Performance
Financial performance
2008 compared with 2007
The Energy & Minerals group's 2008 sales revenue was US$10,998 and its contribution to underlying earnings was US$2,887 million, US$2,200 million more than in 2007. Increases in the cost of basic materials, fuel, explosives and labour were more than offset by production growth and improved commodity prices in coal, uranium, borates and metallics.
Higher prices for coal were realised as a result of increases in hard coking, semi-soft and thermal coal prices. In addition, overall production volumes increased as a result of higher production at RTCA and RTEA.
At RTCA hard coking coal production rose 20 per cent to 7.4 million tonnes from 6.2 million in 2007 in spite of continuing coal chain infrastructure bottlenecks and several weather events early in the year. In the Hunter Valley there was continued focus on production of semi-soft coal in favour of thermal coal to take advantage of higher relative prices.
RTEA's year end shipment total was 133.3 million tonnes for 2008, compared to 128.3 million tonnes in 2007. In addition to increases in pricing and production volumes, RTEA's high margin HL&P broker contract performed at 100 per cent in 2008. High margin export sales and other broker sales also boosted earnings. However, quality considerations and operational issues resulted in Colowyo making a pre-tax loss of US$17.1 million in 2008.
Consistent with the worldwide mining industry, RTCA and RTEA experienced an increase in the input prices of materials and supplies in 2008 resulting in higher variable costs of mining. At RTCA costs were higher as a result of higher royalties due on increased revenues. There were extensive ship queues particularly for thermal coal. Towards the end of the year cost benefits were obtained from price reductions in the purchase of equipment parts and consumables.
Diesel prices at RTEA increased by more than 31.6 per cent in 2008. Explosives costs increased by 26 per cent.
Labour costs also increased significantly, reflecting the competitive regional labour shortage and steadily increasing healthcare costs. Tyre costs increased with the worldwide shortage of large mining equipment tyres. Unscheduled repairs at Jacobs Ranch and Colowyo increased maintenance and contractor costs. At the same time, strip ratios increased as reserves got deeper, resulting in the requirement to move increasing volumes of overburden.
Non cash costs at RTEA also increased due to a change in the asset base, a new end of mine closure estimate that incorporated a change in discount rates and a fixed asset verification requiring some write offs that accelerated depreciation.
Uranium oxide is typically sold under long term contracts, with pricing determined both by fixed prices negotiated several years in advance, and by market prices at time of delivery. Higher market prices and the expiration of older contracts containing price caps contributed to an eight per cent increase in uranium revenues in 2008 compared to 2007.
Uranium spot prices continued to demonstrate volatility, falling well below term prices in 2008 (after being well above in 2007) as financial speculators liquidated stocks throughout the year. The long term uranium price remained relatively strong at US$95 per pound in the first half of the year, falling to US$70 by December. Despite the fall in spot prices through most of the year, the spot market strengthened in November and December and the longer term prospects remained favourable given the challenges that most uranium producers faced in trying to expand production or bring new production into operation. As a result, uranium prices in the longer term are expected to remain well above the levels seen for most of the last two decades.
Higher pricing and higher volumes at Rössing Uranium were partially offset by lower sales at ERA. Sales at ERA decreased to 11.6 million pounds compared to the 2007 volume of 11.7 million pounds.
However, results continued to be affected by increasing operating costs for consumables, particularly sulphuric acid. In addition, significant costs were incurred at Rössing for aggressive stripping of overburden to expose ore that will ensure the consistency of the quantity and the grade of plant feed for the next few years. At ERA unit costs were adversely affected by the need to build ore inventory in line with the current life of mine plan.
In uranium, earnings benefited from the one off US$495 million sale of the Kintyre uranium project in Western Australia. Improved Minerals earnings reflected improved volumes and prices. These were partially offset by increased freight rates and sulphuric acid and zinc oxide input prices. RTIT recorded earnings of US$295 million up from US$164 million in 2007. Revenue increased by 15 per cent due to strong metallic prices which delivered robust margins on iron, steel and powder products. These increases were partially offset by price pressures on consumables, energy and maintenance costs.
The weakening of the US dollar against the Australian dollar reduced earnings at Australian operations. The Namibian:US dollar exchange rate was favourable, positively impacting earnings from Rössing by US$40 million in 2008.
2007 compared with 2006
The Energy group's 2007 contribution to underlying earnings was US$484 million, net of US$27 million project costs, US$222 million less than in 2006.
Continuing coal chain infrastructure bottlenecks and allocation cutbacks in Australia resulted in ongoing production cutbacks and higher demurrage costs.
The results also reflected the softening of coking coal prices although there were increases in thermal coal prices and the stronger uranium oxide market. The weakening of the US dollar against the Australian dollar reduced earnings at Australian operations. For all operations, rising fuel prices and the tightness of the labour supply market continued to place pressure on operating results. Despite lower volumes of uranium sold, higher market prices and the expiration of older contracts containing price caps contributed to a 69 per cent increase in uranium revenues in 2007 compared to 2006. At ERA results were affected by production losses associated with a severe rain event and flooding of the pit.
Minerals earnings were adversely affected by a tax charge related to the borates business. RTIT recorded earnings of US$164 million, up from US$152 million in 2006. RTIT earnings benefited from a 15 per cent revenue increase, largely due to strong co-product prices.
