Economic performance

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AngloGold Ashanti's global growth strategy has a number of components: brownfields exploration around the group's existing operations, greenfields exploration increasingly in ‘new frontier' regions and countries, and project acquisitions and strategic company alliances in prospective regions. (See Report to Society 2004.)

One such strategic interest is AngloGold Ashanti's 29.9% investment in Trans-Siberian Gold (TSG) plc, a UKbased resources company established in 2000, which listed on the London Stock Exchange's Alternative
Investment Market (AIM) in November 2003. AngloGold Ashanti acquired its interest in TSG in July 2004, after identifying the company as an entry into Russia.

TSG holds mining and exploration licences over three existing projects: Asacha, Rodnikovoe and Veduga, as well as an exploration licence over an extensive area surrounding Veduga and the early-stage Bogunay project. The proceeds from AngloGold Ashanti's investment in TSG are being used to partially fund the development of the Asacha project, for the preparation of a feasibility study at Veduga, and for further exploration at Bogunay.

The Asacha project, located in the Kamchatka region of Eastern Russia, is currently under development at an estimated total capital cost of $90 million, of which $22 million has already been spent. The project has a total Measured and Indicated gold equivalent Mineral Resource of 534,493 oz and a further 131,653 oz in the Inferred category. Planned full production will be about 100,000 oz of gold per year and 220,000 oz of silver, at a cash cost of around $200/oz. The first gold is expected at the beginning of 2008 and, based on current estimates, the life-of-mine is expected to be in the region of seven years, although additional mineralisation around the current resource, as well as the possibility of mining Rodnikovoe as a satellite of Asacha, suggests the mine life could be extended. Rodnikovoe is located some 65 km from Asacha. A total of 230 people will eventually be employed on site at Asacha, while another 25 will be based at the Petrapavlosk Kamchatski office.

Prior to the commencement of the Asacha project, environmental impact assessments, reviews and public hearings were completed, in order to obtain the requisite permits as required by Russian legislation.

The second project, Veduga, is located in the Krasnoyarsk region of Russia. The project currently has a Measured and Indicated Resource base of 1.9 Moz, with a further 871,000 oz in the Inferred Resource category. TSG completed a preliminary review of Veduga project after a pre-feasibility study indicated that construction of a metallurgical plant on site was not economically viable. Nevertheless, TSG is of the opinion that considerable value exists at Veduga and, as a result, a number of alternative exploitation avenues were examined. These include the production of flotation concentrates which could be transported to existing metallurgical plants in the Urals, Kazakhstan and/or China that have the technical capability of treating such material. In parallel with this, TSG is actively pursuing its exploration programme with a view to increasing the overall Mineral Resource and ultimately the mineable Ore Reserve at Veduga. Given that Veduga will, in all probability, be a larger operation than Asacha, a larger employee complement is anticipated.

Bogunay is an early stage exploration project also located in the Krasnoyarsk region.

TSG has 260 employees, most of whom are Russian citizens. More recently Jonathan Best, former and retired Finance Director of AngloGold Ashanti assumed the position of CEO of TSG. A senior AngloGold Ashanti mining engineer and former manager of Morila mine, Glen Kuropchuk, has been seconded to TSG as Chief Operating Officer.

The rationale behind the investment is simple, says Richard Duffy, who heads AngloGold Ashanti's Business Development programme. Russia hosts a large number of known gold deposits and has an established mining industry. The country ranks fourth in the world in terms of gold reserves (behind South Africa, the USA and Australia) and fifth in terms of gold production. Moreover, since 1999, Russia's annual growth in gold production has exceeded that of the top eight gold producing countries, giving an indication of the under-utilised potential that exists.

"Not only will our investment enable us to participate in several promising mining and exploration projects, it will also provide AngloGold Ashanti with an opportunity to develop a better understanding of the gold industry in this highly prospective region, allowing us to identify further opportunities for growth."

As part of its arrangement with TSG, AngloGold Ashanti has a number of agreements in place that both secure its interests and support TSG's success. These include:

• Board representation (as a 29.9% shareholder, AngloGold Ashanti has two seats).
• Technical assistance and personnel: AngloGold Ashanti has agreed to provide technical assistance to TSG.
• Veduga financing: AngloGold Ashanti has the right to provide any financing for the Veduga project on the basis that the company meets or extends financing arrangements offered by third parties.
• Earn-in rights: AngloGold Ashanti has the option to exercise an earn-in right enabling it to acquire a 51% interest in any new mining or exploration projects undertaken by TSG.
• Anti-dilution rights: in the event of any further shares issued by TSG, AngloGold Ashanti has the right to maintain its interest in TSG at 29.9%.

Should AngloGold Ashanti increase its stake to beyond 30%, it will be required to make an offer to acquire the shares of all the remaining shareholders. Any decision to increase its investment will be based on a view as to the value of TSG at the time and to AngloGold Ashanti's Russian strategy more generally.

The company's stake in TSG does not preclude it from working with, or investing in, other companies with Russian interests. A small AngloGold Ashanti exploration office has been established in Moscow and a number of exploration projects are being pursued within Russia. The company has, for example, entered into an exploration alliance with Eurasia, another AIM listed company, to look for gold in the Chita region. Through its involvement in both TSG and exploration activities, AngloGold Ashanti has become aware of the challenges that present in a Russian mining environment, says Richard Duffy, "One needs to be fully au fait with the rules and regulations of mining and exploration licences, and to keep abreast of legislation. Equally important is the planning of mining development, where the logistical difficulties are compounded by remote localities and severe climatic conditions. Employing people with the right expertise and who understand the environment is, therefore, an essential aspect of successful mining in Russia."