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The following is a transcript of an interview with Tony Trahar, chief executive of Anglo American plc on August 9 2004.

Financial Times: What is Anglo American’s strategy in the US now following the settlement of the De Beers case?

Trahar: We have operated in the US for many years now. We bought a mining equipment company and we have recently bought a cement bag manufacturing operation in Mexico and the US. I travel freely to the US. It is really of much more significant for De Beers itself and their executives. Going back many years when Anglo and De Beers were managed more sort inter-related way, it was something for Anglo American. But that is five or six years behind us now.

We have started to raise our profile in the US, the US shareholding has increased from eight per cent to around 14 per cent over the past two years, which is very encouraging so we are starting to get up to weight.

For De Beers the significance is that the US is their biggest market for diamond jewellery and for them to be able to travel to the US see their big clients, big customers attend promotions has some significance. It is also good to get that sort of thing out of the way because you don’t want the US justice department case hanging over your heard. It reflects the role that De Beers has played on conflict diamond and promoting regulations, certifying the sources of diamonds and that has been very well received by the authorities.

The mining environment in the US is quite difficult, huge environmental regulation. It is not an area Anglo has sought by choice to be in a big way. There are more attractive mining areas in the world and that is where we have tended to focus on. We did keep a low profile in the US while the De Beers case was exited???, but actually in terms of mining acquisitions it is very difficult what we can do.

Our focus on South Africa, if you take that 41 per cent of our earnings come from the Americas and 90 per cent of that comes from South America and that has been a great place for us to expand. The acquisition of Disputada, which was renamed Minera Sur Andes lease, was really a nice acquisition at the bottom of the copper market. We paid $1.3bn for it, we had some criticism from the competition bidding for the business in that we paid overpaid for it, but I think that is just a bit of sour grapes.

We are getting an annualised return on it of 25 per cent on it 18 months later and it is really throwing cash as is all our copper operations at these copper prices.

It is an interesting thing to look at because when we did the long term evaluation of where the copper prices are going to be. We were very conservative, I think we plugged in 82 cents to get our minimum hurdle price and two year later we are the copper price is $1.30. It just shows what can happen in this base metals market if things go right.”

Financial Times: Do you regret the Zambian decision?

Trahar: Not at all. Zambia was a high cost producer. We put a lot of money into Zambia and we left it in far better shape than when we came in. But we underestimated the extend of the neglect of those assets over many years. The existing operations remain relatively high cost producers. We bought the cost of production down 20 to 25 per cent, so we made huge inroads, but these are old mines and I am pleased these mines are making money because that is very good for Zambia because the whole of the economy depends upon it.

Our strategic focus shifted to acquiring low cost, long life mines and the Zambian mines did not fit into that. We also exited a few other small medium cost mine operations in which we had a minority interest.

Two to three years ago, we had a huge strategic review of our base metals division, which had not really performed well for 10 years and the boards backed the management’s strategy to reinvent the division and I think that has been highly successful. I am really thrilled with its performance now, it is also good for the management of that division to be back in the performing part of the group.

Financial Times: Would Anglo return to Zambia?

Trahar: If there were attractive mining opportunities in Zambia we would go back there. We are very comfortable operating in Africa that is one of our strengths – operating in emerging market economies generally.

We are now branching into China and Russia, and they are quite exciting areas for us. We opened an office in Beijing with an experienced mandarin speaking English person. Signed a coal exploration in Shaanxi province. Tarmac are acquiring a quarry to supply the Shanghai market with crushed stone.

What is interesting in China is the absolute preoccupation with international safety standards, international environmental standards. Nothing is second rate, you have to convince the Chinese authorities of your international standards. Once you are in they are very supportive and then of course it is a big market for De Beers, for diamond jewellery, which is growing in excess of 10 per cent per annum, and for platinum jewellery. So we have this great exposure of diamonds and platinum both of which are growing with these marketing campaigns and it is fascinating to see these buying trends.

The target market is representing more than $2.50 a month. It amazes me that people to think that people at that low level can think about luxury goods and it underpins the whole cost of living in China and how low it is. The marketing reach in De Beers case only extends to 10 cities, so the potential to increase that further is exciting.

What differentiates us, first of all our turnover of $30bn a year and our sales into China directly and indirectly is about $1.2bn. So we are not overdependent on China. We have the mix of basic commodities such as copper, nickel, iron ore and coal and the consumer precious metals – so we are exposed to two elements of the Chinese market the infrastructure growth and the consumer spending growth, and the third leg where we are going in small bites is in developing local operations. We have a plant there that makes mining equipment, three cement bag plants, we are the biggest producer of cement bags in the world – that is a nice little niche for us. People ask how does that fit into natural resources, well we are natural resources in the broadest sense not pure mining and this concept of adding value to natural resources where we can that takes us from trees through pulp, through paper to the end product.

We are looking at this coal exploration, we are looking at a platinum deposit, so China is an interesting new market for us.

Financial Times: What is it like dealing with Chinese authorities?

Trahar: You have to know your way around the central government authorities, the provincial authorities, the municipal authorities and you have to make sure that your relationship with all of these authorities are good.

One of the first things we did with Tarmac was build a community centre, and invite the local community in to show them what we were doing.

Financial Times: Outlook for China?

Trahar: This is the big debate, are we on the verge of a super commodities boom? or is this just a flash in the pan, an 18-month cycle in basic commodities. Personally I think we are on the threshold of a Japan in the 1960s, which had three decades of unparalleled growth. I am not saying that there won’t be set-backs and slowdowns. But the potential for China to become like Japan, highly industrialised and highly productive, it is a very exciting concept. When people are talking about the slowdown in China, sure 12 to 15 per cent GDP growth rates might not be maintainable, but if it is 6, 7 or 8 per cent that is not so bad. I’m quite bullish about China.

Financial Times: Will Anglo increase capital expenditure to meet rising demand for raw materials?

Trahar: That is where it pays to be big in the resource sector because you can take these bets which won’t bet the shop. If we can just reinvest our free cash flow of $1.5bn to $2bn a year at cash returns higher than our hurdle rates. We will continue to grow the size of our business. Some of the smaller cap companies have a much bigger challenge of how they get bigger quickly. As one of the big three in natural resources. We have critical mass, not saying that it is easier, but you have this critical mass base to go forward, so you can look at $2-$2bn bites with reasonable optimism.

Our philosophy is to grow by acquisition, through brownfields and greenfield projects and that is why we have kept a central technical resource.

He said they are mining down to 3,5000 metres underground and exploring technological to go 4,500 underground.

The other thing we are into is cost savings and efficiency improvements, I have tried to entrench that across the group.” Anglo pays bonuses to meet targets. The company has saved $250m to $300m annually in recent years. That is a big factor for shareholders. Having less downtime, buying more effectively.

Acquisitions in the mining sector are looking pretty expensive at the moment. So it is probably a time for standing back rather than pursuing acquisitions. Although we can still see potential value in the paper and packaging industry and the industrial minerals sector where the multiples are a bit lower.

I think there will be increasing consolidation. If you look at the tail below the big three, there is a long tail of $3bn to $5n companies and I’m sure there will be lots more consolidation there over the next five years. In the big groups, I think it will come from organic growth. It is quite difficult to do acquisitions that don’t run into anti-trust or market concentration issues.

We are in eight different product sectors. We have expansion plans for all of them, we don’t have to have a ninth. Our diversity has put in good stead over the last three or four years.

Financial Times: Are you happy with Anglo’s business portfolio?

Trahar: We are very comfortable with our current mix. We look at companies all the time. We did two small acquisitions in the past six months of €300m.

I think the market is going into an interesting phase now and there might be opportunities down the track.

Financial Times: Why in forestry?

Trahar: Anglo was big in mining sector, and went into everything, banking, finance, insurance, chemicals, motor retailing, motor manufacture, clothing, forestry, you name it. When we decided to list in London, we decided that we had to slim down to a more cohesive concept and we look at where we should go pure mining or natural resources. We decided to go natural resources, like BHP has oil, we have paper and packaging and its more downstream, value adding to natural resources where we can get a high capital turnover ratio and much less cyclical position from branded products. We are the biggest producer of A4 copy pay in Europe, biggest producer of industrial sacks, - so it is an insurance as part of our diversification. We have grown (paper and packaging) into a very big group $7bn group of which much is outside South Africa and industrial minerals is the same concept.

It has the attraction of being a environmentally attractive asset with forests sequestrating carbon dioxide, which is a good environmentally attractive thing to do. We have debated several times should we exit it? And we don’t need to liberate that cash, we can finance our expansion across the group. Some question about Tarmac, it is extractive and it is also value added in terms of ready mixed concrete, we a are a big producer of concrete products in the UK, these are two big European therefore politically less sensitive cash driven generative businesses and that is good for our geographic mix.

Financial Times: Is it recognised?

Trahar: I think we are getting credit for that.

Financial Times: Do you think your successor will of had a similar career path as yourself?

Trahar: Not necessarily at all. I see my successor as a globally successful businessman, probably with experience in natural resources and hopefully an internal appointment. Corporate governance cannot guarantee that, you have to appoint the best man for the job. There are clearly a couple of people emerging in Anglo American as potential successors and we must benchmark them against the best possible external candidates. I think our management mix is starting to internationalise, it was heavily South African, our board of directors has a Dutchman, a Brazilian female, a Swede, in fact of the non-executive directors, South Africans are in the minority. Our human resource policies are very much now about internationalising our management team. I think the executive management is probably still too South African centric. But I think that is going to change progressively as well.

Financial Times: Has it been an easy issue to handle the shifting to an international resource company from a predominately South African based company?

Trahar: I would not regard it as an insurmountable challenge. I think it is evolving naturally. We have an English chairman, Mark moody-Stuart. We have continued to invest in South Africa. I think the South African political risk issue is starting to diminish - although I am not saying it has gone.

Financial Times: How to balance the two external views of the company?

Trahar: The fact that you have a dual-listing in London and Johannesburg recognises that, the fact that we are in a seamless timezone makes huge difference. The executive committee meetings are done by video conference.

I think there is some reflection in South Africa that Anglo American should not have become a global Plc, but there is an overwhelming acknowledgement that this was a good thing and good for South Africa. It has enabled us to diminish our dominant position in the South African stock market very considerable as we have exited a lot of non-core holdings. So it has opened up opportunities in many sectors in South Africa where Anglo American had a big presence. It has been part of our black empowerment process to sell off these companies and that is good for South Africa. We generate a huge amount of export revenue for South Africa, we pay a lot of tax. We employ a lot of people. Our HIV/Aids strategy has been absolutely at the forefront of global corporate policy.

Financial Times: What is the relationship like with South African government on Aids?

Trahar: They are recognising the problem much later than they should have. But there has been encouraging developments recently, with the government looking at providing ART treatment in certain cases, starting with pregnant woman and looking at the infrastructure necessary to roll this out, they are not there yet, but it is starting to make progress.

Financial Times: And the negotiations with the South African government on Aids?

Trahar: The negotiations with the South African government on Aids has not been easy as they have been coming at it from a very different policy viewpoint. On black empowerment, a lot of focus has been made. We have been very closely involved in the new minerals act, having discussions with them about royalties.

In a number of our mines we are quite advanced in percentage terms against the measurement of 15 per cent required in five years time.

What South Africa is doing is moving to an area that other government have done several years ago, so it is not surprising,” – we don’t see a problem with complying with that.

After 300 years of depravation in the black community, this is absolutely necessary.

Financial Times: The impact of the Rand on Anglo’s business?

Trahar: The inescapable fact is that the rand has strengthen back to the level it was five years ago of about 6 Rand to the dollar, and we have had 40 per cent inflation on the cost base in the interim, so the equilibrium rate should be less than 6 Rand to the dollar like 8 to 9, that is what we would like to see an equilibrium rate that would allow these mining projects to go ahead. It is the swing of the dollar that has down this.

He said whether it happens in 6 to 12 months, he doesn’t know, but it will have to correct itself.

We have an inflation rate higher than our trading partners, and we have too high an interest differential like 6 per cent and I don’t think that can pertain forever. There are a number of levers that the government or the reserve bank can play with and this will stimulate growth, the growth rate is being constrained by this exchange rate

Financial Times: The impact of the rand on Anglo Platinum?

Trahar: The prospective returns are lower, but they are still above our hurdle rate, some of the platinum projects are more marginal, unless the platinum prices increases and we would not like that.

Personally I think they will go ahead, the rand will weaken, our board cannot take those decisions until they see those trends become apparent.

Financial Times: Will Anglo American buyout the rest of Anglo Platinum?

Trahar: It always remains an option open to us in any of our listed entities, there are very good reasons why Anglo Platinum should remain listed. For black economic empowerment, we have got black economic empowerment partners in this unlisted joint ventures, well down the track they might want to trade out of them and into a listed vehicle.

We built up a surplus of $12bn after exiting all of these non-core holding and we thought investing in Anglo Platinum was the best option, now the South African business has debt, they used cash for Kumba acquisition and we have been buying more shares in AngloGold.

Russia is highly prospective in mineral terms, it is opening up. Opened an office in Moscow, our policy in these countries to get in and learn about these countries, developing relationships and linkages. It is not to rush in with big cheques and buy assets. Russia like China certainly has some difficulties. I think Putin’s actions with Yukos has certainly rattled foreign investment sentiment.

Anglo has a pulp and paper business in the Komi Republic – that has been a good experience so far, cost $300m, not all plain sailing in Russia.

Financial Times: Thoughts on Russian oligarchs going to South Africa?

Trahar: I think this is fine, South African wants to attract new foreign investment. As long as they play by the rules, they should be welcome, just as we should be welcomed in Russia.

Trahar said gold made up 40 per cent of Anglo American’s earnings about 15 years ago, now it is 5 per cent.

Financial Times: Is the gold industry doing enough to market the metal?

Trahar: It is something that AngloGold is preoccupied with, if you look at De Beers spending about $190m a year on advertising and now getting their customers to increase their spend on diamonds as well. You look at the surging demand for diamond jewellery that has been a highly successful strategy and I think frustrate AngloGold that the World Gold Council has not come to the party in the same way and AngloGold is looking at ways to stimulate the demand for gold and might look at some projects on its own to do that.

The World Gold Council does have an important role and does attract some advertising support from the other major players, so either the World Gold Council should have it budget expanded or gold companies should do their own gold promotion campaign, I think there is room for both.

De Beers is a fantastic success story, it is basically a mining company that developed a feel for advertising and stimulating demand for its end product and the same can be done in the gold sector.

Financial Times: What sort of threat is the Leviev Group to De Beers?

Trahar: Leviev appears all over the world, where ever there are diamonds to be mined and sold. He would obviously like to have some of Botswana’s diamond production. The Botswanan government has an important and valuable interest in De Beers and De Beers Botswana.

I think it could be quite a lengthy negotiation, both parties have a lot to bring to the table, and we will have to see where those negotiations come out and these negotiations may go on for some time.

Financial Times: Would the Botswanan government lower the new lease term from the current 25 years?

Trahar: I have seen nothing from the De Beers meeting that the Botswana government are considering a shorter term.

Financial Times: What lessons for Anglo American can be learned from the Royal Dutch/Shell issue?

Trahar: I think our board as a result of the Shell issues has taken a very detailed look at our policies valuing reserves.

The big issue in mineral reserves is not establishing the existing reverse but establishing the economic viability and what long term exchange rate and prices do you assume.

My concern with governance is that western companies will become over governance and I realise that this is a reaction to the Enron scandal, and that there is a cost to that.

It also worries me that it may stifle risk taking and entrepreneurship in these big western companies compared to the competition developing in other parts of the world and it might also stifle our ability to attract world-class non-executive directors, who are not prepared to put their reputations on the line because of the risks involved. I think it is a double edged sword. I am fully in favour of having laws that we must comply with, but if you become over regulated you get into a governance straight-jacket, which makes it difficult to operate and I am not saying we are near that stage, but some boards could get too pre-occupied with governance that there is so little time on the agenda for business issues.

Financial Times: Can you talk about your career, Mr Trahar?

Trahar: I had a stint as the personal assistant to the then chairman of the executive committee, which was a great mini-MBA, which was a great exposure to workings of the senior executives without being responsible for anything at the age of 27.

My big break came at the age of 36 when I was dropped into run our pulp and paper company Mondi, which at that stage was 100 per cent confined in South Africa and then set about internationalising it and building its European business, which is now by far the biggest part of the group. I ran that for probably too long, for about 14 or 15 years, and that is too long as a chief executive and I went from there to be the chief executive of Anglo in 2000.

Financial Times: What was your biggest challenges?

Trahar: The biggest challenge was three months after I started in the job was the start of the discussions to do the De Beers takeout, it was a $19bn deal. We were negotiating with the Oppenheimer family, which was a big shareholder in Anglo American and De Beers and that was challenging. That took nine months from start to finish. The globalisation process was underway and we continued with that.

The trait of Anglo American was to create continuity and a set of strategies that people continued with, so we haven’t had to change direction mid-stream, it has really been setting the course and sticking to it.

Financial Times: Is there a changing of the guard at Anglo with the retirement of Julian Ogilvie Thompson?

Trahar: I guess with Julian’s retirement that was the last of that particular era and I guess that has ushered in the new global younger management in a sense. I think that has been a fairly seamless transition.

Financial Times:Is the London office any more than just a postbox?

Trahar: From Anglo’s point of view, we absorbed Minorco, which already had staff and a base in London. So it was easy to draw on that base. There are about 180 people in London office. Johannesburg remains a cost-effective resource to us and it would be very costly to shift all of that to London.

Personally it is quite challenging, I say to my wife, we lead two half lives, which means we don’t see our friends and family as frequently as we like to. It is also the excitement of leading two half lives in that they are totally different cultures and providing you can switch on and switch off form one to the other, but quite exciting in a way.

Financial Times: How do you relax?

Trahar: I think my wife looked quite crestfallen when my personal assistant said last year, do realise it is now 11 months into the year and you haven’t slept more than 10 days in the same bed anywhere. That was bit of a shock to the system. She travels with me to the operations, that is part of seamless seeing the wives of people and talking to them, not just the employees of the company.

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