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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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. [Operator Instructions] Please note that this call is being recorded.
I would now like to turn the conference over to Stewart 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, we will be making forward-looking statements during the course of the remarks. On Slide 2 is our Safe Harbor statement, which is important. Please would you refer to it.
We've got a busy presentation today. I'll be sitting for Graham, whose voice is on its last legs. He will be around to take Q&A then. And without further ado, I'll hand the agenda over to Kelvin.
Thanks, Stewart, and thanks, everyone, for joining us. Our strategy is underpinned by our overall objective, which is to deliver quality production responsibly with emphasis on widening margins, extending 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 today for AngloGold Ashanti and that will continue.
For the seventh year running, the company has met guidance on key operating metrics. We navigated a challenging year at some operations, but this was offset by exceptional performances at Geita, Kibali, Tropicana and Iduapriem.
In fact, Kibali, Tropicana and Iduapriem registered record production numbers in 2019, while Geita's performance was its best in 14 years. Production for the year was 3.30 million ounces with an especially strong fourth quarter. All-in sustaining cost for the year was $992 an ounce. Including project capital of $321 million, total capital expenditure came in below budget at $814 million. Cash generated by operations was strong, up 22%, just over $1 billion. Free cash flow before growth capital doubled year-on-year to $448 million. 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% from 2012. And in 2019, for the first time in our history, we passed the 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 zero harm.
We also have a strong commitment to operating a sustainable business. We continue to find ways to deepen partnerships with our local communities and host government to ensure the benefits of modern, responsible mining extend as far as possible. We're staying 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 firm 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 planned previously, converting our earnings into cash at this 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 of Wafi and great sale of the South African business will assist in that process.
In 2019, we conducted three sales processes. We're looking to create a more focused business with enhanced operating and financial metrics. We now announced two sale agreements. First, just before Christmas at Sadiola and earlier this month, our South African business, the resale of our South African portfolio at Harmony followed a robust nine-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've achieved that objective and our engagement with a number of our most important shareholders in the past few weeks confirmed that this view is widely shared, stakeholders by the way, as well as shareholders.
During the year, we also reached an agreement with B2Gold 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 sale process related to sales of Vanguardia continues. We'll make a decision whether to accept a firm offer, which we expect to receive or to continue to own the asset by the end of this quarter. We'll 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, Kelvin. I'm on Slide 10. Following the announcements of our South African asset sales, our results have been separated between continuing and discontinued operations.
For today, to ensure comparability to what we've 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 again pretty higher than the first half with cash costs and all-in-sustaining costs, 4% and 1%, respectively. The stronger gold prices, weaker currencies and better operating performance resulted in a 50% improvement in adjusted EBITDA. We also saw a 105% increase in cash flow from operational activities. The most significant improvement came in free cash flow generation, which was $159 million during second half compared to $31 million after during the first half. This gain came from continued investment in the Obuasi Redevelopment Project.
The strong second half performance alongside a higher average gold price translated into strong financial performance for the year with EBITDA up 16% year-on-year to $1.7 billion and free cash flow up 90% year-on-year to $127 million. Production against the prior year was marginally lower, about 2% on a like-for-like basis, excluding production from Moab and Kopanang, which were sold in February 2018.
Strong performances from Geita, Kibali, Iduapriem and Tropicana largely compensated the planned lower production at CVSA, Sunrise Dam, Siguiri and Kopanang. Free cash flow of $127 million for the full year was a 90% improvement year-on-year. All of our operating mines were cash positive.
AngloGold prices with steady production, higher capital expenditures, increased profit rates, taxes and further cash repatriation from the DRC. We received $75 million in dividends from Kibali for the year. In addition, our attributable share of cash balance within country at $202 million at the end of the year.
Our partner, Barrick, is going to be advised to pay obtaining formal approval to transfer the fund. Capital expended accounted for $14 million coming below the guidance. The capital expenditure related primarily to the Obuasi Redevelopment Project. The $168 million have spent over the last six months. We expect the project to achieve commercial production around the middle of the year. Non-sustaining capital expenditure included project capital of $325 million related to Obuasi and residual spending at Siguiri, Tropicana, Boston Shaker, Mponeng and Quebradona.
Working capital outflow for the year included VAT losses in Tanzania, export duty in Argentina, higher level of prepayments at Siguiri and gold stockpiling in Argentina and Tropicana and Siguiri. At the end of the year, we have VAT of $115 million outstanding in Tanzania, reflecting an increase of $13 million on Q3 and $66 million of historical VAT relating to Kibali. $89 million were spent on nonsustaining exploration of which $65 million was spent on greenfield exploration in Colombia.
Moving on to cash cost. Our cash costs were largely steady with total cash cost of $776 an ounce in 2019, $3 an ounce higher than in 2018. Cash costs were favorably impacted by weaker currencies, which helped offset inflationary pressure in the emerging economies that we operate in, particularly in Argentina and South Africa. The main cost drivers being mining contract labor and conceivable, these are predominantly indexed to inflation. Costs were further adversely impacted by lower production and lower product revenue and CVSA as planned.
Operational efficiency improvements continue to be an adequate focus to mitigate operational cost pressure. All-in sustaining costs of $992 an ounce in 2019 were 2% higher than 2018. This excludes $600 an ounce from rehabilitation provisions in Brazil under the new regulation. Notwithstanding that with capital of $16 an ounce was largely offset by IFRS 16 costs, higher rehabilitation provisions and other noncash costs.
We've implemented a $0 cost collar on 70% of CVSA gold production from February to December 2020. The instrument has a floor of $1,500 an ounce and a cap of around $1,700 an ounce. This cash flow during sales process and is consistent with the risk mitigation strategy adopted for the South African business last year. We will also be executing the $0 cost collar each – on about one-third of our oil needs this year at the range of $45 per barrel, $65 a barrel. Associating strategy is consistent with past year to partially mitigate the risk of an upward movement toward profitability one-third of this mandate has been executed.
On the balance sheet strategy, we continue to execute on our balance sheet strategy and informed capital discipline. The group has continued to delever the balance sheet on the back of stronger cash flow with fast self-funding and other growth initiatives. It is pleasing to see a lower adjusted rate base to adjusted EBITDA ratio at 0.91x, the lowest from 2011 and below our targeted ratio of 1x due to higher gold prices.
Proceeds from the South African asset sale will be applied to further reduce debt. Liquidity remains strong. There is roughly $1.4 billion undrawn on the total available US$1.6 billion facility and $463 million of cash on hand. We will careful our undrawn $1.4 billion facility, and seek the remaining ZAR 3.5 billion facility. Just to correct that, our undrawn facility that we will be casting is a rand facility. We also plan to redeeming the US$700 million bond, maturing on April 15. With this, we will use available cash under $1.4 billion to this dollar facility.
The bond, as the Board has declared dividend of US$0.11 per share in line with our policy to pay out 10% of free cash flow before growth capital. This is 57% increase from 2018 in dollar terms and reflects our focus on disciplined capital allocation, prioritizing weight reduction, reinvestment in portfolio and improving returns to shareholders.
Our credit ratings are unchanged. We have an investment-grade rating from Moody's and Fitch and sub-investment grade from S&P. All have a stable outlook. As Moody's has issued a credit positive report following the announcement of the South African asset sale.
We're strongly levered both to the gold stock and currency. We improved cash flow generation across the business, particularly given strong market condition we're seeing and the efficiency improvement are being [indiscernible].
On guidance, we see production this year at 3.05 million ounces to 3.3 million ounces. Discontinued operations relate 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 Obuasi to offset lower planned production from CVSA and Tropicana, while to be perfecting no contribution from [indiscernible]. CVSA reflects lower rates demand plan, while Tropicana will fall below 300,000 ounces as Boston Shaker reaches commercial production in 2021.
In line with fall stream, production is expected to be second half weighted, as total cash costs are expected to be between $775 to $825 an ounce equivalent to last year.
All-in sustaining cost is expected to increase on back of increased sustaining capital, including Obuasi and additional investments in oil reserve development and underground drilling across our operations. This will improve operating flexibility and expense [indiscernible]. Brazil has also increased investment in storage facility as we move forward.
Other operating expenses impacting earnings, we estimate at between $16 million to $17 million. This includes care and maintenance costs for the South Africa region, cost of wholesaling facility in Brazil, fiscal plant, and the post-retirement vehicle age, the capability costs in South Africa.
Total capital expenditure is guided at $920 million to $990 million for 2020, which includes the remaining spend of Obuasi growth project at about similar levels to 2019. About 60% of our Obuasi project capital of $495 million to $545 million has been spent today. The balance of the growth capital relates to feasibility studies on projects and Geita, Kibali, Iduapriem and Tropicana, Boston Shaker as well as Siguiri Block 2 spend. The trailing capital expenditure of $650 million to $680 million amount 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 reduction in this as we anticipate cash repatriation from the DRC, proceeds from the South African asset sales and improved cash flows, along with our strong acreage to gold prices.
I will now hand over to Sicelo, who will talk about the African portfolio.
Thank you, Christine. I'm on Slide number 15. I am pleased to report on the safety front that is across our African operation improved by 41% to 2.8310 million. Because in this African region, we exclude South African operation and a strong 2019 with increased gold production and reduced costs. The region produced 1.54 million ounces at a total cost of $759 an ounce for the year. This was an improvement on the 1.5 million ounces at $773 an ounce in 2018.
All-in sustaining cost 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 operations over the past three years, starting at $9.53 an ounce. This was despite both geological inflation and other cost inflation. We've been driving continued progress year-on-year that we use our OE program to achieve sustainable efficiency.
Looking into more detail and starting this Geita and Kibali, our two multi-assets. Geita had a stellar year producing a record of 208 kilo ounces in the fourth 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 $695 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 rate of 5.3 grams per tonne. The all-in sustaining cost at Geita also fell 5% to $894 an ounce.
At Kibali, the site had another record year. Attributable gold produced was at 366 kilo ounces at an all-in sustaining cost of $704 an ounce. Gold production improved once again to record of 275 kilo ounces at an all-in sustaining cost of $890 an ounce was the lowest cost for [indiscernible]. This was achieved despite the 21-day maintenance shut in Q4, as explained on our Q3 update. Again, this showed our operational strategy bearing fruit.
At Siguiri, attributable production was at 213 kilo ounces. This was lower compared to 242 of 2018. It was due to commissioning challenges with the new [indiscernible] led to the market. It is pleasing, however, to note that in Q4, production moved in the right direction, up 14% quarter-on-quarter. And in 2020, we started the year tracking production to plan. We will work on the site – working hard to keep the plant running.
Now moving on to our African operations. The implementation of Mponeng mines level our [indiscernible] arrangement last year was a strategic intervention in support of our free production strategy. We continue to believe that a safe workplace is a more productive workplace. The outcome of this implementation has seen Mponeng mine achieve the set [indiscernible] shift and 11% improvement in productivity matrix.
Now looking ahead on Slide 16. We expect another strong year for Continental Africa with the following priorities. Geita will continue its underground drilling program, which has shown success at both Nyankanga and Star & Comet.
At the Nyankanga underground, in the past three years, we have started with Block 5 and have continued to expand the undermining profile with addition of Block 3 and 4 and now Block 1 and 2. Drilling today shows that there is significant down plant opportunity.
On Slide number 17. Star & Comet is another good example. Once we enter underground project, we continue to expand in terms of its development and drilling. All the ore bodies we have developed today indicate that there are opportunities there.
In 2019, Geita delivered 800,000 ounces of gold reserves net of depletion, primarily from Star & Comet and Nyankanga underground operation, thereby extending life of mine.
We are looking to build on this success and have earmarked additional capital to ensure that this happens. As we look to further unlock our endowment potential within this area at Geita, we are testing promising open pit targets in the area and have filed for a PMIC application for an underground site.
In 2019, it was [indiscernible] into inventory, which ended 500,000 ounces of ore reserves net of depletion, thereby also extending the life of mine. Our priority this year will be getting into reserve by lowering mining costs and targeting other brownfield opportunities.
At Siguiri, we are testing potential for more fresh rock target to supplement and extend current life of mine. Block 2 will reach at stage gate this year to be declared into invest. In conclusion, we remain focused on improving margins, managing our risk profile and instilling a culture of learning and improvement across our plants.
Thank you, and over to Ludwig.
Thank you, Sicelo. Starting during the year, the challenges were most of 2019. We are able [indiscernible] in comparison Q4. International, we like flexibility and we're now in the middle of the program. So we call extend the last year, delivering a record production of 360,000 ounces during the year. [Indiscernible] best ever segment performance. Now as in 14 months without loss. We are going to stop offset this and so result in lower production for us over the next 12 months, on the levels over the next three years. Production of gold in lower underground volumes and growth we saw in Q4 has improved flexibility. With both of these things on the exploration program and grow reserves and support development in the medium and long-term.
Our consumer operation had a challenging year. Starting with the Brumadinho's result in Q1, which resulted in increased operating complexity. If you see the impact was limited to brief stoppages immediately. And so besides, we received [indiscernible] now continue to drive savings. I think in our previous year our experience at forecasting through the year, we responded to the tenants by signing the mining. Being internal and external working community provided. Subsequently, mid-surface report has been used to readvertise asset growth, while new [indiscernible] has also been introduced.
Earning ahead of shelf, these measurements are working well that we will monitor conditions closely as we move into the deepest high-grade. Serra Grande delivered a solid performance. We are ready to start the mining in the new format, so over later this year of the development in 2019. This already will extend life of mine, improve flexibility and depending on the exploration results give an opportunity to scale this mine life.
At Cerro Vanguardia, production was in line with the schedule with lower prices. Unit cost rose mainly due to the lower production that helped inflation, which remain very high in Argentina. This was partially offset by a weaker peso. The presence team is currently working on drilling programs to replace mining and extend life.
Looking ahead, we will continue to drive the operational excellence program. As we said, our [indiscernible] increasing our order reserve development and reserve conversion on our existing sites over the next two to three years. We plan 30% this year from seven to 40 kilometers across the international operations. This will give us better result confidence, improved productivity and, over the next few years, increased life of mine.
On projects we are [indiscernible] study at Quebradona, which is expected in early 2021, and we're expecting the EBIT for Gramalote at around the same time. The International operations team has worked that we've seen steady improvement in the portfolio.
With that, I'll hand it over to Stewart, who will talk about the results.
Thanks, Ludwig. I'm pleased to report an excellent progress that's been made on Obuasi Redevelopment Project. Firstly, on Slide 23, to recap on the project dimension. Obuasi has a large resource of around 50 million ounces. I'll highlight a little later the reserve that increased to around 7 million ounces at almost 10 grams a tonne. Gold production in the first 10 years is in the range of 350,000 to 400,000 ounces per annum. Margins are also strong. Life of mine all-in sustaining costs averaging around $800 an ounce in money term, when you put it all together, you get an after-tax IRR of 23% and payback in around 60 years using conservative assumption. At first, the after-tax IRR is close to 40% with about a 4.5-year payback.
On the 18th of December, the redeveloped Obuasi completed its first goal pour. This was a significant milestone for the company, our supportive stakeholders and indeed for the country of Ghana. On the 29th of January, we celebrated the restock with the President of Ghana, the Ashanti team 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 objectives of stabilize the production capacity of 2,000 tonnes per day. Phase I 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.
Growth of bacteria progressed to commercial scale leading to first goal, though we are still building significant gold inventory in the BIOX CIL [indiscernible]. I'm pleased to say that even at this early stage, client performance is in range of design where [indiscernible] and refurbished plant 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 our focused efforts on resource modeling, relogging and data validation, reserves increased to 7.12 million ounces from 5.86 million ounces using the same $1,100 an ounce gold price. Mineral resources reduced slightly to 31 million ounces after cleaning up some non-mineable areas based on the new gold reserve.
Geological program is well underway with four 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 Sansu, the grade control drilling is confirming and expanding the resource. With Phase I completed, we're now focused on Phase 2. The objective of Phase 2 is to establish an operating capacity of 4,000 tonnes a day by the end of this year. Phase 2 is about new plant builds, new tailings and water facilities, the new GCVS vent shaft and refurbishment of the KRS placing shaft. Mining will progress to blockade level, establishing second mining front.
Stakeholder relationships, Ghanaian participation and mine reclamation are equally important elements of this project. With our social management plan, we completed and facilitated a number of developments, increased the expansion of the Obuasi school and establishment of the Obuasi campus for the Kwame Nkrumah University of Science and Technology. There are now approximately 4,000 people employed in the project, 96% of whom are Ghanaian and most of whom are from Obuasi 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 regard to our reclamation obligation, and we've completed the earthwork in the northern area of the [indiscernible]. 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, Stewart. On Slide 31. Our generative and mine site exploration programs were active across the portfolio, delivering on station to $34 per ounce. Our mine site exploration program has drilled over 860,000 meters in 2019, which is 30% more than in 2018, more than double the levels that we were achieving four, five years ago.
Our program this year was designed to unlock [indiscernible] additions led to better development, advanced rates in our underground operations. In 2019, we saw ore reserve gains above depletion at Obuasi, Geita, Kibali, Iduapriem and Tropicana. This is a combination that we believe will continue to produce stable year-on-year replacement in growth, support our planning process and allow for better operational flexibility. In 2020, we expect continued positive ore reserve results in general from Africa and Brazil and from Sunrise Dam where the drilling ramp-up will enable us to grow reserves.
On Slide 32, we have core exploration hub in Australia and North America with drilling programs completed in both areas during the year. In Australia, exploration progressed in the Laverton area around Sunrise Dam with two new projects advancing in 2019 at [indiscernible].
In Nevada, an exploration plan of operations for the silicon project was submitted to the Bureau of Land Management and is advancing through the permitting process. [Indiscernible] also in Nevada, drill target definition was completed in 2019, and I'm pleased to say that drilling started earlier this week at schedule. Target generation activities were ongoing in South America and West Africa, and we expect this work to provide new project for our portfolio.
On Slide 33. We had a strong year in brownfield exploration. For 2019, the ore reserves have assets outside of the South Africa group for the third straight year, adding an impressive 1.1 million ounces net of depletion. This was achieved at a consistent and conservative $1,100 per ounce gold price. This is a great result as we step up reinvestment into our orebody. We continue to see strong geological potential across our operating group portfolio with a robust pipeline of targets.
On Slide 34, we have an excellent record of discoveries with 53 million ounces added to ore reserves between 2004 and 2019 from our portfolio outside of South Africa. This averages roughly 3.5 million 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 million – the $30 per ounce investment in ORD and drilling was built up on our integrated mine planning process linked to this first principle-based drill for plan, coupled with historical resource to reserve conversion rate that we have maintained over the past 15 years.
Keep in mind that ore reserves are not necessarily unmarked by drilling on an annual basis and will sometimes be realized in the medium-term in an 18 to 24 months incurrence on the target. Our defence and strong understanding of our ore body more than justifies our investments in ore reserve development.
I'll hand back now to Kelvin to conclude.
Thanks, Tim. We're committed to cost control and keeping a tight range 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, bad lockups from 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 backlog, free cash flow before growth capital would have increased nearly fourfold to $832 million.
So to wrap up, we're excited about the year ahead. Our ongoing focus on ESG is paying dividends, including our steadily improving safety record. We've made good progress streamlining the portfolio. We're generating strong cash flow with the problems of more to come, especially at a higher gold price.
Our dividend increased year-on-year and at 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 place. This is an important addition to our portfolio, it's ramping up on production – it's ramping up production on plan, as you heard, we expect positive results from increased reserve development and reserve conversion and we'll remain 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. [Operator Instructions] 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, two to three years? Could we get a disclosure or a future plan on that by the end of this year? Thanks.
Hey, James, it's Kelvin. I'll start, then turn to Tim. Regarding the expense this year on largely 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 as we move into 2021. But Tim, why don't you give a little more color on that?
Thanks, Kelvin. If you look at the past three years, we've added ore reserve above depletion, and we expect that to continue with this additional investment going into 2020.
And as well, James, sorry, we didn't touch on the second part of your question, long-range planning. Yes, that's a key aspect of this, in fact. And we want to be in a position where we've got better predictability, reliability. So you will see that in our long-range planning.
And as we 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. Of course, first one year out, then beyond that two and three. Beyond three at this point, I'd like to pass and we'll see where we go. Directionally, I'd love to be able to give guidance out five years, but we'll walk before we run. And I think it will be – it's important that we get a position where we can confidently guide on at least three years and that's the objective.
Okay, that's great. And just one more on the cost side. Your feeder 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 selling and you may want to talk about what we're doing from an OE perspective as well. But you want to start with the how we’re managing inflation from your perspective.
Yes. So I mean, specifically, the cost inflation assumption that we assumed is 6%, which is what we are experiencing and this is across economies that we're operating in. I think, in particular, in some of the emerging economies, not Argentina and South Africa, even though [indiscernible] operation, we are seeing quite higher inflation. In terms of having that itchiness and having that uncertainty, if you look at our three big cost buckets, I think, in particular, its labor, its consumables and its mining contracts.
And as regards managing it, later, I think we're perfectly managing it with index inflation level. As we do mining and contracts that we got typically three to five year mining contracts later between these two inflations. But we certainly try and manage that even for no inflation. And I think similarly and with large consumables that really leveraging our global supply chain to achieve all efficiency.
Thanks Christine. And then Ludwig, you want to give any guidance?
I think that Christine answer the question of inflation, there is more comment on this. On the operational flexibility means the investment into the drilling will give us a certainty around the production and will also help with the unit growth. And on top of that, we've got operational excellence programs that we monitor on a monthly base and, actually, with clear targets that we try to drop at least inflation as we go forward.
Okay. Thanks, Ludwig. In terms of portfolio, you think about – sorry, a velocity coming in, in 2021, coming in around $350 million and around that 800,000 – sorry, 800,000 – $800 an ounce level. So the net debt will actually improve and help our costs.
Great, thank you.
Okay. We have a question from Shilan Modi 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 1x net debt to EBITDA. Could you talk us through your outlook for dividends? And then talk us through the rank of the – the rank of where your CapEx will be – where your cash will be spent for 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?
Sure. Thanks, Shilan. I'll start and then others can weigh 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 out. Likewise, Morila will be ceasing operation. As Ludwig explained, we're seeing lower production from CVSA in Tropicana, which is in line with their respective production plan.
On the positive side, we'll see Boston Shaker ramp up going through this year and into 2021. And importantly, as Graham just touched on, Obuasi ramping up. We're budgeting in 2020 about 150,000 ounces of Obuasi and then ramping that up to the 350,000, 400,000 level as we move through 2021 and beyond. So that is the – that's generally where we are in terms of production, the cost delta for the year.
Our own sustaining costs, the average over the last while, it's usually in the kind of range of $160, $170 up to $200 an ounce. This year, if you take the all-in sustaining cost production and you back out that $30 an ounce for an additional reserve conversion, that puts us around $180, which is reasonably consistent. As Graham touched on as well, in 2020, we do see the higher all-in sustaining costs as we ramp up Obuasi. I believe it's around $1,200 we're budgeting for this year. And Tropicana, as we're moving to treat 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 look 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 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 Obuasi about $220 million on Obuasi to bring in full production, between Gramalote and Quebradona, it's around $45 million to bring both those projects to feasibility. Then we said Boston Shaker, about $30 million. That project, very high return. So we're going to be investing back into the business on top of the $30 million additional on ORD and reserve conversion.
On dividends, we're pleased – our policy is 10% of free cash flow before growth. If gold prices stay supportive, then we continue to run the business well and execute. We do anticipate increased free cash flow generation, in which case the dividend will rise commensurate with that. From a dividend policy perspective, that – it's a Board decisions, but it gets discussed regularly at the Board, there is a view that we will like to be in a position to kind of steadily increased yield as we go forward with time. But we don't want to lurch. We want to do that kind of steadily and progressively. And so that will be the plan. But the returns to shareholders is obviously the – obviously important to us.
I think I touched on both questions, Shilan. If there is anything else, let me know.
One more, if I may. So 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 two?
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 discuss it from – we discuss dividends from time to time. At this point, though, we really are focused on the priorities that I've outlined.
Okay, thanks very much.
Thank you.
We have a question from Dominic O'Kane from JPMorgan. Please go ahead.
Hi, guys. Thanks 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 reserves, you're using $1,100 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 cut off grades and cost management? 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, Dominic. Well, look, I think the most important thing is our strategy is unchanged. I mean, we're honestly happy with the gold price. But we're going to continue to focus on streamlining the business as we have been and conclude the asset sales. That's priority one. If we keep driving Obuasi and bring in those kind of new, lower-cost, long-life ounces as we go through this year into 2021 as well as progress the projects that we have in front of us in Gramalote and Quebradona, we will maintain the focus on our leverage onetime and lower, and we'd love to continue to chip away on the debt.
And as far as the price – the reserve price of $1,100 an ounce is conservative, I'm guessing we'll probably, if not the lowest. We're certainly among the lowest in the peer group, and we're going to maintain that reserve price. We want to maintain the cost discipline that comes with that. We're not moving off the $1,200 15% after tax IRR. That stays in place. We're going to manage our cost discipline as well as manage our overhead-type utilities. 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, I think we're the only company in the peer group that hasn't issued equity, and that obviously is something that's important for us. We're going to maintain the share count. I'm asked a question often, will we look at doing M&A? And the answer is no. I stay still, we don't need it. I'm really happy with the pipeline as it exists and moving forward, of course. So that's really the objective.
The portfolio is changing. As we saw the South African business, that's the last kind of ultra-deep, hard-rock underground mine, we shift more towards shallower underground and open-pit production. So that's an important transformation. And otherwise, we're just going to stay really focused, and 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 – the capital expenditure is nothing significant, and there are obviously – it'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 in the business in reserve as well, our hurdle rate hasn't changed. So it's a 15% after-tax return at a $1,200 gold 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, Obuasi, et cetera. But that's the minimum.
And by the way, that minimum doesn't mean that just because you passed the 15% hurdle rate, and it's automatically a green light, we'll – the project is going to complete. We're going to invest in those to get the better term, 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, Kelvin, 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 AngloGold 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 for Cerro Vanguardia, which you point out? Or is there some more sort of adjustments you would like to do for the business?
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 in. 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 streamlined the business. I don't see any more transactions at this point. We're derisking nicely. And so from that perspective, I'm pleased with the progress.
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, it's flat year-on-year, which – could you explain that, given that you plan on degearing? And could you give us a guidance on the actual cash flow portion of that interest flow, please?
Okay. I think with the assets the SA asset sale on priorities. I mean the agreements has been concluded and subject to condition, as we know. So it really depends on when those conditions were met and primarily it's decommissioning approval and the sectionally limited from the DMRS. And for profit, the date for closing the deal is the 30th of June. And clearly, we want to keep you updated on that. And with regard to proceeds. I'm getting that. As regards to proceeds, we announced that we will apply the currency to further this production.
On the interest charges, which was your other question, why it's being flat year-on-year. Are you talking about you in terms of the guidance?
Yes...
Yes. So I think a large part of our interest bill is related to the hardened debt. What we are planning on doing is with the – on redeeming in April. We do expect to see some interest reduction. Although small, but the differential between the cost of RCF and what we're planning on the bond, which is about [indiscernible] differential and then of course, we are looking at canceling the commitment fee relating to the ZAR 1.4 billion facility.
In addition to that, I think what you're got to keep in mind is there's some unwinding of environmental obligations and the full IFRS leases that do impact finance costs. And that, by and large, results in a flattish year-on-year comparison. So it's not just pure interest cost...
What is the cash component of the interest?
So it's $120 million to $130 million, that is the cash component of the interest in regards to our cash.
And then lastly, if I may, just the mechanism that you try to iron out with the DRC regarding remittance of those funds. Is there 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 flow, 1-line item, please?
Adrian, starting point is, as you know, Barrick, 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 on factors. So the positive news is that Barrick, for me, has been constructive. We're at the highest level with the DRC government. They reaffirmed – received confirmation with cash. It can be used to pay dividend and replace shareholder loans to the JV.
As of very recently, yesterday, in fact, we sent and received from Barrick as that they're kind of dotting the i's and crossing the t's. And so what we expect is of the $202 million tied up right now in our account, that will come out probably in a pretty big chunk. But importantly, what we've been working is a mechanism going forward. So we can do this in regularity. We're not hitting the same kind of build-up.
And 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 and coming out in chunks.
That steady release relate to future profits or were you expecting a big chunk right now out of that – from that $202 million?
Yes, we're expecting a good chunk right now out of the $202 million.
Thanks.
You’re welcome. Thanks Adrian.
Our next question is from Arnold Van Graan from Nedbank. Please go ahead.
Hi, yes, good afternoon. Kelvin, I've got a question on the possibility of moving your ratings? There's obviously been a lot of talk about that, that it could drive a re-rating, so my question is, have you done a detailed study on whether changing the primary listing would actually lead to a re-rating for a gold stock? So do you have empirical evidence to show that this is indeed the fact and it's worth the cost? And if so, what do you think actually drives that re-rating? 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 JSE or through that ADR?
Arnold, thank you. I mean, good question. And we get asked a lot, as you can imagine. I think the starting point is we don't want to be distracted, so we're focused on including 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 sales.
We've also been clear that anything that unlocks value, we're open to it. It is on the table. And of course, some of the speculation with regard to a change in primary listings comes with indexation and other things that, of course, in fact, were available, we totally consider.
But at this point, we're not really doing anything further than that. And so we'll just kind of walk away through till we see the process and make sure we conclude that well. And then other things in terms of the corporate structure, whatever we can do that's sensible, 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 project's coming-up ranks. 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. Look, Patrick, that is – it's a good question. I consider it a Hollywood problem. They're two good projects. They're moving to the pipeline at the same time with feasibility studies approaching. The good news and part of the reason that we elected to allow our partner, B2Gold and Gramalote, to earn back the 50% is, as you know, they're funding a drilling program that's underway and the feasibility work flowing from it. And so we like the fact – and B2Gold, I think, are a great company. I think they develop projects well. They operate well. And so in some ways, they take the approach to projects exactly the way I want them to.
So from our perspective, the fact that they're moving it forward and allocating 100% of their time and attention to it, like us allocating 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. And then as we come to the end of the year, and we evaluate the feasibility studies to assess it against market conditions, where we sit then, and we've got options available to us. We can proceed in our own. We can bring in partners. There's a lots of things we could do that we choose from a funding mechanism.
So from that perspective, we'll wait and see. Again, the bottom line is we're not going to do anything unless it passes our hurdle rate and more. And we'll evaluate the opportunities then relative to everything else in the mix. But I consider it a good thing. It's like I said to have two good projects like that moving down the pipeline, it's one of the reasons we're not considering doing M&A and looking at other places we don't need to.
Great. Thank you.
You’re welcome.
Our final question is from [indiscernible] from Anibok Investment. Please go ahead.
Thank you very much for the call. Having divested about 13 million 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 2.6 to 2.8 million, coming off from around 3.3 million. How long might it take for us to get back to a production of about 3 million ounces?
Well, let me try both those questions, and anyone else can weigh in. I think the – I'll work backwards. In terms of the production profile, we already see the – our guidance for this year, which is 3.050 to 3.3 million ounces. That's for the combined portfolio. As we divested the – of the South African business and then bring in Obuasi, those two – the production levels kind of balance each other, where they're trading in kind of different kind of mines. For the Obuasi, 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 sustainable basis. That three million mark, it feels about right. But importantly, it's not just about ounces. If we produce a little less than $3 million, but we're reproducing much greater margin, we're okay with that. So 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, what – I'm sorry, could you just repeat the first question?
Would you like to replace 10 million ounces?
Will we replace? Well, that's something – well, first of all, as Tim indicated and we'll bring in 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 million ounces. It turns out that this year, we added 4.5 million 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 as Tim touched on.
During the press, I forgot to mention, there are a number of key sites this year that added more than 0.5 million ounces. And Obuasi added 1.3; Geita, 800,000 ounces; Kibali, 800,000; Brazil, 580; Iduapriem, 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 really what we're about.
Okay, thank you.
Thanks very much. And I think that with 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 and afternoon here. We're really excited about 2020. We've got a lot 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.