Financial review

The 2007 financial year was characterised by a surging gold price towards year-end, the benefits of which failed to offset cost pressures – of oil in particular – and a weakening of the dollar on global currency markets.

The mining industry continued to experience high prices for many commodities and consumables used in the production of gold, as well as in some cases, constraints on supply. In particular, oil prices continued to rise significantly from $60 per barrel at the beginning of January to $94 per barrel at year-end. During the year, gold prices were relatively static in the first three quarters trading in a 10% range from the beginning of the year followed by an aggressive upward trend in the fourth quarter closing at $836/oz with a trading range of $606 to $836/oz for the year. The primary economic factors influencing gold prices include strong demand, inflationary concerns caused by high commodity prices, record crude oil prices, continuing weakness of the US dollar and flat mine supply of gold.

A weaker US dollar caused costs reported in US dollars, which are not protected by currency hedges, to increase.

Results for the year

• Average dollar gold spot price of $697/oz, 15% higher than in 2006.
• The received gold price increased from 2006 by 9% to $629/oz.
• Adjusted gross profit declined by 12% to $935 million.
• Adjusted headline earnings decreased by 32% to $278 million from $411 million or to 99 US cents per share in 2007 from 151 US cents per share in 2006. Factors affecting adjusted headline earnings were mainly those affecting adjusted gross profit, i.e. the benefits of the higher gold price was eroded by the effects of inflation, higher rehabilitation costs, lower income from by-products and lower gold production, increases in corporate and operating expenses offset by increased interest received.
• The net loss for the year was $636 million (2006: $14 million) mainly due to the unrealised loss on non-hedge derivatives and other commodity contracts following higher spot prices.
• A final dividend of 53 South African cents per share or approximately 7 US cents per share was declared, resulting in a total dividend for 2007 of 143 South African cents or approximately 20 US cents per share.
• Reduction in shareholding of Anglo American plc from approximately 42% in December 2006 to 16.6% in December 2007.
• Return on net capital employed decreased from 9% to 7% in line with the lower profit margins.
• Gold production from continuing operations declined from 5.6 million ounces in 2006 to 5.5 million ounces in 2007.
• Total cash costs increased by 16% to $357/oz, largely owing to the impact of stronger local operating currencies, inflation and decreased production.
• Ore Reserves increased by 6.2 million ounces net of depletion to 73.1 million ounces and Mineral Resources were net of depletion 26.0 million ounces higher at 207.6 million ounces as at the end of December 2007.

Exchange rates

The average exchange rate for the year ended 31 December 2007 was R7.03:$1 compared with R6.77:$1 in 2006. The average value of the Australian dollar versus the US dollar for 2007 was A$1.19/$1 compared with A$1.33/$1 in 2006. The average value of the Brazilian real versus the US dollar for 2007 was BRL1.95:$1 compared with BRL2.18:$1 in 2006.

Gold production

The decrease in production of 158,000 ounces to 5.5 million ounces was largely a result of grade and seismicity issues in the South African operations reducing output by 226,000 ounces and reductions in Mali of 37,000 ounces resulting from the Sadiola sulphide recovery issue with a small reduction in Ghana, after adjusting for the disposal of Bibiani, of 65,000 ounces. This was partially offset by increases in Australia of 135,000 ounces because of accessing the high-grade ore in the open-pit operation and increases in Geita of 19,000 ounces, being better grades and partial recovery from the pit wall setbacks of 2006. Brazil increased production by 69,000 ounces as a result of the Cuiabá expansion project. The remaining group mines generally reported a total decrease in production of 53,000 ounces in 2007.

Income statement

Gold income

The average gold spot price of $697/oz for the year was 15% higher than that in 2006. However, due to deliveries into the hedge book, the received gold price increased by only $52/oz or 9% to $629/oz.

Gold income increased by 11%, rising from $2,964 million in 2006 to $3,280 million in 2007.

This increase was primarily a result of the improvement in the received price of gold partially offset by the lower production.

Cost of sales

Cost of sales increased by 16% from $2,282 million in 2006 to $2,636 million in 2007. This was largely attributable to the mix of currency and inflationary effects, resulting from increased mining contractor costs and higher diesel, fuel, transport and electricity prices. This was partially offset by the effects of cost-saving initiatives.

Cost of sales changes can be analysed as follows:

• Total cash costs increased to $1,988 million in 2007 from $1,746 million in 2006, equating to an increase in cash costs per ounce from $308 in 2006 to $357 in 2007. Of the $49/oz increase in per ounce cash costs, $21/oz was due to inflation and $20/oz to lower efficiencies resulting from higher treatment and maintenance cost, $8/oz to decreased by-product sales, $6/oz to lower volumes and $5/oz to exchange and royalty effects. These increases were partially offset by higher grades of $2/oz and other variances of $9/oz. During the year, the contingent liability disclosed in prior years, concerning water-pumping costs was satisfactorily resolved by the establishment of a jointly owned company. The establishment costs have been written off as the Group do not believe the amount will be recoverable.
• The cost savings programme achieved savings of $58 million.
• Retrenchment costs were $19 million in 2007 compared with $22 million in 2006. The costs in 2006 were incurred as a result of a general cost efficiency drive and staff reductions at African mines. In 2007, the general cost efficiency drive was continued at all the African mines.
• Rehabilitation and other non-cash costs increased by $68 million compared with the previous year resulting in a charge of $65 million compared to a credit of $3 million, largely because of changes to estimates, the effect of interest rates in the discounting and a reassessment of the processes to be undertaken to complete the group’s restoration obligations. This was especially impacted by changes in certain regulations implemented during the year at the African mines.
• The amortisation of tangible assets at $590 million was $7 million lower than in 2007. This minor reduction is largely attributable to the reassessment of the useful lives of our mining assets.

Corporate and other administration expenses increased by $42 million on the previous year to $126 million, mainly as a result of the costs associated with share-based payment expenses, increased retirement costs, higher consultancy and advisory fees, salary and bonus inflation and lower cost recoveries.

Market development costs amounted to $16 million, most of which was spent through the World Gold Council.

Exploration continued to focus around the operations in the countries in which the group operates, namely, Australia, Ghana, Guinea, Tanzania, Mali, Namibia, South Africa and the USA. In addition, exploration activities continued to focus on new prospects in the Democratic Republic of Congo, Colombia, China and Russia. The total exploration spend for 2007 was $167 million of which $92 million was for greenfields exploration and $47 million was capitalised expenditure at existing mine sites. The increase in exploration costs of $59 million on the previous year was primarily a result of increased expenditure at greenfields sites in South America and Australia. For further information on Exploration, activities refer to the exploration section.

Loss on non-hedge derivatives and other commodity contracts was $780 million in 2007 compared to a loss of $239 million in the previous year. The loss is primarily a result of the revaluation of non-hedge derivatives resulting from changes in the prevailing spot gold price. During the year the spot price of gold has increased from $636/oz at 1 January 2007 to $836/oz at year-end. This bull trend has continued during 2008. Refer to the market view during 2007 for more on the Gold market.

Other operating expenses include post-retirement medical provisions for operations, mainly in South Africa, of $3 million, other employment costs of $15 million and sundry expenses.

The group incurred an operating special items loss of $21 million which arose from a reassessment of indirect tax recoverables at the African mines of $26 million, provisions for royalty disputes and insurance claims not yet received of $7 million and impairments of $2 million, partially offset by profits on the disposal of and recoveries from various assets of $14 million.

Operating (loss) profit

The group reported an operating loss in 2007 of $439 million compared with an operating profit of $246 million in 2006, as a result of the increased revenue from the average gold price, offset by the effects of increased costs of sales and the unrealised loss on non-hedge derivatives and other commodity contracts.

Adjusted gross profit decreased by 12%, from $1,058 million to $935 million. Major factors affecting adjusted gross profit were the significantly higher gold price, which contributed $274 million. This was offset by the negative effect of changes in operating currencies of $13 million, inflation, which reduced profit by $105 million, efficiency variances of $108 million resulting from higher treatment and maintenance costs, by-product profit declines of $63 million, rehabilitation reassessments of $66 million. The combination of lower volumes and improved grades had a negative effect of $34 million and that of other sundry adverse variances amounted to $8 million.

Loss attributable to equity shareholders

The loss attributable to equity shareholders resulted from the net effect of the operating (loss) profit and the following:

• An increase in interest received of $13 million to $45 million, mainly as a result of increased funds arising from the higher average gold price.
• Finance costs of $103 million, which approximate those of 2006, are as a result of similar average borrowing levels during the year in a stable interest rate environment for variable overdrafts and bank loans and the fixed interest rate on the convertible bond. The unwinding of the decommissioning and restoration obligations amounted to $22 million for the current year compared to $16 million in the previous year.
• The taxation charge decreased by $35 million to $145 million from a charge of $180 million in 2006, primarily as a result of lower earnings for the year, a decrease in the effective rates of taxation and the effect of higher tax losses in the current year.
• Minorities’ share of earnings of $32 million.

Cash flow

Operating activities

Cash generated from operations was a combination of the loss before taxation of $492 million as set out in the income statement, adjusted for movements in working capital and non-cash flow items. The most significant non-cash flow items were the movement on non-hedge derivatives and other commodity contracts of $1,088 million and the amortisation of tangible assets of $590 million.

Cash generated by operations of $1,121 million was reduced by normal taxes paid of $237 million and cash utilised by discontinued operations of $2 million, to $882 million.

Net cash inflow from operating activities was $882 million in 2007, which is 22% lower than the amount of $1,137 million recorded in 2006. The decrease was mainly as a result of higher payments to suppliers which increased by 24%, partly offset by a higher average gold price received for the year which in turn resulted in increased receipts from customers of 9%.

Investing activities

Funds of $882 million generated from operating activities were used to grow the group and a sum of $1,022 million was invested in capital projects.

Total capital expenditure for 2007 was $207 million more than in 2006, mainly owing to expenditure during the year of $117 million for the Cuiabá expansion in Brazil and, in Australia, for the Boddington project of $249 million.

In addition, the 15% minority interest in Iduapriem was acquired for $25 million as well as the acquisition of the two exploration companies from Trans-Siberian Gold for $40 million. The exploration companies consist of Amikan (which holds the Veduga deposit and related exploration and mining licences) and AS APK (which holds the Bogunay deposit and related exploration and mining licences).

Investments acquired during 2007 include investments in the rehabilitation trust funds established by AngloGold Ashanti in compliance with regulatory requirements.

Proceeds from the disposal of investments, tangible and discontinued assets amounted to $55 million. This related to the disposal of assets and discontinued assets arising from the cessation of operations at Ergo and various smaller exploration properties.

Financing activities

The net cash flows from financing activities increased by $237 million to an inflow of $127 million in 2007 (outflow of $110 million in 2006).

Proceeds from borrowings during 2007 amounted to $870 million, and included $195 million on the previous $700 million syndicated loan facility and a $525 million drawdown on the new $1,150 million syndicated loan facility and other sundry amounts.

Repayment of borrowings amounted to $560 million and included $375 million on the previous $700 million syndicated loan facility. Other loan repayments included normal scheduled payments in terms of loan agreements.

Dividend payments totalling $144 million were made during the year, compared with dividends paid of $132 million in 2006.

The net result of AngloGold Ashanti’s operating, investing and financing activities was a net cash outflow of $13 million which, when combined with the opening balance of $495 million, and a positive translation of $14 million, resulted in a closing cash and cash equivalents balance of $496 million.

Overview of the hedge book

AngloGold Ashanti actively manages its hedged commitments in a value accretive manner. During 2007, the Group continued delivering in and buying back a number of hedge contracts, although the increase in the gold price resulted in an increase in the net delta hedge position from the beginning of the year. The company currently believes that market circumstances favourable to the gold price are likely to remain in place for some time and will continue to manage the hedge book accordingly. Refer to note 39 of this annual report for further analysis and details of the group’s hedge position.

Outlook

AngloGold Ashanti expects (attributable) production for 2008 to be lower than that in 2007 in a range of 4.8 to 5.0 million ounces primarily due to the power constraints in South Africa, delays in accessing higher grade ore in Tanzania and lower grades when compared to 2007 in Australia. Total cash costs are anticipated to range between $425 and $435/oz based on the following exchange rate assumptions: R7.35/$, A$/$0.88, BRL1.81/$ and ARS3.10/$.

Capital expenditure for 2008 is expected to be $1.2 billion and will be managed in line with profitability and cash flows. The increase over prior years is due to completion of the Boddington project in Australia and some expansion at the South African operations.