from a Cantonal perspective, no real change on Glencore's Swiss tax position over here. They're more aligning different cantons and various other concessions that might have been historically available to some other companies.
But we've we're a mixed business here. That's a concept that they have in Switzerland, which allows certain rates to be maintained. But roughly about 10%, 11% is corporate tax rates here in Switzerland. What was the question again, Dom? Just on DRC, what was the assumptions that we used where?
So just in terms of the $7,500,000,000 free cash flow number, I guess my question is do you assume within that number any super profits tax?
We do not assume super profits tax in that number, but we assume a lot of other DRC in that number.
Yes. Taking in some risk in that number.
Thank you.
Thank you. We will take our next question from Tyler Broader from RBC.
Great, thanks. Hi, Evan and Steve. Thanks for the call. The LIBOR has gone up from 1.7% to 2.7% this year. Just wondering if Steve could remind us what exposure you have to floating rates at this point?
And has that had any impact yet on the marketing business in terms of any of the lower margin business that you do there? And then secondly, my guess just on Colowase, you think the 170 will go forward. There were some plans that Anglo proposed last week on potentially further expansions, I guess. What are your thoughts around that? And then also with the underinvestment that we've seen in the industry according to your slide, how are you looking at other brownfield opportunities?
Is there any that are sort of starting to emerge within your portfolio? Thank you.
Floating rate, you announced?
Yes. In terms of interest rates of our funded part of our balance sheet, we'd be about 60% floating, 40% fixed. So on the 60%, which is then we've always sort of said that you want to stay floating within the marketing part of the business because that's the environment in which we are competing against competitors and working capital and how one's able to price terms through receivables and the general funding in that particular part of the business. So that's, I guess, 1.7% to 2.7%. Our overall cost of debt as a business even with all that come through and baked in is under 4%.
So it's still functioning sort of quite well there. But that's one of the if you look back to the slides that I had said on the marketing part of the business is that performing towards the upper end would be one of the factors that would drive that would be continued increase in the interest rate environment. And there is a bit of a lag effect. If you have these rates pass through on a Monday, you're not suddenly repricing everything on Tuesday. There may be a few months for it just to work through in terms of the sort of renewal of your working capital and freshing up of that business.
But that's been a pretty modest impact up until now and is a largely hedged exposure going forward as we look at that split between its and if we've taken RMI, even sort of putting some sort of capital map that sort of provides some sort of exposure maximum again exposure that one needs to think about working capital that's also deployed into that business. The Colorwassee, I don't think we can add much more than probably you got it from the horse's mouth last week if you were sort of down there. That's probably the most up to date. They were I think from some slides I saw, it was 5 or 6 expansions options and we've gone from base up to 1 here. But it's a great reserve resource base down there and we'll be producing copper at these levels and maybe materially higher for the next sort of 100 years or so.
So as and when the guys have done enough work and they feel like they want to come and present something to the shareholders about taking on additional investment, we'll us in Anglo and Mitsui will make the decisions at that point.
Yes. Look, and you talk about brownfields and actually Kalawasi is one of them. We got other opportunities. As you know, we got Caracahuacu with our Entepacay operation in Peru, where we got brownfield expansion opportunities. We've always got brownfield expansion opportunities in the DRC if and when we want to do that.
Mopane is another one. As you know, we are expanding production at Mopane and Mopane will start increasing its production in 2020. However, as we said, even though we got the brownfield, we don't want to pull the trigger on them until we really see the markets are up. We don't want to start predicting markets up and start pumping tonnes into those predicted future markets. We may get it wrong.
So we'd rather sit on our hands, wait for the markets to rise. And when they do rise to levels that we like, then we will go ahead with the brownfield. And we've the boat for a year or 18 months, so be it. We're happy to wait, enjoy the run, not cannibalize the price on our own production where we're producing 1,500,000 tons of copper. So to chase the extra 100,000, 200,000 metric tons of copper against the 1,000,000 5,000,000 ton base.
As you know, that's always been the policy within Glencore. Don't cannibalize with new tonnage your existing large production where you will have a negative effect on the prices, rather wait for prices. And if we are correct in believing in these drawdowns of stockpiles and we do start drawing down these stockpiles and the prices rally, then we'll look to pull the trigger on some of these brownfield operations. But let's wait to get these good numbers and not prejudge them.
Thanks very much.
Thank you very much. I think that's all the calls. We thank you for attending our presentation today. Thanks very much.
Thank you, ladies and gentlemen. This will conclude today's conference call. Thank you for your participation. You may now disconnect your line.