Edited Transcript of GLEN.L earnings conference call or presentation 6-Aug-20 7:00am GMT

The full year costs/margins forecast in our key commodities, we’ve given a few — the numbers there, once again, displays the strong performance of our industrial assets where we are in the lowest quartile in most of these commodities. These assets, long term, great assets, especially in copper. You’ll see our cost of production around about $1.06 per pound; zinc, $0.05; nickel, $2.57; and thermal coal, even under the COVID type where we had to cut a bit of production across the board, our costs are sold $46.

The balance sheet. Steve will talk more about that later and give the details, but the net debt is $19.7 billion. It’s been temporarily affected with the increase slightly because of the oil department working capital reset, which Steve will talk in more detail later.

The spot illustrative free cash flow generation at current spot prices, you will see we will generate an EBITDA of around 4 — free cash flow, sorry, of $4.1 billion under the current spot environment, could be a bit higher, with recent increases in copper, gold and silver prices. And our EBITDA at these levels, spot prices around about $10.5 billion for the year.

As we said, we always will target net debt between $10 billion to $16 billion. We would like it down to $16 billion by the end of the year. At a preferred range, we can — we should, with this type of generation of cash flow, get to those levels by the end of the year. We have a large amount of committed available liquidity, $10.2 billion, and we only have maximum maturing bonds of $3 billion in any given year.

Safety performance. We are working hard in this area, and our industrial teams are working hard to progressing with an enhanced group-wide fatality reduction program. And we’re seeking to have a major step change in our performance there. Year-to-date performance, we have had 6 fatalities, over 5 incidents at our various operations around the world. And this is an unacceptable level, and the team is working very hard to reduce this area with intervention programs across the board where it is required.

If you turn to the next slide, talking about our commitment to the transition to a low-carbon economy. And as you will see, we’re aligning our business with the Paris compliant pathway. And we’re focusing on our Scope 3 emissions. And as you will see, our diversified portfolio of metals and minerals is well positioned to support the transition to a lower-carbon economy. We are prioritizing our capital investments to align ourselves to this transition while maintaining strong operating standards. And as you will see, the expansion of the operations is mainly in the areas of low-carbon energy, cobalt, nickel, copper, which is the future of this low-carbon energy, and that’s where our expansion projects will be.

By aligning our capital investment decisions with the goals of the Paris Agreement, we project a reduction, as we said in our previous results presentation, that — from the December results, we — our Scope 3 emissions will reduce by 30% by the year 2035. And this is primarily driven by depletion of our coal reserves as we move later on in our production levels. And therefore, we should achieve the Scope 3 reduction of 30%.

In addition to consideration of emissions from our products, we continue to reduce our own operational footprint, both our Scope 1 and 2 targets, and we’ll issue our targets at the end of this year in that area. But we have exceeded our current Scope 1 and 2 targets up to date. So that we are pleased to say, on our Scope 3, we are moving to reduce that as we move forward and should be reduced by 30% by the year 2035.

So with that, I hand over to Steve to talk about the detailed financial performance for the first half of the year.

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Steven Kalmin, Glencore plc – CFO [3]

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Thank you, Ivan. We continue then the presentation on Slide 7, and good morning to all those on the call.

On Page 7, just a scorecard across a variety of sort of financial metrics, all of which we’ll have some more detailed slides as we move down the track. But EBITDA at $4.8 billion, as Ivan said, down from $5.6 billion, down 13%, relatively small percentage considering the backdrop that we experienced in H1. And that was as much as Marketing increasing $1.1 billion; Industrial, $1.9 billion, primarily due to lower prices, but now set up for a much stronger second half 2020 as well as an annualized performance which will show some of the cash flow going forward. We’ll provide the Industrial bridges, as we normally do, later on as well as the Marketing comparison.

So Industrial, $2.6 billion; the $ 4.5 billion, very much commodity price, but we’ve had some cost and volume impacts COVID-related, particularly in our metals business and coal business, to some extent, down in South America. Marketing half yearly performance of $2 billion. We’ve noted the oil stronger performance and conditions. There was also more normalized metals performance where the base period, as you would recall, was impacted by largely noncash cobalt mark-to-market adjustment that we realized in first half last year. And that’s obviously — hasn’t reoccurred as we wouldn’t have expected to have occurred.

Good cash flow generation pre-working capital. Funds from operation actually up 5%. And free cash flow, in fact, up 50% because of lower CapEx as well and now settled into sort of the $4 billion range in terms of CapEx, which is also driving free cash flow through the business. And CapEx, as I said, $1.7 billion, tracking comfortably within — in fact, below the $4 billion annual guidance that we have at the moment.

Net debt, plus 12%. I’ll talk a bit about that later on in some slides and tracking towards the end of the year, temporarily also higher due to the working capital reset, predominantly the oil business. The Marketing leases also have increased $0.4 billion, reflecting some of the short-term nature of particularly tankage and vessels supporting some carry trades, Katanga trades, particularly in the oil business. Those will all resolve themselves and roll out within a couple of years. And also some of the cash margining, initial margining required to hedge those particular transactions, that increase consumed $0.5 billion. We’ll talk about that later on.

So jumping then into Page 8. This is the Industrial, $2.6 billion, comparison ’20 against ’21. It’s worth noting that $2.6 billion for our half year price is in volume, affected as well. We are annualizing at $7.5 billion to the Industrial at spot. So there’s near-tripling impact, particularly, we’re going to see in the metals, and I’ll talk about both price and volume impacts as we move forward. So that is going to be expected to be quite a big step change as we roll into H2 cash flows as well as out into 2021 as well.

So where has it impacted us? The metals and minerals has been the sort of a more stable contributor, just down 16%. Good cost performances and improved Katanga contribution. We spoke 12 months ago about the turnaround in some of the ramp-up development assets. Katanga has performed as we would have hoped and expected, at least operationally. And that’s set up for continued cash flow generation going forward. And we’ll see some of the price impact as we roll into the second half.

Of course, the energy side was down from the $2.1 billion to $0.7 billion, coal being a big factor there, but also the oil business, fairly small on the industrial side, good trading performance. If there’s one negative from the — both the volatility and low prices that we have seen is both on the upstream, the Sebree E&P. And also, some of the demand-driven downstream impact through refining and marketing in our South African business has been impacted by the lower oil prices as well.

So the waterfall on Slide 9 sheds more light. Our net pricing has been pretty much the — and has been the dominant driver, $2.1 billion, spread $1.2 billion across energy; within energy, $1 billion coal and $0.2 billion on the oil side; metals, $832 million, and that’s a function, you can see, of average prices. In copper, zinc, prices has helped us, of course, on gold and silver, 26%, 13%. It’s important to note, and this is why I have highlighted and pausing just on how the momentum on the industrial metals business is going now into the second half, where all the prices, if we take spot prices today relative to the average realized or the average prices during the first half of 2002 (sic) [2020], there’s material increases. And that’s getting — as I said, on the Industrial side, $2.6 billion in the first half on a sort of annualized spot basis, tracking about $7.5 billion.

So copper price was $5,502 for the first half average, whereas against spot today, it’s 18% higher. Zinc at spot price today is 17% higher against first half average. Gold is 24% higher. Silver, the standout, today at 60% higher at over $26, $27 a pound against $17, with significant producer of silver through by-products. Oil is up 10%. Coal, broadly flat. Nickel is up about 16% against first half average. And cobalt, not so much the average, but just on a spot basis since the end of June, is up close to 20% in pricing, both on the metal side and the hydroxide payabilities, which is what we’re mostly exposed to out of our DRC operation. So very positive cash flow and earnings momentum going into the industrial metal side of the business as well.

Volume impacts for us, $273 million negative, mostly COVID-related as we had suspensions either short term or extended. Of course, the Antamina was well — was pretty well chronic during the period. It’s had lower zinc production period-on-period of 32%. That’s now ramping back up. Colombian coal was down 43% in volumes. Ferroalloys, with the South African lockdowns and shutdowns, was 42% lower on ferrochrome. And some expected lower grades at Antapaccay with some copper and gold as well.

Cost side, you have the double whammy of both the COVID-related curtailments both on the cost as well as volumes. So we have additional shutdown costs mainly in South Africa across ferroalloys, including higher electricity prices. In Australia, through both just the mine sequencing and also how we’ve managed supply, you’ve had some long wall and some strip ratio impacts through the first half of 2020 as well. FX clearly provided some relief primarily in Australia and South Africa.

And you can see where we have separated, as we’ve done in previous years, the ex-price, so the volume cost impacts of the African copper business has been a $423 million turnaround there, reflecting the positive EBITDA generation and turnaround, particularly at Katanga. And the other is some SG&A, that’s mostly timing. There was a bit more than good expense into the first half, given timing of when settlements of bonus accruals and calculations get finalized this year. We had more of it going into H1. So that, again, should be a positive timing difference as we roll into H2 and beyond.

What we’ve provided for the next 4 or 5 pages is just a 1-page scorecard across the various businesses. So Page 10, we’ve got copper performing very well. In a cost perspective, you can see down at $1.09, full year down to $1.06 and even trending closer to $1 a pound as we go into 2021. You’ve got some African copper turnaround, so as we’ve said, further improvements. On a half yearly basis, $1.3 billion of EBITDA, which are very consistent with Martin’s modeling guidance. I know that he sort of gives you all, and we’ve sort of compared guidance against actuals, and it was bang on $1.284 billion. So that’s pleasing on that front.

If we do look at — and we’ll get to some of the spot cash flow generation around both cost production and current price on Page 21 as we go forward. But on a spot basis, copper is around $4.1 billion. So compared to the first half, you’ve got a more than tripling of EBITDA as we roll forward from the copper business, which is both copper but also the significant by-products across gold, silver and cobalt that we have coming out of that business. It has increased its share of the overall EBITDA from 24% up to 20%. And decent both demand as well as primary supply losses in scrap and the likes that’s keeping the market reasonably tight in terms of inventories and overall supply.

If we go across to zinc, also, we’ve got strong momentum. There’s a lot of silver by-product in this business and gold and lead as well, $648 million of EBITDA for the first half, which comes in well also against the guidance that we provide as well. But again, you’ve got, relative to current prices on production and costs, we’ve got a near tripling of that EBITDA up to close to $2 billion. If we look at that business on an annualized cash flow generation business, augurs well for H2 in that business. And in fact, we go into a negative cost structure post by-product credits, gold and the likes, with $0.28 versus the first half; full year guidance, $0.05. So clearly, you got a big negative as we go through that particular business. You’ve seen a lot of mine supply reduction, particularly in this area, including ourselves. We’ve calculated around 1 million tonnes, which has kept this market reasonably in check and has more than offset initial supply growth that we’re expecting in zinc.

If we go across to nickel, we have alerted to a — to some ramp-up timing factors over at Koniambo where we’re running single-line operation for the balance of H2. And that was essentially the main factor in taking down guidance by 8,000 tonnes for the full year. But again, due to higher volume, we’ve got some recovery in both the Canadian and Australian business production second half and due to higher price in nickel. You’re still going to see EBITDA at first half a little over $200 million. On an annualized basis, you’ve got more than sort of 2.5x that, sort of more than doubling up to $539 million as we look later on. And that price has been pretty strong lately as well. Costs are reasonably under control. We’d like to see Koniambo, of course, getting good strides as the one asset today that operationally is clearly lagging expectations.

In terms of coal, this is the business that’s been the most materially impacted by lower prices and sort of demand/supply is trying to rebalance. We’re trying to do our part. But clearly, China and Indian lockdowns has had an impact across pricing in some of the European competitive energy landscape. Cost structure has been stable at $46, $46, $46 against guidance and the likes, with realizations and pricing both in Asia and the European market has seen us come in at $869 million EBITDA against $2.1 billion in the prior period. As we said, we have taken full year production guidance low, 18 million tonnes, in last week’s production guidance. That’s Prodeco with extended care and maintenance and also taking our tonnage out of various Australian operations also to rebalance the market as well. And it’s not going to take too much to see that market hopefully find its [blow] and potentially move up at some point.

If we looked then at Marketing on Page 14, it’s nice to see the big bar on the graph of $2 billion. So you’ve got it up — and you’re doubling up at 108%. It’s somewhat so clearly assisted by the comparative base having been impacted by that $350 million of largely noncash cobalt mark-to-market losses. So the metals and minerals side sort of — it really belies the increase. $785 million is a more normalized performance anyway. Last year, had we excluded the $350 million, would be up $88 million, but that’s still a strong performance across metals. The energy side is where we’ve clearly seen the big increase, 92%, primarily in oil with exceptional market conditions, dislocation structure and the ability to go and see some Katanga and carry structures, which we have loaded up quite materially in that particular area. So we are now guiding to the top end of that particular range in Marketing.

Also worth highlighting the strong agricultural performance. It does sometimes get crowded out within our overall business, but we’ve gone from pretty much 0. This is our share of their net income, EBITDA, depreciation, interest and the likes at 50%. That was $118 million for the half year period, which is a very strong underlying performance from that business. It’s continued for the second half and so augurs well also for the sort of valuation and the general monetization of that business to start materializing through dividends or the likes that could come from that business as well. So to those that maybe haven’t quite grabbed it in the models, certainly, it’s back performing. And this is the best period we’ve had since about 2014, which was a record, but this is not too far away from that as well.

If we move into Page 15 on the CapEx side, just trying to hold one’s hands through the sort of leases, the cash CapEx and the different effects, but we’re around $1.7 billion across the business net cash on CapEx. You can see the Industrial CapEx at $1.777 billion. Marketing CapEx is plugged in at sort of $474 million. But that’s all, if you like, noncash capitalized capitalization of vessels tankage supporting the carry trades. And from both the balance sheet and cash flow perspective, that all works its way out of the system within a couple of years. I think that was one of — potentially one of the unintended consequences out of those new IFRS 16 standards. We’re clearly not the owners or we’re short-term renters of that and does work its way out the system relatively quickly as well.

So $1.7 billion. We’ve revised down the full year CapEx guidance, with $4 billion to $4.5 billion was the last update back in April was the range. We’re now going to be — we’re still comfortable we’d be bottom end of that range at $4 billion, tracking at $1.7 billion. We’ll obviously come back to you all in end of November, early December, with an eye on CapEx for 2021 and ’22. The last update towards the end of last year or February this year was around $5 billion. I would think that none of the reductions this year is going to impact where we finish up. At least, we should be able to have CapEx well contained within that $5 billion. Notwithstanding, there are some deferrals, but some of the longer-term care and maintenance factors around places in Chad, Prodeco and Mopani has taken out longer layers of capital out in some of the projections that will only ever come back with some incremental cash flows and EBITDA if those volume growth was to materialize as well. So that’s on the CapEx side.

The last 2 slides in terms of balance sheet. As I said, net debt, temporarily higher. Just mathematically, we’re tracking $2.8 billion above our target range of the $16 billion cap, and that’s just $19.7 billion where we’re at, $0.9 billion at the marketing leases that we take out for the reasons that I’ve just mentioned, less the $16 billion, so that’s the $2.8 billion. That has been — and we’ll see there’s been strong free cash flow generation at an operating level. It’s all being consumed in some net working capital, which has taken us up to the $19.7 billion. That’s all been through the working capital reset in the oil business through the significantly lower oil prices and demand environment as well.

That part of our business — the overall business runs — it can run slightly positive working capital, net receivables — or the payables are slightly payables and receivables, but oil within that component is significantly higher payables or the payables and receivables. That tends to be the structure, the terms of trade, the discounting of receivables. And as we noted last week, we’re around 45 days in payables and 20 days in receivables, not too dissimilar from our integrated ore peers without naming any one. So you’re obviously sort of a favor some of the large integrated ore players that don’t necessarily separate their marketing and trading business.

But if you look without fail, all of them are very — if you look, payables, receivables are much larger on the former. And every one of them in this lower oil and market environment have had some reductions in net payables, i.e., an increase in working capital. And some numbers of one of the peers out there, if you look, was $6.7 billion, one was $4.2 billion, one was $3.6 billion, and you can certainly go and find them as well. Also the additional margin calls, as I said, $0.5 billion in respect of some of the carried inventory and the Katanga structures that we have as well. That will just come back as those structures work their way out over time.

So clearly, still committed around the, as we said, the strong BBB ratings and against our targets. Still, even though 1.8, still comfortably within our either cycle, less than 2. And as we project ourselves forward, we’re pretty comfortable and there’s a credible pathway towards getting back below $16 billion by the end of the year. And on a pro forma basis, when we’re at $16 billion with the EBITDA at spot around the $10.5 billion and potentially higher today, and I’ll give some indication of that, then we back down to 1.5x or slightly below 1.5x. So we’ll be back, by the end of the year, we’ll be back below in terms of both absolute and leverage ratios. And that will happen by the end of the year. And we’re already sitting in August, so we’re 1/6 of the way towards that as well. So those are the factors. Liquidity is still strong at $10.2 billion, a very manageable profile and a business that’s throwing off healthy levels of free cash flow generation as well.

Page 17, I think, is an important slide then as well as we look at the cash movements in net debt in H1 2020, top right. So you can see the net was $2 billion of free cash flow even in a low price environment and a COVID backdrop. Strong performance free cash flow. Where’s it ended up in terms of net debt and balance sheet? Clearly, it’s still there in the business. It hasn’t gone. It hasn’t disappeared. It’s gone towards reduction in payables and creating more working capital float than they otherwise would have been at the beginning of the year. So there’s $3.1 billion there. And that was a function of both those margin calls as well as the payables, receivables in the oil business.

We’ve then said, well, how do we want to sort of get back below the $16 billion in whatever environment we are as soon as we can? And mathematically, that does require a $2.8 billion reduction. The bottom right there says what’s the pathway, how do we get there, what assumptions are needed to get below the $16 billion. And as a minimum, have debt reduction of $2.8 billion, which again — and we’ll talk — and we’ll look to Page 20 — 19 to 21 later on the free cash flow at spot prices, which we’ve used that to post a number here as well.

So that’s $2 billion, which is half the $4.1 billion or so we’re generating at the moment. We put it down $2.3 billion net CapEx, which is just mathematically the $4 billion for a full year, less the $1.7 billion, which we are at the half year, that $4.3 billion in funds from operation to give the $2 billion. There is a step change H1 to H2 of $3.7 billion on funds from operation to $4.3 billion. Just industrial metals alone will clearly get us there. I’ve spoken about how those prices. And then again, mathematically, this is not a target necessarily at saying how much of that $3.1 billion of working capital outflow in H1 would need to reverse back through high oil prices, margin calls coming back, additional volumes. And you just need $0.8 billion of that, which is about 1/4, so it’s 25%, and that gives you a $2.8 billion. Now clearly, that number is bigger. We’re going to blow significantly below the $16 billion if we do this potential, still some long-term asset monetizations. There’s some stakes of companies that we have, if any, that gets executed during the year. Again, that’s going to start making material inroads getting us below that $16 billion.

So that’s the pathway. It’s tangible. It’s near term. It’s credible. It’s real. And we’re very confident about that, that should help both the aesthetic sort of net debt. It will help in terms of some of those ratios as well. It will get us much closer to being able to commence distributions again when we reunite back here in February next year. But clearly, the key thing, what’s the underlying business doing? What’s the quality of the earnings? How does that get capitalized and reflected long term? This is a very short-term manageable phenomenon as we’re going through the business.

In terms of 2020 modeling guidance, the building blocks the last 2 or 3 pages that we give as well. Let me — Page 20, we just start on the production side of Industrial. So that’s across our main businesses, first half, second half. And the recent volume pickup that we expect second half, COVID was clearly a factor that suspended and had an impact on some of the fluency of operations during first half. So on — in copper, you can see 588,000 first half production, 667,000 at the midpoint. So we’ve got a pickup of 79,000 tonnes at 13%. And Antamina was a big factor, that was out for the best part of 6 weeks. We got some extra by-product copper coming out of the zinc business, in particular, Kazakhstan and Canada, and better operational rates due to maintenance and activity levels in Australia in copper. We’ll get a better second half performance there.

Cobalt, broadly flat because that’s primarily Katanga anyway and that’s performing well. Zinc will pick up 60,000 tonnes. That’s a lot of — and at Antamina as well, a lot of the South American smaller assets that we have were all out for extended periods of time in Argentina, Bolivia and Peru. Nickel will pick up 4,000 out of Canada and Australia. There’s no expectations on the new reset that you’re going to have a better second half at Koniambo that’s running one line. Ferrochrome recovers somewhat, but still taking it easy given market conditions down in the ferrochrome market. And coal actually declines because of some of the reductions that we’re putting in Colombia and Australia.

So back on Page 19, reflecting both production, unit costs and current pricing. You have a copper business, keeps on declining in unit costs, improving the overall cash flow and quartile position of that business. $1.06 full year guidance, should get to closer to $1 when we’ve got Katanga up and running in terms of both copper and cobalt. It’s getting there. That’s EBITDA at spot prices, and $4.1 billion on current production will roll into next year. There will be higher production. And even our spot $10.5 billion will be higher in 2021. Zinc, $1.9 billion; nickel, $0.5 billion. And the coal business, $1.3 billion in the current margin environment as well.

And then finishing the last slide then is Page 21, showing that EBITDA spot price at $10.5 billion, culminating in $4.1 billion of free cash flow. That’s now copper and zinc taking top 2 on the podium across the current cost structure. These were all surprises that were cut as of last Friday. There’s generally increases across, particularly zinc, cobalt, gold, silver and the likes. If we recut these numbers as of today, they’d be around another $300 million of EBITDA and free cash flow. But that’s the nature of the beast, the nature of the industry. So $10.5 billion, $4.1 billion.

The mix and the composition has sort of changed a bit. But I look back even into February — February’s results, and we were $4.3 billion of free cash flow. So almost sort of as you were against February having been through a very interesting 6-months period. So that’s sort of where we’re at. And that’s got the business, obviously, in a strong cash flow generating position. Marketing, most businesses coming pretty well at the moment.

And with that, back to Ivan.

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Ivan Glasenberg, Glencore plc – CEO & Director [4]

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Okay. Thanks, Steve. We talk about — if you look on Slide 23, we talk about our priorities during the year. And the first thing, which is important for us, the health and safety to deliver a step change in our safety performance. We are enhancing our performance there and our operations all around the world. And an enhanced fatality reduction program is being implemented. And hopefully, we will reduce the fatalities which we’ve been having in the past. Ongoing precautionary measures, we’ve got to ensure across all our offices and industrial assets in response to COVID-19, and we’re ensuring we are handling that correctly without issues across the board.

On our ramp-up development of our ramp-up assets, we always talk about these. The last 2 that we got ramping up is Katanga and Koniambo. And I’m pleased to say that Katanga is performing very well this year. We will hit our guidance levels of 270,000 tonnes copper and 26,000 tonnes of cobalt. And I have no doubt we will get this next year to nameplate capacity of around 290,000, 300,000 tonnes of copper production. So we’re pleased to say that Katanga is a new asset, is being ramped up and it is achieving the goals that we set it during this year. And no doubt, it will be delivering strong cash flow with the copper and cobalt price starting to move up and coming to the levels where it will be a big cash generator for our company.

We’re also commissioning the asset plant at Katanga. It’s — we had a bit of issues during COVID-19 getting people into the country. But I’m pleased to say it is ramping up well now, and it should start operations on the 2nd of September this year. Koniambo is still an issue. We are only running one line at Koniambo. We’re making sure that, that line is running well, also having issues of getting people onto the island in New Caledonia. When that’s in place, we’ll be able to ramp up and start moving on line 2 and hopefully get that asset up to nameplate capacity, and that is the last of our ramp-up assets.

Then we move to operational efficiency and capital discipline. We deliver, as we say, to now push all the existing assets to ensure that they operate efficiently. And as you will see, and Steve’s gone through the numbers, all — most of our assets are first quartile, extremely low-cost producers, especially in copper. We have 3 great copper assets. If you look at Katanga, if you look at Collahuasi and you look at Antamina, we have 3 of the best copper assets in the world, low-cost producers. And we should be generating strong cash flow on those, especially as the copper price moves up, to ensure that we will get the free cash flow, keep those costs down and we will maximize the free cash flow and focus on the portfolio NPV of all these assets and, therefore, moving into the share price.

We have a strong balance sheet. Steve’s spoken enough about that, the commitment to strong BBB. We spoke about the net debt. We have to get it below our target of $16 billion and keep it within the range of $10 billion to $16 billion. And distributions will occur once the balance sheet allows and we’ve got it in the right place.

Management, we’ve spoken about this in the past, the transition to the new generation of leadership is taking place. It’s taken place over the past 2 to 3 years with most of the senior managers having left and the new management team in place, 1 or 2 more changes. And then we will have that transition to the new leadership in place to take the company forward for its long-term future.

Confidence. We have stability and consistency of the operational and financial performance, which I’ve spoken about. Return excess — it is a matter of returning excess capital to shareholders. We’ll continue being disciplined with our capital allocation framework. We do have potential brownfield expansions, which the company can do. We’ll do that at the right time. And as you are aware, we believe it’s always been the right approach within Glencore. We’ll manage these brownfields. We’ll bring back any assets which are on care and maintenance at the right time. We don’t wish to add new tonnes to the market which the market does not require. And as you’ll see, what we said we did this year, reduced the production of our coal production. We’ve reduced in both Colombia and Australia to ensure that we are not bringing tonnes into the market which it does not require to bring stability to the market.

So I think that gives you an idea of how Glencore looks going forward. And with that, we open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Liam Fitzpatrick from Deutsche Bank.

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Liam Fitzpatrick, Deutsche Bank AG, Research Division – Head of European Metals and Mining [2]

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Two questions from me on the coal market and just your latest strategic thinking. So firstly, on the market, you’ve made some pretty material shutdowns. Do you think these are going to have to be semipermanent in nature? And has your structural view on the coal market changed compared to where you were 1 to 2 years ago?

And then secondly, strategically, what is your latest thinking on potentially separating the coal business over the medium term?

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Ivan Glasenberg, Glencore plc – CEO & Director [3]

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Okay. Thanks, Liam. Yes, look, the coal market has been hit this year because of COVID. It affected the demand in part of the major importing countries, India, for example, which normally imports around about 180 million tonnes of coal, we believe, is reducing the imports around about 35 million tonnes. You have China will be reducing imports around about 33 million tonnes. So we think the demand has been cut by COVID in the 985 million tonne seaborne market by about 133 million tonnes. However, with that, the coal price has come down, so certain countries have cut production. We believe Indonesia could be down around about 50 million tonnes. So we — in our calculations, the markets lost about supply about 120 million tonnes.

So demand has reduced more than the supply reductions, and therefore, we’re getting a bit of this excess supply. It could correct itself with the lower prices. You will have further shutdowns around the world. No doubt, Indonesia, who are cash negative today, will reduce some of their production. We’ve reacted, like we always do, when you have falling commodity prices and oversupply in the market. And as you’ve seen, we put Prodeco onto care and maintenance, and we’ve cut 7 million tonnes out of Australia. And hopefully, we believe with these actions by ourselves and Indonesia, the market will be back and rebalance, and you will have an upward movement on the pricing.

I don’t want — for our regional belief, in the past, we are still having a lot of new coal-fired stations being built around the world. The new developing relations, Pakistan, Bangladesh, India, China continue to, what you call it, to build new coal-fired stations. So demand continues to grow in those areas. Naturally, in Europe, it is decreasing, and Europe has gone down, considerably down to around about 40 million tonnes of coal. So the overall scenario on the seaborne market, we think, is still okay and should bode strong for the future. And in fact, we look at future years and believe there will be a shortage because there is no new supply coming into the market. So that’s where we look.

Regarding our coal business, it’s still a good business for us. It is a cash generator, not as high as it has been in the past with the falling coal prices. However, even at these lower prices, it still generates cash for the company. And Steve gave you an idea of the EBITDA, which is about $1.3 billion, $1.4 billion at current prices. So still a good EBITDA generator and a cash flow generator for the business. So we’ll continue assessing it, but coal should remain within Glencore right now.

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Operator [4]

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Your next question comes from the line of Ian Rossouw.

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Izak Jan Rossouw, Barclays Bank PLC, Research Division – Director [5]

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I had a couple of questions. Just firstly, on the safety performance, which still remains quite disappointing, and it’s obviously something you’ve spoken about quite a bit around prioritizing that and delivering it to change in the performance with some of the appointments and focus from Peter as well. I sort of wanted to get a sense of how that is progressing. Obviously, the performance in the first half is still disappointing. And whether down the line, you would be willing to shut down assets or dispose of assets if you can’t actually improve that performance. That’s the first question.

And then second question, just for Steve, is around the balance sheet. Obviously, the spot prices, as you mentioned, should drive net debt down quite meaningfully in the second half. But I was just sort of curious, if you see spot prices fall, how much flexibility do you have in the business to deliver or bring net debt down further, whether it be further working capital releases or asset sales, which I guess you didn’t mention this time? Maybe just to get an update on that as well.

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Ivan Glasenberg, Glencore plc – CEO & Director [6]

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Okay. I’ll handle the first part of the question. Yes, safety is not ideal. However, having 6 fatalities is concerning at 5 incidents. Peter Freyberg and his team is working extensively in this area. And as we said, if you look at Slide 4, the identifying and targeting areas of underperformance with clear plans are going to get this right. Intervention is taking place at all the assets where it is required. However, you’ve got to remember, we do employ 150,000 people, 150,000 employees across the group, different to our competitors, our peers in the mining industry. I think we are the largest employer of the major mining companies. Even the bigger ones have far less employees than us. However, this is no excuse, but we do have a lot of assets around the world.

As you correctly say, some of the assets, what we call the tail assets, which do give us a lot of management time to look — to ensure that they operate under the same standards that Glencore would like at all its operations, of course, will have to be reviewed over time. So we continue focusing on that area. Up until June, we did only have 2 fatalities. 2 is already too much, but we were performing well. Unfortunately, in the last month, we did get 4 over various incidents. But we think we are on the right track, and we believe we will improve considerably over that. And hopefully, next year, we’ll report much better figures.

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Steven Kalmin, Glencore plc – CFO [7]

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Yes. Ian, on the — I mean, if we look at Page 17, that’s probably a good one to clearly look at in terms of the path to below $16 billion. Now of course, things can flex across those 3 graphs. So we’ve got funds from operation. We’re saying sort of $2 billion there, only requiring a — now we’re not saying, as I said, $0.8 billion is a target. Now if we assume — I mean, if we said, let’s say, half of that working capital through the sort of carry trade margining and the general are slightly better priced than average prices in oil in H1, which would be a reasonable assumption given what happened in sort of the double whammy in those markets, then certainly a number of greater than $0.8 billion would just passively materialize as well.

So there is [fat] just on that alone, clearly, as well. And against the $4.3 billion to $2.3 billion, now we sort of — obviously, we’re 1 month or sort of 1 and a bit already, and so you can say, well, let’s bank that. Obviously, pricing doesn’t start from 1st of July. So that sort of materiality of lower prices gets less and less as we head towards the end of the year. So I think the pathway towards $0.8 billion being conservative on working capital, the cash from operations already is low relative to the prices in the last week or so, particularly on the pressure side.

And yes, I think there certainly can be some long-term asset monetizations. We don’t want to — we’re not promising in this particular area. But again, on Page 29, we update on some of the — some of those stakes as well. There’s sort of Rosneft stake, which is still there at about $300 million. At some point, that will monetize as well at some point. The sale of that Mototolo one down at the bottom, that’s a deferred consideration from the sale of that asset to Anglo Plat a couple of years ago, which is certain volumes with unrisked on volumes. It’s only price participation around some PGM, rhodium, platinum and palladium. At current spot prices, that is at least sort of $200 million to $300 million. And if that sort of — over the next 3 or 4 years, we’ll start banking $100 million to $150 million a year on that. We’re already 6, 7 months in. So you can actually bake in some of that, that the cash flow comes in installments over the next 3 or 4 years. There’s still some old U.S. oil infrastructure, which is quite valuable today around the Californian side as well. We began — there was a piece that wasn’t sold into that HG Storage. That could work its way through. There’s certainly a few hundred million there.

So a variety of potential opportunities there. We also announced a purchase of an asset to Ørsted towards the end of last year, which takes off some rental storage commitments for import net gas and LNG into the European market, which will be a good opportunity for us in that business. Given the sort of structure of that business, we’re actually going to collect about EUR 300 million. That should close Q4, so there’s some proceeds coming in. So there is a few bits and pieces that could be in aggregate a reasonable size. We haven’t baked that into that slide, in 17, but let’s see how we go. I think the pathway and the sort of risk attached to it or the derisking attached to getting below $16 billion is pretty comfortable, notwithstanding almost any price environment that you may think in the next 4 to 5 months.

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Izak Jan Rossouw, Barclays Bank PLC, Research Division – Director [8]

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Okay. Sorry, and maybe just a follow-up on the Marketing performance. I see in the spot illustrative numbers, you’re still using the midpoint of the range. I mean, obviously, if you’re pointing to the top end of the range, which implies a pretty conservative second half on the Marketing performance, I mean, is that reflective of how markets’ dynamics have changed? Or is that just you being more conservative and there is a chance you’ll actually be above the top end of the range for the whole year?

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Ivan Glasenberg, Glencore plc – CEO & Director [9]

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Yes. Look, as Steve said, we’ll be towards the top end of the range. We said that previously. That’s the way we see it. Looking at $3.2 billion, we made $2 billion, so you should get $1.2 billion in the second half. We want to be a bit conservative. Markets do different things over the next 6 months. We’re not sure. So we still want to stick within the range. But as we have indicated, we should be towards the top end.

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Steven Kalmin, Glencore plc – CFO [10]

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Yes. I mean it might be conservative a little bit for an H2 performance. When we’re always doing a spot annualized, we’re never going to go bottom or top. I think the midpoint is where we position it just for a spot illustrative point. But hopefully, sort of from the top end, that the people that — obviously, the sort of marketing people haven’t said it’s a great sort of 6 months, we’re off to the beach. We should keep going.

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Operator [11]

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Your next question comes from the line of Sylvain Brunet from Exane BNP Paribas.

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Sylvain Brunet, Exane BNP Paribas, Research Division – Head of Metals and Mining Equity Research [12]

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Ivan, Steve, first question on specific costs you would — you could highlight related to anti-COVID and treat as one-off in H1, if you’re able to measure that across operations.

My second question is on Marketing, clearly, still your best business. Is there still growth opportunities in that business in your view?

My third question is on zinc. What would be your criteria to revive the Zhairem project? I mean we don’t see much capacity additions. Prices have recovered, even if the automotive outlook is still pretty subdued.

And my last one, on coal, in the context where you’re clearly making some portfolio changes. Post-COVID, what is the future for Cerrejón where we can sense both your other partners or potential sellers, please?

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Steven Kalmin, Glencore plc – CFO [13]

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Sylvain, in terms of absolute COVID costs, I wouldn’t categorize them as potentially material. It was really opportunity cost of having lost production and the unit cost effectiveness. I mean, of course, there is added costs and additional shifts and protocols and the likes, but it’s not the one that we would want to sort of blame COVID on some big sort of cost increase. Some of that will — and we still stuck with it. I mean we still got these extra protocols in hygiene and cleaning and sort of some inefficiencies. So for as long as we’re in an environment where there — we’re having to be — having to have these sort of precautions, I don’t think we’re going to be out of it anytime soon. So I wouldn’t say it’s necessarily hugely material that we’d wish to highlight on that side.

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Ivan Glasenberg, Glencore plc – CEO & Director [14]

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Yes. Opportunities on trading, Sylvain, what are the opportunities? I think we see the same commodities. We take the opportunities when they come.

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Steven Kalmin, Glencore plc – CFO [15]

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And LNG-sided…

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Ivan Glasenberg, Glencore plc – CEO & Director [16]

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Yes, LNG should grow. As Steve said, we’ve got this new Ørsted terminal. Hopefully, that will assist the LNG business to grow there, so that should grow. But as I say, we look at opportunities on the pricing and the modeling. We also have a bit more of a downstream oil in both Brazil and South Africa. Hopefully, that will allow the oil business to grow, that they got the short on that. And then we just see what opportunities come. That happened in the first half. Various opportunities came. Definitely, on the Katanga plays in oil, we took advantage of that, and that’s why they’ve done well.

So we’re there. We’re very active in the market. We got the balance sheet that can handle it. And as Steve has explained clearly, because of our balance sheet, we’re able to take advantage of the Katanga plays, the margin calls there, et cetera. When you do hedge out those trades, and not everyone can do it, you need a decent-sized balance sheet to be able to do it. So it does give us opportunities which others may not have.

On your question on zinc, Zhairem, no, I think we’ll still keep Zhairem for next year. We said we’re going to delay the start-up of Zhairem until 2021. No reason to start it right now. Yes, zinc prices have recovered nicely to $2,400, but we don’t want to be the ones to push down price as we’d rather be the ones to bring it onstream when the market needs it. And therefore, Zhairem will come on in 2021.

Regarding coal, Cerrejón, I can’t talk about my competitors. Cerrejón still performs. Tonnage has been reduced because of COVID this year. It’s clear, the markets which Cerrejón sells the coal into the European market is more difficult. But we’ll wait and see what I — partners wish to do with their stakes. We cannot comment on them right now.

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Operator [17]

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Your next question comes from the line of Jason Fairclough from Bank of America.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division – Head of the Developed & Emerging EMEA Metals and Mining Equity Research [18]

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Just 2 quick ones for me: one on succession, the other one on Volcan. First on succession, over the half, we had the announcement of departure of Daniel. I’m just wondering how COVID has impacted succession planning at Glencore. Do you have any of the new generation on this call? And if not, why not?

And secondly, just on Volcan, it’s a relatively recent acquisition. Can you really sort of talk us through a little bit what happened in terms of the impairment?

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Ivan Glasenberg, Glencore plc – CEO & Director [19]

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Yes. Okay. On succession, we see clearly what will take place, and we’re moving through the succession plan. And as you say, Daniel had departed last month. The old generation, we are — there are not many of us old generation left. And we’re working on it, and it will happen at the right time. COVID, does it affect it? Yes, it affects travel a little of people when they’re introducing the new guys. It may affect it, but we can still work through it, so I don’t think a major impact.

Steve, do you want to talk about Volcan?

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Steven Kalmin, Glencore plc – CFO [20]

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Yes. I mean, Volcan, like you said, a fairly recent acquisition, I think it was sort of 2 or 3 years ago. I mean our share of all this impairment was about $350 million, Jason, because we need to consolidate it. There’s sort of higher headline numbers and then you take out tax and minority interest, and you get to about $350 million. The $350 million, which is discussed in the financials somewhere, was effectively the original, I would say, call it premium, but the surplus of purchase price over Volcan’s book value themselves that we ascribe value to it, it’s a very rich resource sort of prospective company across South America having a lot of opportunities in not just zinc, but the full polymetalic silver. There’s even copper deposits and the likes.

And having gone through sort of COVID and trying to sort of read the tea leaves on any sort of scenarios around macroeconomics and growth and these things, so this did come out of sort of allocating both probabilities, confidence around how you would go approving the next wave of potential projects there, some brownfield, some sort of greenfield. So what we’ve done, just from an accounting side, is just push some of those out, reduce the likelihood confidence, which is our general approach to this thing. And that did ultimately result in that net-net, the $350 million charge for us on the Volcan side.

But the base business is — there’s sort of 2 operating units. They perform okay. Obviously, zinc and silver in the last while would have sort of helped their cause. And I mean we’re just a 23% economic shareholder. We have certain voting control. They’ll have to sort of deliberate at their own entity how they want to take their business forward, but it was an appropriate accounting adjustment to take this period.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division – Head of the Developed & Emerging EMEA Metals and Mining Equity Research [21]

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Just a follow-up, if I could. So — and back to Ivan, I guess. Sorry for the noise in the background. Do you have any of the new guys on this call at all, Ivan? Just checking.

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Ivan Glasenberg, Glencore plc – CEO & Director [22]

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The new guys? It’s just Steve and me on the call, basically.

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Operator [23]

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Your next question comes from the line of Myles Allsop from UBS.

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Myles Allsop, UBS Investment Bank, Research Division – Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [24]

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Just on a few assets first. Mopani, with the copper price recovering, are you reconsidering whether to (inaudible) the mine? And with Mutanda and the potential restart, how’s the kind of negotiations going with the DRC government around the sulfide processing investment?

Secondly, on Koniambo, it’s still EBITDA negative. You seem to be incredibly patient with the assets. Are you — is your patience wearing thin? Or are you still very confident that once it’s running with 2 lines, you’ll be making a more meaningful contribution?

And then maybe going back to Jason’s question around management transition. Do you think this is one of your last calls, Ivan?

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Ivan Glasenberg, Glencore plc – CEO & Director [25]

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Okay. Let’s talk Mopani. As we said on Mopani, we applied to put it on care and maintenance, the 90-day proposal, which we’ve worked through. We are now in discussions with the government, and we’re trying to see where we end up there. But I think we would like to go that direction, but we’ll see where we get to with the government. But right now, we are operating.

Regarding Koniambo, of course, our patience is wearing thin. It’s a long time to try and get that asset up to nameplate capacity. It’s in a difficult part of the world. It has its issues, but we are running one line now, which is running well. Unfortunately, we’re struggling to get enough people on to the island because of COVID-19. So it doesn’t make sense to start up the second line right now. So I think until the end of the year, we’ll just keep the one line running and make sure we get great operational performance on the one line.

Hopefully, when we get the second line up and running, it will work as well as with 2 lines running as the 1 is working and will eventually get it to nameplate capacity. If we do get it to nameplate capacity, it should be a decent cost producer. It’s — costs should be low enough where we should generate decent cash. And therefore, hopefully, we will be comfortable with that asset going forward. And with the demand for nickel potentially picking up, and as you heard, there are enough statements about the demand for nickel in batteries, et cetera. Hopefully, demand is there, and this material will be required in the market.

On management change, as I said before and as I’ve just said to Jason earlier, we’re working through it. We still got 1 or 2 guys which will change the old generation, and then it’s time for me to move on. Exactly when that will be, we’ll see.

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Myles Allsop, UBS Investment Bank, Research Division – Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [26]

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Okay And just on Mutanda and the discussions with the DRC government around the investment now, is there any progress there? Or should we assume it’s not for a couple of years or so?

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Ivan Glasenberg, Glencore plc – CEO & Director [27]

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Well, Mutanda, we’ve always said we’d shut it down. Once again, the Glencore policy, if we believe the market is oversupplied, we don’t need the operation running. We also had the issue of the oxides and the sulfides, and we had to understand the level of oxides and sulfides and the cost of processing the sulfide. Pete and his teams are going through that operation right now and assessing it, no major rush, because we do want to only bring it on to stream when the cobalt market requires it to come back. And as you can see, the cobalt price is not great at the moment. Naturally, with more electric vehicles being produced and especially in Europe, more cobalt will be required, and then we will assess it at the time. But right now, it makes clear sense to keep it on care and maintenance, finish the studies on the sulfides. And when that is done, we’ll assess the market and then decide when to bring it into production.

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Steven Kalmin, Glencore plc – CFO [28]

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Myles, it’s actually mostly sensitive to cobalt prices, not copper pricing in terms of its mix of revenue. Maybe it’s sort of 50-50, whereas you got other operations are more geared towards copper. So cobalt is a key — it’s sort of key catalyst there. And of course, at some point, when you look at demand profile, the world is going to need some cobalt. And hopefully, the price is going to have to respond accordingly.

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Ivan Glasenberg, Glencore plc – CEO & Director [29]

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There’s no doubt that mining is going to be needed to fulfill the shortage of cobalt. Exactly when required with the electric vehicle and how fast that occurs, but our assessment is it definitely has to come into production at some stage, but we just got to time it correctly. But as Steve says, it’s an operation that will most probably produce 150,000 tonnes of copper, but potentially 30,000, 35,000 tonnes of cobalt. So that is the key element of that operation.

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Operator [30]

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Your next question comes from the line of Alain Gabriel from Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division – Equity Analyst [31]

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One final question for me is on the dividend. How are you thinking about that going forward? And are you looking to revamp your dividend policy to perhaps shift it into a formula that can better withstand the market volatility?

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Steven Kalmin, Glencore plc – CFO [32]

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I mean I think our dividend policy sort of per se around the paying out of cash flows in the sort of $1 billion for Marketing, minimum 25% of Industrial, is still an appropriate one, and there’s no change. But that always is a sort of dividend policy that’s subject to — because that’s a pre-working capital. So we can’t ignore working capital nor one can ignore if there’s sort of M&A. So you need to look at the other elements of what may be consuming cash flow and what’s your net debt and ratios potentially sort of looks like. So I’d say the working capital has the temporary build, and how that sort of development is sort of jump the queue in terms of capital allocation. But we’ll get to February, we’ll get below our $16 billion.

And I think it’s still — it’s — I mean the real test of the business and the stress in the scenarios, I think COVID-19 was obviously a great test of your free cash flow generally in assets and performance and marketing, which has stood up pretty well in 6 months from a cash flow pre-working capital. We’re just having to sort of prioritize and for good reasons and for good consistent marketing earnings, having to pause for now, consider that back in February. But I think the base policy is still sensible. So we’ll get together in February.

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Operator [33]

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Your next question comes from the line of Dominic O’Kane from JPMorgan.

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Dominic O’Kane, JPMorgan Chase & Co, Research Division – Analyst [34]

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Two quick questions. Just going back to Mopani. Obviously, the decision to mothball was made of copper price about 30% below where we are today. Is Mopani cash flow positive at today’s commodity prices? And I wonder if you could just give a bit more detail in terms of the kind of the driving force of the decision to put on extended care and maintenance. Is it kind of economic? Or is it slightly political?

And my second question goes back to your previous $2 billion disposal target. Obviously, a more — probably a more favorable commodity pricing environment for hard asset disposals. Are there kind of hard asset disposal opportunities that you are considering? And the one that, I guess, particularly interests me is gold. You produce about 600,000 ounces of gold. At the time of your IPO, you talked about a potential gold IPO. Are those ounces that having unencumbered? And is there sort of a potential gold flotation or listing a potential option for you guys?

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Ivan Glasenberg, Glencore plc – CEO & Director [35]

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Okay. On Mopani, as we said, we still got some CapEx programs over there which have to complete. We just felt it was the right thing to rather put it on care and maintenance now with the copper price, okay? It has improved recently at $6,400, but I think it’s the right thing to do while we assess the asset. However, as I say, we are in discussions with the government for certain issues that are taking place where we may find a solution, but we’ll wait and see. But right now, care and maintenance is our best option, we believe.

Regarding sale of assets, look, we’re always looking at potential sale of assets. Steve spoke — it’s not $2 billion. I think we spoke about $1 billion. Steve spoke about the liquid assets, the listed companies which we own, which we could potentially do some sell-downs there. There’s a list of them. Some of our tail assets, of course, the market environment is a bit better today. We will look at the sale of some of our smaller assets. I don’t know — if you talk about hard assets, which those may be, there are certain people in certain countries who are prepared to look at those smaller assets and take less management time from us to look after them. So we will look at that. They don’t contribute large amounts to the EBITDA of the company, so it may make sense from a management point of view.

If you talk about gold, I think we produce across the board about 1 million ounces of gold, not 600,000 ounces. The main gold asset in the company is Kazzinc. It does generate — you can imagine that the current gold price today, $2,050, it does perform exceptionally well. There have been various offers over the U.S. gold companies who wish to buy them. We clearly understand gold companies trade at higher multiples than we trade within ourselves. So we always open any of our assets, if some — if we get a favorable bid, we can look at it. Would we spin, of course, separately into a separate vehicle? I don’t think so. And it’s a good cash generator for the company at the moment, an exceptionally good cash generator. But at the right price, if a gold company wishes to own it, we’re happy to discuss any of our assets in that frame of mind.

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Steven Kalmin, Glencore plc – CFO [36]

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I mean, Dominic, just on terms of encumbering or unencumbered, I mean all of Kazzinc is all sort of unencumbered from a sort of gold we sort of exposed. We did some — we did 1 silver stream, 1 gold stream back in sort of 2015 or so. But that doesn’t affect the operation. It’s all sort of done above the operational level, and it’s sort of not attached. And of course, so — and we still have pretty good participation both in volumes and in price, even in those streaming transactions, but it has a declining profile. It probably takes about [1.50] or so relative to spot out of the sort of EBITDA to cash flow bridge at the moment. But for the most part, we’re still positively exposed to sort of copper zinc unencumbered, I mean, in particular to sort of gold and — gold and silver.

And obviously, as Ivan said, we did — there was the M&A, the gold frenzy, these things, I mean, obviously, Vasilkovskoye is a very attractive asset out there. There has been quite a bit of reverse inquiry. And people had loved sort of interest in there. And fortunately, we didn’t action any of those today because the price would have been sort of $1,500 when some of those level of interest came in, and we’re sitting at sort of $2,100. It is — I mean there is a certain countercyclical natural hedge argument around the business as well. It is a bit noncore. If someone clearly came in and sort of throws a knockout punch, and then who knows?

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Ivan Glasenberg, Glencore plc – CEO & Director [37]

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If someone uses the [BAML] price of $3,000, we could look at it.

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Steven Kalmin, Glencore plc – CFO [38]

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There we go.

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Dominic O’Kane, JPMorgan Chase & Co, Research Division – Analyst [39]

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I mean on the 1 million ounces of gold that you mentioned, I mean, theoretically, is all of that available for streaming opportunities if you strategically decided to go down that route?

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Steven Kalmin, Glencore plc – CFO [40]

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It would all be available except what’s been streamed already, right, which is, I don’t know, sort of a fraction of that, maybe 10%, 15% or so. I’ve got to calculate the exact number. Okay.

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Operator [41]

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Your next question comes from the line of Sergey Donskoy from Societe Generale.

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Sergey Donskoy, Societe Generale Cross Asset Research – Equity Analyst [42]

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Three questions for me. First, Katanga, you mentioned that it has performed in line with expectations, but without providing any details. Katanga being such a focus area for many investors, it would be helpful if you could provide some granularity in terms of EBITDA and cash cost now that we don’t have any other source of information on this particular asset.

Second question, your illustrative coal division economics. You use $60 coal price, which is, I think, about $10 higher than spot. Does it mean that in today’s environment, coal business is generating basically 0 EBITDA?

And lastly, just conceptually, it looks a bit counterintuitive, you log a strong year-over-year improvement in cash flow, including a very strong performance in Marketing, and at the same time, you have to mix dividends to counter increase in net debt. Is it conceptually that free cash flow is the wrong way of looking at Glencore? Maybe we have to use some adjusted free cash flow to make — to account for such events like this?

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Steven Kalmin, Glencore plc – CFO [43]

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Okay. So it’s quite a selection there. Let’s start on the coal one first. In terms of spot, the $60 is a sort of an average over the forward curve. So already, you’ve got — we’re at about $53 and a bit or so spot, but you’re really into Q1 towards the end of the year, you’re crossing into 60s and almost $63, $64. So it’s an average forward across that curve as well. And that — yes, spot, if you say, what are we generating today? We’ve also got fixed-price contracts. We have a lot of Japanese sort of JPU stuff at $68. That’s also working its way through the system.

So that’s how actual H2 will clearly play out in terms of cash and domestic business. That’s also sort of unhedged by that. So sort of — that’s the one we sort of take the curve approach as being a reasonable sort of benchmark over a period of time. You’ll have your own views on these sort of things, and it will play out as it sort of plays out. But I think that’s a reasonable stab at sort of cash flow 12-month period on that particular business. And it will sort of move around, hopefully, in a positive direction as we move. So that’s the logic, and that’s actually consistent with how we’ve sort of looked at that. And it is quite a Katanga steep curve in coal across the various indexes as well.

Katanga is, yes, it’s sort of — it’s true, it’s sort of left the list. That 0.5% listing in Canada was — has finally been resolved, which is good. So I think maybe let’s — if we pause until the end of the year when we give our update because it’s still — we got quite a cost-reduction process coming through the asset plant, as Ivan said, gets commissioned 2nd of September, that’s a huge downshift in terms of their sort of cost. So that moved from negative EBITDA. Last year, it was quite positive. I mean the whole African copper, I think, was small positive from a large negative. Next year, Katanga has moved from a negative into quite a reasonable positive, and it will move into the low $100 million into the high $100 million and ultimately into the sort of $1.5 billion to $2 billion at some point as the sort of pricing. So I would think when we come to the end of the year and we give the updates on copper cost looking for ’21, comparing that to ’20, we can give some granularity on that business specifically because we want you to have that granularity because it does show that was part of the turnaround cash flow story as of 12 months ago. So it’s obviously performing well.

The — I mean we went through — in terms of working capital swings, I think we were in a sort of pretty uncharted territory in the last sort of 6 months. So I wouldn’t necessarily say COVID sort of throw the further baby out with the bath water here about what working capital should do under any sort of normal horizons. We had some demand fall off a cliff around a normal kind of business into certain markets. We saw pricing even drop into negative for some periods. We’re loading up on Katanga storage, which relative to normal holding levels of inventory, particularly in the oil, is sort of factors of multiples the size in terms of barrels that we have either tankage, onshore, offshore. That’s sort of part of that.

So we’ve shown on that Page 17, some of that should obviously clearly unwind. There’s the projection towards. I’d much rather take a temporary working capital sort of adjustment. And if we can get a permanent step-up in marketing that you can capitalize for the long term, that’s clearly more positive in terms of cash flow. We all need to sort of manage for the short period around some of these temporary factors. And COVID doesn’t happen every sort of period of time. And I don’t think it’s necessarily the sort of catalyst or the — or sort of back to the drawing boards on any of these things.

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Operator [44]

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Your next question comes from the line of Tyler Broda from RBC Capital Markets.

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Tyler Anson Broda, RBC Capital Markets, Research Division – Director, Global Mining Research [45]

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This one is probably for Steve. With the transitory nature of the balance sheet, seeing the net debt higher, like strengthening commodity prices coming through, but then also, as you mentioned, the coal supply, we’re starting to see the supply response. We’ve seen this before, prices start to come back. I guess with the 2020 dividend effectively coming out of 2021 cash flows, does this kind of indicate that you want to move lower into the $10 billion to $16 billion net debt range by canceling the dividend for the full year? Or is there a potential that you could potentially, at that point, reassess, I guess?

Secondly, as well as to some Marketing, I guess, with the working capital effectively full at this point with a focus on the balance sheet, is this impinging your ability to transact at all in H2? Or how should we think about that from a sort of balance sheet versus opportunity perspective?

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Steven Kalmin, Glencore plc – CFO [46]

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No, it’s not impacting at all in terms of impinging business. Liquidity is obviously very strong. Hopefully, we’ve peaked in terms of working capital sort of outflow, and we can start clawing back some of that as we move into, obviously, into H2. But it’s not — it’s — and as long as the underlying business is sort of demonstrating that we’re not — that you’re generating the sort of ROEs and returns and that sort of performance in Marketing, I think if you had one without the other, this sort — maybe it starts breaking down a bit. But if you got that working capital deployment and having put $2 billion of earnings on the table, which is the one’s permanent, the one’s temporary or at least it sits within the balance sheet that’s creating a working capital flow to more conservative structure, I think that’s a healthy sort of dynamic that’s obviously at play there.

In terms of balance sheet, I think it would be, and I think one would sort of collectively say, would be better to at least be in the mid part of that range, where that we tend to — so we talked $10 billion, $16 billion, settle with $13 billion. By definition, your ability to sort of navigate cycles have more cushion, have more sort of headroom. You don’t want to be bumping up against some levels that we’ve set internally and put financial policy around because your flexibility, clearly reduces and your ability to — and your predictability of a scenario, as likely here, is also clearly reduces. So I think in the short — maybe medium to longer term, I think being in the mid to maybe lower end of that range would allow you to have a lot more sort of flexibility and tools as you navigate different cycles. So I think it does make sense to build in some headroom over time.

But I think you can both — with the sort of cash flow the business is certainly generating, the first priority, getting to the $16 billion and then the — and then sort of deliberate out of those sort of cash flows and capital allocation in early sort of ’21, how much continued deleveraging is appropriate, what the distribution out of those cash flows, what the macro picture looks like at that point. These are all deliberations that make sense. But yes, I don’t want to be bouncing around the $16 billion. I want to be, certainly, I would have thought in the mid of the range, mid to lower part of the range.

And I think you’ll see an equity re-rate if that sort of came over time. I think it’s not something — it’s sort of left hand, right hand, where the money is in the business and can equitize and get value, though it’s gone out in the [4 months] on some sort of distribution. I think it hasn’t gone anywhere except sort of sitting there as part of a capital buffers. And I think there’s a potential re-rating if we can have some strong — I think it’s unquestionably a strong balance sheet, but it could be even stronger. And with — and if there’s a constituent that is comfortable, we would — probably it’s not 100%, but let’s start with a great proportion, you would be able to make even that sort of greater distribution out there, people that can sort of come in and say, this is what I like in terms of leverage for cyclical companies. So I think it makes sense.

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Operator [47]

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And your final question comes from the line of Myles Allsop from UBS.

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Myles Allsop, UBS Investment Bank, Research Division – Executive Director,Co-Head of EMEA Mining Equity Research & Equity Analyst, European Mining Research [48]

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Another one on the management transition, but for Steve. Steve, I presume you’re kind of more of a second-, third-generation hybrid, and you are kind of here to stay. I just want to clarify that.

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Steven Kalmin, Glencore plc – CFO [49]

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Yes. I mean there was probably, what, the sort of generations 1, 2, 3. I think Ivan spoke of the 3. I was probably a 3.5, maybe, in that sort of…

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Ivan Glasenberg, Glencore plc – CEO & Director [50]

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He’s a mixed generation. We’re trying to work out the issue between…

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Steven Kalmin, Glencore plc – CFO [51]

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I’m somehow not part of the old guard, but I’m not part of the new guard.

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Ivan Glasenberg, Glencore plc – CEO & Director [52]

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And he moved from that and he went to (inaudible) and he came back to us. So we’re still trying to work out which generation he fits in.

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Steven Kalmin, Glencore plc – CFO [53]

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I’m not going anywhere, though.

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Ivan Glasenberg, Glencore plc – CEO & Director [54]

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He’s not going anywhere though.

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Operator [55]

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I would now like to hand the conference back to Mr. Glasenberg for closing remarks.

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Ivan Glasenberg, Glencore plc – CEO & Director [56]

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Okay. Thank you very much. Thanks for attending the call. I think we’ve given an outline how we look for the first half and a good idea the way we look for the second half based on spot prices. And so the tonnage cuts which we’re doing, especially in coal, has a positive effect, and the market looks better for coal, which I think is a key for the balance of this year. But as you can see, the EBITDA for the U.S. spot price is looking very good, as Steve said, around about $10.5 billion with an extra $300 million pickup. With the recent movement on some of the commodity prices that we’ve seen in the last few days with gold, silver and zinc and copper moving, that’s advantageous for us. And hopefully, we’ll get more of that in the second half.

So I think that covers everything. Thank you very much for attending.

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Operator [57]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.