Good day, ladies and gentlemen, welcome to the Glencore 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 Glencore's management. There'll be a question and answer session to follow. Today's conference is being recorded. I will now turn the conference over to Mr. Ivan Glasenberg, Chief Executive Officer. Please go ahead, sir.
Thank you. Good afternoon. Thanks for taking the time to attend our investor call, I'll start off with the highlights, 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, we have seen certain reasons for this. Number one 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, inventories are low and likely to fall even further if we look at the demand/supply going forward. Glencore, we've 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, cobalt helps underpin the technologies that enable the looming energy, 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, 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 billion-$10 billion based on if you look at the lower end of the cycle or the higher end, it's still extremely resilient. If we utilize spot commodity prices today, our free cash flow generation is right about $7.5 billion. That's based upon an EBITDA of $17.1 billion.
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, our current shares are trading at low levels, whereby we believe we can continue focusing on deleveraging the company, shareholder returns or buybacks as we've done in the past. As you'll see in 2018, we announced $5.2 billion, 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, continuing to deleverage the balance sheet.
The financial policy, as we've always said, we've commitment to strong BBB, Baa investment grade ratings, and we continue targeting a maximum 2x net debt to adjusted EBITDA through the cycle, and this is augmented by a net debt keeping the maximum net debt of $16 billion. Turning to the next slide, talking about the commodity markets and what we have 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 a great amount. We do see a bit of uncertainty around the world.
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 2016 and 2017, very limited capital investment and going forward, still limited capital investment with about the industry $37 billion, moving down to $32 billion planned before 2018. However, even with the uptick of commodity pricing in 2018, the capital expenditure of the mining companies has not increased much. The slide shows in 2018, only an extra $1 billion and $3 billion-$4 billion added to the CapEx on the mining industry going forward, even with the recent uptick of commodity prices.
It 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 not expansion 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 to 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 five years. That gives you an idea. Copper, we up at 3% growth in 2018. Looking at nickel, you're up at 7% growth between 2017 and 2018.
Demand has clearly been relatively solid across all commodities during 2018. A very important slide, which we look at all the time is, looking at slide six. If we look on the left-hand slide, it shows you if we look at inventories, whether we look at SHFE, 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 2015 to June 2018, have come down considerably. 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 days supply. Zinc, we have seven days supply, and nickel, we have 66 days supply.
Looking that as opposed to the average over the past, that period, over that period between December 15 to June 18, we are well below those levels and we are at record low levels. 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, for example, if you taking one of the commodities, if we talk about copper there, you'll see copper, the tonnage that been produced in the world in 2018 was around about 23.5 million-24 million tons. While consumption has been pretty similar, not that much of that figure, maybe consumption a little bit higher. 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 tons new supply. That is saying new mines coming in, less the other mines which are reducing tonnages. Total new supply coming into the market in copper, we believe is around, I think WoodMac are also saying around about 250,000 tons. I think that's the WoodMac figure. 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. If you look at copper during, as I said earlier, during 2018, you had 3.1% growth.
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 it 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 had 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. You had supply of 2.2 million tons, but demand was 2.4 million tons, and we saw the drawdown of 200,000 tons in 2018. What happens going into 2019? The same story, like I said, of copper. If you look at all the increases of nickel which is occurring in 2019, you go from about, I think 2.2 million tons to about 2.4 million tons.
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. 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. 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. That's an extremely important graph to try display with limited demand growth in all these commodities. In fact, nickel you've 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. That definitely bodes well for 2019 commodity prices based on those figures.
We give more detailed explanations in appendix to show how we have got to these figures to show supply demand. I think it is in the later part of the appendix, and that is 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 the next page, HSEC update. Once again, safety, we have had four fatalities during 2018. We have had 12 fatalities from 11 incidents across the board. Certain of these fatalities occurred at our focused assets. As we have said, we got, it is Kazakhstan, it is Africa, certain assets in Africa, and the other ones have occurred at operations which are not our focused assets, a lot of work still has to be spent in this area.
Commitment to transparency, we displayed during 2017, we paid $4.5 billion to governments, 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 portfolio, which is enabling us to transition to a low carbon economy while providing access to affordable energy. 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 the technologies that enable the looming energy and mobility transformation, which we see occurring with electric vehicles and the battery industry. Glencore produces a large amount of commodities in that area. 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.
Looking at our portfolio mix, we really have a nice mix of commodities there across the different spheres of these areas. With that, I will 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 six or seven pages before I hand back to Ivan is really providing many of the economic and financial building blocks, as we have been used to and accustomed to doing over the last four or five reporting periods. You can think about some of the cash flows and the sensitivities and some of the capital allocation processes as we go forward in the next year or so. Page nine is just a snapshot, we will get to more detailed pages for copper, cobalt, zinc, nickel, and coal. You are seeing expected production growth over that three or four-year period, 2018 to 2021. In copper, we are looking at 5%.
Cobalt is up 74% from 39% or so this year to 68% if we look out in the 2020. Zinc as well, up 28% over that period. There's a page on that. Lead 30%, nickel 10%, and the likes as well. The three that we don't have specific pages on in lead and ferrochrome and oil, have all got recent upgrades to production volume expectations from those that we provided 12 months ago. 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're still maintaining the 1.465 million tons ±15% on the copper side. That's exactly where we guided to 12 months ago.
That's all been proceeding well, including Katanga's ramp-up throughout the year of their line one, which was the 150,000 tons of copper, 11,000 tons of cobalt. They released quite a comprehensive report or an update, would have been in the last hour or so. Feel free to grab that off the Katanga website or the Toronto Stock Exchange, which goes into a bit more detail. They've re-guided to or confirmed the successful commissioning of the phase 2 now of the whole of 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 2019-2021 years.
The reflection there is a slightly slow ramp-up at Mopani is about 20,000 per year, before the ultimate commissioning of quite a comprehensive upgrade of shafts and concentrated development there. There was a small operation. You might have seen an announcement of that a month ago or so, Punitaqui down in Chile, between 8,000-10,000 there, and some changes across Mutanda, which we've currently put across the outlook period. Just focusing on Mutanda, we have seen recent extensive drilling work down at that operation. It's identified a faster-than-expected transition to sulfides. As you'd all know, we're currently processing the copper through the oxide ores, through the SXEW 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 sulfide resource base. Of course, we take into account the full financial aspects, CapEx, operating costs, the regulatory regime, taxes, royalties, et cetera, that apply or are 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. That's on the copper side. Generally, Katanga, as we've said, there is quite an extensive press release that they've put out. Guidance continues to be around the full target level of 300,000 tons of copper within our own numbers. As you can see on the earlier pages, we put 285,000 ±15%, to reflect a range around the 300,000 tons of copper.
Certainly at site, there's confidence that 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, for 2018, generally copper and cobalt is where we said it would be. 2020 cobalt, the 63,000 tons is also where we said it would be last year. We've taken down 2019 on cobalt by 8,000 tons to 26,000 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 at 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 closer to 40,000 tons, which is where they expect to be in 2021. We've put 38,000 ±2. 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 electrowinning house down there. That's the new phase 2, which looks as good as you'd see at any operation around in the world of how that's now been set up. 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 150,000 11 this year and then moving to the 285,000 ±15,000. The cobalt to work around their plans is ±2,000 tons cobalt, just to bring in a certain range around ongoing potential variability, particularly in the ramp-up phase. Also announced by Katanga, there's a big acid plant being built there as well, being able to then process and produce their own acid for consumption within the business. That will be progressing during 2019. First acid expected Q1 2020, which is expected to have a materially positive impact on their consumable cost as they go forward as well. 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.
We're working with Gécamines to find solutions around potential interim solutions as well around cobalt as well. We go into page 12, you can see the coal profile over the next three or four years. This year was really a function of some M&A, which brought HVO into the stable in May, and it brought Hail Creek, which closed in August 2018. We just look at some of the outer years, 2019, 2021, there's a net about 3 million ton increase against previous guidance from last year. That's essentially Hail Creek, because HVO, we'd already considered that into the numbers last year. Hail Creek's come in. We've got 80% of 10 million, so we've added 8 million. Less, there's an operation in South Africa called Goedgevonden, which we had to deconsolidate for accounting purposes during the early stages of this year.
It was no net economic impact, it was around a 50/50 operation we used to consolidate. We no longer do. There was three million tons of a drop there. We sold the Tahmoor, a smaller coking coal operation down in Australia. There was about two million tons. Net, that was the increase of the three odd million tons, which has hit the outer years of 2019 to 2021. We've already identified quite significant savings at Hail Creek. For those of you that were on the coal site visit a month ago in Hunter Valley, we spoke about the progress that was being made both at Hail Creek and at HVO, 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 five million tons 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 17-18 million tons. They would trend to those levels from 2019 onwards. This year, there was a volume impact of about five million tons across the coal business, which has been previously discussed. Onto zinc as well on page 13 now. Slight upgrades to where we were last year's guidance, +35,000 in 2019 and across the guidance period primarily this year. We said 1090 at the beginning of the year. That's still the number that we're maintaining. 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 tons 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 of zinc contained out of McArthur River. That's a positive this year, which would have offset somewhat the later than initially expected restart of Lady Loretta. 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 1090-1195 of zinc next year. The step up from 2019 to 2020, which we discussed last year, is the Zhairem project within our Kazzinc subsidiary, which has got an initial 14-year mine life. Good returns, generating 160,000 tons contained zinc. Quite significant lead as well out of that operation.
First 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. 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 three or four years. This year, we have seen about a 6,000 ton reduction against projections at the start of the year. It was about 50/50 of that, so 3,000 tons call it each, reflecting the timing of own use, own unit feed processing at INO.
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 Koniambo. That's where we're at, 126 ±2 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. Koniambo is sort of grinding forward. It was 17,500 last year in 2018. This year, we're looking to pick up at about 10,000 tons 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.
As you can see later on, the cost impact of now bringing Koniambo 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 refreshes happening across the INO business we discussed last year, the $1.2 billion CapEx over seven years. That's all on track for 2021, 2022. That's across Onaping Depth and a 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 Rim Depth, which we hope there can be a framework going forward there. That's on the nickel side.
If you look at 2000 and 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. This ultimately makes the sense of all the numbers, and you'd be familiar with these charts as well. Robust unit cost and margin outlooks, particularly the two largest industrial businesses, copper and coal. Nickel, I'll explain below, is now blended in for the achievement of what we call commercial production at Koniambo, which is primarily an accounting term, and I'll refer to that as well in due course. Focusing on copper, we're looking at a 2019, $0.92 a pound all-in cash build-up across that business. As we've always said, that is a fully loaded, allowing for the generation of spot or generated EBITDA within that business.
It accounts for all the cash costs less the credits, smelting earnings, and realizations that would be part of that business as well. $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 a reduction. You've got extra cobalt volumes, which I mentioned, particularly at Katanga, more than offsetting some lower by-product pricing for 2019. On a spot basis, we've got lower by-products 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. There is built into that number, obviously, if production sales was equal to production across that business, we'd expect a further downward pressure on cost. We built in some working capital build there. On the zinc side, you've seen an increase reflected by various factors. Of course, we've 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 of by-products. 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 of 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.
That, of course, at these sort of levels that we spoke about on the previous slide, while still being subscale, and 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 by-products currently that they have as well. There is an averaging effect during this particular period. As Koniambo moves towards the 40,000, we'd expect to be negative EBITDA potentially coming out of that business. You have had that averaging effect, but now it's all baked into the numbers. The nickel team, of course, is tasked with enhancing and managing those sort of cash flow generation into the future. 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.
We've got $40 a ton. In fact, a reduction in cost, $52 to $48 a ton. There's some portfolio effect across the different businesses that we've acquired against some of those which have been deconsolidated or sold. In particular, we have highlighted an extensive multi-year project to focus in a lot of detail on cost out, margin up processes and various initiatives. We went through some of those with you all last month. We have delivered $450 million of recurring benefits. If you look, that's about $3 to $4 a ton or so has come through that. On CapEx, as we move through the economic building blocks. We're looking at an uplift of about just under $0.3 billion for the next three years to average $4.8 billion.
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 $4.5 billion. 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. Some of you were on Anglo American's copper visit down to South America last year, and at the Collahuasi project, they would have shown you one of the quick brownfield expansions, which has been permitted, but is still going through some other approvals. That operation can go to 160,000 up to 170,000 tons per day of mill processing. That would bring our share about 18,000 tons of copper to 40,000, I think, at the 100% level with a greater than 30% IRR.
That's $200 million. 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, it's just a couple projects to highlight. In Equatorial Guinea, there's Alen Gas and a Cameroon one field development in partnership with Perenco within Cameroon for $150 million combined. The Alen Gas one, 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 is a nearby gas plant that's going to be, in a few years' time, is going to be in need of gas supply. 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 three-year paybacks at current oil price as well. Of course, Hail Creek wasn't known last year, so that's kicked in $200 million CapEx over the period. 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 million. Mount Owen life extension, $220 million across the period. This one's an interesting one in that, apart from the economics, we're expecting first 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 BHP days when it was bought in 1988 or so, or 1998. We're now looking as part of the expansion to transition away from the contract mining into an owner-operator miner.
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. That of itself is going to have a positive OpEx. We have the CapEx side, you take away the contractor margin that goes into this business. 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 five extra coking coal longwall blocks. That's $70 million of development. That'll be a greater than 40% IRR. In Spain at the Asturiana de Zinc smelter, we're looking at an updated jumbo cell house.
That'll have 25% returns around some better efficiency and lower operating costs when that's up and running. 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, is that we've had around a 2%-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. We just focus on marketing now, page 17, we're looking at, this year, a full year $2.7 billion ±$100 million. That's against a guidance to be in the top half of the range.
I would highlight two factors that have occurred in the last, at least in the second half and largely in the last two or three months, none of which would come as too much of a surprise around where we might have been $200 million higher. One of which is in alumina, there was a recent other aluminum producer that highlighted this fact in an aluminum update that it did in the last month or so. Our exposure is much smaller, it would reduce significantly from 2019, so it should be a non-event going forward. There were a few legacy 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. 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 alumina market has developed in the last three to four years, as I said, reduces significantly into 2019. We just look at cobalt, we've seen some customer contractual non-performance 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%-30% during that period. There's also the marketing impact, which is important to understand 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. When Glencore buys the cobalt from Katanga and Mutanda, it has purchase commitments to buy those cobalt at the market price of the time, based on some benchmarks. As and when those operations produce, it gets transferred to Glencore. If 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.
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. Just under these various offtake agreement, it immediately comes into our business. 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. Some of the exposure on that will then be picked up within the Glencore business.
We try and manage that as best we can, there is some sort of inherent lag in timing that could exist, and we would try to keep the position within Glencore to such a level that was, of course, manageable. It is unavoidable that we may have some cobalt exposure within Glencore by virtues of those purchase commitments. 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 placing cobalt 24 seven. 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'll need to spend an hour just reprogramming some of your models down there is that we would, within the agricultural products, we closed the 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 GAL at the 50%, and we'll just leave it in favor of retaining its associate accounting. We'll just be picking up our share of net income.
There's no, obviously, change at the net income level, 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%. 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 Glencore Agricultural is going to be. We've shown both at a 2017 year-end and the H1 2018 at the EBIT level. This year, it's projected to be around $100 million.
If you just looked at page 26 just for a minute or so, just from the capital structure, the net debt level, not much of a change, you will see, if we take H1 2018 on page 26 right at the bottom, you'll see we will have a net debt reduction by going to associate a not proportionate net debt reduction of $255 million. That's because Glencore Agricultural, we picked up 50% of their net funding, which was $1.86 billion, and 50% of their RMI was $1.6 billion. At the moment, clearly from a Glencore plc, there's further and further ring fencing around whatever happens within the Glencore Agricultural Products, and they are fully independent now and stand alone from a capital structure perspective. Just go on to page 18, again, marketing guidance.
We are maintaining the $2.2 billion-$3.2 billion, which is a combination of some factoring and additional business and volume opportunities from recent M&A. We spoke about some oil and coal in particular, with all those expected to offset the accounting impact on EBIT from the discontinuation of the proportionate consolidation of the Glencore Agricultural Products. Like for like, because of Glencore 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 around the midpoint of the $2.2 billion-$3.2 billion, which is $2.7 billion.
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 $17.1 billion or $7.5 billion of free cash flow. We have to cut it as of now, of course, mark to market is a futile exercise in these long-term businesses. Clearly prices, even in the last weekend, have responded, metals and coal. We'd be a few hundred million USD higher just today if we were to cut those numbers. I think an interesting slide 20. If you just look at that.
We're trying to demonstrate or graphically present that through the cycle, free cash flow for Glencore, what it might look like, $5 billion-$10 billion 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 three to four years. Our spot is $7.5 billion. If we look at page 28, we highlight for you what our assumptions that we've gone into, what a trough cash flow generation was B, and that was the average of Q1 2016, which was quite a somber period, clearly within the commodity world. On page 28, you can see coal price was down 51%. Average copper and zinc, you were $4,600, $1,600 or so. We were still materially free cash flow generative during that particular period of time with $3.6 billion of CapEx.
We put that aside and said, that's your trough. The downside, we said, what was the average for 2016 when you had some sort of recovery from those unsustainable levels? We're up to about $5 billion. What could an upside look like? Which we put as $10 billion. 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, $3,250 zinc, nickel $15,000, coal $120. All those numbers would look very familiar if you look back through your models. 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, 25,000, et cetera.
We put a super cycle case just to put the range, but we put the green spot $5 billion-$10 billion. I think it's a nice slide. On page 27, we've provided you with the various sensitivities to a 2019 EBITDA around changes on our various prices as well. Just to finish up before I hand back to Ivan. Our capital allocation framework is pretty well known today around maintain strong BBB, Baa. We are there. Net debt maximum of $10 billion-$16 billion through the cycle maximum 2 times net debt, EBITDA. We're comfortably in those levels. 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. $5.2 billion basis, the base distribution, various announced buyback programs, which we largely through.
Ivan spoke about confidence in the own business and current share price levels pointing towards the prioritization of shareholder returns as well, where value can be most constructively deployed at the moment. Just on the balance of the 2019 equity cash flows at the bottom left of the page, I've said even from a net funding, there is focus on selective RMI reduction. We're trying to consistently target levels below $20 billion. We were about on a pro forma with the Glencore Agricultural Products business, we would've been around $20 billion-$21 billion or so. As a minimum, we'd be looking to reduce it down $1 billion or so. Plans are in place for that and look to target levels around that. That's something that is a new focus that's been put down in this particular presentation.
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 has been reducing quite significantly as we go through. I think another slide before I hand over to Ivan that's just worth having also in the back of the file, front of the file, frankly, on page 29, is just we showed 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 as going through their own portfolios.
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 transparently, during the course of this year and ongoing, to highlight where the value is here and seek to have this better reflected also in our share valuation. There might be one or two areas there that could be non-core. You could see some monetization of that also during the course of 2019, including a couple selected other non-listed. With that in mind, I'll hand back to Ivan just to wrap it up.
Thanks, Steve. 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. As you're aware, we've created the value of this company over the past years. It's not decades of years, but over a relatively short period of time. The management have grown from within the company, and most of the senior executives have been in the company between 15 and 25 years. What we've decided now to change the structure a little in the company, and as you'll see on this 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 coal portfolio over the last few years.
Before that, he was in Colombia and South Africa. 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. 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.
Peter will be moving into this role early next year and working alongside me to managing all the industrial mining assets. Naturally, we need a replacement for Peter Freyberg, and Gary Nagle will replace him as head of the coal assets, and Japie Fullard will be taking over Gary's job as the head of the ferroalloy assets. Gary has significant experience in the coal industry, having been head of Prodeco for a number of years, and he has managed our ferroalloy industrial assets successfully over the last five years after moving from Colombia back to South Africa. Japie 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 two of our long-standing heads of departments retiring at the end of the year, both Telis Mistakidis 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. Telis will be succeeded by Nico Paraskevas and Stuart by Jason Kluk and Ruan van Schalkwyk. Both Telis and Stuart have been, as I said earlier, they have been with the company since 1993 and 1995 respectively and have been instrumental in building the development and growth of the business into leading ferrochrome and copper producers in a short period of time, as I mentioned earlier. Nico, Jason, and Ruan have also been in the company for many years.
I think 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. Telis and Stuart will assist with the transition 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. I am 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 have structured it and continue creating value for the company. As I say, turning to the next slide in a summary, Steve has mentioned most of the points.
I have mentioned them earlier, and as I say, we have got a great diversified portfolio enabling a transition to a low-carbon economy while affording access to affordable energy through our coal division. 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 do not see new big mines being built around the world. Very limited amount of mines being planned for the future, and it is still getting more and more difficult for people to find reserves in countries where it is 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 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. 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.
If you look at those various slides, especially the ones which are mentioned earlier in 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, 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. At spot levels, as I said earlier, we should be generating at least $7.5 billion of free cash with an EBITDA of about $17.1 billion.
As we said, Steve's last slide gave an idea, we have confidence in our own business prospects versus current share price levels. After with this amount of free cash flow coming in around about $7.5 billion post base distribution, we'll continue prioritizing on buybacks and deleveraging the company. That gives you an idea how we look going forward. With current commodity prices, the company is in extremely strong position. I think with that, we're open to calls. Thank you.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask question. We will pause for just a moment to allow everyone to give an opportunity to signal for questions. Thank you. We will now take our first question from Liam Fitzpatrick from Deutsche Bank.
Afternoon. Two questions for you. Firstly, on cash returns, there is some disappointment in the market that you haven't provided
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? Secondly, just on the deconsolidation of Ag, what drove this? Is this the accountants calling the shots or is this more a management decision? 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 sort of 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 one vote, and others might have some other votes, but I would say we pay 100% of free cash flow. That's the range. 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%. There's the base distribution, and it would be a continuation of our buybacks, which we've announced up until now. There was the $1 billion, and that was done, and we put the other $1 billion that'll run until February or so next year.
Sort of $7.5 billion sort of free cash flow. If the base is 3-ish or so, it's $1 billion a quarter, seems to work mathematically.
That's pretty precise, Liam.
That's how one can think about it.
100%.
Okay. As far as deconsolidation, nothing to do with accountants. That was purely our own internal sort of reporting and management, sort of financial internal. You're supposed to do the reporting segmental, all that stuff as in terms of how one looks at those business and the degree of integration or link between the businesses. As I've said, you've had a business now that over two years, maybe over the first sort of year or two, 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 of December, certainly 2016.
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. If Ivan wants to round our commitment to the business, it certainly remains as strong as ever. We'd like to 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.
Yeah, Liam, I think Steve's 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. 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 via that vehicle. We wait and see where opportunities exist, if and when we want to grow that business.
Okay. Very clear. Thank you.
Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. 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 Telis. Given obviously his huge amount of experience that he has in the markets, will he be having or will he be retaining any sort of advisory role from here on forward? What is the sort of path to sort of transitioning, sort of the handover of his responsibilities here? Will he have any kind of role going forward? The second is also just wondering about the sort of Cobalt situation. Yesterday there was some 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.
Just finally, a very sort of minor point, but the $200 million that you mentioned for the Kolwezi 170,000 tonne per day expansion, that's the Glencore attributable share, I take it. Thanks very much.
Yeah. Telis, as I said, will help with the transition until the end of the year. Niko has a lot of experience, and Niko's been in the business for many years working under Telis, and I'm very comfortable Niko will do a good job, having been tutored by Telis over the years. I'm sure we should have no hiccup in that area. Agree, Telis has a lot of experience, but Niko 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 Telis 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, we 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. 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 audit that the government intends doing, yes, they're going to look at how this material was exported out of the country, it has been checked.
I understand it was audited by the government agency that checks for uranium content, it seems that it wasn't picked up during that process, it was picked up while the material was stored in South Africa. We're trying to review that, but I'm sure, the government audit will just check, I would imagine, to see how the material got out and was it government checked by the agency for uranium exports. Your third question, Paul.
Yeah, Paul. I think it was around whether the CapEx for Kolwezi was just our share, which yes, the $200 million is just our share.
Brilliant. Thank you.
Okay.
Thank you. We'll take our next question from Jason from Bank of America Merrill Lynch.
Yep. Good afternoon, gents. Thanks for the call. Just, I guess, simple questions. There's two 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. 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.
Yeah, the second you know the answer. I don't need to comment. In respect of the DRC, are we getting full valuation of the DRC? I think yes, there's still 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. Not much we can really comment there except we are now paying the new royalty which the government has put in place.
Ivan, if I could just follow up, if that's okay. I'm looking at your.
Sure
$7.5 billion in free cash flow. That's an implied 14% free cash flow yield and on spot we're probably actually a little higher than that. 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. I'm just wondering, what are your thoughts? What do you think the management team can do to drive the rating higher? Today, it seems like you're presenting business as usual, I'm wondering, would you do anything more drastic to release value in the business? People talk about a breakup at Anglo.
Yeah.
Would you consider a full breakup of Glencore?
No, Jason, I think you got a good point. Why are we trading at a 14, I think at spot, a 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 around about 5% or 6% free cash flow yield. Why are we there? You most probably know that better than us when you look at your reports and that, just why are we there? I believe two reasons, may be 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 $6 billion EBITDA around about there. What multiple should we trade at? Is it a six multiple? Are we getting a $36 billion value on our coal business?
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, $85 going forward. If you take it down there and you're not using your 103, I think we've used in our model for Newcastle, 92, 93 for South Africa, people are not using that in their forward projections. We just need time, I think. Nothing we gotta 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 hold those levels, maybe they will give us a $6 billion EBITDA and give us a multiple on that and value our coal business at $35 billion. I think that's the one thing, coal is, people don't see these numbers going forward. Second thing, as you say, DRC. What is our DRC business gonna give us? I think around about EBITDA, $2 billion, I think around about there, Steve. Are they valuing our business at six times two, $12 billion EBITDA valuation? Maybe not. As you say, with all the noise around DRC, they're putting a limited value. I think these
If anything.
If anything. 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 $7.5 billion of free cash flow, use it to pay the $3 billion dividend that Steve talks about, and the rest, three and a half dividend and $4 billion of buybacks. I think the share price will slowly take care of itself with this free cash flow. 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.
Cheers.
Thank you. We'll take our next question from Sam Catalano.
Yeah, good afternoon. Two questions. Firstly, just on Peter Freyberg'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? 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 by-product prices changed your net cash cost guidance. Given that your numbers are unchanged for 2018, I'm assuming you haven't run through spot by-product prices into your cost guidance for 2018 at this point. Thank you.
Yeah. Thanks, Sam. I think, regarding Peter Freyberg's promotion, and yes, it is a promotion. Yeah, I think Peter's proved himself. I've worked with Peter for many years. He first joined us when he was running Teck Coal in South Africa, where we employed him at the time to join us there. He came from Rio Tinto. Peter's 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. Peter's 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.
It'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 there. Of course, you always have problems at certain assets and other assets. Peter's also had some problems at some of his coal assets. 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 Nagle, who has now had enough experience at asset levels where he can take over one of the bigger asset groups in the department. The time is just right for that. It makes my job easier that I don't have to have all these asset heads reporting directly into me.
Peter can work alongside me. He can also work very closely with sustainability, the health safety side of the business, where he can coordinate that part. It just helps a bit in the coordination of the business. It was just time.
Sam, just to your point number 2, we have obviously run Spot. We have looked at it, we've concluded that there's no reason to do any update on the basis they're still materially valid from where they were recommended.
Okay, right. Not enough material changed to change the guidance numbers effectively?
Correct.
Yeah. Okay. Thanks, gents.
Thanks, Sam.
Thank you. We'll take our next question from Ian Drauzer.
Hi, guys. Thank you. Just two questions from me. Just on Mutanda, would it be possible just to give a sense, 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 three to five years? Just secondly, on the sort of cash returns, and 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 top end of the guidance range at 16? It sort of suggests that you want to keep options open to actually employ cash elsewhere in the business or for maybe inorganic opportunities.
Following up on that, just the RMI 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. Ian, 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'll obviously then be at a final stage from 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 anyone that may want to run some what if scenarios. Just what could a theoretical capital structure look like. I think 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. 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. Clearly there's no, from a sort of materiality perspective, you will not see some large cash funded M&A that obviously fits into that framework. I think it's still useful, but I wouldn't be looking to go 10-16 from which to relever to make distributions. That degree of range there is only around the sort of M&A potential.
As obviously as Ivan said and the capital allocation story generally now is such that there has been some sort of deprioritization, de-emphasizing in as much as the opportunity set and the value to be extracted from buying back our own stock at the moment. 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. Ian, the RMI reduction, what was the specific I know that was the last point. You ended on that.
RMIs and 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 obviously already doesn't change the net debt, at least in terms of the way we report it and where we see the range of the 10 now. To the extent that some people may have some other, we'll sort of assume other debt levels or take certain net funding or some things into their own economics, then the release of any RMI should clearly go towards equity value.
Yeah, in the net funding, sorry to interrupt. Do you plan to bring the net funding down by an equal amount then?
Yes, that's what would happen.
Yes, it has to.
Okay. All right.
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. For those that were taking an overall gross funding and looking at applications thereon compared to a net funding, and there maybe are different philosophies out there on that, then that should be an equity re-rating 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. If you do look at that page that had some of those, sort of the $3 billion 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 towards free cash flow at the moment in terms of debt reduction. I would definitely consider that, yes.
Sorry, can I just push you on the Mutanda? Could you maybe just say what the old plan was? When do you need to start to build the sulfide plant or expansion to sustain production? Just to give us some reference for your previous plans, not the new ones under review.
Yeah, that would really be the most beneficial, I think at this stage, just to wait until the February update and everything. 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 moved between A and B, so that would've, at the margin, cut down some life on the oxide, and some work is underway around the resource base of the sulfide. We'll have a lot more information to be able to come, I think, the first week in February and update on all that.
Okay. All right. Thank you guys.
Thanks.
Thanks.
Thank you. We'll take our next question from Menno Sanders from Morgan Stanley.
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, et cetera. Steven, can you just help us understand what we need to think about with respect to Glencore in this area for 2019? Secondly, on structure and management changes. I appreciate this is often an ongoing thematic, but is this a structure in place now for the next, say, two to three years, Ivan, or do you foresee further changes?
Okay. I think I will answer the first, Steven, you answer the second. The management changes for the next two to three years. Look, I have always said you will have senior executives. The management has 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 there will be, like we have seen with Stuart, like Telis, it comes a time where the younger generation needs to take over. Now, whether it will happen in the next two to three 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 have always said, it's their time and they wish to take over. So it will happen over time. I have always said in my position it will be three to five years.
I don't know, but we're not here forever. So 65, I have always said that's time when hopefully I will find a successor by then. I think the other departments, each department, the other guys are working on successors. We train successors. There's a great bench of people behind each head of the department. As we proved with Stuart, as we proved with Telis, as we proved before with the aluminum division, there's a very good bench of people ready to take over. So over the next two to three years, you may not get another change, but you may also get one or two changes. I don't know. We will 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.
Menno, I will 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 not as attractive generally in the last month or two. Certainly for people that have needed to access those markets, we're not in that position. We have always managed this balance sheet such that we effectively would never need to fund this business for at least a two-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 billion of capital markets or notes maturing in any one year. We would obviously come into any period with $10 billion 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+. 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.
We have an entirely, basically 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+. We have an entirely unencumbered receivables inventory base as well. 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, $5 billion-$8 billion probably in 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 is a price ultimately-
Sure
particularly in gold.
No, it's.
We're in a pretty comfortable position there.
Quick follow-up on Mutanda. Sorry. The copper and CapEx guidance that the company provided today, does it include the view for Mutanda for the next three years?
It includes the view for the next three years, correct, but not capital that may go towards a sulfide expansion or sulfide extension. There's various options that you can extract that metal also from sulfide ore, and this is the work that's obviously happening on site as well. 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.
On the sensitivity of the coal volumes, it says $489 of EBITDA on 148 million of volumes. What adjustment does the company make extra royalties? I appreciate the royalties, but what other adjustments does Glencore make to that sensitivity figure?
Is this the?
This is the sensitivity you described. Yeah. The $10 new customer.
It would just be royalty. We don't make any other adjustments.
It's just royalty?
Yeah. That's the only revenue link to our consideration down there.
Okay. All right.
Good.
Cheers.
Thanks. Cheers.
Thank you. We'll take our next question from Myles Allsop from UBS.
Great. Thank you. 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? Maybe first on that, then secondly in terms of management change, is there any lockup around Telis' stake? Ivan, yeah, in terms of looking for your successor, what skill set are you looking for? Are you looking for someone with a trading background, someone who's been in different divisions? Just give us a sense as to who should be putting their CVs forward.
Okay. Thanks, Myles. Yeah, on the ground, we've just had a team on the ground at Katanga just this last week. Things are fine on the ground. Nothing to be concerned about. Will the elections take place on the 23rd of December? Like you, we hear they will take place. There's nothing to tell us otherwise, we look forward to with whoever will be voted in as the new president of the country and the new government. 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, knowledge of trading, has a knowledge of the assets. Hope he comes with an all-round knowledge of the business. 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 gonna 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. Hopefully, when I go, it hopefully will be a 45-year-old who can take over and run the company for a lengthy period of time. It will come from that younger generation with an all-round knowledge of the business.
Just following up on the DRC as well, do you still intend to push back on the cobalt royalty if it goes up to 10% and the super profit tax? Because 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 2002 stabilization agreement, as you're aware. 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. 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. 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 for Telis and Gary, if there's any kind of lockup-
No
have they done any commitment to sell? One thing on that as well is, how much of the equity is held by employees now post Telis and Gary leaving?
Post Telis and Gary, I would imagine, I'd say 20, 30%. I think it's 30% pre them going. I think it's around about 30%.
Gary's staying. Sorry, Myles.
Gary's staying. Gary.
Sorry. Gary. It's good.
Hope Gary's not selling his shares in ahead of the full premium.
To-
Hopefully, I don't know what the other parties will do with their shares, hopefully they still love this company.
Yeah.
We'll put them on the roadshow schedule.
Yeah. We better go visit them on the roadshow. I've always said, when I leave this company, I don't think I'll sell my shares. Hopefully, I've put a good guy to take over, does a great job.
Thank you.
Thanks, Myles.
Thank you. We'll take our next question from Sylvain Brunet from Exane BNP Paribas.
Good afternoon. First question for me, with Koniambo changing optically the numbers for nine. What could you give us as the target for the cost at the end of the tunnel, so say 2021? 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? Third 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. Lastly, on management change, with Peter looking at other divisions as well, could we imagine more benchmarking across the group? If you guys have already some ideas or some numbers behind that. Thank you.
Yeah. Koniambo numbers, Steve, was it looking at a sort of a cost at time of ramp up, I think $450-$5?
Yeah. Okay.
Yeah. $450-$5 there.
450 to 5 there. The alumina, this differential going into 2019, is very limited tonnage. It should have a 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. We're doing that already. Will it be done in a more constructive manner with Peter heading 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. On Sudbury.
I'm sorry, Sudbury, I forgot to ask you. We in advanced discussions with Vale. Extremely advanced discussions, hopefully we should reach an agreement in a not too distant future.
Thank you.
Thanks, Sylvain.
Thank you. We'll take our next question from Sergey Donskoy from SocGen.
Yes. Thank you very much. I have two small questions on Katanga and one other on Volcan. On Katanga, should we assume that the suspension of cobalt sales will remain in force for, say, next 12 months? If that is the case, should we then reduce your EBITDA guidance at spot prices by, say, $1.1 billion-$1.3 billion? That's first question. Second question, you provided some update guidance on Koniambo cash cost. Is it possible to provide some update on Katanga as well, assuming the mine reaches full capacity over the next several years? Lastly, on Volcan, 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 Volcan?
All yours. Okay, Sergey, 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, would then expect to be able to post upgrades to the plant 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. That's according to their public disclosure. They will sell everything by the end of next year that's what's been produced. You don't have to make that billion-dollar adjustment, Sergey, thank you for the spot illustrative numbers.
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. 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.
If we're sitting here in 12 months' time and we're saying that sales is equal to production, our numbers 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. Katanga is obviously its own listed company. They will need to separately report that via the Toronto 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 Toronto Stock Exchange by the end of March next year. 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.
That's obviously. Even back to a point that I even had to cover off originally, there are quite a few moving targets in the DRC under the mining code. Let's try and get some resolution, maybe on some of those, also around where potential cost structures of some of the businesses can be down there. Volcan, we're comfortable on the carrying value at the moment.
Okay, thank you.
Thank you.
Thank you. We will 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? On the free cash flow guidance of $7.5 billion, could you just clarify for us what fiscal assumptions are included within that number for the DRC? Finally, on marketing, could you just remind us what the effective tax rate guidance is for the next couple of years? There has 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 will not go on board of Katanga. Remember, Nico has been appointed the head of the proper marketing division, and the assets are being run by Mike Ciricillo . Mike Ciricillo is head of the assets, and he sits on the Katanga board.
Dom, on the marketing, tax-wise, no change. 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 $3.5 billion or 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. 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. We're a mixed business here. That's a concept that they have in Switzerland, which allows certain rates to be maintained. 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 were?
Just in terms of the $7.5 billion 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, we assume a lot of other DRC in that number.
Yeah.
Taking in some risk in that number.
Thank you.
Thank you.
Thank you. We'll take our next question from Tyler Broda from RBC.
Great, thanks. Hi, Ivan and Steve. Thanks for the call. The LIBOR has gone up from 1.7% to 2.7% this year. Steve, you 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? Secondly, my guess just on Collahuasi, you think the 170 will go forward. There were some plans that Anglo proposed last week on potentially further expansions. What are your thoughts around that? Also with the under-investment 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 rates, you want to know, Steve?
In terms of interest rates of our funded part of our balance sheet would be about 60% floating, 40% fixed. On the 60%, we've always 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. That's 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%. It's still functioning quite well there.
That's one of the factors, if you look back to the slide 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 a continued increase in the interest rate environment. 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 renewal of your working capital and freshening up all that business. 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 it.
If we've taken RMI, even putting some sort of cap on that provides some sort of exposure, maximum, again, exposure that one needs to think about working capital that's also deployed into that business. The Collahuasi, I don't think we can add much more than probably you got it from the horse's mouth last week if you were down there. That's probably the most up to date. There were, I think from some slides I saw, there was 5 or 6 expansions options, and we've gone from base up to one here. 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 100 years or 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. Us and Anglo and Mitsui will make the decisions at that point.
Can you talk about brownfields? Actually, Collahuasi is one of them. We got other opportunities. As you know, we've got Coroccohuayco with our Antapaccay 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. Mopani is another one. As you know, we are expanding production at Mopani, and Mopani will start increasing its production in 2020. As we always 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 tons into those predicted future markets. We may get it wrong.
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. If we missed the boat for 1 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 1.5 million tons of copper. To chase the extra 100,000-200,000 metric tons of copper against a 1.5 million 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, well, then we'll look to pull the trigger on some of these brownfield operations. 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. Bye.