Anglo American Platinum Limited (OTCPK:ANGPY) Q2 2022 Results Conference Call July 25, 2022 5:00 AM ET
Company Participants
Emma Chapman – Head IR
Natascha Viljoen – CEO
Craig Miller – Finance Director
Conference Call Participants
Arnold Van Graan – Nedbank
Catherine Cunningham – JP Morgan
Christopher Nicholson – Morgan Stanley
Dominic O’Kane – JP Morgan
Leroy Mnguni – HSBC
Myles Allsop – UBS
Patrick Mann – Bank of America
Rene Hochreiter – NOAH
Steve Friedman – UBS
Unidentified Company Representative
Good morning, ladies and gentlemen. Welcome to the Anglo American Corporate Head Office. My name is [Captain Graman], and I form part of the emergency response planning team. It is my responsibility as the incident commander to see you safely out of the building in the event of an emergency. There are planned evacuations. There are no planned emergencies for today. However, if you do hear the very loud PA system, which gives us an audible warning to evacuate the building. I’d like you please to make note of the evacuation points in the building, which are demarcated with a little green running man on the top there on the left-hand side. So anybody is on this side of the auditorium, if you could make your way single file down and escape through that glass door. Those of you that are in the middle of the auditorium, you can use this evacuation point here, and you’ll see that those wardens of mine with the orange jackets, will be able to lead you safely out of the building.
If anybody has any kind of disability, physical challenge, please let me know during the break so that we can actually get you out of the building safely. I’d also like you just to leave your cellphones and your laptops for now. Do not use, do not hold them and do not take them out when you’re going down the stairs. If you find yourselves in the rest of the building upstairs, and you need to get out, please do not use the lifts because the lift is actually home. You will not actually be able to use those lifts. Please make use of the fire escapes.
Once you’re in the stairwells, please make use of the hand rails. Make sure that you have a free hand, use the hand rail and keeping a single file out of the building. Once you’re clear of the building, you will find assembly points at the rear and at the front on the Oxford side and on the rear side of the building, and the [Ralco] will be done to establish your location. If you are physically challenged, remember, please let us know as soon as you possibly can, as soon as you have a break. Thank you.
Natascha Viljoen
Thank you so much, Captain. And good morning, and welcome to everybody in the room and online. I must say, this is the fullest room that we’ve had certainly, since my start here, and it’s actually delightful to be able to talk to real people and did not imaginary people online. So welcome. Delighted to have you here as part of our presentation of Anglo American Platinum’s 2022 interim results. Thank you again for taking the time to join us today.
I’m Natascha Viljoen, the CEO, and I’m joined here today by Craig Miller, our Finance Director. At the end of the presentation, we will have time for questions and answers.
I would like to draw your attention to the cautionary statement, which I will appreciate if you could read this in full in your own time.
Now before we start, on behalf of everyone at Anglo American Platinum, we would like to pay our respects to two of our colleagues who we’ve lost in this first half of the year. Julian Sesinyi sadly passed by following a slip and fall accident at the ICP processing facilities on the 23rd of November 2021, when he sustained a serious spinal injury. He succumbed due to a complication while recovering at a rehabilitation facility. He showed tremendous courage and a fighting spirit in his rehabilitation. And from this, we draw additional inspiration in our work towards achieving zero injuries.
Rheina Malatji from the independently managed Modikwa operation, tragically lost her life after being struck by a tire from an underground mining vehicle. We send our deepest condolences again to their families, friends and colleagues.
Now despite these two incidents, we have made progress on improving our total recordable injury frequency rate. With a relentless focus, we will further build on this improvement in the second half. We’ve made a significant contribution of ZAR 71 billion to society highlighting the work we are doing to distribute value to all of our stakeholders. We’ve concluded a groundbreaking 5-year wage agreement illustrating the constructive relationship with our unions and employees and importantly, improving the stability of our business.
We launched our very popular hydrogen fuel cell haul truck that is a key part of our decarbonization program. And as a result of successful integration of the concentrated debottlenecking projects, we saw a significant increase in production from our two operations at Mototolo and Unki.
Our PGM basket prices were robust in the first half with a realized average price of $2,671 per PGM ounce, the second highest on record. This illustrates the robust underlying fundamentals for our metals.
Now in line with our balanced capital allocation framework, we are pleased to again deliver industry-leading returns with a first half dividend of ZAR 21.5 billion, equating to 80% buyout of our headline earnings.
In the first changing and an uncertain landscape, we operate and we continue our uncompromising focus on getting the building blocks for success in place to deliver on our strategic priorities in order to create value to all of our stakeholders. This is underpinned by ensuring safe, stable and capable operations and a workplace where every employee can come to work every day being physically and psychologically safe.
Now we continue to navigate a challenging operating context. And we have previously flagged the items mentioned on this slide. And it is important to recognize that COVID-19 did change our operating environment. It is further being impacted by disruptions on supply chains, the looming global recession and closer to home, the socioeconomic and political impact on stability around our operations.
It is also worth highlighting that our comparative period, the first half of 2021 at both record prices for the metals we produce. And we had record sales volumes due to being able to process almost all of our build up work in progress inventory following the temporary closure of our ACP for a couple of months in 2020. In this context, we have returned now to a more normalized level of production, but within a more complex operating environment. Despite these circumstances, we have navigated the headwinds and continued to produce a strong set of results.
Our strategy is guided by our purpose to reimagine mining to improve people’s lives. And it is underpinned by the delivery of the objectives set out in our four pillars to ensure a shared value for all of our stockholders. We are building on our performance with ESG measures and continue to be a leader in this area. We are going beyond just being a resilient business with an aim to thrive through this ever increase rate of change.
This specific strategic priority forms the basis of successful education of execution of our strategy despite the fast changing environment. We have a world-class portfolio of assets in an integrated value chain, and we are maximizing value by pushing for benchmark performance and deploying technology and innovation to drive efficiencies and growth with targeted investments that will generate incremental value.
And finally, our market development work is fundamental to ensure a sustainable market for all of our products. We are leveraging capabilities through our market development activities and capturing value from adjacent value chains. We will highlight the progress we are making in delivering against our strategy throughout the presentation. Now let’s start with ESG.
As I mentioned, tragically and unacceptably, we lost two of our colleagues in this period. A slip and fall incident resulted in a tragic fatality. And it is a stark reminder that we need to focus on the elimination of all harm from our workplaces. As Julian’s accident occurred in November 2021 and aligned with our reporting standards, we will record this fatality in the year that the incident happened being 2021.
We are constantly working towards safe, stable and capable operations. During the first half, our total recordable injury frequency rate improved to 2.41 per 1 million hours worked. After COVID, our health approach strives for zero harm, promoting employee well-being and optimal levels of health. And at our operations, we make sure that immunocompromised employees have their chronic disease under control with viral rollout suppressed and that it has been ongoing – an ongoing focus for us through the period of COVID as well.
You will see that our TB incident rate has remained the same, but we remain well below the South African average. They are indications, though, that the focus on COVID-19 management has negatively impacted on chronic disease management in the countries that we operate in. For all of these reasons, we are broadening our health focus to track our employee wellness now also including long-term effects of COVID-19 and mental health.
In this period, we have commissioned our sulfur dioxide abatement plant at our Polokwane smelter, which has significantly improved the air quality around our operations and reduced emissions to below legislated limits. We continue to manage our environmental impact and have once again had no serious environmental incidents in this reporting period.
We continue to contribute to building thriving communities where we operate. In the first half of ‘22, we have made meaningful economic contributions and added value to broader society. This totaled over ZAR 70 billion and included our significant contribution to the fiscus, making us one of the largest tax buyers in the countries where we operate.
As part of our efforts to stimulate off-mine job creation, we increased our local procurement spend to ZAR 15.3 billion. And of this, ZAR 1.1 billion are with suppliers from our doorstep communities. We invested ZAR 350 million in social investments, community development projects and dividends to our community trust as well as ongoing COVID-19 support.
We paid nearly ZAR 7 billion in salaries and wages to our employees. And importantly, we continue to invest in capital projects to ensure the long-term sustainability of all of our operations.
And finally, we’ve paid a ZAR 33 billion in dividends in respect of the second half of 2021, which included ZAR 213 million tied to our community share schemes. We balance this contribution with strict capital allocation and ensuring meaningful returns to our shareholders.
In May of this year, we signed a ground-breaking 5-year wage agreement, and I’m looking at Virginia here in front of me, [premise] on strong foundations of trust with our employees and unions. This was signed with 3 of our 4 recognized unions, representing 90% of our unionized employees and enabled the implementation across all of our affected employees. It increases salaries and related allowances, which will increase the total labor cost to company on average by 6.6% per annum over this period. It is an important factor in ensuring stability and is the reason why the negotiation process started earlier this year.
As part of our work with the Anglo American Group, we are collectively evaluating options for multiple forms of renewable energy across Southern Africa. And this includes solar, wind, hydro pump storage and wheeling renewable energy into the grid. At Mogalakwena, we launched our hydrogen electrolyzer and 300-tonne hydrogen fuel cell mine truck. And the technology will be commercialized and scaled across the rest of the fleet once the pilot is completed.
As part of the overall energy solution to the field truck – to fuel the truck from green hydrogen produced on site, we expect to start the construction of our 100-megawatt solar plant at the mine at the end of this year.
Now the truck represents the first of its kind in the world, and puts South Africa on the global stage in terms of innovation and the decarbonization of heavy-duty transportation. It will also drive demand for PGMs and help create a new economic sector in Southern Africa, a powerful example of how we help address society’s biggest challenges.
Healthy community relations are vital to the success of ensuring thriving communities around our operations. We are aware of the socioeconomic challenges our host communities face and we continue to work with our stakeholders to collectively address these. Our focus areas include local employment and skills development, host community supplier development and procurement as well as education and health initiatives.
Now we’re working with Anglo American [Zameli], where we have intentionally increased our spending with doorstep communities. Recently, we awarded a ZAR 2 billion load and haul contract at Mogalakwena to a consortium consisting of 51% doorstep ownership.
We invest significantly in education and training with support to bursars and graduates with ZAR 65 million invested in the first half of this year. And we’re very proud of our engineering students who achieved an average of 77% in their exams. Furthermore, in partnership with the Department of Basic Education in South Africa, Anglo American launched a second phase of our education program, investing over ZAR 1 billion by 2027 and aims to achieve quality education and training for all children in Anglo Americans host communities across South Africa. But importantly, we need to produce safe and stable – stably to ensure that we can continue to support returns to all of our shareholders. So let’s, from that point of view, return to our production performance.
Our total PGM production was down 4%, with the majority of our own mine assets performing better than in the first half of 2021 and highlighting the benefit of our portfolio of diverse and world-class assets. Despite this slightly lower production, we have maintained strong mining EBITDA margins across all of our operations, as you can see in the blue bubbles on the slide.
Operationally, Mogalakwena specifically experienced a number of headwinds, which led to a slow start of the year, but we believe we will continue to see improvements into the second half. Amandelbult maintained production despite mined-out areas, which led to infrastructure closures at Tumela at the end of 2021. Mototolo and Unki as mentioned, both delivered 21% increases in production, and we success – as we successfully implemented the concentrator debottlenecking projects.
Now Mogalakwena, as I mentioned, experienced a number of headwinds in this half. Firstly, unprecedented rainfall, which diverted us to mine in lower-grade areas. Delays in delivering of drilling equipment as a result of supply chain disruptions. And as part of our ongoing cultural heritage work, together with our local communities, we identified an area of significance for our communities which caused us to divert our waste dumping zone, resulting in longer hauling distances.
We are confident though that we can improve performance in the second half. We have access to higher-grade mining areas in line with our mine plan moving from the central pit into the south pit. We’ve increased our truck fleet to mitigate longer haul distances. And we are seeing operational improvements through the operating model gaining maturity and implementing our operational excellence initiatives.
We also will have greater run time at our North concentrator as we’ve pulled forward our North concentrator major shut into the first half. And despite our south concentrator going into a planned maintenance shut in the second half, we should be able to process most of this material by year-end.
Now let’s look at refined metal – refined production. Refined metal production and sales were lower year-on-year. And as I mentioned, this is due to the refineries who benefited from having significant stockpiles available for processing in 2021. This ones-off stockpiles resulted from the unplanned temporary closure of ICP plant in 2020. The build-up in work-in-progress inventory was largely released and processed in 2021 due to a significant improvement in the ICP performance. Subsequently, we have returned to more normalized levels of refined production and sale volumes a year ahead of time.
We had strong refined production performance in the first half, refining all of the metal in concentrate production and navigating the annual stock count and planned maintenance at both our Mortimer and Waterfall smelters to ensure smelter reliability into the second half.
As we have highlighted before, we – our Polokwane smelter will undergo a full rebuild in, and has already started now in the third quarter of 2022, taking it offline and reducing overall smelting capacity into the second half. We are confident though that second half refined production will be above that after the first half as we will prioritize high-grade metal in concentrates and process additional stock releases.
I will now hand over to Craig to take us through the financials and a review of the market. Thanks, Craig.
Craig Miller
So thank you, Natascha, and good morning, everybody. I’m pleased to be reporting a strong set of financial results. The company generated revenue of ZAR 86 billion in the first half. We achieved robust first half EBITDA of ZAR 43 billion, with a solid EBITDA mining margin of 59%. Our cash operating cost per PGM ounce was ZAR 14,600, 16% higher than the prior year, but firmly within our market guidance.
Return on capital employed of 150% highlights a strong performance and the efficient use of our capital. The company’s balance sheet remains in a net cash position of ZAR 42 billion after paying the dividend in respect of the second half of 2021.
And on the back of these strong results and in line with our disciplined capital allocation framework, the Board has declared an interim dividend of ZAR 21.5 billion, which equates to ZAR 81 per share, 80% of our headline earnings.
We delivered a solid earnings performance in the first half of ZAR 43 billion on the back of a realized PGM basket price of ZAR 41,132 per PGM ounce, due to the robust underlying fundamentals for our metals. This is a good earnings achievement relative to prior periods. However, EBITDA was about ZAR 20 billion lower than the record we achieved last year due to two things.
First of all, the 3E dollar basket price declined 14% compared to the record PGM prices achieved in the first half of 2021, resulting in ZAR 14 billion lower earnings. Earnings last year also benefited from the higher sales volumes, about – of about 0.5 million PGM ounces as a result of the release of the work in progress that we achieved in 2021 following the ACP shutdowns of 2020. Sales for the half year were 2 million ounces in line with our refined production. And our mining margin remains strong at 59%.
So turning to costs. During the first half of the year, we experienced around a 10% year-on-year increase in mining inflation. Labor and contracted costs rose 5% despite the salary increases of 7% for employees. Maintenance costs escalated by 11% and consumables were 18% up year-on-year.
The sharp rise in consumables was mainly attributable to increases in commodity-linked inputs such as oil, which was up 61%, chemicals were up 71% and explosives were up 55%. Despite these significant increases, we managed to contain the cash operating cost escalation at 8% as we focused on driving efficiencies and savings in the business.
If we rebase the 2022 oil, explosives and chemical prices to rates achieved in 2019, i.e., before the COVID pandemic and the global supply shocks we’re experiencing, our consumables and maintenance costs would be about ZAR 700 million lower, and the total costs would have increased by about 4%.
Cash operating costs per PGM ounce was around ZAR 14,600 driven by those above-mentioned escalations that I’ve spoken about as well as the impact of lower production.
We remain agile in a global inflationary environment, and we’ll continue to focus on containing our costs by driving, first of all, those P101 efficiencies, progressing the renewable energy projects to address escalating energy costs and embedding the certainty that we’ve derived from the completion of the 5-year wage agreement.
Our company is in a strong net cash position of ZAR 42 billion. During the period, we generated from our operations, ZAR 39 billion. We paid taxes and royalties of ZAR 10 billion, and we invested capital into the business. Our cash position is after paying the final ‘21 dividend of ZAR 33 billion.
So we continue to invest capital in sustaining the business. As I said, we spent about ZAR 6 billion capital expenditure in the first half, ZAR 4.8 billion of that was in sustaining capital, while ZAR 1.3 billion was spent on progressing our growth studies and our breakthrough projects.
In the second half of the year, we plan to invest between ZAR 10 billion and ZAR 11 billion, again focused on maintaining asset integrity and reliability, such as completing the Polokwane smelter rebuild and the slag cleaning furnace rebuild at the Waterval complex. We’ll also take delivery of heavy mining equipment at Mogalakwena.
The Mototolo, the Brochen life expansion project, which was approved at the end of last year, we anticipate spending ZAR 1 billion of the ZAR 3.9 billion project CapEx this year.
You will see that we revised our total CapEx guidance down to between ZAR 16 million and ZAR 17.5 billion. The reduction has been necessitated by us having to reorientate skills and expertise critical to projects such as the Polokwane smelter shut and the supply chain disruptions, impacting equipment and material delivery. And consequently, we’ve had to reschedule some of the execution of our projects.
In terms of returns to shareholders, the Board has approved an interim dividend of ZAR 21.5 billion or ZAR 81 a share. It comprises of a base dividend of 40% of headline earnings, equaling ZAR 10.9 billion or ZAR 41 a share and a special dividend of ZAR 10.6 billion or ZAR 40 a share, taking our total payout to 80% of headline earnings. This represents an annualized dividend yield of approximately 14%, highlighting our commitment to return value to shareholders.
We remain committed to our disciplined and value-focused approach to capital allocation. The strong performance in the first half resulted in ZAR 23.5 billion being generated from our operations after paying taxes and investing capital expenditure, supporting the ZAR 21.5 billion dividend to be paid to shareholders in the middle of next month. And as I mentioned, in the second half, we anticipate spending between 10 – sorry, yes, between ZAR 10 billion and ZAR 11 billion of CapEx to sustain the business into the future, whilst maintaining a strong balance sheet.
And so finally, we’ve also retained our full year production and unit cost guidance. And as I just mentioned, we’ve updated our capital guidance for the year. Our guidance is clearly subject to the impact of any Eskom load-shedding and other headwinds, which Natascha has mentioned.
So turning now to a review of the PGM markets. The first half of 2022 was another strong period for average PGM prices, though with exceptional volatility. The basket price was higher than the second half of 2021, although it was lower than the record we achieved in the first half of 2021.
PGM prices surged in February and into March as the Russian invasion of Ukraine sparked supply concerns, seeing palladium hit an all-time high. When the supply impact was not as negative as anticipated, PGM prices fell back. A strong dollar was also another headwind.
Minor PGMs, iridium and ruthenium showed similar trends, remaining above long-term averages and continuing to make sizable contributions to our basket price.
As you know, the automotive sector is the largest contributor to PGM demand. Automotive sales have remained production-constrained. The first half, once again, this was disappointing for automotive production. China’s COVID-related lockdowns hit domestic output and was exacerbated by supply chain issues.
The second half is looking more positive. Easing lockdowns, Chinese purchase incentives and improving chip suppliers seem to be feeding through into higher auto production. May’s output was higher year-on-year and preliminary data suggests that June has accelerated further. Of course, there are still downside risks due to supply chain issues, especially in Europe, and we’re closely monitoring the consumer – and closely monitoring consumer demand. Though at present, we think the demand remains above production levels.
In contrast, platinum industrial demand was exceptionally strong. Last year, this was a nearly 3 million-ounce sector, making it one of the largest of the four traditional categories, which, as you know, includes automotive, jewelry and investment.
Platinum plays a crucial role in a range of sectors. Last year, demand in the glass industry was nearly 1 million ounces on the back of an expansion of lightweight fiberglass manufacturing which is crucial for new technologies such as wind turbines and vehicle lightweighting.
2022 might see some pullback in overall volumes, especially if the global economy continues to slow. But areas such as fiberglass, packaging, chemicals and hydrogen all point to a strong future.
When we look ahead it’s – within awareness that it is a particularly uncertain time. The long shadow of COVID-19, Russia’s invasion of Ukraine comes at a time when economies and societies are grappling with the huge effort needed to achieve net zero.
For our metals, as in any period of great change, there are risks, many obvious and well known. However, we must not lose sight of the many opportunities too, offering upside potential to both demand and price.
As a result of our market development work in targeting the many future opportunities and turning risk into potential demand for our metals such as progressing the line batteries and leveraging the useful characteristics of PGMs in new applications.
In the short term, all these factors have meant changes to our expectations for PGM balances. We see platinum and rhodium tightening in the next few years, that a return to deficit will possibly take a year longer than we had previously anticipated. And if correct, the recent downgrades to auto production forecasts are likely to mean palladium will move into a surplus, assuming all Russian metal flows continue.
Thank you. I’ll hand you back to Natascha.
Natascha Viljoen
Thank you so much, Craig. Now let’s look at our portfolio of Tier 1 assets. We do have the largest PGM resource globally with every asset having a different PGM mix, base metal content and other coproducts.
This – highlights a diversified portfolio of commodities that we mine and allows us to take a portfolio view while considering our integrated end-to-end value chain to ensure that we optimize value. The quality of our ore body and assets enable us to ensure we have the lowest cost assets amongst our primary producing peers.
Now despite our capital reinvestment cycle into our assets, which is a really important cycle for us to build asset reliability, we continue to have the lowest all-in sustaining cost in the industry. We have the most productive assets with optionality and growth projects in our portfolio, which will continue to drive competitive advantage in the industry.
For Mogalakwena, we have completed the resource development plan that takes a holistic long-term view on how to maximize the value of this orebody and optimize shared value across all of our stakeholders. In addition to optimizing the open pit, we are investing in the development of an underground operation, which will allow for more targeted mining on – I’m sorry, more targeted mining of the reef, resulting in reduced cost and ways to access the ore body, reduce surface mining and therefore, less of an impact on communities and environment and new mining methods that should not be compared to traditional underground mining methods to enhance safety and efficiencies.
Within these parameters, we saw how important underground mining will be come to the future of this asset. And we have, therefore, committed capital of ZAR 2 billion for a twin exploration declines. The declines are already at about 20% of the first stage of targeted development and underground geological drilling from these declines will commence before the year-end.
We’ve increased our engagement with all of our communities to develop open and transparent relationships, and we are undergoing a process to address value protection and value creation for our communities. Our resource development plan further indicated the need for access to land, and we have commenced engagements with relevant communities for potential resettlements.
To understand our ore body better, we are executing a fast-track plan to improve the right of understanding. And we are doing this in two ways. From surface, we are targeting 120 kilometers of surface drilling this year. We are – that will be double what we’ve done in 2021, and we’re well on track to deliver that. We are embedding innovation through technology use at this operation. And as an example, all sort is fully commissioned and the integration process is at an advanced stage. It is already demonstrating value with rejecting approximately 4% of low grade or waste material. Further work will continue to establish stability and increase this rejection rates. Our coarse particle recovery plant is under construction and will be commissioned in the fourth quarter of this year.
Now our resource development plan further indicated bottlenecks in our downstream processing, and these will be addressed through a combination of technical options and commercial solutions. The ICP debottlenecking project is already in execution and further facility optimization studies are underway. We’re also evaluating commercial battery-grade nickel production opportunities.
The feasibility study for a third concentrator is now complete and progressing through the relevant review processes. Lastly, the future of this mine will be developed on the foundation of achieving P101 performance, independent on whether it is an open pit or underground facility.
We are committed to develop this world-class asset, and we will do so in a holistic and measured way. Our approach allows for value-based incremental capital steps to be taken, allowing for optionality to respond to market cycles.
Now we have more work to do but – than just take a decision on the future of a concentrate. And as I hope you can see here that we have made significant progress in the last 6 months in each of the six work streams that we need to deliver on.
Now we’ve highlighted that we have a portfolio of Tier 1 assets, and we have considerable growth optionality and margin expansion opportunities at every asset. We show on this graph that by 2030, we will have more than offset the end of life of our Kroondal joint operation through operational efficiencies across our portfolio, such as the benefit of the concentrated debottlenecking projects that are already delivering value. In addition, as we progress the future of Mogalakwena, we should see growth from both a PGM and [bismetal] point of view.
Now what we’ve done on this chart is we’ve got converted our bismetal tonnes into PGM equivalent ounces at 2030 consensus prices and which – and we should – apologies, we should see growth and greater diversification in our portfolio through this process. Now this does not include the further optionality in our portfolio, which we will discuss on the following slide.
I think it is important to note that the capital required to unlock these opportunities would at all times be assessed through our disciplined capital allocation process that include a continued evaluation of the development in the markets and are generally much more conservative than what we see in consensus pricing.
As we’ve shown, we continue to focus on understanding how we generate the greatest value from each of our assets. We have a number of ongoing studies, which assess growth and efficiency opportunities across the portfolio. None of these are embedded into any valuation or ounce profile into the future but highlights that we have many organic opportunities in our business that can unlock significant value in the future.
Now let’s stand still for a moment on the demand side that also closely link into our market development work. In the medium term and certainly in the longer term, we believe that the foundation of the hydrogen economy and the hydrogen pure powered fuel cell mobility is critical to decarbonization and energy security.
The positive news is that this is already gaining momentum. Firstly, we know there is a necessity for hydrogen as an alternative fuel source. The urgency of net zero has never been so apparent with global warming already impacting lives and businesses. Hydrogen and fuel cells not only help us to reach net zero but also offer a pathway to greater energy independence.
We have long known that fuel cell electric vehicles are as described by the International Council on Clean Transportation as 1 of only 2 mobility solutions that would provide a pathway to a low-carbon future. Increasingly, we have learned that for many other industries, hydrogen seems to be the only decarbonization solution.
In its role as an energy carrier, it also helps to maximize potential of renewable energies. In decarbonized mobility, fuel cell electric vehicles and electrolyzers have very different resource requirements than battery electric vehicles. Both facts mean that I – transition to zero carbon easier, cheaper and given marginal mining and energy impact, also cleaner.
This year’s sharp price rises in battery electric vehicle materials and concerns about the future availability of sourcing of key metals have brought home that mobility transition will not be easy or achievable by only one technology. And for these reasons, governments are increasingly keen on hydrogen.
39 countries now have a hydrogen strategy at the core of their decarbonization journey with China, the USA and the EU all making big announcements this year. There’s also been some useful commitments made to fuel cells in regions like China.
As governments seem to be focused on battery electric vehicles, we need to continue our advocacy programs through the hydrogen council and various other forums to remove restrictions and to create a level playing field that in able economies of scale.
One of the main things holding fuel cell electric vehicles back is the lack of cheap and available hydrogen. But there is good news in this space as well. Recently, we have seen strong growth in green hydrogen production and a big expansion in capacity. This will drive cost down, which ultimately will enable faster growth in fuel cells and further opening of new areas for hydrogen.
And when we put all of these items together, and aided by our continuous efficacy and market development efforts, we see progress in the last block, commerciality. For hydrogen in hard to abate areas such as steelmaking and certain transport applications, this is already happening. In others, such as light vehicles, it remains in its early stages.
As a society, we are developing a better understanding of the interdependencies required to deliver a successful decarbonization agenda.
Now in closing, we continue to focus on delivering our strategy through our four strategic pillars to ensure we achieve our purpose of reimagining mining to improve people’s lives. As illustrated with this set of results, we’re already making good progress on our targets. Our ultimate outcome is to ensure a shared value benefit to shareholders and our broader stakeholders. And we continue to track our delivery against these value creation outcomes.
That concludes our presentation, and thank you once again. I will now hand over to Emma Chapman, our Head of Investor Relations, to facilitate a question-and-answer session for us. Thanks, Emma.
Question-and-Answer Session
A – Emma Chapman
Thank you so much. I guess we can try and start and see if we have any questions in the room. Chris Nicholson. Why don’t we start with you?
Q –Christopher Nicholson
I’m interested just in a little bit chatting about the volumes and the smelter rebuilds, et cetera. So I mean just on Page 17, you talked to the fact that you think in the second half of this year, you’ll be able to get your refined production pretty much through despite the Polokwane smelter rebuild yet for next year, you still have that implied inventory build. I think it may have to do with the base metal intensity of the Polokwane production. Could you confirm that?
And then linked to it, you’ve had a very good quarter in terms of what you put through the base metal refinery. Can you maybe just comment on that and whether there’s any way you may be able to kind of tweak that up next year and you won’t get that inventory build next year?
A –Natascha Viljoen
Yes. Thank you, Chris. I think it is, firstly, a combination of targeting the ounce throughput for H2. We will be targeting higher-grade concentrates, which is generally from operations other than Mogalakwena. Mogalakwena generally having a higher base load – base metal load, as you know. And that we will need to release into next year. And that is some of the lockups that you see that we will release into next year.
From a base metal refinery point of view, there is significant amounts of work that’s been happening from a renewal and an asset reliability point of view, and we start to see some of that coming through. There is still quite a bit of work left to be done there, but we believe that we see to start that has come through.
And what we’re doing in the second half as part of our base planning process is to look at how we now optimize that we need to deliver into next year. And there would be an opportunity for us on the back of proven performance this year to really look how we unlock that value into the next year.
Emma Chapman
Catherine?
Q –Catherine Cunningham
Just two quick questions for me. So the release mentions that there’s been negligible impact from load shedding for the first 6 months of the year. How was that in July? And has there been any negative impact from reports around power rationing and Zim at the Zim assets?
And then just in terms of the macro, how concerned are you guys in the near term around end user demand destruction like vehicles, just given where consumer inflationary pressures are globally?
A –Natascha Viljoen
Okay. And thank you, Catherine. You comment correctly. Our first half impact from Eskom was very – was negligible, about 6,000 ounces. The second half would be a bigger risk for us as Polokwane is down for the rebuild we’ve mentioned. And our agreement with Eskom is when we curtail, we curtail from the base load that we are on in that period of curtailment, which now takes our base load significantly lower.
How we normally manage it is to protect areas like mining and concentrators and tight load where we have catch-up capacity. If it happens in the second half, we might have to push back into areas that we don’t have catch-up capacity. So there is a risk in that area. We’ve seen less of that in Zimbabwe.
When we look at your second question – sorry, is that – okay. When we look at the demand for our metals from a car manufacturing point of view, the demand is – there’s quite a bit of pent-up demand at the moment. But we do see that production due to all of the other realities that we’ve seen, hard lockdown in China, chip shortages, that the actual production of vehicles are quite low already and compares to previous periods of recession.
So when we then consider ongoing recession threats, the uncertainty, the geopolitical uncertainty, energy into Europe, we believe that quite a bit of that already will be through into similar kind of production levels.
So when we take all of this into consideration, we will see volatility. Craig has touched on some of the volatility, but we think that the kind of range that we’re in at the moment would be stable for a period of time.
Emma Chapman
Perfect. Arnold?
Q –Arnold Van Graan
Yes. Arnold Van Graan from Nedbank. Two questions, if I may? The first one is on Mogalakwena with the areas of cultural significance. Is that something that you’ve known about for some time? Is it a new issue? And the question that goes to that is, what impact does it have on your longer-term plans for Mogalakwena? Does that push you closer or more towards going underground because then you obviously bypass a lot of these issues?
Then my second question is on hydrogen. You focused quite a lot on that. So my question specifically deals of your hydrogen truck project. How has that performed relative to plan? So obviously, it is R&D and it is work in progress. So you would expect that the performance wouldn’t be on par with what you have in your conventional vehicles, but has it exceeded expectations? Or are you struggling? And what’s sort of the longer-term outlook in terms of when you bring on more of these vehicles and when they reach let’s say, commercial state, do you have a time line for us or it’s still too early?
Natascha Viljoen
Okay. Thank you. You need to start to ask questions that Craig can answer you. Well, Craig can answer this question as well but it feels like this is my – it’s still my responsibility to answer this.
So on – very valid question around Mogalakwena. We – you would remember, in the last 2.5 years, we have reshaped that project to include a very specific work stream on our relationship with our communities.
As we mature our understanding and our realization on our responsibility around our communities, we’ve also matured the work that we are doing. We had to start by ensuring that we rebuild trust with those communities, and we had to close out on commitments that we’ve made to those communities, which we have done.
We see that opening up more open and transparent conversations with our communities. It’s also some of the local economic development work with doorstep community spend is all helping us to build a more trusting and transparent relationship.
In that process, one of the pieces of work that we have been doing in that pillar is understanding culture and heritage into the communities that we work. It’s part of our Anglo social way. So quite a bit of work done in understanding better. And in that process, we have identified additional areas to the ones that we were aware of.
So I think it all bodes to the relationships that we are building. We’re not there yet, but it’s definitely, I think, a sign of progress.
Is this impacting the way that we’re looking at the future of Mogalakwena? Yes, it does. I guess as we understand our ESG responsibilities, as we stand back and we look at the long-term sustainability, both social, environmental, energy, water, those all are factored in when I talk about a realistic plan around resource development.
And then if we consider the significant surface impact that we will make on an open pit only, the underground options become a real opportunity because it will be less energy intensive. We will deal with waste, lease-wise. Your all-in sustaining cost will come out in the wash because you will have less surface waste that you need to remove and stripping versus targeted and more quality mining. So all of this come together to say, well, probably optimizing what we have with the open pit and going underground is overall the best option for that asset.
Then your last question on hydrogen. The truck is not in the pit yet. The truck will be in the pit in August. As we’ve done work with it, there was some finalization of small operational issues around the truck. It will go into the pit in August, and then we’ll be able to tell you exactly how it’s performing.
If we consider the performance just with the load that we’ve put on it before the launch, and we’ve driven it around quite a bit, there was no reason for us to believe that it would not be able to perform well in the pit.
I think the focus needs to be for us on how the prototyping in layout on the truck, how we optimize that into commercialization with big partners. Are we in – for instance, and then how do we build it into the mining ecosystem and looking at full life cycle costing. So that is the next piece of work underway. Our target is to have our 40 fleet – 40 trucks converted by the end of the decade.
Emma Chapman
Steve? Yes.
Q –Steve Friedman
It’s Steve Friedman from UBS. Maybe a question for Craig. Just on the third-party material, maybe – I mean this has been what seemed like an exceptionally good period half or half 4 third-party from an EBITDA margin perspective, I think 36% looks like a record, at least over the last maybe 10, 15 years and also contributed around ¼ of your group EBITDA. So maybe if you could just sort of unpack what were the key drivers for that sort of strong performance from the third-party material and what you expect in a more normalized environment? Obviously, there’s lots of moving points at the moment. So maybe just you can comment on that.
Craig Miller
Thanks, Steve. Yes. So certainly, the 36% EBITDA margin from the third-party materials, that’s in line with what we actually had in the first half of last year. So I think it’s sort of broadly – it’s just reflecting, I think, the PGM prices, as we mentioned, sort of second highest level of PGM prices in the half. And certainly, if prices continue to change downwards what we’ve seen in the last month, you would obviously see that EBITDA margin coming down to more levels that we’ve experienced before. So roughly between 15% and 20%.
Emma Chapman
We’ll take a final question from the room? René?
A –Natascha Viljoen
Whilst we make move to René, I think it’s still important to note, Steve, that it’s still lower than our own EBITDA margins. And our own product is still the best product through our value chain.
Q –Rene Hochreiter
Rene Hochreiter from NOAH. You mentioned your new mining method at between decline, that’s 20% complete. What is that your mining method?
A –Natascha Viljoen
So what we’re currently doing, René is we are exploring – we’re putting down twin exploration declines. We’re doing two of them, and that’s not the mining method I referred to, but just for completeness sake. We’re doing one decline with a tunnel borer, and another decline with modern drill and blast methods. And we are also using this opportunity to live out – to lift our knowledge and skill and efficiency in this underground mining method.
So the contractor that we have involved is setting world-class standards for us and achieving world-class performance. And we’ve already have a team of our local community, we’ve employed from people from our local community who are learning, so that we can transfer that knowledge and skill in going forward.
The mining method that we are targeting for underground is long-haul open stoping. It is a well-utilized method. It is bulk mining, totally mechanized mining. And all indications if we look at benchmarking across the world, assuming that we continue with the world-class mining standards that we are setting already in the decline development is well in – from an all-in sustaining cost would be very competitive to what we’re doing with open pit mining.
Q –Rene Hochreiter
And hopefully lower. But also, CapEx guidance were 23, 24. I think you gave it in February, but you haven’t given it now. Is that still the same?
A –Natascha Viljoen
We have given – do you want to take that, Craig?
A –Craig Miller
Yes. So we’ve just – we’ve maintained 22, 24. We’re obviously in the middle of our planning process for the next 5 years. And it’s something clearly we’ll need to take a review on based on sort of where we are where we are on just execution of projects this year. But I think at the moment, assume that that’s sort of the anticipated spend in the next 2 years.
Q –Rene Hochreiter
Just the last question. You allocated quite a lot of CapEx to project breakthrough. Is that going to be ongoing? Or is that project coming to an end? Or could you remind us what that is that project?
A –Craig Miller
Yes. So we’ve got a series of breakthrough projects. Some of those relate to the coarse particle recovery at Mogalakwena. You’ve got some of the bucket. You’ve also got the copper debottlenecking project at the base method refinery. So those are all projects that we have underway that either look to improve throughput or recovery or ultimately product.
Emma Chapman
And we have a couple of questions coming through from the web and then we’ll come back to the room shortly. But I have a question here from Nkateko from Investec who asks, can you please give us a bit of color on the Mogalakwena cost performance in the next 2 years considering the substantial increase in the past year as well as the impact of the bulk ore sorting plant coming online in the next year?
Craig Miller
Okay. And so will you cover the bulk ore sorting.
Natascha Viljoen
Yes.
Craig Miller
Okay. Perfect. So in terms of cost, we’ve certainly obviously seen and the increase of in unit costs at Mogalakwena, driven by some of those commodity-linked escalations that I’ve spoken about, particularly oil. So just by way of reference, every $10 increase in the barrel adds about ZAR 100 million worth of cost to the Mogalakwena base. So that’s been a key driver to the increase in costs.
Clearly, obviously, the assumption around what happens in the next 2 years, depends on what happens to the price of oil. But if it stays at this level, that will obviously give us some degree of certainty. But in terms of the next 2 years, from our perspective, we’re in the middle of that budget process. And just looking at the mine plan, taking into account the disruptions that we’ve experienced in the first half, what does that do from a mining sequence and we’ll look to update you as soon as we’ve got a better view of that in the second half of the year.
Natascha Viljoen
So the bulk ore sorter, as we’ve mentioned, we see approximately a 4% rejection rate, which effectively mean that for the same ounces, we have to treat 4% less material. As we develop that, it’s a target of getting, at least double that will continue to help the efficiency of – and the related PGM cost – PGM unit cost and bring that down. So that’s certainly the target around the bulk ore sorter.
I think the other aspect that’s important for me around both this project and the coarse particle recovery, is the fact that ultimately, it reduced our overall energy consumption because we are spending less energy to recover the same amount of metal. And ultimately, with coarse particle flotation as we’re targeting a dry engineered stack instead of typical tailings facilities, the recovery of water would be way more efficient which brings that total ESG cycle into it, cost and then obviously the efficiency and ESG impact.
Emma Chapman
I have a question here from Wade from Avior Capital Markets. He also asked about the benefits of higher rejection rates, so we’ve answered that. But he also asks, how should we think about the quantum of Mogalakwena’s grade improvement over the next 18 months as the mine moves to higher-grade regions of the pit?
A –Natascha Viljoen
So I think the first thing that’s important around Mogalakwena, it’s quite a variable ore body, where we’ve got the highest grade in the south and lower grade in the north. And it compares — the kind of ranges we’re talking about is about 2.8 to 3.2 in the north and it goes higher as we go down to the south, more to the upper 3.5. So that’s the kind of variance that we need to consider.
Our normal practice is to ensure that we spread the mining plan for the year across all of these areas to get more of an average. And it’s important that we also then build stocks to help us to manage the variance that we have in the pit.
So I think Wade, you can work across those kind of upper and lower limits in terms of grade, but we’ll continue to see – if you look at full year results or longer-term performance that we should average it out. It is also the reason why if we look at the underground exploration declines that we are doing, we started in the South because those are the areas where we will achieve the highest grade.
Emma Chapman
I have a question here from Thomas Streeter, who asks, you mentioned that you have concluded wage agreements with 90% of unionized employees. Where are you at with the remaining 10% over last union?
A –Natascha Viljoen
So that conversation continues. It’s important to note that it is a union that is only at our Mototolo operation, and we will continue those conversations and – into its conclusion. In the meantime, we have been able because it’s – the agreement was with 90% of our employees and our unions already that we have implemented across the entire business.
Emma Chapman
A question for you, Craig, from Nina from Goldman Sachs, who asks, you typically spend around 40% to 45% of your full year CapEx in the first half. But in 2022, the one – the first half CapEx is around 30% of your full year guidance. Do you see risk to full year CapEx spend? And what has triggered lower spending in the first half?
A –Craig Miller
Thanks very much for the question. I think it’s just important to recognize that in the second half, we have a number of rebuild projects that you’ve spoken about, the Polokwane smelter rebuild being a very significant build. It’s the first time that we’ve rebuilt – undertaken a full rebuild of that furnace in the last 12 years. So that is planned for the second quarter. So that’s one of the drivers in terms of the increase versus what we’ve experienced previously. We’ve also got continuation of delivery of heavy mining equipment at Mogalakwena. That’s about another ZAR 1 billion of spend in the second half. So it’s a lot of these planned activities that we had – that we’ve now got into the second half of the year.
In terms of the risk to the spend, as you note, we’ve sort of lowered our guidance just given some of the disruptions that we have seen to supply chains in the first half of the year and how they’ll sort of factor into the second half, and that’s really why we’ve taken the second half spend down between ZAR 1 billion and ZAR 2 billion.
Emma Chapman
Perfect. We’ve got a number of callers on the conference call. So can I please link over to the conference call and see the questions there.
Operator
[Operator Instructions] The first question comes from Patrick Mann from Bank of America.
Patrick Mann
I wanted to ask you a little bit about platinum substitution. So — just how much of — or how much impact are you expecting from substitution palladium or platinum in? So how key is that to your forecast that platinum goes into deficit? And then do you think that given Russia is the primary or the biggest supplier of palladium, have you seen any acceleration in efforts to substitute out palladium as sort of this year as a result of Russia, Ukraine? That’s my first question, please.
And then the second one is just — you spoke a little bit about CapEx scheduling and pushing out a bit of CapEx. Has there been any operational impact? Has it slowed down any projects at all?
Craig Miller
Okay. So Patrick, in terms of the substitution, yes, we have see — continued to see this substitution taking place. I think last year, we estimated there was around about 75,000 ounces of substitution. We think that, that possibly will increase about 200,000 ounces this year and still up to potentially 1 million ounces. So those have been incorporated into our forecast.
We haven’t necessarily seen significant changes to the flows of metal from Russia at the moment. I think a lot of — and so what we do acknowledge, a lot of the supply contracts sort of agreed at the beginning of the year. And so a lot of that sort of understood. It’s very clear — clearly obviously something we just going to need to monitor in the fourth quarter and into 2023 in terms of whether customers still look to take Russian metals or whether they would look to sort of to not take those metals and seek them from ourselves and other PGM producers in South Africa. Do you want to do the —
Natascha Viljoen
The Russian bit?
Craig Miller
No, I think —
Natascha Viljoen
Capital scheduling, sorry.
Craig Miller
The impact from the operations.
Natascha Viljoen
Yes, I’ve got that. So I think a big portion of our capital spend is a part of our renewal program, and this is also the areas where we’ve seen slight delays to ensure that our capital efficiency and readiness to execute some of these larger projects are in line with our own expectations.
So the renewal projects would not have any impact on production. It will delay some of our renewal projects to get to full completion, but we’re comfortable that it is the right thing to do, as you know that our capital profile has increased quite significantly. And Prakashim is taking a very deliberate approach to ensure that as we step into these projects, that the level of engineering and confidence that we have in execution is at the point that we need it to be before we trigger a project. But we will not see that flow through in any operational challenges.
Operator
The next question comes from Dominic O’Kane from JPMorgan.
Dominic O’Kane
Two quick questions for me. First question is just relating to Amandelbult and specifically costs. So the costs came in above ZAR 18,000 per ounce, and we’ve seen a trend higher over recent years. Can you maybe just help us with how we should think about some of the medium-term cost movements and guidance for Amandelbult? Is it reasonable to assume that we can think costs can come down? Or would you see current rates as being kind of a new normal for the mine?
And then my second question is around the dividend. Obviously, the policies to pay out 40%, but this now represents the second year of a very big pay-out of 80%. Can you maybe just help us with some of the goalposts about how we frame ordinary dividends versus excess capital returns going forward?
Natascha Viljoen
Thank you, Dominic. I’m going to ask — we’ll do this question jointly. I’ll ask Craig to touch on the detailed breakdown of cost. I will go into some of the operational efficiencies, and then we’ll go into the dividend question.
Craig Miller
And so look, I mean, obviously, the biggest component of Amandelbult’s cost is labor, and that’s sort of roughly 50% of its cost base. You’ve now got some degree of certainty as a result of the wage negotiations in terms of what the cost escalations will be. And so we’ve provided that to you around about 6.2% per annum. So you can sort of filter that in. But I do think that there is opportunities for us to continue to drive efficiencies at Amandelbult, and that is linked to what I’m sure Natascha will touch on, particularly around the benefits of cycle mining and really sort of driving some of the improvements there in order to control and maintain costs.
Do you want to do that, and I’ll come back to dividend?
Natascha Viljoen
Okay. So for starters, if we’re talking about 50% of Amandelbult’s cost is labor. We do have excess labor at the moment. We’ve been in a process of voluntary separation and looking at how we get that labor to within the required level in a way that is obviously considering the socioeconomic challenges that we have in the country. So that process is underway. We are also addressing some of our operational discipline items on site that ensure that we have full capacity on the mine as we should on a daily basis.
Then we’ve been talking about the modernization of Amandelbult for quite some time. So you should be — I think everybody is fairly familiar with it. One big portion of the modernization is our cycle mining. We are learning as we go with cycle mining and Tumela specifically, 80% of our working areas at Tumela is now running at on cycle mining which does give us quite a bit of uplift in efficiency.
I think our challenge there is to get consistency. We’ve seen good runs for a number of months, and then we saw consistently and falling through. And then we see the lift. And we’ve seen this quarter 3 going into quarter 4 last year, we’ve seen a significant improvement, and we lost that stability over our Christmas period and restart period. We’ve rebuilt that now in Q1 going into Q2, and we’ve seen it higher than the levels in 2021.
So the work at hand is to ensure that we get stability in that process. It’s very different way of thinking about conventional mining, but we are definitely building and we’re seeing the benefit of that coming through.
It’s still a little bit of a bigger challenge because of ground conditions. And for us to — it will take us a little bit longer to get to full efficiency there.
So if we combine the two areas, excluding the inflationary pressures that we do see, there is a real work that we’re doing in bringing the cost down on Amandelbult instead of seeing the continuous increase. That’s outside inflation, of course.
I think the other area that’s important is just to consider the work that we are doing in mechanization. We — 15 years drop-down, mechanization is underway. The efficiencies as we have expected, and we’ve worn the risk around it is lower than expected. But we have not stopped that work. The team has stepped back and reviewed the way that we’re approaching mechanized mining. So there will be a continuous push for us to bring this mine to a mechanized mine into the future. Dividends?
Craig Miller
And so in terms of dividends, so absolutely, very happy to have obtained the Board support to pay a special dividend. So if I can just remind you, Dominic, as you’ve pointed out, 40% is our base dividend — 40% of earnings is our base dividend. And then clearly going through a disciplined capital allocation review at the half year and at the full year again in terms of what do we do with any excess cash that we have available to deploy to shareholders.
So at the first half of the year, we generated roughly net of taxes and CapEx, about ZAR 23 billion, paying out ZAR 21.5 billion. So I think just demonstrating that discipline will do, that we continue to have. And sort of going forward, you absolutely bank in the 40%. And then clearly, obviously, we’ll progress the various options that we have in terms of Mogalakwena and progress those sites and make sure that they still meet our investment criteria. And as they progress, we’ll reevaluate what the dividend policy — or the dividend policy is. But at the moment, you have taken around 40% of earnings.
Emma Chapman
Do we have any questions on the line?
Operator
Yes, we do. The next question comes from Myles Allsop from UBS.
Myles Allsop
Just a couple of follow-up questions. First of all, could you remind us with Mogalakwena, when you’re targeting kind of FID, is it still end of this year, beginning of next year?
And then on Dominic’s question as well, do you have a net cash buffer that you see as a normalized level for the business?
And then the last question very quickly, just on market. Have you seen palladium move back into surplus over the next couple of years? Do you think we’ll see prices of palladium and platinum converge more? And maybe on rhodium as well, why are prices so resilient?
Natascha Viljoen
So I missed the second question.
Craig Miller
When we make an investment decision on Mogalakwena.
Natascha Viljoen
Yes. And the second question was?
Myles Allsop
Net cash or your net target net cash sort of level is?
Natascha Viljoen
All right. You’ll take the second question, right? Okay. Myles, I think it’s important to reiterate that we have been taking decisions around Mogalakwena. There is for a period of time, it’s — we have created a perception that the decision on Mogalakwena is premised on taking a decision on the concentrator. But we have reshaped this project now for the last 2.5 years to be clear on the six work streams that needs to happen for us to unlock the potential of this asset.
If you were looking at it greenfields, and we say we needed to build all of these at once to get the operation going, it would have been a very specific financial decision to take the project forward. We have been taking decisions to — in the direction that we believe we will continue to build this. We’ve taken the decision on the exploration declines that will not only give us access to faster access to the knowledge of the ore body and developing the underground mine, but if that is the case, it gives us faster access into the underground mine. We will license this from being an exploration decline to a mining decline, but it will give us early access into the ore body.
We have taken decisions on downstream processing. We’ve kicked off the ICP debottlenecking as an example a portion of that project is already underway. The next portion of the project is in last stages of evaluation.
The work that Yvonne and her team has been doing around the communities is fundamentally part of how we unlock this asset. And that work has been going on and has been showing significant improvement and progress.
We still have challenges around the community. It’s not dissimilar to what we see due to socioeconomic and political challenges across our country. But I believe there’s enough indication for us that we are making progress and we — for that reason, we have opened up conversations with our communities on resettlements.
So there’s a number of examples where I’m hoping you’ll get the indication that we are taking decisions, and it will not be a single big decision, which I think is always also beneficial to us. We do have the option to say, well, we’ve got confidence in the market. But if affordability plays a role and our capital — our disciplined capital allocation tells us that it’s not the right time to make a next step of investment we have the opportunity not to do so.
And I think this is the beauty of this project. It is long term. It’s got a number of different assets and — aspects to the project, and we’re unlocking it as we go with incremental decisions that from a risk point of view, in an uncertain environment, I think, gives us a really good opportunity to develop this asset and make sure that we continue to give the returns that we committed to. Net cash?
Craig Miller
Yes. So net cash. We don’t have a prescribed net cash balance. Clearly, obviously, we — as I’ve explained, the capital allocation framework. But we’ve obviously got a number of options that we have on the table that we’re continuing to pursue. And as part of that, we’re also looking at how do we actually structure — how do we fund that and what does the structure look like?
And as we progress that, we will evolve that thinking. But clearly, one of the tenements of that disciplined capital allocation is to maintain a strong balance sheet and the required liquidity to be able to support the business.
Emma Chapman
And then the last question on the palladium —
Craig Miller
Palladium substitution. So say, I mean we are forecasting palladium being substituted at going into a surplus. And when we look through what does that mean from an overall pricing perspective, we do take that into consideration and clearly forms part of our price evaluation which then sort of steps back in terms of the requirement for the various projects that we have and looking to execute that they meet their disciplined and their strict investment criteria, financial criteria as well as the ESG criteria that we have in terms of them going forward.
But clearly, obviously, we take — when we do that assessment, we do an assessment of prices, which are much lower than where spot is today. And so I think taking on board the point that it could be in a bit of a surplus 5 years after.
Emma Chapman
Perfect. I think we’ll go to the last question in the room. Leroy, do you have a question, sir?
Leroy Mnguni
Great. I was wondering if you could share with us — I understand that some of your customers have contractual ranges on how metal they take. If you can maybe share with us if that has changed the levels at which your customers are taking metal and if you’re seeing anything that maybe suggest that the market is tightening as we get into the second half of the year?
And then just the chrome volumes on — at Amandelbult, it seems to have declined a bit more than the rest of your sort of metal and concentrate production. If anything happen there, if there are any issues?
Natascha Viljoen
Don’t take it — so from a range point of view, you are correct. But we’ve seen that stabilize. We haven’t seen for a period of time during COVID, we’ve seen our customers taking on the lower end. We’re back to normalized levels. What we’ve also seen on the back of the geopolitical situation is that we have more of our — more customers reaching out to us and — in exploring availability of metal.
Now as we know that many of these contracts, not our contracts, other contracts, do tend to come to an end at this year-end. We are assuming that, that’s also on the back of Russian palladium. And customers exploring that if they want to sell sanction, whether there’s other metal available in the market. So we have seen an increase.
Now when you’re talking about tightening in the market — made was — sorry, if I — apologies if I repeat myself in this audience. We currently see that production levels, car manufacturing, is at recessionary kind of production levels. So despite the fact that there’s pent-up demand, the production has — is quite lower than what we expected. We know we saw — we thought we’ll see at least a 10% increase this year. We’ve only seen about a 4% increase. And if you look historically, it is at the lower end of vehicle manufacturing.
So I don’t think we’ll see further tightening. I think it’s already at fairly low levels despite the fact that demand is there, and it’s already been incorporated into the broader demand side instead of seeing a tightening of the market. Any comments —
Craig Miller
Yes, just to add — sorry, I mean, we are obviously seeing with some of the recent upgrades in car production coming through that — is starting to more inquiries and so sort of stocking levels starting to take place.
Natascha Viljoen
So it’s the opposite of tightening, I would argue. Okay.
Chrome volumes is a factor of the amount of Merensky — open pit Merensky that we’ve also treated at Amandelbult. And then we have seen challenges with operational stability through the concentrates. We’ve got three concentrators there, Merensky being an old, very old concentrate and not automated. And when we see any disruption in that area that then we do see that flow through into general operational stability across that asset. So you will see some of that.
And then we have seen quite a bit of stock build of chrome because of our inability to get it through the port. The challenges with Durbin, with the Rhine that we’ve had disruptions there and disruptions through on [indiscernible] has all resulted in quite a bit of chrome stock belt on site. And then sometimes we just start to run out of spots.
Emma Chapman
Perfect. I think we’ll close there. But thank you, everyone, for joining us this morning. If you have any further questions, please do feel free to reach out to me and we will respond to your questions offline. But thank you so much, and yes, have a good afternoon.
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