Good day, ladies and gentlemen, and welcome to the AngloGold Ashanti 2019 Annual Results Call. All participants will be in listen only mode. There will be an opportunity to ask questions later during the conference. Please note that this call is being recorded. I would now like to turn the conference over to Stuart Bailey.
Please go ahead, sir.
Thanks, Claudia. Good afternoon, everyone, to those joining us from North America, good morning. To start, please let me call your attention to the fact that we will be making forward looking statements during the course of the remarks. On Slide 2 is our Safe Harbor statement. It's important to refer to it.
We've got a busy presentation today. I'll be finishing for Graham, whose voice is on his last legs. He will be around to take Q and A. And without further ado, I'll hand over to Kjell.
Thanks, Stuart, and thank you everyone for joining us. Our strategy is underpinned by our overall objective, which is deliver quality production responsibly with emphasis on widening margins, spending mine life and improving the portfolio. We've done well in delivering on each of these focus areas, but there's more to do. The ESG area has become a focus for investors and I'm pleased to say this has been an area that receives a lot of attention to the AgriGold Ashanti and that will continue. For the 7th year running, the company has met guidance on its key operating metrics.
We navigated a challenging year of some operations, but this was offset by exceptional performances of GATA, Cabali, Tropicana and Udiaprem. In fact, Cabali, Tropicana and Udiaprem registered record production numbers in 2019, while Gated's performance was its best in 14 years. Production for the year was 3,280,000 ounces with an especially strong 4th quarter. All in sustaining cost for the year was $9.92 an ounce. Including project capital of $321,000,000 total capital expenditure came in below budget at $814,000,000 Cash generated by operations was strong, up 22% to just over $1,000,000,000 Free cash flow before growth capital doubled year on year to $448,000,000
and the Board declared
a final dividend of $0.11 per share for 2019, up 57% on 2018. We have a steadily improving safety record across all metrics and that's a driving priority for us. We lowered injury rates by almost 60% in 2012 and in 2019, for the first time in our history, we passed a calendar year without a workplace fatality anywhere in the business. And while these are important milestones, there will be no complacency. Our goal remains to achieve 0 harm.
We also have a strong commitment to operating a sustainable business. We'll continue to find ways to deepen partnerships with our local communities and host governments to ensure the benefits of modern, responsible mining extend as far as possible. We're then focused on expanding margins. We've seen success in this regard in recent years, even with the gold price at significantly lower levels than we see today. And we remain firmly in our commitment to exercise disciplined capital and cost management.
This will allow us to take advantage of the positive gold price environment, but we won't rely on it. As we flagged previously, converting our earnings into cash at a time has been a challenge. We're actively working to improve on this by creating more efficient cash repatriation processes from certain of our jurisdictions and by reducing care and maintenance costs, particularly in Ghana and South Africa. Our recent restart in Obuasi and Greece sale of the South African business will assist in that process. In 2019, we conducted 3 sales processes.
We're looking to create a more focused business with enhanced operating and financial metrics. We've now announced 2 sale agreements, 1st just before Christmas with Sadiola and earlier this month, our South African business. The retail of our South African portfolio to Harmony followed a robust 9 month process. You'll remember when we embarked on that process in May, we committed to selling to a responsible counterpart with the operating skills and financial capability to invest in and take the asset forward in a sustainable way. We believe that we achieved that objective and our engagement with a number of our most important shareholders in the past few weeks confirms that this view is widely shared, stakeholders by the way, as well as shareholders.
During the year, we also reached an agreement with V2Gold to assume operatorship at our Gramalote JV in Colombia. In each of these cases, we've improved our focus on the remaining portfolio and evaluated adding options open to us. In Argentina, the sales process related to Cerro Vanguardia continues. We'll make a decision whether to accept a firm offer, which we expect to receive or to continue to own the assets by the end of this quarter. Continue to position the company to deliver long term value through performance, effective capital management, proactive portfolio management and the ongoing review of the corporate structure.
Now I'll hand over to Christine to go through the financials.
Thanks, Calvin. I'm on Slide 10. Following the announcement of our Valaficant asset sales, our results have been separated between continuing and discontinued operations. For today, to ensure comparability to what we previously reported and to reflect how the business was managed for the year, we'll talk to the group as a whole unless otherwise indicated. We had a strong second half.
Production was 11% higher than the first half with cash costs and all in sustaining costs 4% and 1% lower than expected. The stronger gold price, weaker currencies and performance resulted in a 50% improvement in adjusted EBITDA. We also saw a 105% increase in cash flow from operating activities. The most significant improvement came in free cash flow generation, which was $159,000,000 during the second half compared to a $31,000,000 outflow during the first half. This gain came despite continued investment in the Abuwati redevelopment project.
The strong second half performance alongside a higher average gold price translated into a strong financial performance for the year with EBITDA up 16% year on year to $1,700,000 and free cash flow up 90% year on year to $127,000,000 Production against the prior year was marginally lower about 2% on a like for like basis, excluding production from Mohave and Coconut, which was sold in February 2018. Strong performances from Geyser, Cabani, Ideocris and Tropicana largely compensates for planned lower production at TBSA, Sunrise Dam, Ziguri and Tukwune. Free cash flow of $127,000,000 for the full year was a 9% improvement year on year. All of our operating mines were cash positive. Higher gold prices offset oil production, higher capital expenditure, increased profit base, taxes and slower tax repatriation from the DRC.
We received $75,000,000 in dividends from Cavalli for the year. In addition, our attributable share of cash balances in country at $202,000,000 at the end of the year. Our partner very good in the advanced phase of obtaining formal approval to sponsor the fund. Capital expenditure at $814,000,000 came in below the guidance. The capital expenditure related primarily to the Adwasi redevelopment project will be $168,000,000 of zinc over the last 6 months.
We expect the project to achieve commercial production around the middle of the year. Non sustaining capital expenditure included project capital of $329,000,000 related to Owysee and residual spending at Zikuri, Tropicana, Constance Shaker, Simpleen and Kripadonna. Working capital outflows for the year included cash flow ups in Tanzania, export duties in Argentina, higher level of prepayments at Taguasi and ore stockpiling and gold in place at Tropicana and Biguri. At the end of the year, we had VAT of $115,000,000 outstanding in Tanzania, reflecting an increase of $13,000,000 on Q3 $66,000,000 of historical VAT relating to Cabali. Dollars 89,000,000 was spent on non sustaining exploration, of which $65,000,000 was paid on greenfield exploration and heavy costs in Colombia.
Moving on to cash costs. Our cash costs were largely paid with total cash costs of $7.76 an ounce in 20.30 dollars 3 an ounce higher than in 2018. Cash costs were favorably impacted by weaker currency, which helped offset inflationary pressures in the emerging economies that we operate in, particularly in Argentina and South Africa. The main cost drivers being mining contracts, labor and consumables, these are predominantly indexed to inflation. Costs were further adversely impacted by lower production and lower byproduct revenue at CDMA as planned.
Operational efficiency improvements continue to be a key focus to mitigate operational cost pressures. All in sustaining costs of $9.92 an ounce in 2019 were 2% higher than 2018. This excludes $6 an ounce from rehabilitation provisions in Brazil under the new legislation. Lowest paying business capital of $16 an ounce was largely offset by IFRS 16 piece costs, higher rehabilitation provisions and other noncash costs. We've implemented a 0 cost collar on 70% CDFA gold production from February to December, 2020.
The instrument has a floor of $1500 an ounce and a cap of around $1700 an ounce. Ounce. This will protect cash flows during the process and is consistent with the risk mitigation strategy adopted for the South African business last year. We will also be executing a 0 cost comment hedge on about a third of our oil needs this year at the range of $45 a barrel to $65 a barrel. This hedging strategy is consistent with past years to partially mitigate the risk of an upward movement in the oil price.
1 third of this mandate has been executed. On the balance sheet strategy, we continue to execute on our balance sheet strategy and support capital discipline. The group has continued to delever the balance sheet on the back of stronger cash flow despite self funding of Wadi and other growth initiatives. It is pleasing to see a lower adjusted net debt to adjusted EBITDA ratio at more 0.91 times, the lowest since 2011 as we know our targeted ratio of 1 times to the cycle. Proceeds from the South African asset sale will be applied to further reduce debt.
Liquidity remains strong. There is roughly $1,400,000,000 undrawn on the total available one point $6,000,000,000 U. S. Dollar facility and $463,000,000 in cash on hand. We will cancel our undrawn $1,400,000,000 facility and keep the remaining ZAR3.5 billion facility.
Just to correct that, our undrawn facility that we will be canceling is a rand facility. We also plan to redeem the U. S. Dollar $700,000,000 bond maturing on April 15. For this, we will use available cash under US1.4 billion dollars facility.
The bond the Board has declared dividends of US11 dollars per share in line with our policy to pay out 10% of free cash flow before growth capital. This is a 57% increase on 2018 and reflects our focus on disciplined capital allocation, prioritizing debt reduction, reinvestment in this portfolio and improving returns to shareholders. Our credit ratings are unchanged. We have an investment grade rating from Moody's and French and sub investment grade from SMB. All have a stable outlook as Moody's has issued a credit positive report following the announcement of the South African annual sales.
We have strongly leveraged both to the gold price and currency. We improved cash flow generation across the business, particularly given strong market conditions we've seen and the efficiency improvements our teams are working on. On guidance, we see production this year at 3,050,000 ounces to 3,300,000 ounces for the combined full time year. This continued operations related to South Africa for the full year. Guidance will be updated once the sale has concluded.
We expect an improved performance from Siguiri and the production ramp up at Umuasi to offset lower planned production from CVSA and Tropicana, whilst we're reflecting no contribution from Saliota and Maruba. PTSA reflects lower grades in line with the plan, while Tropicana will fall below 300,000 ounces as Boston Shaker reaches commercial production in 2021. In line with Faststream, production is expected to be 2nd half weighted as of what we ramped up. Total cash costs are expected to be between $7.75 to $8.25 an ounce equivalent to last year. All in sustaining cost is expected to increase on the back of increased sustained capital, including Abu Dhabi and additional investments in all reserve development and underground drilling across our operations.
This will improve operating flexibility and extend mine life. Brazil has also increased investment in sailing storage facilities as we transition to drive stacking. Other operating expenses are impacting earnings, we estimated at between $60,000,000 to $70,000,000 This includes clearance maintenance costs for the South African region, cost of all sailing facilities in Brazil, physical planes and the post retirement medical aid subsidy costs in South Africa. Total capital expenditure is guided at $920,000,000 to 9 $90,000,000 for 2020, which includes the remaining expense of the Oguaase growth projects that are on similar levels to 2019. About 60% of Bwase's project capital of $495,000,000 to $545,000,000 has been spent to date.
The balance of the growth capital relates to feasibility studies and projects at Quebradona, Gramalote and Capricana Boston Shaker as well as Siguiri Block 2. The trailing capital expenditure of $650,000,000 to $680,000,000 amounts to approximately 70% of the total capital guidance for 2020 and is estimated at approximately $205 an ounce. We are well positioned to see further reductions in debt as we anticipate cash repatriation from the BR and C, proceeds from the South African asset sale and improved cash flows along with our strongly agreed to Gold Coast. I will now hand over to Stefano, who will talk about asset capital financing.
Thank you, Christine. I am on Slide number 15. I am pleased to report on the safety front that the oil change and frequency rate across our Africa operation improved by 41% to 2.83 10,000,000 power demand. Continental Africa region, which excludes South African operations, had a strong 2019 with increased gold production and reduced costs. The region produced 1,540,000 ounces at a total cost of $7.59 an ounce for the year.
This was an improvement of only 1,500,000 ounces at 773 dollars an ounce in 2018. All in sustaining costs of $896 an ounce was better by $9 an ounce when compared to the previous year.
To put
this into context, there's a 6% cost reduction from our Continental Africa operation over the past 3 years, starting at $9.53 an ounce. This was despite both geological inflation and other cost inflation. We have been driving continued progress year on year as we use our OE program to achieve sustainable efficiency. Looking into more detail and starting with Data Antibodies, our 2 market assets. Data had a LIF producing a record of 208 kilo ounces in the 4th quarter.
This was also the highest annual production for the last 14 years at 604 kilo ounces. Total cash cost came in at a world class level of $3.95 an ounce and this was a 14% improvement on 2018. What makes this even more impressive is that these levels were achieved as the operation continued to transition underground. Last year, underground operations contributed 44% of production at a recovered grade of 5.3 grams per tonne. The all in sustaining cost at Geita also fell 5% to $8.94 an ounce.
Excibali besides had another record year. Attributable gold produced was at 3.66 kilo ounces at an all in sustaining cost of $704 an ounce. At Equatorial, production improved once again to a record of 2 75 kilo ounces at an all in sustaining cost of $8.90 an ounce was the lowest cost for in a decade. This was achieved despite the Fed Mill 21 day maintenance shut in Q4 as flat as our Q3 update. Again, this showed our operational excellence strategy bearing fruit.
SC Brewery attributable production was at 2.13 kilo ounces. This was lower compared to 242 of 2018. This was due to commissioning challenges with the new hard rock factors expressed to the market. It was pleasing, however, to note that in Q4, production moved in the right direction, up 14% quarter on quarter on quarter. And in 2020, we started the year tracking production to plan.
Have an excellent team on-site, working hard to keep the plant and recovery on-site. Now moving on to South African operations.
The implementation of Money and
Mine's 11 hour shift arrangement last year was a strategic intervention in support of our safe production strategy. We continue to believe that a safe workplace is a more productive workplace. The outcome of this implementation has since MorningMine achieve the 1st ever patient free year in its history, 2,000,000 sales reached and 11% improvement in productivity in Asia. Now looking ahead on Slide 16. We expected a strong year for Continental Africa with the following priorities.
Eta will continue its underground drilling program, which has shown success at both Nyan Kala and Stine Company. At Nyan Kala Underground, in the past 3 years, we have started with Block 5 and have continued to expand the underground mining profile with additions of Block 34 and now Block 12. Drilling to date shows that there is significant down plunge opportunity. On Slide 17, time comment is another good example. Once we enter an underground project, we continue to expand in terms of its development and training.
All the 4 bodies we have developed today indicate that they are implemented. In 2019, Geyser delivered 800,000 ounces or 400,000 less of depletion, primarily from Dine Commerce and Yankanda Undercount Corporation, thereby extending life of mine. We are looking to build on this success and have EMR additional capital to ensure that this happens. As we look to further unlock our endowment potential within the leased area at Geita, we are testing promising open pit targets at the Robust area and have filed for a permit application for a new underground site at KDAU. In 2019, Eduacrim brought Block 5 into inventory, which added 500,000 ounces of ore reserve net of depletion, thereby also extending the life of mine.
Our priority this year will be getting cut fixed into reserves by lowering mining costs and targeting other branches opportunities. As Tiguri, we are testing potential for more fresh rock targets to supplement and extend current life of mine. Block 2 will reach a stage gate this year to be declared into reserve. In conclusion, we remain focused on improving margins, managing our risk profile and instilling a culture of learning and improvement across our side. Thank you.
And over to
ever seen some pretty impressive in Q4. In a nutshell, we like flexibility and we're now in the middle of a program to address that. Tropicana was a standout last year, delivering a record production of 10 to 6,000 ounces during the year. This is held by higher mold traffic, we set our record in December. The site ended the year with best ever safety performance, Production in Sunrise Dam was impacted by lower underground financing growth,
largest study in Q4
and that's as we prove flexibility. We've launched a few things of increased program to grow reserves and support development due to additional mining areas in the medium and low- and long term.
Our consumer operations had a
challenging year, starting with the Permianoz results in Q1, which resulted
in increased operating complexity.
If you use credit to our teams on the ground, the impact was limited to brief stoppages immediately at the base. And as it decides,
At SIP and I
previously experienced difficult ground conditions during the year, we responded to the challenge by slowing the mining rate. Any internal and external rock engineering experts we currently provide advice. Subsequently, net surface support has been used to rehab the Texas plate, while new controls and mine sequencing has also been introduced. Early indicators show these measurements are working well, but we will monitor conditions closely as we move into the deeper, higher grade areas. Cerro Grande has delivered solid performance.
We expect to start the mining in the new Valera Sole ore body later this year of the first checkpoint development in 2019. This all way will extend life of mine, improve flexibility and depending on the exploration results, give us opportunity to scale this mine up. At Cerro and Boya, production was in line with the shale with lower planned grades. Unit Contra mainly tested a lower coal production as well as inflation, which remains very high in Argentina. This is partially offset by a weaker vessel.
Looking ahead,
we will continue to drive the operational excellence program. As we've said, our emphasis is on increasing our ore reserve development to 3 years. We plan
to increase our brownfield drilling by
30% this year from 7 to 40 kilometers across the international operations. This will give us better resource confidence, improved productivity and over the next few years increase in life of mine. On projects, we are progressing well with the feasibility study at Pobadona, which is expected in early 2021, and we're expecting the efforts for bapolose at around the same time. The international operations team had its work cut out this year, the good news is that we've seen 3 improvements in the book targets. With that, I'll hand over to Stuart, who will talk about the work.
Thanks, Ludwig. I'm pleased to report on excellent progress that we've made on the Obuasi redevelopment project. Thirdly, on Slide 23 to recap on the project dimension. Hawa Wasi has a large resource of around 30,000,000 ounces. I'll highlight a little later the reserves that increased to around 7,000,000 ounces to almost 10 grams a ton.
Gold production in the 1st 10 years was in the range of 350,000 to 400,000 ounces per gallon. Margins are also strong. Life of mine all in sustaining costs averaging around $800 an ounce in money churn. When you put it all together, you get an after tax IRR of 23% and payback in around 6 years using conservative assumptions. At spot, the after tax IRR is close to 40%, it's about a 4.5 year payback.
In the
18th December, the redeveloped Hawaii completed its 1st gold ball. This was a significant milestone for the company, our supportive stakeholders and indeed for the country of Ghana. On the 29th January, we celebrated the restart with the President of Ghana, the Ashanti King and over 3,500 traditional and elected leaders, employees, contractors and the Obuasi community. Moving to Slide 25. At the end of 2019, we saw the completion of Phase 1 of the project, which had the objective of stabilizing a production capacity of 2,000 tonnes per day.
Phase 1 was mostly about demolition, refurbishment and operational readiness. It was completed with a very good safety record. Commissioning was completed in December and we're now ramping up. Brows and bacteria progressed to commercial scale leading to 1st gold, though we are still building significant gold inventory in the BioXCL circuit. I'm pleased to say that even at the same stage, plant performance is in range of design by run times and refurbished plants are presenting the sort of challenges that we expected.
In 2020, we're targeting production of around 150,000 ounces. On to Slide 26, following a focused effort on resource modeling, re logging and data validation, reserves increased to 7,120,000 ounces from 5,860,000 ounces using the same $1100 an ounce gold price. Mineral Resources reduced slacking to 31,000,000 ounces after cleaning up some non mineable areas based on the new ore reserve. Geological program is well underway with 4 drills now operating. All of 2020 and most of 2021 is now grade control drill, providing good resource confidence.
As shown in this section on Slide 27, from the current mining area at San Su, The grade control drilling is confirming and expanding the resource. The Phase 1 completed. We're now focused on Phase 2. The objective of Phase 2 is to establish an operating capacity of 4,000 tons a day by the end of this year. Phase 2 is about new plant builds, new tailings and water facilities, new GCBS bench shuts, the paste full plugs and refurbishment of the KRS hoisting chart.
Mining will progress to Block 8 Lower, establishing a second mining trend. Our stakeholder relationships, Ghanaian participation and mine regulation are equally important elements of this project. Our social management plan, we've completed and facilitated a number of developments, including the expansion of the Obuwaiti School and establishment of the Obuwaiti campus for the Kwame Nkrumah University of Science and Technology. We're now approximately 4,000 people employed in the project, 96% of whom are Ghanaian and most of whom are from Obuwaisik and the Adansi area. Notably, 80% of the spend to date has been spent in Ghana.
The reclamation security agreement with the EPA was one of the key agreements enabling us to proceed with the project. We're ahead of plan in regards to our reclamation obligation and we've completed the earthwork in the northern area of the lease. This work has been done in consultation with the community through the community consultative committee. With that, I'll hand over to Tim to walk us
through the exploration. Thank you, Stuart. On Slide 31, our generative and mine site exploration programs were active across the portfolio, delivering out sufficient to $34 per ounce. Our mine site exploration programs drilled over 860,000 meters in 2019, which is 30% more than in 2018, more than double the level that we were achieving 4 or 5 years ago. Our program this year was designed to unlock oil reserve additions linked to better developments, advanced rates in our underground operations.
In 2019, we saw over year gains above depletion at Awase, Deida, Kibali, Ideoprene, AGA Brazil Mineracao and Tera Grande.
This is a combination that
we believe will continue to produce stable year on year replacement growth, support our planning process and allow for better operational flexibility. In 2020, we expect continued positive Orbiter results in general from Africa and Brazil. And from Sunrise, the Amador, the drilling ramp up will enable us to grow reserves. On Slide 32, we have core exploration hubs in Australia and North America with drilling programs completed in both areas during the year. In Australia, exploration progressed in the Libertian area around Sunrise Dam with 2 new projects advancing in 2019 at Bismarck and Cleveland.
In Nevada, an exploration plan of operations for
the silicon project was diminished to the
Bureau of Land Management and is advancing through the permitting process. At Rhyolite, also in Nevada, drill target definition was completed in
2019 and I'm pleased to
say that drilling started earlier this week as scheduled. Target generation activities were ongoing in South America and West Africa, and we expect this work to provide new projects for our portfolio. On Slide 33, we had a strong year in brownfield exploration. For 2019, the ore reserves
had the assets outside of
the South Africa Group for the 3rd straight year, adding an impressive 1,100,000 ounces This was achieved at a consistent and conservative $1100 ground gold price. This is a great result as we step up reinvestment into our worldwide. We continue to see strong geological potential of top of our operating portfolio with a robust pipeline of targets in each segment. On Slide 34, we have an excellent record of discoveries with 53,000,000 ounces added to our reserves between 2,004 2019 from our portfolio outside of South Africa. This averages roughly 3,500,000 ounces a year at a cost of $33 per ounce.
We have, at some sites, more than doubled the reserve base, which underpins the life of mine plan. The $30,000,000 is a $30 per ounce investment in ORD and drilling was built up on our integrated mine planning process linked with 1st principle based drill plan, coupled with historical resource reserve conversion rates that we have maintained over the past 15 years. Keep in mind that our reserves are not necessarily unlocked by drilling on an annual basis will sometimes be realized in the medium term in an 18 to 24 month increment depending on the target. Our success and strong understanding of our ore body more than justifies our investments in oil reserve development and reserve converting. I'll hand back now to Calvin to conclude.
Thanks, Dick. We're committed to cost control and keeping a tight line on our share capital to ensure strong leverage to the gold price. The fundamentals of the business remain solid and we're generating strong cash flow. That said, we can recognize that we can do even better. Repatriation of cash, backlog ups and care and maintenance costs are challenges we're working to address.
As we do, our cash flow will continue to improve. To put this into perspective, when you add back cash from the DRC and unwind the back lockup, free cash flow before gross capital would have increased nearly fourfold to $832,000,000 So to wrap up, we're excited about the year ahead. Our ongoing focus on ESG is paying dividends, including our steady and improving safety record. We've made good progress streamlining the portfolio. We're generating strong cash flow with the promise of more to come, especially given the higher gold price.
Our dividend increased year on year and current gold prices we see it increasing again this year. Leverage is below our target level and is expected to improve further given the strong fundamentals in price. Obuosity is an important addition to our portfolio and it's ramping up production on plan, as you heard. We expect positive results from increased reserve development and reserve conversion and more being disciplined in managing costs and capital to ensure investors see the operating leverage they expect. So with that, thank you very much and let's open it up for questions.
Thank you. We have a question from James Bell from RBC Capital Markets. Please go ahead.
Yes, good afternoon. Thanks for the call and taking my question. The first one is really around the spend on ore reserve conversion and development. Should we expect that to lead to increases in reserves at full year 2020? Or is this going to be longer dated in terms of improvements?
And secondly, would that feed into some more clarity on your production profile over the next, say, 2 3 years? Could we get a disclosure or a future plan on that by the end of this year? Thanks.
Hi, Jade. It's Calvin. I'll start then in terms to Tim. Regarding the expense you've issued on ORG and reserve conversion, yes. And by the way, we're tracking that like an investment as we do with all our other investments.
And so we'll be getting updates as we go along. But we do expect to see the increase in 2020 and as we move into 2021. But Tim, why don't you
give us more color on that?
Thanks, Calvin. If you look at the past 3 years, we've added ore reserve above depletion, and we expect that to continue with
this additional investment going into 2020. Yes,
that Yes, that's a key aspect of this impact. We want to be in a position where we've got better predictability, reliability. So you will see that in our long range plans. And as we've discussed before, I want to be in a position where we move beyond guiding in year and this will put us in a position to be able to do that, course, 1 year out and beyond that 2 and 3. Beyond 3 at this point, I'd
like to pause and we'll see where we
go directionally. I'd love to be able to give guidance of 5 years, but we'll walk before we run. And I think it will be it's important that we get to a position where we can confidently guide on at least 3 years from that we've checked.
Okay. That's great. And just one more on the cost side. Your costs are going up year over year on a cash cost basis more than some of your peers. Can you give us some color on what your inflation assumptions are?
And maybe talk about anything you can do to offset those increases through operational efficiencies or other measures?
Sure. Christine, touch on inflation and then literally against Dolly, you may want to talk about what we're doing from an OE perspective as well. Do you want to start with the how we're managing inflation from a German perspective?
Yes. So I think specifically, the cost inflation assumptions that we've assumed here is 6% to 6%, which is what we are experiencing And this is across the economies that we operate in. I think in particular in some of the emerging economies like Argentina and South Africa, even though treated as a country operation, we are seeing quite high inflation level. In terms of how we're managing it, I think we certainly if you look at our 3 big cost buckets, I think in particular, it's labor, it's consumables and it's mining contracts. And as regards managing it, labor, I think we certainly managing it in that inflation level.
As we do mining contracts, so these are typically 3 to 5 year mining contracts, basically index to inflation. But we certainly try and manage that even below inflation. And I think similarly as it would apply to Consumer Focus, it's about really leveraging our global supply chain to achieve
more efficiency. Thanks, Kirlin.
I don't want to move again. So I'll give any data or is
I think, yes, Kristine answered the question. Maybe just a few more comments
on that. Part of the
operational flexibility and the investment into the drilling will give us the certainty around the production will also help with the unit cost. And on top of that, we've got operational excellence programs that being monitored on a monthly basis and actually with clear targets that we try to offset at least the inflation as we go forward. Great.
Thanks, Luke.
Graham, I'll
take that. In terms
of portfolio, you see Cabalet, sorry, Obuasi coming in, in 2021, coming in around 350,000 and around that 800,000 dollars sorry, dollars 800 an ounce. So that will start to improve and help out cost. Thank you. James, is that clear?
Okay. We have a question from Shilin Mody from UBS. Please go ahead.
Afternoon, guys. Just a couple of questions from my side. Can you talk us through the change in guidance versus your current production base? So why does it effectively step down? Just give us more color on that.
And then in terms of your balance sheet, it's relatively strong. I mean, you're just below 1 times net debt to EBITDA. Could you talk us through your outlook for dividends? And then talk us through the rank of where your CapEx will be or where your cash will be spent, projects, stay in business type of capital, deleveraging dividends, like just rank those for us and give us an idea of how to think about that? Thanks.
Sure. Thanks, Joe. And I'll start and then others can wade in. As far as guidance goes, from a production perspective year on year, the delta transition year, the delta would be first, as you know, we sold ounces in Saviola, likewise, Marillos and CECM operations. As literally explained, we're seeing lower production from CVSA and Tropicana, which is in line with their respective production plan.
On the BOSTON side, we'll see Boston Shaker ramp up going through this year and into 2021. And importantly, as Graham just touched on, Oahuasi ramping up. We're budgeting in 2020, about 150,000 ounces for Obuasi and then ramping that up to the 350,000, 400,000 level as we move through 2021 beyond. So that is the that's generally where we are in terms of production. The cost delta for the year, our all in sustaining cost, the average over the last volume, it's usually in the kind of range of $160,000 $1.70 up to $200 an ounce.
This year, if you take the all in sustaining cost production and you back out the $30 an ounce for additional reserve conversion, that puts us around $180,000,000 which is reasonably consistent. The as Grant touched on as well in 2020, we do see the higher all in sustaining costs as we ramp up Oblastia, I believe it's around $1200,000,000 for budgeting for this year. And Tropicana is removing street stockpiles. I think those touch on the key buckets. The question regarding the balance sheet, you're right.
I mean, we're pleased. We started last year with a 1.5x target. We moved it down to 1x during the course of the year and we ended the year below that, which we're happy with. We're going to continue to chip away on it. But in terms of priorities for the year for cash, I would say, we'll again, we'll nip away at the balance sheet, although we're in good shape.
We've got lots of liquidity and it's not doesn't have kind of urgency that I had a few years ago. But we think it's prudent to continue to work down the debt. At the same time, we are reinvesting nicely in the business this year. When you think about bringing a velocity about $220,000,000 on a velocity to bring into full production between Grand Alote and corporate going on, around $45,000,000 to bring both those projects to feasibility. Then we said Boston Shaker about $30,000,000 That project is very high return.
So we're going to be investing back into the business on top of the $30,000,000 additional on ORD and reserve conversion. On dividend, we're pleased our policy is 10% of free cash flow before growth. If gold prices stay supportive and we continue to run the business well and execute, we do anticipate increased free cash flow generation, which is the dividend will rise commensurate with that. From a dividend policy perspective, that's the Board decision, but it gets discussed regularly at the Board. There is a view that we will likely be in a position to kind of steadily increase yield as we go forward this time, but we don't want to lurch.
We want to do that kind of steadily and progressively. So that will be the plan. But returns to shareholders is obviously important to us. I think I touched on both questions, Sean.
One more, if I may. Given the corporate restructuring that you guys are doing, so selling certain assets and changing the structure of the business. Should we be thinking about special dividends at some stage or is that off the cards for the next year or 2?
Well, I guess nothing is off the table,
but we are focused on
the other areas as we discussed. So I wouldn't necessarily see a special dividend at this point, but that's a Board decision. And so we discussed it from we discussed dividend from time to time. At this point, though, we really are focused on the priorities that I've outlined.
Okay, cool. Thanks very much.
Thank you.
We have a question from Dominic O'Kane from JPMorgan. Please go ahead.
Hi, guys. Thank you for the presentation. Just a quick question. Could you maybe define for us what your strategy now is? Specifically, what is your capital allocation framework?
What are your hurdle rates? If I look at your gold price for calculating your reserves, you're using $1100 an ounce. So you is that a price that we should sort of bake into our assumptions for the long term, I. E, how we think about cutoff grades and cost management? So I suppose my question is, can you help us just understand what the strategy is given the fairly substantial portfolio transformation in 2019?
Yes. Thanks, Tony. Well, look, I think the most important thing is our strategy is unchanged. I mean, we're honestly happy with growth rates. But we're going to continue to focus on streamlining the business as we have been and conclude the asset sales.
That's probably 1. We're going to keep driving Obuasi and bringing those kind of new lower cost long life ounces as we go through this year and into 2021, as well as progress the projects that we have in front of us in Gramalote and Cebolla. We will maintain the focus on our leverage one time and lower and we'd love to continue to chip away on the debt. And as far as the price, the reserve price of $1100 an ounce is conservative. I'm guessing we're probably,
if not the lowest, we
should be among the lowest in the peer group, and we're going to maintain that reserve in price. We want to maintain the cost discipline that comes with that. We're not moving off the $1200 15 percent active tax IRR. That stays in place. We're going to manage our cost discipline as well as manage our overhead type B2.
So
those are the key.
The other really important thing that we don't talk about a lot, but if you look out over the last decade, think we're the only company in the beer group that hasn't issued equity and that obviously is something that's important to us. We're going to maintain the share count. I'm asked the question often, will we look at doing M and A? And the answer is no. Our play is full, we don't need to.
I'm really happy with the pipeline as it exists moving forward, of course. So that's really the objective. The portfolio is changing. As we sell the South African business, that's the last kind of ultra deep under the hard rock underground mine, we shift more toward a shallower underground and open pit production. So that's an important transformation.
And otherwise, in the sense they really focus on this year is all about
executing. So can you just to push you on that a little bit, can you help us sort of gravitate towards a hurdle rate? You obviously did capital expenditure is not insignificant and there are obviously there's a good project pipeline. Can you help us sort of pin some capital allocation numbers to a hurdle rate?
Yes, 100%. Look, all of the projects and by the way, the reinvestment thing that in the business and reserve as well, our hurdle rate hasn't changed. So it's a 15% after tax return at a $1200 roll price and all the projects that we're pursuing right now do at least that. Some of them much more, as you heard, Boston Shaker, Oblasi, etcetera. But that's the minimum.
And by the way, that minimum doesn't mean that just because you pass the 15% hurdle rate and it's automatically a green light, we'll the project is going to compete. We're going to invest in those who get the best return, but that is the minimum.
Thanks very much.
You're welcome.
We have a question from Adrian Hammond from Standard Bank. Please go ahead.
Hi, Calvin. I have a question for you and I have some for Christine. Just if you look back to your goals that you originally had for annual gold regarding the portfolio and the assets that you wanted to relinquish in certain jurisdictions. Are you now satisfied with what you've achieved so far, which pretty much is complete by Cerro Vanguard, which you point out? Or is there some more sort of adjustments you would like to do for the business?
Hi, Adrian. Listen, thank you. No, look, we announced those three processes. We're pleased with how they've come along. We'll decide on Cerro Vanguardia and it's a nice position to be We take a good price or we keep the asset and it's generating good cash and it will.
So the answer is we I'm happy with how we streamline the business. I don't see any more transactions at this point. We're derisking nicely. And so it's not perspective, but I'm pleased with the progress.
Thanks. And then Christine, could you give us some indication on your expectations for closing the deal on SA? And what do you intend doing with the cash? And just on your guidance for interest charges, flat year on year, which could you explain that given that you plan on de gearing? And could you give us a guidance on the actual cash flow portion of that interest book, please?
Okay. I think with the asset sale process, I mean, the agreement has been concluded in subject to conditions, as we know. So it really depends on when those conditions are met and primarily is the composition approval and the sectioning method from the EMR. And so far, I just gave for closing the deal is 30th June. And clearly, we'll keep you updated on that.
As regards to proceeds, as regards proceeds, we announced that we will apply the proceeds to further debt reduction. On the interest charges, which was your other question, why it's being flat year on year, Are you talking about in terms of the guidance?
Yes. So I
think a large part of our Inclis build is related to the heart and see. What we are planning on doing is with the bond redeeming in April, we do expect to see some interest reduction. Although it's more the differential between the cost of the RCS and what we're paying on the bonds, which is about a 1% differential. And then, of course, we are looking at canceling the commitment fee relating to the ZAR1.4 billion facility. In addition to that, I think what you've got to be in mind is some unwinding of environmental obligations and the full IFRS leases that could impact finance costs.
And that by and large results in a flat so we're back to year on year comparison. So it's not just pure interest costs.
What is the
cash component of the interest?
So it's €120,000,000 to €150,000,000 That is the cash component of the interest. Provided on that.
And then lastly, if I may, just the mechanism that you're trying to iron out with the DRC regarding the remittance of those funds. Is this something that's going to be concrete going forward? And perhaps you can give us some color as to how will that mechanism work? And so doing how we should be modeling the profits on your cash flows cash flow one line item, please?
Adrian, starting point is, as you know, Barrick is the JV partner managing the operation, so we're respectful of that. But we've been having, as you can imagine, regular discussions, daily, twice daily discussions, practically. So the positive news is that various meetings have been constructive, right at the highest level with the DRC government. They've affirmed, received confirmation that the cash can be used to pay dividends and we paid shareholder loans to the JV. As of very recently, yesterday,
in fact, we sent me
or received from Veritas that they're kind of dotting the I's and crossing the T's. And so what we expect is of the $202,000,000 tied up right now in our account, that will come out probably in pretty big chunks. But importantly, what we've been working on is a mechanism going forward. So we can do this with regularity and we're not having the same kind of buildup. I think that was the first part of your question.
And from our perspective, it's taking a little more time, but we'd rather be in a position where we can have a steady release as opposed to these big buildups coming out in chunks.
Does that steady release relate to future profits? Or are you expecting a big chunk right now out of the from the $202,000,000
Yes. We're expecting a good chunk right now out of the QOCs. COPs. The
next question is from Arnold Van Grun from Nedbank. Please go ahead.
Yes, good afternoon. Kelvin, I've got a question on the possibility of moving your rating. There's obviously been a lot of talk about that that it could drive a rerating. So my question is, have you done a detailed study on whether a change in your primary listing would actually lead to a rerating for
a gold stock? So do
you have empirical evidence to show that this is indeed the fact that it's worth the cost? And if so, what do you think actually drives that rerating? Is it the inclusion in global tracker funds and global indexes? Or is it just opening up the investment to a wider pool of potential institutional clients that are not able to invest in the JSC or through the ADR? Thank you.
Well, thank you. I mean, good question and we get asked it a lot as you can imagine. I think the starting point is we don't want to be distracted. So we're focused on concluding the transaction and all the other things we described on that are on our plate It would take us through the middle of the year to close on the South African asset sale. We've also been clear that anything that unlocks value we're open to and is on the table.
And of course, some of the speculation with regarding a change in property when it comes to indexation and other things that, of course, if that were available, we certainly consider. At this point, we're not really doing anything further than that. So we'll just kind of walk our way through the process and make sure we conclude that well. And then other things in terms of the corporate structure, whatever we can do that, the sensible numbers, we'll look at that.
Okay. Thank you.
You're welcome.
The next question is from Patrick Mann from Bank of America Securities. Please go ahead.
Hi, good afternoon. I wanted to ask about the how your projects coming up rank. So you've got Quebradona and Gramalote, which the feasibility studies coming up, both of them in the second half of this year. I mean, if those are positive and those projects look likely to progress to construction. Is it possible for you to do both of them at the same time?
How would you think around funding those? Yes, I mean, it looks like it's quite a chunky project pipeline coming up at the same time. Yes.
Yes. Look, I just asked you a good question. I consider it a Hollywood problem that 2 good projects moving to the pipeline at the same time with feasibility studies approaching. But the good news and part of the reason that we elected to allow our partner, VG Gold and Gramalote to earn back to 50 percentage, as you know, the funding and drilling program is underway and the feasibility work flowing from it. And so we like to and these 2 goals, I think they're very healthy.
I think they develop projects well. They operate well. And so in some ways, they approach projects the exact same way as I want us to. And so from our perspective, the fact that they're moving it forward and allocating 100% of their time and attention to it, like us to allocate 100% of our time and attention to Quebradona, which is also moving along very nicely and we're enthusiastic about it. So I think the best thing for us to do is increase value in both projects.
Then as we come to the end of the year and we evaluate the feasibility studies, we'll assess it against market conditions, where we sit then. And we've got options available to us. We can proceed on our own. We can bring in partners. There's lots of things we could do if we choose to from a funding mechanism.
So from that perspective, we'll wait and see. Again, bottom line is we're not going to do anything unless it passes our hurdle rate and more. And then we'll evaluate the opportunities then relative
to everything else in the mix.
But I consider it a good thing, like I said, to have 2 good projects like that moving down the pipeline. It's one of the reasons we're not considering doing M and A and looking at other projects, we don't need to.
Great. Thank you.
You're welcome.
Our final question is from Gubilate Lima from Anibok Investment. Please go ahead.
Thank you very much for the call.
You haven't divested about 13,000,000 ounces in reserves from South Africa. Can you give us an indication on roughly how long it would take to replace those reserves? And second question is, production from continuing operations is roughly EUR 2,600,000 to EUR 2,800,000 coming off from EUR 3,300,000. How long might it take for us to get back to a production of about 3,000,000 ounces? Thank you.
Well, let me try both those
questions and anyone else can wade in. I think the I'll work backwards. In terms of the production profile, you see our guidance for this year, which is 3.050 to 3,300,000 ounces. That's for the combined portfolio. As we divested the of the South African business and then bring in Obuasi, those 2 the production levels kind of balance each other.
We're trading kind of a different kind of mine for the Oblasti kind of longer life, lower cost ounces.
So that kind of keeps
us around the same level. And it feels the portfolio feels like on a sustainable basis. That $3,000,000 mark feels about right. But importantly, it's not just about ounces. If we produce a little less than $3,000,000 but are producing much greater margin, we're okay with that.
But at this point, it does feel like a kind of a sustainable and reasonable production level. As far as the reserve replacement, the first question I'm sorry, can you repeat the first question? How long would you like to replace $10,000,000 answer? To replace. Well, that's something well, first of all, as Tim indicated and Ludwig and others, this year is about focusing on inward investment into reserve development around the existing assets, but we don't have a target of replacing 10,000,000 ounces.
It turns out that this year we added 4,500,000 ounces before depletion. And we've had a very good track record of resource to reserve conversion and reserve additions over the last number of years that Tim touched on. During the press I forgot to mention there are a number of key sites this year added more than 500,000 ounces. The Loma Obuasi added 1.3 GAEA, 800,000 ounces. Covali, 800,000.
Brazil, 500, Adiafrin, 500,000 ounces. So it just gives you shows you the potential. But as far as picking an actual number for a target, that's not number that we're about.
Okay. Thank you.
Thanks very much.
And I think that
was the last question. And if so, that will conclude the call. So I just want to thank everybody for joining us. We've got a busy day, and I know it's morning in North America, afternoon here. We're really excited about 2020.
We've got lots in front of us to do. It's all about execution. So we look forward to updating you with our Q1 results. And in the interim, thank you again for joining us today.
Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.