Management s Discussion and Analysis of Financial Condition & Results of Operations Three Months Ended 31 March 2016

Transcription

1 Management s Discussion and Analysis of Financial Condition & Results of Operations Three Months Ended 31 March 2016 Three Months Ended (million tonnes/ US$ million) 31 Mar Mar 2015 Tonnage Revenue 11, ,640.6 Operating income from supply chains, net Operating income margin 2.19% 2.51% Losses on supply chain assets (1) (16.1) (18.8) Share of profits and losses of joint ventures and associates (1) (10.7) (24.4) Total operating income (1) Other income net of other expenses 2.2 (0.4) Selling, administrative and operating expenses (146.3) (156.9) Profit before interest and tax (1) Net finance costs (38.0) (48.5) Taxation (0.2) (10.7) Net profit excluding exceptional non-cash losses (1) Exceptional non-cash losses, net of tax (2) - (51.9) Non-controlling interests Net profit (1) Three months ended 31 March 2015 adjusted for exceptional non-cash losses and other items. See note 2 below. (2) Includes impairment losses on supply chain assets of US$5 million and share of losses related to Noble Agri of US$47 million. 1

2 Message from the CEO From the beginning of the first quarter through to this week, we have focused on managing liquidity and strengthening our funding position in advance of the major refinancings today. It has been prudent to constrain capital in the short term to conservatively manage liquidity; even though this limited our ability to take advantage of market opportunities during the quarter. Net debt fell a further US$281 million during the quarter to US$3.7 billion, a reduction in net debt of US$1.7 billion in the last eighteen months. We continue to focus on extracting capital employed from low-return businesses and the sale of non-core assets, along with other capital raising initiatives. These continuing measures will generate in excess of US$1 billion in liquidity by year end, which will be reallocated to high-return businesses and used to further reduce net debt, with a target net debt to capitalisation of 45%. We have now completed both the refinancing of the Revolving Credit Facility and the US Borrowing Base Facility, which have been closed at US$1.0 billion and US$2.0 billion respectively. Our focus on liquidity, and the short term constraints also placed upon us by both banks and counterparties, in advance of the refinancing, impacted our operating results in the period. With refinancing now resolved, we expect to re-establish more normal operating conditions as we move further into We have also been focused on strengthening the foundations of Noble, in particular on improving commercial opportunities, returning all of our businesses to profitability and reallocating capital away from underperforming businesses. This has resulted in an overall drop in our first quarter tonnage, down 9 million tonnes from Q to 57 million tonnes, mainly in the Carbon Steel Materials and Logistics Businesses, as we actively reduced their counterparty exposure. However, the Energy Segment continued to grow strongly with volumes up over 20% year on year. This focus on profitability and reducing our exposure to low-return businesses has delivered results, with all major segments making a positive contribution to the operating income from supply chains. Operating income from supply chains, at US$250 million, has improved US$111 million from Q4 2015, largely on account of the swing back to profitability of the Mining & Metals Segment, although it remains below Q Profits and losses from joint ventures and associates improved by US$61 million from Q1 2015, as we removed a significant portion of the agricultural/mining asset drag on the business, the share of which is inclusive of US$47 million as our share of Noble Agri s losses in Q1 2015, which we will no longer incur going forward. Further progress has been made in managing our cost base, with the Group headcount having fallen by almost 20 per cent year on year and although one-off costs are incurred as these reductions are made, we expect to see the benefits from this during Selling, administrative and operating (SAO) expenses were US$146 million in the quarter, down US$10 million from Q despite the one-off costs, whilst net finance costs were US$38 million in the quarter, also down US$10 million from Q Group net profit of US$40 million in the quarter was lower than Q1 2015, mainly as a result of constraining capital to the Energy and Gas & Power Segments, as we prioritized liquidity. This was offset somewhat by reduced associate losses and lower SAO expenses and finance costs. The first quarter of 2016 has been about establishing a solid foundation for our operations going forward, and 2016 is a year for rebuilding and repositioning, with a clear understanding by all our people on how we intend to move back to generating the returns that we know we are capable of. 2

3 Energy Three Months Ended (US$ million / million tonnes) 31 Mar Mar 2015 % change Volume % Revenue 9,494 12,106-22% Operating income from supply chains % Profit before interest and tax % Oil Liquids: Market Overview Selected Commodity Prices Average Quarterly 31 Mar Mar 2015 % change S&P GSCI Energy Index % Crude Oil Brent ($/bbl) % Crude Oil WTI ($/bbl) % RBOB Gasoline ($/gallon) % NYMEX Heating Oil ($/gallon) % Source: Bloomberg Crude prices recovered by over US$10/bbl during the later part of Q1 2016, driven by a growing perception that non-opec supply declines would be realised, a number of politically-driven supply disruptions and OPEC and other large producers restricting production in anticipation of the DOHA meeting. The price recovery occurred despite record Q OECD stocks, record or near record oil-exporter production and the pending increase of Iranian supplies. Given the high level of US crude output, product exports remained a key swing factor in demand. The movement of crude oil by rail began to drop sharply during late 2015, and this continued during Q The decline in rail movements was steeper than the decline in production, as pipelines took market share back from rail. This switch was reflected by a sharp increase in East Coast waterborne imports of crude. Another key factor in Q was that oil-weighted Heating Degree Days (HDDs) were down significantly, the quarter was approximately 25% warmer than Q1 2015, consequently reducing US distillate demand. This was further affected by lower requirements from drilling/mining/manufacturing use, the strong US dollar, and weaker economic data, even when normalized for the warmer weather. U.S. gasoline demand, especially during February and March 2016, saw respectable growth. The strength in gasoline demand and weakness in distillate demand was reflected in relative stock positions. From late Q and for most of Q1 2016, gasoline stocks, while in surplus, were relatively tight versus distillate stocks, and this was reflected in seasonally high gasoline to ultra-low sulphur diesel (ULSD) spreads. 3

4 Oil Liquids: Performance Oil Liquids volumes grew by over 30% from Q1 2015, while revenues were down 22% from Q as a result of significantly lower prices. Positive operating income was generated across all major businesses in Q1 2016, however operating income was down on Q1 2015, which was a record quarter for Gasoline. During the quarter, the Group prioritized balance sheet liquidity above profitability, despite this the Global Gasoline, Oxygenates, and Distillates businesses, US Crude, Petrochemicals, Biofuels and other business lines all contributed. In particular, earnings in US and EMEA Crude improved significantly from Q driven by the WTI pricing structure allied with our Cushing storage. The Global Distillates benefited from improved margins in US high sulphur blending and the strong performance of our Asian Team. The Asian Oil business has been built out over the last two years with the hiring of a new team, trading across the barrel, from crude to distillate to gasoline. With China opening up crude imports, Noble has access to storage in China and has expanded the physical franchise, building new relationships with enduser clients. Further, with Noble s mining presence, the Asian Oil business is expanding its diesel supply arrangements into Noble affiliated mines across South-east Asia and Australia. The Latin American business continues to grow with a focus on strengthening customer relationships across Colombia, Mexico, Argentina, Chile and Bolivia. The gasoline and distillate supply contract with Ecuador, as well as term storage agreements in Panama, continue to provide Noble with a strong platform in the region. Growth in the Middle East continues to be a focus area. 4

5 Energy Coal: Market Overview Selected Commodity Prices Average Quarterly 31 Mar Mar 2015 % change Coal API4 ($/t) % Coal API2 ($/t) % Coal Newcastle FOB ($/t) % Source: Bloomberg The main international energy coal indices (API2 and Newcastle FOB) fell from Q to Q1 2016, except for the index for South African coal (API4), which showed extraordinary resilience. The global coal market seems to have hit a bottom in January, and has started to recover along with the rest of the energy complex. The recovery in oil prices, that started in January, has supported producer currencies (for example, the Australian dollar recovered by 11% from its low in January), which in turn caused production costs to increase for all major coal origins. On the fundamentals side, demand remains weak in most destinations, but supply has started to respond after 6 years of losses, and seems to be rebalancing. The backwardation in coal futures has almost disappeared, and the market appears to be gathering momentum towards reaching a healthier contango structure. Rebalancing is also being aided by migration of Australian thermal coal production into semi-soft coking coal, as the carbon steel materials complex improves. Currently, the market outlook is much more optimistic than at the end of Oil prices support coal and gas prices through various mechanisms (less coal-to-gas competition, stronger producer currencies) and as the outlook for China improves, so do the prospects for coastal coal imports. Energy Coal: Performance The Energy Coal business performed well in a challenging market environment with volumes increasing 5% from Q1 2015; the volume growth in a tough market reflects the strength of the business franchise and client relationships. Turnover declined quarter-on-quarter in line with lower energy coal prices. The customer franchise remains strong and is being built out further as we continue to work with our partners to provide solutions and align interests, both on the supplier and customer side, and establish new long term relationships and partnerships. During the quarter we enhanced our sales to both India and China. The business s foray into new partnerships and markets continues to grow and develop. Notably, during Q1 2016, we formed a new partnership in joint venture with one of the Japanese Power Utilities to procure coal for their requirement and also to manage the price risk and supply chain. It is a significant positive development in a top tier market with a highly reputable partner, which we expect to expand further over time. 5

6 Gas & Power Three Months Ended (US$ million / million MWh) 31 Mar Mar 2015 % change Volume (1) % Revenue (2) % Operating income from supply chains % Profit before interest and tax % (1) Volume conversions from MMBTu to MWh based on current market heat rates (2) The Gas & Power distribution business typically recognizes the net of sales and purchases as revenue. However, some businesses that we are expanding into, such as the distribution of LNG, recognize the gross revenue and cost of goods sold Gas & Power: Market Overview Selected Commodity Prices Average Quarterly 31 Mar Mar 2015 % change Gas Henry Hub ($/mmbtu) % Gas NBP ($/mmbtu) % LNG Spot JKM ($/mmbtu) % UK Power Baseload ($/MWh) % German Power Baseload ($/MWh) % USA PJM Baseload ($/MWh) % Source: Bloomberg Global gas markets continued to soften in Q owing to the start-up of new liquefaction facilities in Australia and the US, along with the continuation of a very mild winter across the Northern Hemisphere. Specifically, lower-than-normal heating-related demand in Northeast Asia helped weaken LNG import volumes, contributing to Q spot LNG prices for delivery in Asia dropping 35% year-on-year. Warmer-than-normal weather also affected Europe during Q1 2016, keeping residential and commercial demand for gas low while pipeline imports remained high, particularly from Russia, with volumes significantly above last year s levels. This led to European gas inventories quickly eliminating their year-onyear deficit during the period and moving to a year-on-year surplus. As a result, National Balancing Point prices moved lower, declining 13% sequentially over Q and averaging 41% lower than in Q A similar theme was observed in the US, where a combination of strong production and a mild winter was more than enough to offset growing pipeline exports to Mexico as well as the start-up of US LNG exports out of Louisiana. This led US natural gas inventories to record-high levels at the end of March, keeping NYMEX natural gas prices almost 30% down year-on-year for the quarter. 6

7 Going forward, with Asian LNG demand growth having decelerated significantly, especially in Japan, South Korea and China, we expect the ramp-up of new liquefaction facilities in Australia and the US to keep global markets over supplied, with Northwest Europe as the best candidate to absorb the bulk of the excess cargoes given the significant spare capacity at its importing terminals and its transparent exchangetraded market. This process will likely keep Europe over supplied with gas this summer (despite a colderthan-normal April) and likely into 2017, pressuring the National Balancing Point lower to incentivize incremental demand (through coal-to-gas substitution in the Continent) and/or discouraging supply to rebalance the market. Conversely, in the US, increasing LNG exports will likely continue to tighten the local market along with growing pipeline exports to Mexico. This structural step-up in US natural gas demand is especially relevant in the context of declining gas production. To be clear, although US gas production levels remain high, they have started to show signs of year-on year declines, which, if persistent, could lead to a much tighter market environment as we head into Gas & Power: Performance Volumes in Gas & Power fell by 14% in Q1 2016, compared to Q1 2015, in part due to the working capital constraints placed on the business as the Group prioritized liquidity. Gas & Power operating income from supply chains down 27% from Q in a challenging market, with gas prices and volatility continuing to fall during the quarter, squeezing margins. Key drivers during Q1 have been the consistent performance of mature customer franchises in North America. These core activities were supported by income generated by the long term investment in the associate Watt Power. The LNG franchise has continued to deliver on its business expansion whilst also executing key hires, with new Heads of Trading and Origination respectively hired and due to join during Q Energy Solutions: Market Overview Low price volatility continued to impact the North American retail energy market, minimizing trading opportunities. At the same time, the forward years provided an opportunity for customers to hedge positions at attractive pricing. Our risk management expertise places NAES in a strong position in this environment, as we continue to see some competitors exit the market or rationalize their businesses. Energy Solutions: Performance NAES finished the quarter in line with 2016 plan. Operating Income from Supply Chains in Q fell modestly when compared to the same period in 2015, which was a record Q1 performance for NAES. Q remains, however, as the second highest operating income performance for NAES. 7

8 Mining & Metals Three Months Ended (US$ million / million tonnes) 31 Mar Mar 2015 % change Volume % Revenue 1,676 3,382-50% Operating income from supply chains % Profit before interest and tax (1) % (1) Three months ended 31 March 2015 adjusted for exceptional non-cash losses and other items. Metals: Market Overview Selected Commodity Prices Average Quarterly 31 Mar Mar 2015 % change S&P GSCI Industrial Metals Index % LME cash aluminium price ($/t) 1, , % LME cash copper price ($/t) 4, , % LME cash zinc price ($/t) 1, , % Bauxite Aus FOB ($/t) % Source: Bloomberg Average London Metal Exchange (LME) aluminium prices edged ahead by 1% in Q compared to Q4 2015, although this small change belies significant swings within Q Prices, which had been on a declining trend from late April of last year, remained under pressure well into January before beginning a recovery, rallying strongly in February and finally retreating, to some extent, in March. Despite this volatility there has been a clear upturn in the aluminium price trend which has been attributed to (1) production cuts implemented by smelters in response to previous pricing pressures; and (2) emerging evidence of a recent upturn in China s economy. World primary aluminium production fell sharply in January-February and, although output began to recover in March, the total for Q was still down by - 2% year on year, owing mainly to cutbacks in China and the Americas, offset to some extent by modest increases in Europe (including Russia) and the Middle East. Spot aluminium ingot premiums increased in Asian and North American markets, on average, in Q compared to Q4 2015, impacted in part by production cuts in these regions. European premiums dipped further in Q1 2016, leaving average levels for the period the lowest of any quarter since Q

9 Alumina prices, which had been on a declining trend since Q2 2015, remained under pressure into January. Following reports of production cutbacks by refineries, prices began to recover from mid-to-late January, with the rally accelerating into March, although this was ultimately insufficient to avoid a fifth consecutive fall in quarterly average alumina prices in Q Atlantic alumina prices outperformed prices in the Pacific, with the price differential between the two regions reducing to the narrowest seen since Q LME base metal prices followed broadly similar patterns to aluminium. Prices, which had mainly been trending downwards since Q2 2015, fell further into early January. Subsequently prices increased, particularly prices for zinc and tin which made strong gains, buoyed by expectations of tighter market balances emerging as a result of supply-side constraints. Metals: Performance We have resized and rationalized our Metals business. The majority of actions to reallocate working capital were undertaken during Q and are expected to be complete by the end of June We have realigned our regional focus, re-emphasizing the physical franchise in China. With several supply agreements negotiated during Q we have enhanced our presence in the Chinese domestic markets. We have also realigned our supply chain, shortening it, to increase flexibility and reduce working capital usage. As a result of the above actions, Operating Income from Supply Chains improved dramatically in Q from Q4 2015, this improvement was also supported by the rally in Alumina prices during Q1 2016, which supported our Jamalco Asset Performance. Carbon Steel Materials: Market Overview Selected Commodity Prices Average Quarterly 31 Mar Mar 2015 % change Met Coal Platts PLV $/tonne % Iron Ore - $/tonne % Source: Platts, The Steel Index After recording sixteen consecutive months of negative growth, the international steel market has seen a sharp reversal. Steel prices began to recover from multi-year low levels at the end of 2015, and have achieved 20-50% gains - depending on region and product. The broad-based price rally was triggered by drastic production cuts: China s Crude Steel (CS) production had declined from an annualised rate of 845Mt in June 2015 to 736Mt by January 2016; ex-china, the CS output cycle peaked at 847Mt in June 2014 and troughed at 728Mt in December Approximately 165Mt of capacity had been idled between Q and Q4 2015, while, in parallel, the downstream steel supply chain had been depleted in all major markets. As such, a modest steel demand recovery triggered large-scale re-stocking which, in Q1 2016, began in China and quickly spilled over to international markets. April 2016 is expected to be the first month of positive CS output growth since November

10 However, Ex-China, the downward production momentum is yet to be reversed. Despite the rebound in China s output to 70.7Mt in March 2016 (+13% month on month), global production contracted 5% yearon-year during Q Global Blast Furnace Iron (BFI) production was down -4% year-on-year during Q1 2016; however March 2016 saw small marginal growth up 1% year on year (its first increase since December 2014). In terms of regional trends and differentiation, India restored its status as the only major global producer operating at record historical rates. In contrast, North East Asia is still losing ground with 139Mt of combined BFI output in March 2016 the lowest since Europe and North America continued to operate at severely depressed historical levels. Carbon Steel Materials: Performance In Q1 2016, Carbon Steel Materials volumes fell 39% from Q1 2015, primarily due to reduced volumes in iron ore as the business focused on quality counterparties. Revenues fell 47% from prior year, consistent with the overall price declines in iron ore and metallurgical coal. Operating Income from Supply Chains fell over 56% from Q1 2015, while remaining positive, due to the continued margin pressure faced by the industry. Despite the difficult market conditions there were no defaults during the period. Despite the adverse carbon steel market conditions generally, the metcoal/coke business continues to expand its supply side and customer side relationships, including signing two significant contract extensions for coke supply to China and Japan. 10

11 Corporate & Others Three Months Ended (US$ million / million tonnes) 31 Mar Mar 2015 % change Volume % Revenue % Operating income from supply chains (7) (22) 70% Profit before interest and tax (1) (49) (76) 36% (1) Three months ended 31 March 2015 adjusted for exceptional non-cash losses and other items. The Corporate & Others Segment incorporates the Logistics business as well the investments in our major associates and joint ventures, which include Yancoal Australia Limited. The majority of the total US$11 million in the Group s share of losses of associates and joint ventures for Q is allocated to this Segment; this primarily reflects the three months performance of Yancoal. Logistics: Market Overview Freight rates during Q had limited volatility and capesize values slowly eroded to a historic low, below US$1,000 per day. Scrapping volumes during the quarter were at record high levels which offset new building deliveries and with iron ore exports from Australia and Brazil increasing the supply and demand fundamentals have improved and we expect to see a gradual improvement in the dry bulk freight market from current levels. Panamaxes were trading in a tight band between US$2,000-$4,000 per day and Supramaxes were trading between US$2,500-$4,500 per day. Given these low price levels, many vessel owners are unable to cover their operating costs and counter party risk is extremely high. Several ship owners filed for chapter 11 during the quarter. Logistics: Performance Volumes in Logistics for Q1 in 2016 were 8.7 million tons. Volumes were split 39% in-house business and 61% external customers. Volumes have reduced sharply due to the following factors: a focus on profit not volume, an active effort to reduce credit risk, as counterparty risk within shipping is at historically high levels and the redelivery of expensive time charter tonnage which has reduced our carrying capacity. As a result of the above, Logistics delivered positive operating income from supply chain during Q despite the very challenging market conditions and increased counterparty risk. 11

12 Principal Associated Companies The following Associated companies are all publicly listed, and we encourage you to seek further information from the companies own websites and stock exchanges. Yancoal saw the volume of production fall modestly in the first quarter of 2016, down 9 per cent year on year, as Donaldson, a relatively higher cost underground mine, was moved to care and maintenance. While weather impacted Queensland output, production at Moolarben, on the other hand, rose 8 per cent and Phase 2 of the project will see the first development coal extracted in Q2. Once fully developed the integrated Moolarben Coal Complex (Stage 1 and Stage 2 combined) will produce up to 17 million tonnes of Run of Mine (ROM) coal per annum for a period of 24 years. In April, the Group announced the successful closing of the new financing arrangements with the issue of nine year bonds, securing up to US$950 million, while extinguishing Yancoal s interest in its New South Wales mines; Ashton, Austar and Donaldson. The Group remains focused on reducing costs and maximising blending opportunities and product yields across the portfolio. Aspire Mining is the largest coal tenement holder in the vast Orkhon-Selenge Coal Basin in Northern Mongolia. Aspire currently wholly owns the large scale, world class Ovoot Coking Coal Project. The Ovoot project is a large scale coking coal project with a current JORC Probable Reserve of 255 Mt. Northern Railways is a Mongolian registered company, a special purpose investment vehicle established by Aspire Mining, which is responsible for the oversight of all aspects of pre-development, construction, and operation of the Erdenet to Ovoot railway. The Erdenet to Ovoot line extends the national rail network from Erdenet, to Aspire s Ovoot Coking Coal Project and onto the Russian border at Arts Suuri. The Russian Government has further plans to then link the rail from Arts Suuri to the Trans-Siberian Railway at Kyzyl, thereby creating an international rail link connecting Siberia, and northern Mongolia with China. The Group is working with its nominated EPC contractor and consortium partner China Railways Construction Bureau 20 Group ( CRCB20G ) to source bridge funding from a Chinese bank. The proposed funding is a line of credit to enable completion of all pre development activities required under the Erdenet to Ovoot Rail Concession Agreement. The credit facility allows the completion of a rail bankable feasibility study, environmental permitting, and a number of commercial agreements including the EPC and debt refinance. Aspire also has an indirect interest in the Nuurstei coking coal project that could ship its first coal in The project lies in close proximity to a sealed road which provides a connection to the Trans-Siberian Railway. Nuurstei confirmed its first JORC Coal Resource of million tonnes, with the characteristics of a high quality hard coking coal, in the quarter. Xanadu s key Kharmagtai copper-gold project is located within the South Gobi porphyry copper province of Mongolia, approximately 420km south-southwest of Ulaanbaatar, and is one of the most advanced porphyry projects in Asia. Exploration drilling at the Kharmagtai project continues to test a combination of targets which include high level gold-rich porphyry mineralisation and deeper tourmaline breccia mineralisation within the highly prospective 25 km² area of interest which has yielded outstanding results to date. The maiden JORC resource in 2015 indicated that the Resource was likely to be a small portion of what appears to be a large mineral system. The potential of the Group s asset base was also illustrated by the fact that it raised just under A$10 million in late 2015 to develop the scoping of its Kharmagtai resource. Exploration activities have also re-commenced at the Oyut Ulaan copper-gold project. 12

13 Resource Generation is developing its Boikarabelo coal mine in the Waterberg region of South Africa. This region accounts for 40% of the country s remaining identified coal resources. There are probable reserves of million tonnes of coal on 35% of the tenements under the Company s control while Stage 1 of the mine development targets saleable coal production of 6 million tonnes per annum. The company has revised the mine plan, and enhanced its development approach to produce higher yields while also deciding to outsource construction risk to qualified contractors. Also, in order to expand the economic base of the Boikarabelo project, a bankable feasibility study for the construction of a 260MW independent mine-mouth power station to operate as an approved independent power producer ( IPP ) has been fast tracked. The project has already received the environmental and land use approvals and, should the feasibility study confirm economic viability, construction of the IPP will provide the Company with optionality with regard to its domestic coal production and an additional revenue stream. On 17 February 2016, the Company appointed RMB as lead arranger and co-lender for the financing of the project. RMB is a leading financier in the resource sector in South Africa and enjoys an excellent reputation for the completion of project funding packages, including a very recent R10 billion debt facility for a client despite the prevailing difficult economic climate. The Company is confident that RMB and all members of the debt club are committed to complete the funding process in the shortest time possible. In conjunction with RMB, the Company is considering other providers of funding and credible solutions will be incorporated into the debt club as required. PT Atlas, operating in Indonesia, and listed on the Jakarta Stock Exchange has re-organized its business into three units, Coal, Infrastructure and Energy. In addition to securing a 65 million tonne coal supply contract with PLN in Indonesia, the company has completed its 80 mile long coal hauling road and the associated coal export terminal, which can handle 6 million tonnes of coal per annum, triple the current output. Taking advantage of new domestic initiatives in the electricity sector, the company has also formed a subsidiary with Toyota Tsusho of Japan and Gas Natural Fenosa of Spain. Cockatoo Coal has suffered from a slow-down in metallurgical coal demand generally, and PCI coal demand specifically and in November the Group appointed Administrators, which provides a breathing space while they assess the best way forward for the Group. Cockatoo was placed into Voluntary Administration on 16 November A Deed of Company Arrangement (DoCA) was proposed by Liberty and approved by Cockatoo s creditors on 1 March Cockatoo, Liberty and the Administrator are currently working through the DoCA conditions, which include agreeing terms on a senior secured A$100 million loan to recapitalise the company. 13

14 Working Capital (US$ million) 31 Mar Dec 2015 Trade receivables 2,567 2,434 Prepayments, deposits and other receivables 1,206 1,166 Inventories 1,487 1,792 Trade and other payables and accrued liabilities (3,456) (4,727) Net fair value gains on commodity and other derivative financial instruments 2,618 3,178 Working capital 4,422 3,843 Working capital of US$4.4 billion at 31 March 2016 remains below historic levels, as the Group continued to focus on managing liquidity. Working capital increased by US$579 million during the three months to 31 March 2016, compared to 31 December 2015, as Q decreases in net fair value gains on commodity and other derivative financial instruments ( net fair value gains ) and inventories were more than offset by decreases in trade and other payables. Net fair value gains declined US$560 million from 31 December 2015 to 31 March 2016 primarily due to the roll-off of in the money Level 1 Oil Liquids futures contracts. The Group s Level 3 net fair value gains remained largely unchanged in Q Realization on the portfolio of long-term physical contracts continued to be in line with expectations in Q1 2016, as confirmed by the Group s back testing activities. The decrease in inventories was primarily related to a decrease in Metals inventories and overall Metals working capital levels decreased by approximately US$250 million as the business repositioning continued throughout Q The decrease in trade and other payables was driven by the following factors: o o o Approximately 30% due to the maturity of in the money Oil Liquids futures which rolled off resulting in a non-cash decrease in the net fair value gains asset, offset by a corresponding decrease in the due to brokers liability included within trade and other payables; Approximately 50% due to the tightening of the Group s uncommitted unsecured bank lines, ahead of the bank debt refinancing, which resulted in a reduction in the availability of term letters of credit. Such letters of credit instruments are commonly used in the industry as a source of funding working capital; and The balance of the decrease was due to the timing of settlement of trade and other payables. Following the completion of the bank debt refinancing, the Group is now taking active measures to replace and/or restructure its previously available bank lines along with securing alternative sources of working capital funding. As such, the Group does not expect further material decreases in trade and other payables to impact net working capital levels going forward. The Group s adjusted trade payables turnover days stood at 22 as at 31 March 2016, in line with the underlying terms of trade of its trading operations. 14

15 Aside from the tightening in certain uncommitted unsecured bank lines as noted above, the Group s access to credit during Q was materially unchanged, with some movement in ratings-based margin and collateral posting requirements, primarily in the Oil Liquids and Gas & Power businesses. To date, changes in margin and collateral posting requirements have been covered by cash or through letters of credit from the Group s committed and uncommitted bank lines. Readily marketable inventories ( RMI ), at US$1,394 million at 31 March 2016, accounted for 94% of total inventory. The Group s RMI is highly liquid, with more than 85% comprising oil liquids products and LME metals. Given the highly liquid nature of these inventories, the Group believes it is appropriate to consider them together with cash equivalents when evaluating the Group s leverage. As of 31 March 2016, the Group s off balance sheet readily marketable inventory sales program stood at US$413 million, compared to US$1.5 billion a year earlier, with the decrease reflecting the reduction in the Metals business. This program structure carries a call option. 15

16 Selected Cash Flow & Net Debt Reconciliation (1) (US$ million) 3 Months Ended 31 Mar Months Ended 31 Mar 2016 Operating profit before working capital changes 127 (736) Exceptional non-cash losses - 1,053 Adjusted operating profit before working capital changes Increase in adjusted working capital (2) (529) (82) Others Net cash flows from/(used in) operating activities (3) (392) 259 Net cash flows from investing activities Interest paid on financing activities (51) (161) Acquisition of treasury shares - (30) Others 1 (14) Net cash flows used in financing activities (4) (50) (205) Net foreign exchange differences 7 2 Decrease in net debt (1) Full Cash flow Statement available on the SGX results announcement (2) Adjusted for exceptional non-cash losses (3) Excludes movement in cash with futures brokers not immediately available for use (4) Excludes bank debt additions or repayments and redemption of senior notes In line with the targets set in 2H 2015, the Group s net debt decreased US$643 million during the nine months ended 31 March 2016 driven by a combination of positive cash flows from operating activities and proceeds from the sale of the remaining 49% stake in Noble Agri. The Group generated positive cash flow from operating activities of US$651 million in 2H 2015, partially offset by negative cash flow from operating activities of US$392 million in Q1 2016, for total positive cash flow from operating activities of US$259 million in the nine months ended 31 March The operating cash flow result in Q included positive operating profit before working capital changes, offset by an increase in working capital due to the temporary tightening of the Group s uncommitted unsecured bank lines ahead of the bank debt refinancing. Net cash flows from investing activities in the three and nine months ended 31 March 2016 includes the US$750 million in proceeds from the Noble Agri sale received in Q Investments under the Group s asset light business model now relate predominantly to discretionary items and remained at low levels during Q

17 Funding and Credit Availability (US$ million) 3.625% senior notes due Mar % senior notes due Jan % Malaysian Ringgit denominated sukuk due Jan % Chinese Yuan denominated notes due Jan % Thai Baht denominated guaranteed bonds due Apr Mar , Dec , Total debt capital markets 1,654 1,947 Long term bank debt 1,839 1,846 Short term bank debt 1,547 2,128 Total debt 5,040 5,921 Cash and cash equivalents (1) 1,353 1,953 Net debt 3,687 3,968 Shareholders equity 3,399 3,292 Net debt/capitalization (2) 52.0% 54.7% Readily marketable inventory (RMI) 1,394 1,710 Adjusted net debt / Capitalization (2) (3) 40.3% 40.7% (1) Includes cash with brokers not immediately available for use (2) Capitalization= net debt + shareholders equity (unrelated to any share price movement) (3) Adjusted for RMI Total cash and cash equivalents stood at US$1.35 billion of which US$491 million was restricted with brokers and not immediately available for use. Liquidity headroom, being the sum of readily available cash and unutilized committed facilities, was at US$1.9 billion as at 31 March 2016, of which approximately US$1 billion relates to committed facilities coming due in The sum of readily available cash, unutilized committed facilities and RMI totaled US$3.3 billion at 31 March On 28 January 2016, the Group repurchased US$31.6 million and US$1.0 million in aggregate principal amount of the Senior Notes due 2020 and 2018, respectively, representing approximately 2.6% and 0.3% of the total principal amount outstanding. On 1 February 2016, the Group announced the redemption of the RMB1 billion 4% Medium Term Notes and the RM300 million 4.3% Sukuks with an equivalent of US$261 million. On 26 April 2016, the Group redeemed the THB2,850 million 3.55% Guaranteed Bonds. Net debt to capitalization was 52% as of 31 March 2016, down from 55% as at 31 December 2015 and the Group continues to be focused on deleveraging. Secured borrowings accounted for 8% of total debt as of 31 March 2016 in line with prior periods. The Group s intention is to maintain a level of secured borrowings which will not trigger any concerns of subordination by the relevant stakeholders. 17

18 As at 31 March 2016, the Group has a total of US$13.1 billion in committed and uncommitted bank facilities, comprised of US$4.4 billion in committed facilities and US$8.7 billion in uncommitted facilities. Of the US$13.1 billion in bank facilities, US$6.9 billion was utilized, which consisted of US$3.4 billion in committed facilities and US$3.5 billion in uncommitted facilities. The Group saw a US$1.5 billion reduction in the availability of bank lines ahead of the bank debt refinancing as noted previously. Following the completion of the bank debt refinancing, the Group is now taking active measures to replace and/or restructure its previously available bank lines. The Group s uncommitted bank facilities comprise various bilateral bank credit facilities and other financing arrangements, provided by a diverse group of banks globally. The drawings under these facilities support trade finance activities such as the issuances of letters of credit and are largely self liquidating in nature. The issuance of such letters of credit is not an incremental liability to that reported on our balance sheet. The Group s bank facilities do not include any covenants or triggers referencing credit ratings. The Group is in compliance with the terms & conditions and financial covenants of its facility agreements. Subsequent to 31 March 2016 On 12 May 2016, the Group closed a 364-day US$2.0 billion US Borrowing Base Facility, which will be used to fund our US business requirements, especially in Oil Liquids and Gas & Power. This facility allows for the issuance of trade finance instruments such as letters of credit, as well as for loans. At the same time, the Group also announced the closing of a 364-day US$1.0 billion syndicated committed unsecured Revolving Credit Facility. The amounts drawn will be used to refinance the amounts due under the maturing Revolving Credit Facilities. 18

19 Debt Profile by Year (US$ million) Total Bank debt 1, , (1) 3,386 Senior notes ,177 1,654 At 31 March , , ,194 5,040 (1) US$7 million is due after 2020 The refinancing of both the Revolving Credit Facility and the US Borrowing Base Facility, along with the redemption of senior notes in April 2016, addresses substantially all of the debt coming due in The Group conducts a regular review of its debt maturity profile in conjunction with its capital and funding structure to ensure it maximizes efficiencies while maintaining a solid balance sheet. The funding and capital structure will continue to be refined to reflect the asset light business model and to ensure a competitive cost position. 19