Welcome to Glencore Half Year 2018 Results Conference Call. At this time, participants are in a listen only mode. To follow the presentation, we ask that you navigate the slides as directed by Glencore's management. There will be questions and answer session to follow. Today's conference is recorded. I will now turn the conference over to Mr. Ivan Glasenberg, Chief Executive Officer. Please go ahead.
Thank you. Good afternoon. Today we represent our 2018 half year highlights. As you can see, we had a record first half with our financial results, with adjusted EBITDA up at $8.3 billion, which is a 23% increase to the same time last year. Adjusted EBIT, $5.1 billion, which is up 35%. Net income attributable to equity shareholders, pre-significant items, is $3.3 billion, which is up 40% from the same time last year. Funds from operation, $5.6 billion, which is up 8%. We have a continued balance sheet strength. We have wound our net debt down to $9 billion at the half year, which is down 16% to 31st of December last year. A significant decrease in our net debt.
Once again, Glencore proves the resilience of its marketing division. The marketing performance has been strong during the first half of the year, with an adjusted EBIT of $1.5 billion, which is up 12%. This is because of the strong performance from the metals and minerals and the energy product segment, which is up 17% and 23% respectively. There were lower crop yields in key geographies, which reflected the weaker agricultural performance during the first half of the year. However, we expect a stronger performance during the second part of the year. We've already seen that in the early months of the second half of the year. That should increase during this period. Industrial asset performance is underpinned by higher prices and continued cost asset optimization.
Industrial EBITDA is up 26%, as you can see, to $6.7 billion. That is a solid first half mine cost margin performance across the businesses. Copper, our cost of production is down at $0.88 per pound. Zinc, negative $0.11 after by-product credits. Nickel, $1.77. The coal margin is around about $35 with the higher coal prices around the world. The copper and zinc mine costs are higher than the initial financial guidance, which we gave early on in the year, and that is basically due to the lower by-product credits, which we're getting from some of the commodities where we get the by-product credits, and also there is some modest energy cost inflation. However, this is helped by weighted production during the second half of the year. Steven will take you through the costs later on in the second half of the year.
However, we have managed to increase returns to shareholders. This has been funded by the company's own cash generation. Not by sale of any particular assets, but this is cash generated from the existing assets and the marketing business. Therefore, we have returned to shareholders during 2018, $4.2 billion, which comprises of $2.85 billion distribution of dividends of 2017 cash flows, $0.3 billion of the share buybacks for the trust purchase, and $1 billion during the second half buyback program, which we put in place recently. We have strong confidence in our own business prospects, and the current share trading levels clearly points to our near-term focus on deleveraging the balance sheet and shareholder returns and potential buybacks by the company. Turning to the next page, looking at the half year sustainability and governance. You will see safety.
In respect of safety, we had five fatalities up until today. These five fatalities are unacceptable. What is interesting to note is that the five fatalities occurred in Chile, South Africa, Zambia, and two in Kazakhstan. We've always spoken, and remember, we do employ 146,000 employees across the group. We used to have potential focus countries where we were getting our fatalities, and we're pleased to note that the two focus countries where we had fatalities in the past, DRC and Bolivia, we've had no fatalities this year. It's clear we are achieving success in these focus countries. We still have Zambia and Kazakhstan to correct and ensure they reach the same levels as DRC and Bolivia with zero fatalities.
In respect of governance, we have established a board committee to oversee the company's response to the DOJ subpoena, which we received on the 3rd of July. As you can understand, we cannot answer any questions on this issue. With that, I hand over to Steve, who can go into more detail on the financial statements. Thank you.
Thanks, Ivan. I'll assume that you all have the presentation in front of you. To the extent that it's necessary to highlight page numbers, if I jump around a bit, I will do that during the presentation. On page six, the financial highlights are at very much 25,000 feet. We'll work through the details as we get into the presentation. As Ivan mentioned, adjusted EBITDA at $8.3 billion, up 23%. It is worth noting on that performance for the first half, we do expect a better second half performance, a higher second half performance, as you'll see later on as I work through the building blocks.
Based on current prices, which have obviously seen declines on a mark-to-market basis, particularly in metals in the recent weeks. On an illustrative basis, we would be reporting EBITDA of $17.7 billion, generating around $8.2 billion of free cash flow. Just mathematically, if we were to take a six-month period and halve the $17.7 billion, that would show $8.9 billion for a half-year period based on that. We do expect an improved performance second half. As I'll talk later on in the bridge, in the reconciliation of the first half results, there were some timing differences as well across sales and production in copper and a little bit in SG&A as well, which also held back the first half performance, which we'll reverse in the second half as we move forward. I won't spend any time on the other numbers, which we'll get to later on.
Jumping to page seven, slides that will mostly be familiar to you. We just showed the period-on-period performance in the marketing part of the business. Overall, a 12% increase. The two metals and minerals continues to be the key engine room of the firm with a 17% increase, generally supportive market conditions, as we've said, with also an overall increase in volumes handled. We show the volumes handled within the detailed part of the financial statements, and you'll see both in all in copper, zinc, ferroalloys and iron ore, we've seen volumes increase by generally greater than 20% and up to 50% in the iron ore business during the period as well. Energy products up 23%. That's made up of coal and oil as well. Improvements we've seen period over period in both those commodities, which shows the strength of the franchise as well.
The weaker part of the slide, just for the particular period was obviously the base and the materiality is much less, but we've seen a decline period on period in the agricultural business. We've attributed quite a big portion of that to the weak crops in Argentina and Australia in particular, where we have both procurement and handling businesses that do depend on volumes as well as processing margin, depending on the domestic crops as well. We have been hindered in both those locations, and the general industry melee in terms of margins. As Ivan pointed out as well, we do expect a significantly improved performance in H2 compared to H1, providing some tailwind for the overall business as we head into H2.
We would look to reconfirm guidance again, as we did earlier on the year top half of the $2.2 billion-$3.2 billion long-term range, that half of the top half is then sort of $2.95 billion. Clearly tracking nicely there. In terms of industrial performance on page eight, again, as Ivan mentioned, a 26% increase in EBITDA to $6.7 billion. As we'll see in the next parts of the presentation on a half-year basis, that should be trending higher even with the more recent reduction in some metals prices. Hopefully we've even reached some conservative levels around that, and it's another leg of potential improvement in EBITDA and cash flows as we move forward. The big part, clearly the metals and minerals as well.
We flagged at some of the bigger variances period on period that's provided some lift is clearly the ramp-up of Katanga, having gone from zero since its suspension in September 2017, 2015, sorry. With the commissioning of train one of the Whole Ore Leach project in December last year, they did produce 63,000 tons of copper. Even in Q2 alone, I think it was around 35,000 tons, which is already almost running at the 150,000 run rate. We've confirmed guidance of 150,000 tons of copper and 11,000 tons of cobalt for this year, materially increasing into next year as well. I'll spend a bit of time on the cost increases, both just passive inflationary through energy and the like, and a few other cost pressures that we're seeing in the business as well.
I think a good place to just look, which would cover all the other comments that have been written down there, is to look at the bridge on the bottom right-hand corner. As our industrial has gone from $5.3 billion to the $6.6 billion, clearly the big driver has been increase in commodity prices, $1.9 billion. To break that up, we've seen increases in the copper business, which is helped by the cobalt byproducts and various others. $0.6 billion of that $1.9 billion is in copper, zinc at an increased $0.3 billion on pricing. The nickel business $0.3 billion as well. Ferro $1.1 billion, giving $1.3 billion overall for the metals business. On the energy we've had $0.6 billion, which is coal at $0.5 billion and oil is at $100 million increases.
Expanding off a low base as well, we should see some having bottomed out in terms of our oil production in West Africa, we should start seeing some increases over the coming periods as well. Volume was although netted out to a fairly flat variance for the year, there has been some both positive and negative contributors and will be turning materially positive as we move forward as well. Some of the positive changes, as I mentioned, was obviously Katanga, which had delivered the 63,000 tons of copper metal in the first half of the year. Australian coal has also improved volumes owing to a fairly weak base period due to both industrial and weather-related issues in H1 2017. We have acquired, have now consolidated the HVO business from May, which of course brought some additional both steam coal and semi-soft tons into the business as well.
Some of the negatives, mostly temporary from a volume perspective, was Prodeco, two and a half million tons reduction period on period. We've spoken about a significant investment period now as they develop and set the mine up for future rates of production consistent with their normal handling levels. They are going through some temporary reductions in product as they move more overburden. That, of course, had a volumetric impact Mount Isa in copper, you've seen a reduction in copper tons out of that as they did a rebrick of the smelter during the first half. That's an event that only happens every three or four years. On the zinc business, there was the sale of the Zinc African assets in August last year to Trevali. Of course, during the first half, there was production last year.
There was about 70,000 tons of zinc metal. We didn't have that in this period. That'll be more than compensated volume-wise as we move forward with the Lady Loretta tons and ultimately the zinc product and lead coming out of Zhairem in Kazakhstan. On the gold side as well, there was also a slightly weaker production performance out of Kazzinc in gold over the first half last year. Timing difference in a period that favoring third-party material for processing. We expect to catch up some of that during the second half of the year as well. In terms of cost variance period-on-period, it's been a fairly modest and mostly passive increase in costs as we've seen during the business. In terms of real cost, $348 million. By far the highest aggregate contributor would have been the higher fuel prices and other energy costs.
We've seen average Brent prices as an indicator up 34% first half this year compared to first half last year. Various other components that are worth mentioning period-over-period is some Lady Loretta restart costs, can't be capitalized. They have to be expensed within the zinc business as well. That's various costs in mobilizing the business, getting workforce set up, moving out of care and maintenance. We've had no production during the first half of the year, but there were reasonable costs to begin setting up, and we should see the production and the unit cost benefits come through in the second half. Of course, Prodeco as well, some cost effect as it goes through its near-term mine development. The actual inflation component of $184, that's just sort of CPI-linked.
Its average is about 2.5% for the business, much of it running even below one and a half to 2% depending on the geography, with slightly higher CPI impacts coming in South Africa, Kazakhstan and Argentina. FX was actually a small negative variance for us this year, primarily due to the stronger rand period-on-period. The rand's weakened significantly in the second quarter and beyond. That's now going to turn into a more positive indicator going forward. Positive coal hedging variance on not having any. That was an impact on first half last year, which is obviously now no longer the case. It's worth now highlighting two items which impacted first half 2018 EBITDA. You can see there's an other variance of $95 million. That's a corporate SG&A variance that impacted the first half of the year.
You would have seen in the corporate column that our expenses was about just over $300 million the first half this year compared to $200 million last year. The biggest component of what goes into corporate is as we look across our entire industrial business is the variable pool bonus or the allocation of compensation that goes to obviously numerous individuals that participate globally in that particular contribution and incentive scheme that we do have. Historically, that's been something that has, timing-wise, has generally split evenly over Q2 and Q3 over a particular period. During 2018, this was all wrapped up before the half year. It was all done in Q3. In Q2, sorry, that timing, hard to say exactly whether that timing will continue, but it needs to be highlighted and flagged. On a full-year basis, we're not expecting any impact.
You'll see later on when we look at our illustrative full-year EBITDA guidance, we talk about an industrial SG&A $400 million, which is the level that we've pretty much kept at historically. We expect very little to come through in the second half. $300 million plus $100 million roughly is a split this year. Last year was roughly a $200 million and $200 million split. It was more even. That's purely a timing difference that would have impacted the first half of 2018. At this point, it's also worth mentioning, which we do talk on page 20, which I'll get to later on, is that in the copper business, we did close the books off on the first half of 2018, having sold 32,000 tons of copper less than what we produced.
We flagged that in our production report on the basis that it was a material impact, which we knew at the time. We've now confirmed the financial impact on that because you've obviously got both the copper and the byproducts coming out of cobalt, zinc, and gold in particular, depending on where those tons were. Of course, South America, some in Africa. There was a $298 million variance EBITDA-wise on pure timing of having not had those sales go through in the first half. That will come through in the second half.
Just pro forming for the overhead of the $100 million timing between H1 and H2 and the production V sales timing differing in copper, our EBITDA at a group level would have been $8.7 billion as opposed to the $8.3 billion on a pro forma basis, I think that would be a number that would, modeling perspective, would contribute to all, if any, number and variances that you're currently running. We tried to flag as much early on. Of course, the overhead was only something that we could discuss and confirm today. That's on the industrial. If we move over to page nine, which is one of the more important slides as we look to show the development of cost structures, cash cost structures within the various parts of the business.
These numbers are, from our perspective, they're calculated to include everything from mining costs to processing, to freight, to royalties, to everything from which to be able to, from a TC/RCs, treatment charges, everything to then be able to drive based on the volume guidance that we give you to be able to drive EBITDA. We've reconciled the first half for you, guidance re-action on page 20. On page 21, this is the building blocks that will build up to the $17.7 billion of group EBITDA illustrative basis down to $8.2 billion cash flow. Before I just move into some of the details of that page, just a few highlights from the appendix that's worth noting as well, pages 19, 20, and 21.
If we go to 19, which will make sense of some of these numbers as we go through both 2018, and I think as we think forward also into 2019. Production guidance on page 19. You can see in the chart we've shown actual H1 production, the guidance which we updated two or three weeks ago, unchanged in almost all areas except a slight reduction in lead. The 5% that we commented on, the 300 to 285, not as material as clearly some of the other commodities, and a slight tick down in coal, 2 million tons, 134 down to 32. Minor adjustments around South America, Colombia, and South Africa that fell into those particular components.
For those particular guidances we've spoken about on the left-hand side, you can see quite significant H2 on H1 volume improvements, which will drive performance and are impacting or factoring into the cost performance. Copper, we're expecting 73,000 extra tons H2 on H1, the continued ramp-up of Katanga and Mount Isa recovery, as I said, from first half smelt to rebrick. Cobalt, 29% increase, an extra 5,000 tons period on period. That's the Katanga ramp-up. As you would recall, the cobalt circuit was only commissioned in March, so you had a period which really only had a small number of months, and it's now functioning very well as we've gone through six weeks or so in the second half period. Zinc is quite significant, of course, an extra 94,000 tons with Lady Loretta.
Lead similarly brings Lady Loretta lead tons as a by-product out of that, with some H2-weighted production profile at Kazzinc. Nickel, Koniambo. Coal, now you've got HVO for the full period from Hail Creek, which we closed that acquisition last week, Wednesday, 1st of August, and some higher Colombia production as Prodeco is able to start moving back into normal operations from its temporary investment period. Also oil, you've got the Chad drilling program. In every single one of those commodities, and we'll update the numbers in a few months, November, December, when we update life of mine and budgets, we'll come back to you with 2019, 2020, and 2021 guidance. In every one of those commodities, we'll see quite material increases again going into 2019, which will of course have a favorable impact both in a volumetric sense and in a cost sense.
If we look on page 20, that's just the reconciliation of the first half performance on costs versus guidance. You can see bottom left, the copper production versus sales timing in respect to both the primary and the secondary products, so 159 and 139, that's the $298 million. We've reconciled to you based on pricing that's come through for the first half and the updated cost structures as well that's come through. I'll talk about some of the reasons for the cost increases as we go back to page nine in a minute as well. Page 21 as well is then the full year, having baked in now the full mark-to-market numbers of all the commodity prices as they are now. Of course, this is just a point in time.
If we'd been cutting these numbers six or eight weeks ago, they would have been higher because, of course, commodities like copper, zinc, cobalt, and the likes would have been higher back then. If we cut it off in six or seven weeks' time, hopefully it's higher again. These numbers need to be taken with that in mind. It is obviously sensitive and clearly volatility, although as Ivan said, given both the commodity and geographic distribution and the stable commodity part of the business, it should be more cushioned than many of our peers. We've run these numbers. You can see the spot copper price. This is all cut off, I think, in the last few days or so before we finalized. Copper was at $2.80, which is pretty much where it is now, the $6,171. Zinc at $1.21, just over $2,600.
Nickel, that was $13.4, which I think has picked up a few hundred dollars since that, so maybe a bit conservative there. I'll refer to those numbers later on, but as always, we provide those building blocks. Maybe now just covering back to page nine, then I think we'll spend a little bit of time on this slide. The copper and zinc business, just in the first half of the year, has been impacted by, they are two businesses that are most exposed and therefore will show sensitivity and volatility to both. Clearly, the primary product is affecting the revenue line, but the secondary products coming out is affecting the cost line as a credit to those particular business. Copper is getting significant by-products for us out of cobalt, of course. Zinc is a very big by-product normally and particularly now in Antamina.
We've also got gold out of Antapaccay, Ernest Henry, and the likes, and there's also some silver by-product that will be coming out of Antamina and some other operations. Very sizable by-products. The zinc business similarly is affected by very big by-product materiality out of lead and out of some of the precious metals as well as copper. Kazzinc, as you would know, produces 70,000 tons or so of copper, and we have quite significant copper as well coming out of the Canadian zinc operations as well. It is material. If we just provide on a year-to-date basis against where we were in January, the last time we gave some of these guidance. In the copper business, what was relevant to them, you've seen zinc down 6%. This is the average prices for the year against what it was in January.
Zinc 6% lower, lead's 5% lower, copper's 4% lower, and gold and silver themselves about 5% lower. Clearly that's obviously had an impact. We've seen some tick up in fuel and power prices. As mentioned before, Brent price was up around 18% from January's price to where we were for the average for the particular period. The business is very exposed to that diesel price and the fuel price through its mobile equipment and some power associated costs, which could also tick up through either being exposed to coal or through oil or various other utility-like prices as well as they come through. As we move between copper and zinc, they have been affected by byproduct pricing, fuel and power prices, and we've shown the effect of that. Some production that we've shown in the guidance on that page 20.
Against initial expectation, we've seen modest lower productions than what we might have thought for the half year. I think only about 7,000 tons in both those cases as well. The bigger impact, I think, is as we go clearly now for the spot full year basis in costs, which is the next table, looking at 2018 revised, because now we're fully mark-to-marketing the entire byproducts on an illustrative annualized basis. The movements in byproducts is significantly more material than, obviously, just a year-to-date average. Now we're fully mark-to-marketing the entire zinc byproduct in copper at the prices of currently, which is the $2,600. It was $3,400 back in January. Zinc is 26% less. That will have a material impact in the copper business. Lead is 17% lower of that same period.
Cobalt, 13%, gold and silver is 12%, and copper is 12% as well. Within the copper business as well, we've seen the biggest impact on byproducts is cobalt, zinc, and gold. We've also noted some higher costs generally within the group, and Copper Africa has been singled out for the reasons that I will now go into. One of the reasons is Mopani itself. You'll see within, for those more sleuthy detectives, you'll see somewhere in the production guidance we've shown, not so much in its own source, but we've been treating during the period much lower third-party material due to general lack of availability within the area. Of course, you don't have that absorption and those processing margins that we would otherwise get. We've got significantly higher smelting capacity within the business than what we are mining out of our own operations.
That whole dynamic will change as the new tons come out of Mopani and we launch the new shaft projects. There was quite a material impact at Mopani during this particular period due to lack of third-party availability for treatment during that period. That's all been factored. We expect some partial recovery in that as we move towards the end of the year. We have also built in, and no doubt there'll be a question on that later on, we have built in what's currently being imposed out of the new DRC mining code. We are paying certain additions under protest. We don't agree with the application of the code as it currently stands, the royalties has now kicked in since 1st of July or so at the high level, 2% on net. It's now 3.5% on gross.
There is some additional important export duties as well that are being levied and paid in accordance with the regulations. We've built in that through into the copper business as well. That's clearly coming through as well. Just the general, as you go through ramp-up periods, which we're still going through at Mopani and Katanga itself, there can be a timing lag associated with when you're building up and mobilizing the full teams and getting the operation set for the production, which is lagging in terms of that full production. As we look at the copper costs of the $103 for 2018, we would expect all things being equal with even prices where they are now byproduct-wise, we think is generally at fairly conservative levels now.
One can mark to market that on a go-forward basis, with the incremental production we have going forward in 2019, both copper, 150-300 at Katanga with cobalt from 11,000 up to approximately 30,000, with marginal costs being very low to deliver that extra, we'd expect that average cost at current prices to start heading lower than that particular level. That trend we would be hoping to produce in a few months, show you the reversal of that escalation and that effect from the byproduct prices and the volume effect that comes through. Similarly, zinc, which has seen the same byproduct effect on its business as it brings in Lady Loretta and Zhairem, you'll also see the effect of those volumes. High-grade zinc clearly at Lady Loretta. Zhairem, a good zinc with some meaningful lead byproduct should also contribute from a unit cost perspective.
Coal, on the other hand, has been able to maintain its margins and its cost structure pretty much where it is. That is a function of the general portfolio optimization through Hail Creek, HVO, sale of Tahmoor, these have all contributed to an improvement in the margin and the cost structure of the overall business, contributed through some M&A. Timing-wise, you'll see we've gone 52 to 50, then back up to 52. One of the contributors there was some long wall moves just at the Ulan mine, which didn't happen in H1. Now it's going to happen in H2, that's going to impact costs as we move forward. Nickel, pretty steady business as we work our way through. Those are the main costs. We'd expect them all to, as I said, copper and zinc to start coming south as we bring those extra tons.
Coal, steady business as we go forward. Significant cash generator and nickel holding in its costs as well. On CapEx, there's no change in CapEx. Same guidance, $4.9 billion. We've left the same for 2019 and 2020 for now, which we believe would remain unchanged. The update which we will look to provide at the end of the year is whether there's any adjustments would be required or whether we can absorb it in these numbers. We'll just need to see the financial impact of Hail Creek and just look to see what the program looks like at the Chevron business, the refinery down in Cape Town when that gets acquired, which is expected in H2. Most of the expansion areas we provided last time was in respect of Katanga, INO, Zhairem, Katanga, and Chad West Oil.
We provided slides back at the beginning of the year, we'd look to update those slides again as we move towards the end of the year. In terms of balance sheet financial structure, I think the company's in as good a shape here as it's ever been. We've got reductions in net debt, as Ivan mentioned, down to $9 billion, and very manageable bond maturity is capped at $3 billion in any one year, which is very manageable. Just one point to highlight is the 3% increase in RMI for the period, which was $0.7 million, reflecting net higher commodity prices and volumes during the period. Some were lower, some were higher, of course. Oil price, as we mentioned, was up 18% year-on-year.
Just to mention that as we stand at the moment, given the metal prices have come down since that period, that increase has now been fully reversed. We're now at levels that are below where we are at the beginning of the year, and this should see a continued reduction on that or reversal of that increase in the net funding line. All things being equal again, I would expect that we end the year less than where we started in terms of RMI, the way it is at the moment. FFO to net debt, 133%, and net debt now to EBITDA, adjusted EBITDA, running at 0.55 and on any pro forma basis with an increase in earnings expected, that should continue to drop forward. Pretty good balance sheet and structure.
Before we finish off the Q&A, just a quick cycle that we show on our half year capital allocation. As we move around the wagon at the top right, to maintain strong BBB, Baa, that's the priority. As we work through the starting the year with net debt $10.7 billion, we generated equity cash flows of the $4 billion, which was $5.6 billion FFO, less $2.1 billion CapEx, $0.2 billion out to minority interest, $0.7 billion working capital reduction non-RMI. That could be expected to potentially reverse out towards the end of the year. I would flag that within our own assumptions, we're assuming that that flattens out before the end of the year. It's worth noting that in the funds from operation tax, cash taxes were significantly weighted towards the first half.
We expect a much lower tax cash outflow in the second half, which would be helpful both in the FFO and the net debt sequential movement. We did incur a bit of a double impact on tax during the first half. In an improving profit environment, you then will pay tax in respect to previous years, and very often in some countries, you'll then pay provisional taxes in respect to future years. Once you've flattened out, you'll be paying more normal levels of tax. In an up trending environment, you can pay double in some periods. In a down trending environment, you can then have the ability to reverse out. Cash tax will be much lower in second half. We've then seen the distributions and buyback during the first half, as Ivan mentioned as well, $1.4 billion. We'll follow that up with another $1.4 billion in the second half.
There was a small amount of share trust purchases of $0.3 billion. That's our independent trust that manage potential settlements under employee share programs. We just accelerated the purchases in that trust to be fully hedged now to avoid any outflows or dilution over the next three years. It would normally be something in cash flow that might have otherwise been lower over longer periods. We've just accelerated it, and that's something which will be helpful for the equity dilution and cash flow story going forward. Of course, HVO was the net acquisition of $1.1 billion that occurred in May, all of which to finish net debt at $9 billion. For the second half of the year, I would just note to have plugged into models. Clearly, there's still the completion of the mop-up of previously announced M&A. Hail Creek, as I mentioned, $1.7 billion.
That closed last week, that is second half. We still have Chevron to complete. That is about $0.9 billion. In Brazil, there is Alesat, which is a downstream oil business. That is about $200 million, $0.2 billion on the equity side. $2.8 billion we have to still complete the M&A program. H2 dividend will be $1.4 billion and the buyback program. There is $5.2 billion or so accounted for in terms of cash usage for the second half of the year. Ought to be covered almost fully by cash flow during that period and other cash movements. Potentially towards the end of the year might be sort of as you are around the net debt levels of $9 billion, depending what commodity prices you ought to have.
Clearly then with no additional calls and commitments from an M&A perspective currently in terms of announced transaction, we will start next year with the business generating significant free cash flow. We will be declaring our base distribution in February next year. These cash flows would be sort of $3 billion to $3.5 billion. The net debt around the minimum level that we have set at the sort of $10 billion. Clearly having greater both momentum, capacity, and with eyes on the current share price to consider further buybacks as we because we have currently committed to the existing program out till the end of the year, the $1 billion. We could, of course, come in December and look to continue that program again from 1st of January next year or wait until February to make some further announcements around that. Maybe just page 22, then we will just go to M&A.
Just worth highlighting for the purpose, again, of modeling is where the share count is as we see it at the moment, given some treasury shares, trust shares that would not be expected to be dilutive and that are not the lower base is eligible for distributions. I would have thought for both valuation and accretion purposes, we are down to 14.143 billion as well, as you can see on page 22. We thought we would provide that information as well, given there is slightly more material movements and the buyback is ongoing, it ought to be something that is watched. With that, I hope it has been comprehensive enough. I think I will hand back to the speaker for some questions and look forward to answering those. Oh, Ivan, sorry, just concluding marks.
Thanks a lot, Steven. If you look at slide 14, it gives you an idea of the power of our diversified business, the type of commodities which we produce, and it shows the earnings and cash flow momentum. As you can see, if you look at the momentum of our commodity prices during this year, where we have had volatility with all the commodities during the year, look at our year-to-date illustrative spot, EBITDA momentum is definitely superior to our peers. If you break down our commodities which we produce, you have copper, which is weaker since the beginning of the year, 14% negative, zinc 21%, cobalt 15%. This has been partially offset by the strong coal price during the year in both Newcastle, South Africa, and Colombia, where Newcastle price is up 17% and you have nickel up 7% and ferroalloys.
The coal price is extremely strong at the moment. As you know, there's tightness of supply in both Newcastle, South Africa, and Colombia, this is keeping the price up with strong demand, definitely in Southeast Asia. This is comparative to our peers, if you look at our peers, if you compare it to iron ore, we have the CNF price down 19%, whilst you have the FOB price of iron ore down 16%. If you take the balance, that definitely, if you look at the slide on the right, shows a differential of year-to-date spot EBITDA momentum versus our U.K. peers. We also have, as we've always said, the stability of the marketing cash flows, as you'll see, I think we've got a slide in the addendum which shows the stability of the marketing business.
Even though we got the volatility on the commodity prices, the marketing business has been extremely stable. As we displayed, where we had higher prices during the first half of the year, we hit $1.5 billion EBIT on the marketing business. It's clear the EBITDA momentum is superior to the peers who have more iron ore in their portfolio, this has been advantageous to us during the year. We continue to be highly cash generative at current spot prices, as Steve mentioned early on, if you look at our free cash flow at current spot prices, we're going to have a free cash flow of $8.2 billion from an EBITDA at current spot prices of $17.7 billion. That generates this massive free cash flow, as we show here, that's giving us a free cash flow yield based on this $8.2 billion free cash flow.
That gives us a free cash flow yield of 13%, which you'll see from the slide on the right is a 17% premium to our peers. The commodity fundamentals of our commodities, we believe, remain favorable. It's clear you've got a bit of volatility with the potential trade wars occurring. However, there is limited supply in our commodities. As we mentioned, there's limited new supply in coal, there's limited new supply in copper. Cobalt, most of the new supply comes from us, there's limited new mines being developed on the horizon, which produces our commodities. We think we have the right mix of commodities, the fundamental demand for these commodities remains robust in the world. Even with the potential trade wars and the noise around the trade wars, we don't see much decrease in the demand for these commodities, even in China.
If anything, in China, with the shutdown of some of their operations because of environmental issues, demand is, in fact, looking better in certain commodities. If you turn to page 15, giving you a summary, looking at what Glencore has if you look at the year to date, we had a record first half. We're well placed for the future. We believe we've got tier 1 industrial assets, sustainable low costs, long life assets, long life for reserves. As Steve went through some of the costs, the costs will start improving when we increase the volumes later in the year and towards 2019. Hopefully, the by-product credits will bring the cost back in line to where we were before. A large amount of the cost rise was due to the decrease in the price of the by-product credits.
Once again, we always emphasize our marketing business, the resilience of our marketing business, even with lower commodity prices and volatility. That generates a large amount of cash flow. As we always said, from the marketing business, we will distribute a dividend, a minimum of $1 billion from the free cash flow of the marketing business. The benefits of our diversified model is playing out, as displayed by our cash flow momentum and our earnings momentum. We are still very highly cash generative. As I mentioned before, $8.2 billion free cash flow of $17.7 billion of EBITDA. As I said, a 13% free cash flow yield at current share prices. The commodity fundamentals, as I said earlier, remain favorable for us. We still, as I say, emphasize that there's limited supply of our commodities coming into the market and demand still remains robust.
We distributed $4.2 billion to our shareholders over the year. I once again emphasize, as I said in the beginning of the discussion, that is generated from our existing assets, not from any sale of assets or anything of that kind. We will continue doing more distributions, as Steven mentioned, or we will definitely look at the current share price, and if we believe it's undervalued, we'll continue doing buybacks and returning cash to the shareholders. I think that gives you the final summary of the company and how we're looking today. As I say, I once again emphasize the strong free cash flow that we're getting from current lower commodity prices, and hopefully with higher commodity prices, this will increase as we move forward towards the end of the year. I think we're ready for questions. Thank you.
Thank you. Ladies and gentlemen, if you'd like to ask a question, you can do so now by pressing star one on your telephone. We will now take our first question from Liam Fitzpatrick, Deutsche Bank. Please go ahead. We will now take our question from Alon from Macquarie. Please go ahead. Your line is open.
Hi. Thanks. It's Alon Olsha here from Macquarie. Just two questions. Firstly, on the DRC mining code. Thanks for providing clarity just on the uplift to royalties. There are still some other pretty onerous provisions in there. Clearly, they haven't yet been implemented, the potential 10% royalty on cobalt as well as the windfall tax and some of the other provisions. Could you give us a bit of visibility as to when those might be implemented or the status of negotiations or discussions with government at the present time? Then the second question just on coal, a two-part question. Just firstly on the coal market outlook. The market's been very resilient and the spread between high spec and off-spec product has really widened recently. Could you just give us your take on what's been driving that and the sustainability of that?
Related to coal as well, you've now consolidated HVO, or sorry, included HVO into the account. Could you give us a sense of some of the synergies you plan to drive there with the rest of your business in the region? Thanks.
Okay, give me DRC. On the DRC, you are correct. What they are applying now is the 3.5% on the gross and not the 2% that we had before on the net. There are other implications, as you correctly state, on the new code, which we are still trying, the industry is still negotiating and trying to talk to the government. As you are aware, we do have the stabilization agreement in place, which means we should not have from the date they change the code for a period of 10 years. We should stay with our existing agreements. We have tried to find a compromise with the government, which the industry has spoken about and has put out announcements where there's prepared to be a bit of give and take on the new code. We haven't progressed much further on that.
There's still potential discussions there. We debating that continue with the government. The industry is considering its certain legal actions it can take. Nothing has progressed on that side, and hopefully we'll find a better resolution with the government going forward. The industry is still working very closely together, and we're looking at all alternatives. For the moment, against our agreement, we are paying this higher royalty, and as Steve says, also some high import tax on goods coming in. There's ongoing discussion with the government, and it's something we hopefully will resolve, but we do have the option, the industry will look at the option of legal action. As Steve says, we haven't built any of that in these numbers which we've given you, and these numbers are just working on the 3.5%.
Regarding the coal, the coal market is extremely strong, as you know. There is a divergence between the lower quality coal and the higher quality coal. It's clear the higher quality coal, there's strong demand of the higher quality coal outside of China and certain areas. There's limited supply from Newcastle. There's been no new mines being built in Australia, no new mines being built in South Africa and Colombia. There has been an increase in production from Indonesia, but that is the lower quality coals, while the demand for the higher quality coals is strong and continues to be strong what we see going forward. The coal price now is running around about [ a Newcastle $119, $120] , while the lower quality coals are lower.
Even if you look at the Chinese price today and you do the adjustment where China's running at about RMB 600, that reverts back to Australia for that kind of coal going in, is in the low 90s. Overall going forward, still very strong. As I say, we see no new production coming from South Africa and a lot more South African export coal we believe will be required locally by Eskom. It's all holding well for coal going forward. Steve, I think you can answer the one on the synergies we get at HVO.
Hi, Alon. Just on the obviously with HVO, it's only been a couple of months. I think it was since we took Sort of management control of that operation via the JV with Yancoal. It's still undergoing. We're in our planning cycle at the moment. We're looking to both see how HVO itself within its own entity can clearly deliver synergies by looking at things differently with our partner, Yancoal, as well as some of the adjoining properties with Glencore. It's also not a public company, so at this particular stage, it's with Yancoal's on the other side and their own reporting. I think we'd look to try and coordinate something and come back to the markets around November, December and give some feedback together on how that's progressing.
It's sort of first views and having been in there for a while is that it's delivering as per expectations and as being the logical owner or the logical party to be able to deliver those synergies. We're obviously very happy to have the keys for that particular property at the moment.
Okay, great. Thanks very much.
Thank you. We will now take our next question from Liam Fitzpatrick, Deutsche Bank. Please go ahead. Your line is open.
Morning. I've got three questions. Firstly, on marketing, just with respect to the DOJ subpoena, has there been any impact on trading volumes or funding costs since then? Secondly, on strategy, given your legal issues, does this change your appetite to operate in countries like the DRC going forward? Finally, you touch on this in the release, but when we look at M&A versus buyback, is it fair to say that M&A is very difficult to justify versus your current share price, or should we still expect you to look at bolt-on deals going forward? Thank you.
Yeah. The first part of the question, the marketing, no, it's had no effect on our marketing business and no effect on finance available for our marketing business. Regarding going into these countries, risk, we will assess it carefully. We'll operate in a responsible, lawful, and sustainable manner if we do operate in these countries and we'll continue as long as we do it correctly. Regarding will we look at M&A, as I said, yeah, M&A, we'll continue looking at if it is opportunistic, the same way we've always said we'll look at opportunistic type ideas, providing we're getting the right returns that we're looking for in those areas. As I've said today, we would require something around about the 15% RRR. There's not massive opportunities out there today, and we haven't seen anything that really looks exciting. If something comes along, we'll look at it.
If you look along the horizon, we don't see anything that great right now. Potentially the best thing we could do is returning funds to shareholders or doing share buybacks. That potentially will give us the best returns.
Okay. Thank you.
Thank you. We will now take our next question from Jason Fairclough from Bank of America. Please go ahead. Your line is open.
Yep. Thanks, gentlemen. Just two quick ones from me, one on Koniambo and the other one on Dan Gertler. Just first on Koniambo, I see you're ramping up the second line. You spent another $60 million in CapEx. We still don't see any financials. I guess, what is the latest, and how should we think about the trigger to start actually putting some results through the financials? And maybe you could update us on the carrying value of the asset. Then secondly, just on Dan, has your approach to dealing with the issue of payments to Dan Gertler changed since your subpoena from the DOJ?
Yeah. Look, Koniambo, as we said, we should produce, we should get close to both lines are running. We should potentially hit just short of 30,000 tonnes, I think we envisaging this year, Jason. Next year, we should start bringing it to account, and we should ramp up further when both lines are running smoothly. There's definitely the plant is running well. There's no technical problems on the plant. It's just purely ramping it up. On your second question on Dan Gertler, we cannot comment right now. Steve, anything else you want to add on Koniambo?
Yeah, Jason, it was obviously from 1st of January next year is when we'd be looking to bring it in as a typical operation. We'd see all the financial results, the EBITDA, the cost structure start building all of them. That's the period at which we would see a level of accounting commercial production to have been reached. That's our base case for now, and it would have sort of graduated to the big boys club, which is good. I think just to that point, since DOJ, it hasn't reflected how we sort of the resolution and how we reached obviously the announcement with Ventora back in June. That obviously still continues as is, which was the announcement and how that's being treated and the agreement and the way forward, the whole approach, that's as is from the announcement that was made in June.
Okay, thanks. Just to follow up, Steve. The latest carrying value on Koniambo and is it working well enough that you could actually think about writing back some of the value of the asset at some point?
We'll have to look at that. There's a couple areas that we're going to have to look in Q4 when we update all the plans and the assumptions that we put in, that we put some impairments historically where there could be in reversal subject to pricing, of course. We've got nickel and oil. We'd obviously made some impairments against some of the West African portfolio and prices where they are at the moment, sort of holding it at these levels that we'd obviously have to look at both those. It's not always one-way traffic in terms of some of those things and obviously the opportunity to bring back some of that.
Okay, thanks very much.
Thanks. Thank you. We will now take our next question from Sylvain Brunet from Exane BNP Paribas. Please go ahead. Your line is open.
Good morning, gentlemen. Three questions. Maybe first on potential non-core asset disposals that were discussed at the beginning of the year. If you are still considering some of these and which are the criteria. Also, if you could perhaps clarify a little bit your exposure to some offtakes on the aluminum or alumina side with Rusal. It doesn't look like their situation with the U.S. sanctions have been clarified. Lastly, if you could just give us some feel for your preference for dividend over buyback. In the past, obviously the dividend out of Switzerland was more tax efficient, but obviously at this current share price, valuation is very attractive. How do you go about deciding the allocation between the two, please? Thanks.
Yeah. The non-core assets, we don't have many non-core assets. We were talking about Rolleston a while ago because of the situation with the port capacity there, and the liability with the port capacity. With the current premium Rolleston gets today with the low sulfur levels, there's a premium now. Big demand for low sulfur coals in Asia today, and especially in Korea, et cetera. It's something we keep looking at, but the pricing we're getting from Rolleston, the premium you get as against other coals with the regular sulfur, the benefit of it is starting to look interesting. It's something we keep assessing. If we can get the right price for it, we could look at it, but that's the one we had on the drawing board for potential sale.
I think with the new sulfur levels kicking in place and the benefit, it's a little bit off the sale list, but we'll see what we get there and what interest we have got from that. Regarding Rusal and the U.S. sanctions, I think that's something you refer to Rusal. We cannot comment on what negotiations they are currently having with the United States. The third question, share buyback, if you want to talk about that as opposed to us.
Thanks, Sylvain. In terms of, obviously, there will always be the base distribution, which will just come through in the normal course, which will be the formulaic $1 billion plus a minimum 25% of industrial free cash flow. That's going to anchor a certain regular recurring distribution, which as you pointed out, is still from a Swiss perspective, there is some favorable tax treatment around that, given some capital reserves we had, both free of withholding tax and tax free for Swiss shareholders. That's certainly attractive. In terms of the overall equity proposition and share price appreciation and value of allocating capital, of course, at these sort of levels, it is an attractive source.
We've historically said our favoring of distributions over buybacks historically is that we felt the market was sort of in the right zip codes around most of the operating assumptions and some of the risk factors around the business. It was a call on commodity prices, which is something that we didn't necessarily want to make that call, we'd rather pay it out and people can come in. Today, we have a variety of factors outside of commodity prices, where we're seeing some big value that's inherent in the business in terms of probability of outcomes around delivery of our production growth, obviously ramping up. That's obviously something. Risk adjustments that may be built into, obviously, parts of the business. The coal business itself may be certain people that may be a little bit softer in terms of some of those long-term.
We obviously take a different view on that particular commodity and how it's performing and the cash flows that are being generated. You've got asymmetric factors now that are feeding into the favoring buybacks, and for as long as that continues, that will definitely be a tool that gets exploited to the maximum, which is what we're doing. The last one, in fact, the $1 billion announcement of the buyback that we did back in July, as we were going through Q2 and looking at our potential projections, we were always looking at a $1 billion top up, potentially, if we'd been talking in April or May. It may have been a top up through a special distribution as we went through June or July. That turned into the buyback for the exact reasons that I mentioned.
That's the thinking that we do look at in the interest of all shareholders as opposed to just Swiss shareholders, which we do need to take that into account as well.
Okay. Thank you.
Thank you. We will now take our next question from Ian Rossouw from Barclays. Please go ahead. The line is open.
Thank you. Just two questions from me. First of all, on the marketing guidance, which you've reiterated at the top half of the range. If you look at the first half run rate, you're already basically at that top end of the range. You obviously made some comments around the ags performance that you expect that to be significantly better in H2. Does that imply that we should see weaker performance in metals and energy, or is that just you being conservative? The second question, just around the capital allocation. On the buyback, you've already done just under half a billion dollars over the past month. So you roughly have the same amount left to do over the next five months, which obviously suggests that you'll slow down the buyback quite significantly.
In the context of your comments around the share price being very attractive at current levels, how should we think about that? Will you just keep the current pace and finish the buyback early, or would you actually slow it down?
Okay, on the marketing, I'll handle that. Yeah, the first half was good, as you can see, $1.5 billion, but that was off higher metals and energy prices. Coal has been up, yes, so therefore we should do well in coal. Oil is a bit up, but oil hasn't had really great fundamentals towards the end of this half. I think metals could potentially be down, oil towards the second half. Let's see where that ends up. Agriculture will be up, so hopefully it balances out. Let's see what commodity prices do in the second half. As we've always said, with higher metals prices, higher commodity prices, there are more arbitrage opportunities and more opportunities to do better on the marketing business. We've got to monitor what the metals price does in the second half. We will definitely have a better second half on the ag.
As Steve mentioned earlier, we've already seen during July month that it's looking a lot better, and hopefully that will average it out and we should definitely get towards the topper end of that range by the end of the year.
Thanks, Ian. It's Steven here. Just on the buyback. Yeah, you said we sort of designed it in two phases. One was sort of signing the irrevocable during the close period of GBP 350. That's been done as of about a week ago, that completed, so that was around $450. Up to $1 billion, we've got $550 left, which on a sort of an average daily compared to what we've done in the last six weeks would clearly be slower. It doesn't mean we need to be in the market necessarily every day. We're sort of unrestricted now in terms of having to, we can obviously be in the market when levels make sense. We can stay out of the market for a while. We've obviously had a slight weaker period in the last six weeks, clearly.
As we sort of roll forward our sort of debt levels, if it was five or six weeks ago and we were rolling forward sort of spot free cash flow with $1 billion, I would've said we'd be way sort of south of $9 billion. As of now, you sort of said, well, sort of $9 and maybe a touch above $9, which is not leaving as much breathing space around the $10 billion that I definitely want to be below that. We just need to see how the next sort of couple months plays out. Work through the remaining part of the buyback, but stay alert to the evolution of cash flows. We've sort of said anything materially below $10 billion, that belongs to obviously you, as shareholders, and we'd look to find the appropriate time to get that back and in the appropriate form.
We've just got to see how we go towards the end of the year. We do, as I said, a bit of mopping up on the M&A, mopping up on the second half of the dividend. We've got the buyback we need to complete, and let's see how that plays out before the end of the year. We do have the opportunity in November, December, when we come and give the more medium-term guidance. We don't have to wait till February. Either ad hoc, like we even did with the initial buyback or even potentially November, December, that would be an opportunity to say, do we want to just keep this thing running, start it again from 1 January? Do we want to increase it somewhat?
These are obviously options, I want to see how the sort of world looks over the next sort of month or two before making any decisions.
Okay, thanks. Maybe just to follow up on, Ivan, on the first question. Have you seen any sort of opportunities in trading or marketing with the tariff and the sort of trade disputes, has that created more opportunities in marketing?
That will create opportunities, no doubt, with aluminum and different tariffs existing around the world on certain commodities. Any changes is going to create arbitrage opportunities. We've seen a bit premiums move in the U.S. when you get these tariffs and that's sitting in. Anything where you got change, we should be able to take advantage of and get some opportunities.
Okay, I'll leave it at that. Thanks.
Thank you. We will now take our next question from Sam Catalano from Credit Suisse. Please go ahead. Your line is open.
Hi. Good afternoon. Two questions. Firstly, just on the cost guidance increases. Steve, you gave a pretty good roundup of the drivers there, but just excluding the by-product credit impact, the two divisions where you've had the most increases in your guidance are clearly the two divisions where you're ramping up production. Would it be fair to say you've been a bit surprised by cost inflation or ramping up production in those two divisions? There's a second question sort of related, I suppose, is just about where to next for growth. You're obviously ramping up capacity into that latent capacity in zinc and copper. Previously, you always talked about favoring brownfield latent capacity type expansions. Where are the next ones within the portfolio, and when do you think we'd be able to hear a bit more about them? Thanks.
Thanks Sam. I'll take the cost question first. The zinc and the copper is where there is some production increases that at the margin, sort of all things being equal, would expect to obviously mitigate some of those cost pressures. I did in copper mention some of the more extraneous impacts around lack of third-party material at Mopani and DRC and just generally having to probably mobilize and staff up these operations ahead of their expansion with this is just against expectations. At some point, it was maybe a timing thing of how we expected some of the costs to be introduced into the business compared to a certain other profile. Something on zinc that I didn't mention, and maybe I should have on the call, and it was really a sort of a one-off item as well.
Over in zinc Australia, there was about a $20 million-$25 million take or pay settlement or payment on some historical freight agreements and rail agreements that had to go through the books. That was a one-off relating to historical discussions and disputes and whatnot. It just happened to come through this particular period. It's a one-off that's come through the zinc business, and that's obviously not part of the feature. These are some of the smaller things that each of them don't particularly deserve much attention, but you get a few of those and they potentially add up. We will see.
Maybe there's an element of having, in terms of some of the costing, that maybe it built up where there was obviously slightly stretchy targets are coming in, and maybe now it's slightly more conservative, and we can get three or four months down the track and see that we've actually been able to close the gap somewhat. I'd rather take the approach of setting these numbers out here and setting some beats down the track. These are the numbers that clearly come off the system, but that's just my own potential assessment of explaining some of those reasons as well.
Clearly into 2019, having seen some more extraneous factors in 2018 and some of the timing of production and other factors come through, clearly into 2019 we'll be very positive, all things being equal in both those copper and zinc businesses, and that would be in three months' time as we do always around the time, we'd look to come and update and give the full building blocks around that and explain everything, having had another strong three to four months now where the business really does go and turn everything upside down and builds everything up from the bottom upwards, including, by the way, some of your second part of your question is when they start thinking about subject to market, subject to latest capital, subject to latest returns, start thinking about whether it's time to either think about or to elevate or to promote any further organic expansion opportunities that exist in the business.
For now, we're really focusing on those ones, as I mentioned to you earlier on, which was the Katanga, INO, Zhairem, Koniambo, and Chad West Oil. We have options in copper. We have some options in some other commodities. I think it's premature now. Let's wait till November, December, and we'll talk about those.
Okay, thank you.
Thank you. We will now take our next question from Menno Sanderse from Morgan Stanley. Please go ahead. Your line is open.
Yeah, afternoon. Two small questions. First on coal. You both alluded to it. Prices are strong. You yourself see them continue to be strong. Nevertheless, the financial market and ourselves as well stubbornly forecast declining prices. What do you think we are missing, and where should we pay more attention to? Secondly, on marketing and the trade war and the structural quality price differentials. Intuitively, I would think that would be good for the marketing business. Nevertheless, RMIs are slightly flattish. How can we close the gap between flat RMIs and what should be a very advantageous environment for the marketing operations?
Yeah, I don't know what you guys are missing on coal. I suppose you missed the ramp-up to $120, and you missed the ramp-up to South Africa, $110. I think people are forgetting that demand in Southeast Asia is rising. India demand is strong. China has been stronger than people anticipated. You have increase in demand in Malaysia. You have increase in demand in places like Turkey. People are forgetting about the increase in demand. They're all looking at Europe, and you've got to remember, in a billion ton market, seaborne market, Europe is really only about 100 million tons. It's not a big effect on the market.
We hear about less coal burn in Europe and everyone's focusing on that, we're forgetting about the demand which is going on in Southeast Asia and other parts of Asia, and especially India, where Coal India is not ramping up as everyone anticipated. Unfortunately, I think India would even import more tons if the ports could handle it. Those areas are strong and demand is strong. What everyone seems to be forgetting is there are no new coal mines being built. No one is building a new coal mine in Australia. No one's building anything growth in Colombia. Nothing is happening in South Africa. In fact, South Africa could potentially go negative when Eskom has to take some of the export tons onto the local market. You're only getting increases in Indonesia.
What everyone seems to be forgetting, the increases in Indonesia is increase in tonnage, but not increase in actual heating value going out of the country. The increase, they're losing a lot of their higher quality coals and they're increasing volume of the lower quality coal. In calorific value, exports is in fact going down. I think this is where the market's getting it wrong, and that's where I think you guys are putting forward coal prices around about $75, $80 going forward. We don't see it at that. As we've seen this year, look at the numbers we're going to get on EBITDA on coal. I think Steve gives a slide on coal. At current spot prices, I think the EBITDA of coal is our top performing commodity.
I think it's around about where we had about $5.6 billion, $5.7 billion of EBITDA. You've got to remember, the free cash flow from coal is extremely high because we have a minimal CapEx in coal. There's not a big CapEx bill on coal, it generates a massive amount of our free cash flow. I think that's the part where you're getting it wrong. Trade wars and the effect of RMI, et cetera. You've got to remember, the trade wars hasn't really kicked in yet. Therefore, we haven't really started taking advantage if the advantages are there yet. We'll see what happens and what the effect of it is going forward.
Cheers.
Thank you. We will now take our next question from Sergey Donskoy from Societe Generale. Please go ahead. Your line is open.
Yes. Thank you very much. A few of my questions have been answered, two small ones. First of all, speaking of your coal division, I think that portfolio mix adjustment to price in first half was a bit higher than you expected. It was $19 versus $16 that you guided. You maintain your guidance for the year unchanged at $16, if I understand it correctly, which means that in the second half, this adjustment is supposed to shrink to about $13. Is this correct? What is your thinking around this? What will be the reasons driving this adjustment lower? Second question, just a small one. With LIBOR rates up this year quite significantly versus 2017, how this affects your borrowing costs? What is the average change in your borrowing cost across your portfolio this year versus last year? Thank you.
Thanks, Sergey. It looks like a couple questions for me. In terms of coal for the first half, where you've seen a reduction in the portfolio mix, that was primarily on account of the lower coking coal prices compared to what they'd been assumed back in January, because coking coal within this formula calculation is treated as a byproduct of the thermal coal, just to try and bring it into one calculation for the coal business as a whole. I think with the purchase of Hail Creek now, which is primarily coking coal, we'll have to consider whether that's still an appropriate way to show it or whether we split up the coal business into its two components and not have it as some sort of primary component. We did see coking coal was stronger in that sort of January period.
It was above $200, things moved into the $170s, $180s and stuff, that clearly had an impact against expectations as we move forward. On a full year basis as to why that's now contracted in terms of the portfolio mix, which is another attribute or another assumption that goes into that because it's all about discount to a Newcastle average price that gets assumed, is that we're able to achieve, in terms of many of our current coal blends and qualities that historically may have been priced either against a different benchmark or may have received even higher discounts relative to that Newcastle, we're able to price coal that never historically would've been priced against a Newcastle benchmark, which is achieving better returns than historically would've been the case. That's essentially contracting that discount or that mix across.
Our overall quality of coal generally has improved as we've taken in HVO, including the semi-soft coal that comes with that particular division, it was quite material as well. Hail Creek, of course, when it comes in, that's on the coking side as well, and sale of Tahmoor, which was sort of an asset higher cost, reaching the end of its mine life as well. We've taken out those tons. That's the main reasons for that. In terms of LIBOR rates, cost of borrowing, we've seen, obviously, LIBOR go up steadily. It sort of had a different shape. It would obviously correlate reasonably with the Fed funds rate, where you've seen a few increases that's happened across the pond there. Our average borrowing during the period would've increased from around, we have some fixed cost and floating and a mixture and hybrid of debt.
It would've been about 380 up to about 400, would be our average cost of debt based on where LIBOR currently is. For the illustrative assumptions, I've used more like 4.3%. I have baked in another couple Fed rises in there into our blended rate for the purpose of the cash taxes interest and other for the 8.2. There is another two rate increases that are baked into that number.
Thank you.
Thank you. We will now take our next question from Tyler Broda from RBC. Please go ahead. Your line is open.
Great. Thanks, gentlemen. Just have two questions from my side. The first one is just on the DRC. Under the current code, would you have any estimates on the magnitude of what the incremental tax could be if there were to be a request from the government for these taxes? Secondly, in terms of following the deals with Gécamines, the mining code changes, et cetera, would you be able to clarify the tax payable position here in terms of any carry forwards? I see there was a couple of changes to the deferred tax in the financials. Secondly on buybacks. I guess, 13% free cash yield. Your net debt level is at the level you're expected to be at. You've got production growth growing for next year. As you've mentioned on the call, you're preferring buybacks to M&A, potentially to dividends as well.
Is there any practical limitation on the amount of buyback that could be done? Thanks.
Yeah. On the DRC mining code, it's very hard to estimate what it would be under the new code because you've got to go look at your regional estimated project, etc., and you work off that. It would be difficult to do it right now because we don't understand exactly how the code would work, and that's what we are currently in discussions with the government, because a super profit tax would be a complex calculation. That one would be hard to estimate. DRC tax payable, Steven can talk to that and the buy[inaudible].
Yeah. Hi, Tyler. On the DRC, there's an accounting area here as much as a sort of tax area in the DRC, particularly in KCC, which is the Katanga operating subsidiary. There is significant tax losses currently in that business as they've sustained losses during the suspension and ramp-up period and of course, a lot of interest that's gone into funding that business. They have around $4.2 billion of tax losses down there, most of which has not been recognized in the books as well. We've sort of noted a conservative approach within the accounts as well. We've said based on the introduction of mining code, but that's probably a lesser thing there.
It's more around just getting validation of the ramp-up and sign-off of all the recap and everything else is that given all the uncertainties, we've deferred a decision on whether we want to book some of those losses. If we did fully bring in all those losses, you'd have $700 million or $800 million of additional deferred tax asset. That's all accounting. That doesn't sort of change much in any of your own models. In terms of tax, what that does do is, of course, shelter some income tax that would be paid at the sort of statutory rate down there of the 30%. You can't use it fully down there in any particular year. There's a system down there where you can use of taxable income in any year that you do generate, which we expect very soon to become taxable within KCC, given its ramp-up.
60% of that taxable income can be offset by carry-forward losses, which then gets obviously carried forward, 40% would attract some tax as well. Clearly there will be some cash benefit or some tax shield at that particular operation. None of that's been assumed of in the illustrative free cash flow we haven't built in. Obviously the existence of those losses will even during, in actual as opposed to illustrative sense, will on account of that particular operation will result in less cash taxes actually being expensed over a period until those losses are exhausted. That's the only place that we currently have any meaningful tax losses still relevant for that purpose. Certainly that hasn't been booked into the accounts. I think in terms of buybacks, you just asked any limitations on amount of buybacks.
There is none other than buying back in terms of levels that is in accordance with EU rules around market abuse and limits and the like. Essentially there is guidance of ranges of less than 10% that you can buy in any given market, safe harbor rules around there, potentially up to 20% and various gray zones in between. We obviously follow those and take guidance accordingly. That's the only sort of practical limit based on liquidity and appetite in terms of how one could execute buyback programs.
Thanks very much. Very clear.
Thank you. We will now take our final question from Dominic O'Kane from JP Morgan. Please go ahead. Your line is open.
Hello. Just quick question on coal. Could you just give us some guidance on the percentage of thermal coal that you're selling at spot versus contract and how the contract timings evolve over the next six to 12 months? Thanks.
Yeah, I think most of it is spot because we sold a lot of tons on the index, so a lot of it is floating on the index even though the physical tons has been sold. We got a certain amount in Japan, which is fixed pricing. My gut feel for the balance and a lot of the Japanese we priced recently and we back priced it to the 1st of April because it's a 1st of April starting date. I would imagine we most probably on the 135 million tons that we have, I'd say most probably 15% is fixed priced.
Okay, thanks.
Much less than historically because the Japanese, some of them have started pushing towards index pricing. That's a figure I don't know exactly, but I imagine it's around about there because a lot of the tons has been sold, but it's been sold index priced.
Thank you. Ladies and gentlemen, that will conclude the Q&A session. I will now pass the call back to your host for any final remarks.
Yeah. No, thank you very much for the questions. I think the main thing we wish to emphasize on the call is the massive free cash flow generation of the company. As we said, we're generating at current spot commodity prices around about $8.2 billion. As you guys picked up on the call, that's generating at least 13% free cash flow yield.
With that in mind, we definitely for the first time, well, not for the first time, but we were always talking about rather dividend payments, but because we don't want to take the risk of calling the commodity price, but we believe their fundamental situations right now, we believe the market's getting it wrong and therefore we've got to look carefully and we will continue looking at share buybacks as the best option as against any other M&A or other opportunities which may exist out there. Right now we believe buybacks may be the best returns we can get for the company. I thank you for attending the call. Thanks very much.
Ladies and gentlemen, that will conclude today's conference and you may now all disconnect.