Sasol Ltd (SSL) 2015 Q2 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Sasol interim financial results conference call. Today's call will be hosted by David Constable, President and Chief Executive Officer, and Paul Victor, Group Financial Controller.

(Operator Instructions). I would now like to hand the call over to David Constable. Please go ahead, sir.

Thanks very much, operator, and good day, everyone. Thank you for joining us for our interim results conference call today.

Joining me here in Johannesburg from Sasol are Bongani Nqwababa, our new Chief Financial Officer who started at Sasol on March 1; a warm welcome to Bongani.

Also on the call is Paul Victor who has been an outstanding and extremely dedicated Acting Chief Financial Officer, who will support me on today's call. We also have with us other members of the Sasol Group Executive Committee who will support us in responding to any questions you may have.

As you would have seen, today we announced a resilient Group-wide performance notwithstanding an extremely tough macroeconomic environment. Despite the implementation of a major corporate restructuring our colleagues throughout the world have maintained their focus on safety, volume growth, increased sales and key strategic projects.

Turning to Slide 4 in the pack, we'll cover the following key messages today. I'll begin by providing you with a high-level overview of how our optimized operating model is providing Sasol with a solid platform to weather even the most severe of storms.

Next, we'll spend some time reviewing our key performance achievements during the first half of the 2015 financial year. I'll then provide you with an update on one of our most important initiatives, our business performance enhancement program.

Of course, it's clear that the current crude oil price presents challenging times for us. Instrumental to our ability to ride out the storm and maintain our momentum is our response to the low oil price environment.

In December the management team launched our oil price response plan. Today we'll update you on the cash conservation levers we are actioning as part of this plan. Paul will then go into more detail on our financial and operational performance.

Before wrapping up I'll talk you through the advancements we've been making on our dual regional strategy, primarily focusing on our Lake Charles chemicals project in the US. And we'll conclude this morning's session by recapping how Sasol continues to create value by proactively prioritizing our business activities.

Moving on to Slide 5, on July 1 we implemented a completely revamped operating model. Eight months down the track we definitely see it gaining traction and delivering results.

Our new operating model aligns operating business units, regional operating hubs, strategic business units and Group functions into an integrated value chain producing liquid fuels, high-value chemicals and low-carbon electricity.

Having implemented our new model at the start of this financial year we also updated our financial reporting according to new reportable segments. This slide summarizes the key operating model benefits which you will be familiar with, so I will not go into any further detail here.

However, one important take away is that through our internal consolidation and right sizing we have radically streamlined our management layers. In fact, since 2013 we have reduced our top management layer by 61%. This reduction was brought about by more efficient reporting lines and by maximizing economies of scale.

Next to Slide 6, and looking at our interim results, we had solid contributions across the value chain. In addition, our Group safety recordable case rate excluding illnesses improved to 0.32, down appreciably from 0.36 at the start of the financial year.

Turning to our sales volumes, performance chemicals were up 5%. Base chemicals normalized; sales volumes were up 1%. And liquid fuel sales in our energy business in Southern Africa were up 3%.

Through determined management action our normalized cash fixed costs have continued to trend below inflation, at 6.1% versus the South African PPI of 6.8% for the half year.

Over the period headline earnings per share were up 6% to ZAR32 per share and earnings per share increased by 53% to ZAR32.04. The half year had a number of once-off items which for the most part impacted our performance positively. And Paul will explain these items further in just a few minutes.

With significantly lower oil prices the management team and the Board revisited our Group's dividend policy. Last month we moved away from a progressive dividend to a dividend cover range based on headline earnings per share.

As a result the Company has declared an interim dividend of ZAR7 per share for the first half of FY 2015, not dissimilar to last year's record interim dividend of ZAR8 per share.

Turning to Slide 7, in the context of our large-scale change program which commenced in 2011 we've refined our corporate strategy, streamlined our management structures. We adapted our systems and processes and drove a comprehensive business performance enhancement program.

Today, as we navigate our way through a challenging global reality, it's reassuring to know that at Sasol we have been fixing the roof while the sun was shining. As a result, and with our Company redesign fully implemented, we are much better equipped to deal with any challenge.

Looking at some of the specific details of our enhancement program, by December 31 we had signed off on approximately 1,500 employment separations either through voluntary retrenchments or early retirements. We implemented a Group-wide vacancy freeze and a hiring moratorium which today are both delivering additional benefits to our cost optimization endeavors.

As a result of our intensified efforts we have increased our program target from at least ZAR4b in annual savings to ZAR4.3b at the end of FY 2016. If we look at our sustainable savings to date we are sitting at ZAR1b annually, with restructuring charges of approximately ZAR1.5b.

However, in the context of a lower-for-longer oil scenario our change program efforts, although significant, are not sufficient. If we consider the views of external experts and the prevailing market sentiment, far more has to be done.

Turning next to the graph on Slide 8, over the past several months we've seen a sharp decline in the average Brent crude oil price. This has had a severe knock-on effect on everyone in or affiliated with the oil industry.

Forecasting the oil price trajectory remains challenging as the market is still in the process of determining a new short-term equilibrium price. Equally difficult is predicting when supply and demand will become more balanced.

In parallel, storage constraints and geopolitical tensions must also be considered. What we know for certain is that current oil prices are too low to sustain drilling programs or to provide incentives for new upstream investments.

Companies within the sector are substantially reducing their capital requirements and cutting exploration budgets. As is the case with our industry peers, we too are hampered by what many external experts expect to be a lower-for-longer oil scenario until at least mid 2016.

In the longer term the rebalancing of the supply/demand market will require additional volumes to replace global oil production declines, coupled with demand growth. This is evident from the oval shading on the graph, which indicates a recovery to $80 per barrel in FY 2017.

So today's outlook is quite different to how we viewed the world only a few months ago. As a result, in December 2014 we proactively formulated a comprehensive plan to protect cash in response to these oil price uncertainties.

Moving on to Slide 9, having done considerable legwork our response plan caters for a cash conservation target range of between ZAR30b to ZAR50b over the next 30 months. In all the activities we are working on to protect cash, safe, reliable and efficient operations remain non-negotiable for us.

The response plan has flexible levers so that we can respond to the volatile macroeconomic environment while optimizing our ultimate profitability over the long term. The cash conservation levers we have formulated under the response plan are over and above the business performance enhancement program savings targets.

And while our response plan protects cash over a relatively short period, the next two and a half years, several initiatives we are actioning will also result in longer-term cost savings. Here, based on our current analyses we're looking at an additional ZAR1b in annual sustainable savings from FY 2018.

Next, to Slide 10, several core levers underpin our 30-month response plan. These levers are summarized on the screen -- or on your slide, reflecting the individual ranges which equate to the ZAR30b to ZAR50b cumulative target.

Looking at each of the levers in more detail, turning first to cash cost savings, here we have identified an extensive list of activities which will deliver ZAR4b to ZAR7b.

These activities include corporate policies relating to remuneration, travel, entertainment, professional services and a broad category of discretionary spend items. In further optimizing our top and senior management layers of the Company we are looking at reducing our headcount by another 200 senior management personnel.

Next, with a target of ZAR5b to ZAR9b through our gross margin and working capital lever, we are driving margin and efficiency improvements. We are also optimizing our account receivable balances and inventory on hand.

Turning to capital structuring, as mentioned earlier, our Board confirmed a change in our dividend policy based on our cover range. We are also considering other opportunities in this area which has allowed us to set a target range of ZAR8b to ZAR12b.

To our final level, in January we announced that we are right sizing our capital portfolio given certain external factors. As a result of this exercise we decided to delay the final investment decision on our gas-to-liquids plant in the USA.

We are also reprioritizing our other growth and sustenance capital projects. Here, our target range is ZAR13b to ZAR22b in the next 30 months.

I'll now hand it over to Paul who will unpack our results in a little more detail for you. Paul.

Thanks, David. Good afternoon, ladies and gentlemen. I'm pleased to present the 2015 half year-end results to you today, which are well within our guided earnings range provided for in our trading statement.

We continue to deliver an overall strong operational and cost performance despite a highly volatile macroeconomic environment, as signaled by the 19% decrease in crude oil prices for the period under review.

Before I move into the details of the results I would like to emphasize the following. First, management's continued focus on factors within our control has resulted in a strong operational performance with overall increased volumes, cost containment and margin improvement despite a very challenging operating environment.

Second, we have made significant progress on reducing our cost base through our business performance enhancement program and have increased the target to deliver at least ZAR4.3b in sustainable cost savings by the end of the 2016 financial year.

And, finally, mitigating the challenges of the low oil price and continuing to deliver maximum sustainable value to our shareholders remains one of our top priorities.

Moving to Slide 12, the macroeconomic environment driven by the significant decline in crude oil prices remains subdued and uncertain, with tough trading conditions expected to continue in the following two years.

We are expecting a lower-for-longer oil price environment and, as David has indicated, we have taken decisive actions to minimize the impact on our business. The average rand/US dollar exchange rate was 9% weaker with a 19% lower Brent crude oil price.

Chemical prices and margins, on the other hand, have been much more resilient during the period under review. The Sasol business, however, remains sensitive to significant movements in the rand/dollar exchange rate and oil prices. And we do remind you of our sensitivities to each of these variables.

We estimate that a 10 cents' change in the annual average rand/US dollar exchange rate and a $1 change in the crude oil price will affect our profits from global operations by approximately ZAR605m and ZAR800m respectively.

Moving to Slide 13, as mentioned previously, our new operating model, as well as the simplified legal structure, came into effect on July 1, 2014. The results presented today reflect the performance of our six reportable business segments organized along an integrated value chain.

For further details on the new segmental reporting I refer you to the detailed SENS announcement as well as the supplementary information that we published on our website since November of last year.

Overall the Group delivered a strong operational performance as a result of increased sales volumes and improved margins in our performance chemicals and base chemical strategic business units, and increased sales volumes in our energy business unit.

Headline earnings per share increased by 6% to ZAR32 per share. Profit from operations, of ZAR30b, was up 39%. This increase was positively impacted by once-off items of ZAR6.8b driven by macroeconomic factors, changes to the share price and our decision to operationalize our 2050 strategy.

Focusing on our value chain, our operating business unit delivered an overall strong performance driven largely by a stellar production performance from mining.

In our strategic business units the energy business was impacted by the lower oil price. However, through focused management interventions the business increased liquid sales volumes by 3% and reported high refining margins on the back of strong product differentials.

Turning to our international energy portfolio, ORYX GTL delivered a solid operational performance with an average utilization rate of 91% for the period, despite an earlier-than-planned shutdown during December 2014.

In our chemicals businesses both improved volumes as well as resilient margins boosted profitability, contributing 44% to the Group's profit.

Moving to Slide 14, the weaker rand/dollar exchange rate increased profitability by 12%. This benefit was, however, overshadowed by the lower oil price, which adversely affected profit by 20%.

Profit from operations increased by 54% as a result of the following once-off items and period-end adjustments; a ZAR3.7b lower share-based payment charge following a 32% decrease in our share price over the last six months; lower depreciation and rehabilitation charges of ZAR2.5b due to the change in the useful life of our South African assets in accordance with our 2050 strategy; and, lastly, lower re-measurement items of ZAR171m compared to the ZAR5.7b in the prior period mainly due to the ZAR5.3b Canadian impairment booked during the first half of financial-year 2014.

Higher depreciation charges in respect of new plants as well as inflation on cost adversely affected profitability by 13%. We are pleased to report a 6% increase in the sales volumes across the Group.

This is on the back of a 7% increase in sales volumes recorded for the comparative period. The total increase in sales volumes of 13% over the last two years amounts to ZAR7b in real terms.

Moving to Slide 15, we are extremely pleased with our continued cost performance. The increase in normalized cash fixed cost have been contained to 0.7%, below the South African producer price inflation of 6.8% for the first half of the 2015 financial year.

Our cost-savings mindsets of driving sustainable cost reduction in the Group delivered this strong performance, this, despite cost pressures arising from the South African cost environment in respect of labor, maintenance and electricity cost.

In addition, sustainable savings from our business performance enhancement program for the first six months amounted to ZAR991m, while cash implementation costs of the business performance enhancement program as well as growth costs added a further 6.9% [to] the total cash fixed cost.

Overall we benefited from a weaker rand/dollar exchange rate, but the impact of the weaker rand added a further 1.5% to the total cash fixed cost base. Labor, maintenance and energy remain the main drivers of our cost base, with labor comprising now approximately 55% of our total cash fixed cost base.

Our strategy to control energy cost has seen us maintain our electricity generating capacity in South Africa to around 70% of our own requirements. We expect electricity cost inflation to be in the double digits again in the forthcoming financial year.

Finally, cost reduction continues to be one of the critical focus areas for management. And through our business performance enhancement program and our recently-launched response plan we aim to beat the rising cost trends in a save and sustainable manner.

Moving on to Slide 16, focusing on our operating business units, mining's profits from operations increased by 66% mainly on the back of a 5% increase in production volumes.

The benefits of our business performance enhancement program, coupled with further operational flexibility created by the mine replacement program, resulted in the unit costs from our operations being contained to well below inflation, the first time since 2010.

Exploration and production international recorded a loss from operations of ZAR1.7b. Our Mozambican operations were positively impacted by favorable gas prices, whilst volumes remained at similar levels compared to the prior period. We are progressing well with our growth programs in Mozambique and further updates will be provided to the market once confirmed.

In Gabon our assets were under pressure due to the decline in oil prices and the unfortunate souring of wells, which resulted in a partial impairment of ZAR1.3b. In Nigeria we relinquished our exploration licenses and incurred a loss of ZAR565m.

Our Canadian upstream assets generated a loss from operations of a ZAR584m mainly due to the lower gas prices as well as reduced drilling activities. The 91% improvement in the loss from operations was mainly due to the lower depreciation and operational cost, as well as a ZAR5.3b impairment recognized in the period -- in the prior period.

We continue to execute on the approved development plan in conjunction with our joint venture partner, Progress Energy, and are de-risking the assets with specific emphasis on the Cypress A acreage.

Moving to Slide 17, underpinned by overall strong production volumes our energy business delivered a pleasing set of results, with Secunda Synfuels and Natref increasing production by 2% and 6% respectively.

Our Southern African energy portfolio was adversely impacted by the increased cost of production as well as the reduction in basic fuel prices, which resulted in an 18% lower gross margin.

Our business performance enhancement program, however, continues to deliver results in all facets of our business and we expect normalized cash cost per unit for the full year to be below SAPPI.

Our ORYX GTL joint venture delivered a solid performance despite the earlier-than-planned shutdown. Our share of the profit from the joint venture decreased to ZAR1.3b mainly due to the shutdown and low oil prices. The plant achieved a 91% utilization rate, which is ahead of the previous guidance provided.

Moving to Slide 18, we have continued to see an increase in sales volumes and margin resilience in our chemicals business. The base chemicals SBU delivered a pleasing performance, [with] increasing profit from operations by 42%. Our chemicals basket dollar prices have declined by 5% in comparison with a 19% decline in average Brent crude oil prices.

However, sales volumes normalized for the sale of the solvents Germany, and Middle East polymer marketing operations increased by 1%. This business also benefited from the impact of the extension of the useful life of assets in South Africa, amounting to ZAR899m.

The performance chemicals SBU recorded another exceptional performance, underpinned by a consistent and reliable operation delivery and a weaker rand. Profit from operations increased by 60% to ZAR7.4b, whilst operating margins expanded by 6% to 19%. Sales volumes increased by 5% due to the improved production output on the back of higher demand.

Our US business is still realizing healthy margins despite the decrease in sales prices. Our European operations continue to report improved volumes coupled with resilient margins.

In our South African operations we recognized a partial impairment reversal of ZAR1.3b of the wax expansion project as a result of the impact of weaker rand exchange rates as well as the decision to extend the useful life of the plant beyond 2029.

Moving to Slide 19, I would like to expand on what David touched on earlier in respect of our business performance enhancement program. We have increased our savings target and now expect to generate sustainable annual savings of at least ZAR4.3b at the end of the 2016 financial year.

We have achieved actual year-to-date savings of ZAR991m and expect to save ZAR1.5b in savings for the 2015 financial year. This represents an annualized run rate of about ZAR2.2b.

Project implementation costs of ZAR1.5b were incurred for the six months to date and area expected to peak at approximately ZAR2.1b at the end of our 2015 financial year, before tapering off in the 2016 financial year as the project reaches its final stages of implementation.

We then expect cash fixed costs to follow inflation from the 2017 financial year. As David mentioned earlier, through our various response plan activities we plan to deliver further sustainable cost savings of ZAR1b as from financial- year 2018. This is in addition to the business performance enhancement savings of at least ZAR4.3b by financial-year 2016.

Moving on to Slide 20, taking various factors into account, including overall market conditions, the Group's financial position, capital investment plans as well as earnings growth, an interim dividend of ZAR7 per share has been declared.

As part of the capital structuring lever of the response plan the management team and the Sasol Board of Directors have evaluated and changed the Company's progressive dividend policy.

The revised policy is based on a dividend cover range with a corridor of between 2.2 times and 2.8 times of headline earnings per share. Our objective, considering the factors mentioned earlier, is to maintain a 40% to 60% interim-to-final dividend split.

This policy, together with the other components of the response plan, will provide sufficient flexibility for the Company to manage its balance sheet, execute on its growth program while continuing to return maximum sustainable value to our shareholders through dividend payouts.

Moving to Slide 21, another critical lever of the response plan is the reprioritization of our capital portfolio. We have revised our 2015 capital expenditure down from ZAR50b to ZAR45b. Our 2016 capital estimate will remain at ZAR65b.

This estimate, however, negates a ZAR4b impact of the weakening rand on our capital portfolio. A further ZAR8b to ZAR13b in capital reduction is planned for the 2017 financial year.

Even though we are reducing capital and other costs I would like to emphasize that safe, reliable and sustainable operations are non-negotiable and that management will continue to drive world-class safety practices across all operations.

It's also important to note that critical and strategic growth projects in North America and Southern Africa will continue as we evaluate new opportunities for further growth.

Turning to Slide 22, we continue to focus on the factors within our control, that being, volume growth, margin enhancement and cost reduction. We expect an overall strong production performance for the remainder of the 2015 financial year.

Total South African liquid fuel sales volumes are expected to be around 59m barrels for the year. We expect ORYX GTL's average utilization rate to continue to be above 90%.

Our chemicals business will keep on driving improved volumes and margin enhancement. Base chemicals' normal sales volumes are expected to be slightly higher than financial-year 2014, with margins coming under some pressure during the second half of the financial year compared to the first half of the financial year.

And performance chemicals' sales volumes are expected to outperform financial-year 2014, with increased market demand coupled with resilient margins.

We expect normalized cash fixed costs to follow inflation, the response plan's cash contribution to range between ZAR6b and ZAR10b for financial-year 2015, and the average Brent crude oil prices to be at least 30% lower in the second half of this financial year compared to the first half of the financial year.

And on that note I hand back to David.

Thank you, Paul. And to reach our overarching goal of delivering shareholder value sustainably it's important that we maintain focus on our dual regional strategy here in Southern Africa and North America. And this approach complements our other important business activities in Eurasia, the Middle East and the rest of Africa.

Looking at the US specifically, and turning to Slide 24, we're proceeding with the construction of our ZAR8.9b ethane cracker and derivatives complex in Louisiana, as all of you know.

In December 2014 we established a $4b credit facility which will be used to finance the project. We've already secured 80% of the funds required through a combination of project finance and our own equity contributions.

The robust project economics benefit from an advantaged site location which expands on our existing operations, economies of scale that improve our cost structure and upgraded infrastructure and utilities which drive further efficiencies.

The new cracker complex would roughly triple the capacity of the Lake Charles site. Furthermore, our product slate distinguishes our investment from most of the other crackers that have been announced.

Our project combines commodity and specialty products which will leverage low-cost US ethane feed stocks. And note that the specialty chemicals produced will deliver high-value returns even as chemical markets fluctuate.

To oversee the execution phase of the projects we have an extremely experienced owner's team in place and have progressed several key milestones. Site work is proceeding safely and efficiently and we expect that the plant will achieve mechanical completion at the end of calendar-year 2017. Beneficial operations are on track for the first half of calendar-year 2018.

Slide 25 summarizes our broader contributions in Southern Africa. This slide is self-explanatory, so let me just make a few general comments here on air quality and carbon emissions.

Now, responsible operations are at the heart of our corporate commitments. And to ensure our ongoing compliance with new air quality regulations in South Africa we applied for certain postponements to manage our short-term challenges relating to the compliance timeframes.

We've now received decisions on our postponement applications from the National Air Quality Officer, which, while aligned with our requests, impose some stretched targets. Our focus is now on the alignment of our licenses to reflect these postponement decisions and on implementing our air quality emission reduction roadmaps, including community-based offsets to substantially improve ambient air quality where we operate.

As an important aside, it is a given that increasing South Africa's investment attractiveness and alleviating the current electricity crisis are top priorities for the government.

It therefore remains our position that the implementation of a carbon tax any time in the foreseeable future would be ill advised and instead add a further cost to the economy.

At the same time we are concerned that the proposed carbon tax will diminish South Africa's international competitiveness and result in a range of other unintended consequences.

In our view the country needs appropriate incentives to invest in new, more energy-efficient processes and projects that improve our energy security and lower our greenhouse gas emissions.

Looking at the final slide, Slide 26, in order to build on our successes, whatever the global circumstances, we are focusing on enhancing our existing assets and are driving selective growth opportunities.

In 2011 we undertook to get the operational basics right. Today our ZAR14b Secunda growth program is nearing completion, with volume and electricity benefits now fully realized.

Group-wide we continue to generate the improved volumes from our global operations. Our business performance enhancement program is also delivering results with simplified Company-wide structures, reduced management layers and costs contained within inflation.

In South Africa specifically we have embarked on an extensive 2050 strategy to ensure the efficiency and reliability of our in-country operations to the middle of the century.

Looking at our selective growth opportunities, our dual regional strategy remains compelling. In America, our Lake Charles chemicals project is advancing, while in Southern Africa we submitted our full field development plan for the production sharing agreement to the Mozambican authorities on February 25.

Also in Mozambique our 175 megawatt gas-fired power plant is ramping up nicely. Once fully operational the plant will supply electricity to more than 2m Mozambicans, which equates to 8% of the country's current demand.

Here in South Africa the expansion of our wax facility in Sasolburg is progressing well, with phase one commissioning of the new slurry bed reactors scheduled for the first half of this calendar year. Phase two beneficial operations are on track for the first half of calendar-year 2017.

As you can see from the slide, both our existing asset and selective growth pillars are now underpinned by our response plan, thereby, serving to create more value. Here our prioritized plans, supported by a solid balance sheet, underpin our flexible dividend policy based on a cover range.

In the half year we continued to deliver an overall strong operational and cost performance. With oil prices moving dramatically lower over the last six months the management team has formulated a comprehensive response plan to conserve cash and further refine our organizational structures and near-term strategies.

The benefits of the detailed work we're doing now will ensure that Sasol emerges from the current challenging macroeconomic environment as an even leaner and more focused business.

With that, we'd now be happy to open it up for any questions you may have. Operator?

(Operator Instructions). Caroline Learmonth, Barclays.

Thank you. On Uzbekistan GTL I see in the detail that it used to be classified as an asset for sale and now has been brought back into use based on the Group's intention to further develop the asset. So could you give us some background on that? And I see there's been a provision taken against it as well.

And then secondly, just on US GTL -- and I note the study cost clearly causes an impact on cash fixed costs for the energy business. How much has been spent on US GTL studies to date? And how much was spent in the first half?

And I see as well in the detail that land acquisitions in the US continue for future projects. How much of that relates to US GTL?

And then, just finally, you mention the Mozambique one-off social growth development cost of ZAR443m. Could you just give a little bit of a flavor of what that entails? Thanks very much.

Thanks for the questions, Caroline. I'll kick off with Uzbek GTL and have Paul chime in on GTL study costs and land acquisition. And we'll get to Mozambique as well.

Uzbek GTL, as you know, we were sitting at 44.5% shareholding in that project and looking to sell down and spread risk on the project down to 25.5%. Right now we are looking at a revised business model. It has moved from held for sale back into in use.

And that business model that we're looking at would envision Sasol not spending any more capital on the project, but looking at a business model where we would be licensing our technology, supplying catalysts to the project and providing technical services including project management and technical support to get the project up and running. So that's where it stands right now.

We're busy in negotiations. Things look very positive from our perspective. A good -- like I said, a business model we're working on that looks very favorable to Sasol and gets us into licensing, which is something that has been an interest for us in that space as well. So that's GTL.

US GTL -- that's Uzbeki GTL. US GTL study cost spend to date's in the neighborhood of ZAR300m but, Paul, can you give us the details?

Thanks, Caroline. So basically if I look in terms of what we have spent thus far in total on US GTL, it's just over $300m in total. And then obviously not all of the costs one can capitalize.

So roughly ZAR160m of GTL study costs that you cannot carry on the balance sheet that really relates to business establishment type of cost and marketing cost. That's ZAR160m and that will be the growth on the period to period.

That's a portion that we could not capitalize and that we expensed. And you also see that as part of the cash fixed costs declaration and exploration in -- under the energy bucket.

Focusing on the land, David, if I can address the question, so ultimately -- and we also shared that when we were overseas during the visit in Lake Charles, is that there's two components of land. The first basically is the acquiring of the land and then also the voluntary purchase program that we have.

Now in total the land, buying the land, is going to cost us roughly $240m, of which $120m has been apportioned to the cracker and $120m has been apportioned to the GTL.

Of the $120m that's allocated to the GTL we have spent $19m thus far and ultimately there's a remaining $30 -- $30m that still needs to be spent. We do, however, plan to continue and to acquire all the land [and not] selling the land that we have delayed the USG GTL decision.

Thanks. Thanks, Paul. Then on the final, the Mozambican development fund that you are asking about, that is a downstream gas market development fund that we are contributing to through our partners in Mozambique to hopefully get additional downstream projects off the ground, which can obviously benefit our oil and gas development activities in the country.

So that's where we're working with the international -- IFC and E&H, our partners, to put that fund together and, like I say, help develop the downstream gas markets in Mozambique.

Okay, thank you very much.

(Multiple speakers) our next question. Thanks.

Jarrett Geldenhuys, Investec.

Hello, everyone, thanks very much for the opportunity. I've also got three questions, please. Just firstly on maintenance CapEx I realize you say that your volumes are paramount. I just would like to know where exactly in which business units the maintenance CapEx saving seems to be coming through.

And then the second question just relates to the chemical volumes, so a good performance from chemicals. I just want to know if you can split this out of which -- what is the contribution from -- or positive contribution from EPU 5 as well as the C3 stabilization plant and I suppose operations in general relative to market demand.

And then the last question is just in addition to these additional ZAR1b worth of cost savings which you mention sustainable from 2018. And I just want to understand the scope difference between this and Project Phoenix, or is this just more efficiencies coming out of Project Phoenix? And that's about it. Thanks very much.

Thanks, Jarrett. I'll ask on the first one if Paul can talk about the maintenance CapEx savings and then I'll talk about chemicals volumes. And then I think Paul's got the ZAR1b answer as well. Go ahead, Paul.

Good. Thanks, Jarrett. Yes, so basically when we looked in terms of the maintenance capital expenditure we were obviously now thinking a lot of non-negotiables in terms of tapping future cash savings from.

So specifically the shutdown in Secunda, the renewal program and specifically all the maintenance work on the GOs in the boilers and so forth, that, we haven't optimized.

But there is a big portion of other sustenance capital projects that we've looked at across the value chain and where we've either delayed or stopped a project. So the whole value chain was, however, impacted by the reduction of the optimization of the sustenance spend.

And ultimately we have provided those ranges and then ultimately certain non-negotiables specifically ensuring long-term sustainability, reliability and availability of the plants.

Thanks, Paul. Jarrett, you're exactly correct on chemicals' volumes, certainly, in polymers. EPU 5, which has been up and running since last year now, added an additional 47,000 tonnes annually. In reduced flaring I think we've talked about the flaring that was reduced from 7% to 1% based on that installation.

C3 stabilization reached beneficial operation in -- just at the very end of our last -- just at the -- I guess at the start of this financial year and added another 58,000 tonnes per year. So those are two key areas that we see coming through nicely in polymers.

And then keep an eye out for the C3 expansion which has beneficial operation in June of this year, with a capacity of 105,000 tonnes per year. So those are -- those two existing and one coming on shortly is -- will be very nice for the polymers' part of the base chemicals business.

Paul, ZAR1b on sustainable savings response plan in FY 2018.

So the question is on the sustainability and whether it's just a further extension of Project Phoenix; we don't see it. We already drive the response plan as [such an] additional project in our business.

In terms of looking at the sustainability, yes, from a clean perspective it's actually levering further efficiency improvement in our overall cash cost base. So while Project Phoenix is very much focused on cash fixed cost base, and limited to other cash cost, the response plan is actually looking at the overall cash cost base, which really opened up the size of the prize a bit more.

In terms of the general themes that we are looking for, we are further optimizing our structures as we previously communicated to the consolidation of international energy and South African Energy is one example.

We also saw in our SENS announcement we are also levering not filling certain non-critical vacancies and we plan to see whether we can actually continue with the lowest -- or that right staff establishment going forward.

David also spoke about the 200 managerial staff that we further optimize as the result of the response plan. And then generally we are also looking quite differently at our supply chain and also renegotiating contracts quite more diligently as part of this process in order to save cash cost on a sustainable basis.

So definitely the theme is on much more efficiency, but taking a little bit more focus on a wider cost bucket as opposed to Project Phoenix.

Thanks. Thanks, Paul. Thanks, Jarrett. Take the next question.

Alex Comer, JPMorgan.

Hi, (inaudible) questions. Firstly, you extended the life of your plant to 2050 --

Sorry, Alex. Operator, we can't hear the question.

Can you hear me? Can you hear me? Hello?

Try again. That's a little bit better. Thanks, Alex.

Hi. Yes, you extended the life of your plant to 2050 and that helped boost earnings a little bit. I was just wondering what -- did you include any carbon tax in the assumption when you did that, given that if you look at the IEA you have some very significant carbon costs going forward? That's the first question.

Secondly, historically you've given out a US profit, so I would assume that the [port's] chemicals business did very well on the back of the existing Lake Charles cracker. Maybe you could give an indication of what US profits were and also how that's panned out in the first few months of this year.

Also I notice that overall electricity costs seem to have gone down, which I'm surprised at, given Eskom's hikes. So I just wondered what the situation was there. So those are my three questions.

Thanks, Alex. We'll -- I think we're going to give these all to Paul. 2050 strategy, obviously, you need to take CO2 into consideration. Let's start with that one, Paul.

Good. Yes, Alex, we have taken carbon tax into account. We have taken certain assumptions and we were conservative in terms of the impact of carbon tax in our 2050 modeling.

However, we haven't taken a cliff into account in our modeling due to the uncertainty of exactly how the long-term legislation will plan out in terms of carbon tax. So to answer your question, yes, we have included that.

In terms of the US profits from our business there, it's still healthy profits in the region of ZAR4b plus for the six months under review being contributed from our US assets.

And then on the electricity side there is also some benefits in terms of the short-term PPAs that gets offset against the cost of your electricity. And we have seen good stability also in our plants that reduces the requirement to import electricity from Eskom.

Okay. Thanks, Paul. What charge per tonne did you include in for the CO2 then?

Alex, we're not going to disclose that. We have said previously in terms of the mechanism that there is certain reductions and rebates that we are taking into account. And we've previously signaled a -- between a 60% to a 70% offset and within that range we applied the carbon tax.

Yes, that gets you the answer. We took the thresholds into account --

Okay. All right, thanks.

We took the thresholds into account and then built it on top of the main price -- or built it -- took it off the main price. Thanks, Alex.

Okay, thanks.

Operator?

Gerhard Engelbrecht, Macquarie.

Good afternoon. There are just a couple of questions just on the costs that you've spent on gas to liquids. I guess the two elements is you've capitalized some of the GTL costs in the USA after concluding your feasibility study. What's the situation there?

Are you looking to impair those costs? Do you have any idea of how much money you've spent on gas-to-liquids and coal-to-liquids projects over the last decade of projects that haven't materialized?

And then I see that you increased drilling -- your drilling budget in Canada from $369m in 2014 to $389m this year. Is that -- would you say that's prudent in the current environment? And do you have control over this CapEx? Can you cut back if you need to?

And then lastly maybe just try and explain this reclassifying the Company as a special chemicals company. Surely that's not in line with your production profile.

Thanks, Gerhard. We'll start with the USA, the feasibility study costs, and then moving into feed and the capitalization of same. Paul?

Yes. Gerhard, as I've said before, ultimately what's on the balance sheet is in order of $300m. Basically, we -- at half-year end we have had a look at it and the accounting rule that you apply is if you -- well, we haven't cancelled the project. We just delayed the project.

So if we can use those engineering studies going forward, which we plan to do so both on future economics and FRD discussion, then you can carry it on your balance sheet. It's only when you've made the decision not to continue with a project and to cancel it officially that you have to impair it.

You will also notice that we have written off around about $2.5m of that cost, which is certainly not substantial, but our auditors also feel comfortable that, given the accounting rule, that we're actually allowed to capitalize and continue to capitalize until such time that we make a future investment decision.

Thanks, Paul. On Canada, on the drilling costs we're, as Paul said earlier, de-risking that asset, spending minimal amounts of capital. We have two rigs running -- we did have two rigs running in the first half of the year, one on Farrell Creek, one on Cypress A.

And we want to look more into the Cypress A asset, so we'll be adding one rig. And in fact we've just added a rig, a third rig, so we've got two rigs working on Cypress and just one at Farrell Creek.

And that's very -- that's a very low rig count to just continue de-risking the asset. We're only -- I think we're at 5% complete, so it's a long, long way to go as we work through that drilling program.

By the way, the drilling costs have come down below our investment case, which is also positive. The average well costs in the first half were down to $7.8m for drilling and completion, so that's very good news, well below the investment case.

Do we have control? We definitely have a say in the CapEx funding and the development plan there, which is done on calendar years, and participate and certainly have a voice and a say in how to proceed with rigs.

So we're comfortable that we are sufficiently involved with the operator there, who I should say is a -- we've seen great performance from Progress Energy on the operations of that asset.

Chemicals company; the JSE has advised if -- that we're a chemicals company. I will also say that 56.2% of our revenues generated in the first half were from chemicals and 44% of our profit, so certainly that helps in that regard. I'm not sure how JSE does it. Paul, can you give us some --?

Yes. So basically they look at your assets, they look at your earnings and based on that profile and also in terms of the previous segmental information that we presented we have been now classified as part of the INDI 25.

And in similar vein the [MECI] will do exactly the same. And we also expect a re-rating from them -- or reclassification, apologies, from them in terms of the industry sector in which we're going to be consolidated in.

Thanks. Thanks, Gerhard. We'll take -- operator, we'll take one more question today. Thanks very much.

Nishal Ramloutan, UBS.

Hi. Yes, good day, guys. Thanks for the opportunity. Just in terms of that response plan that [paid] ZAR50b per annum can you ever give some guidance in terms of how we should look at that year on year?

Because if I just look at CapEx, for instance, so you're talking about ZAR13b to ZAR22b for the next 30 months, but there's only about ZAR5b in FY 2015 and then the rest is delivered FY 2017. So, as said, it'll be pretty helpful if you can just give us some guidance as to what to expect year by year. I know you've said ZAR6b to ZAR10b this year.

And just that ZAR5b CapEx cut for FY 2015, can you maybe just give us some color in terms of what is that made out of? And also just indicate what portion of that is the delay in the GTL progress and then, as said, what makes up the other component?

Then just in terms of that ZAR4b to ZAR7b cost-saving reduction, which is also part of that response plan, just the examples that you give it indicates -- or my impression is that that should have been something that should be captured in Project Phoenix. So maybe just can you give a bit more color in terms of what exactly that is? Why is only ZAR1b of that sustainable?

And then just -- yes, I think let's leave it at that.

Okay. Just on your second question, and then I'll turn it over to Paul for the response plan targets, but the ZAR1b sustainable savings, as you know, will be on top of the Phoenix savings of ZAR4.3b. So that ZAR1b of cash cost savings, as Paul went through that, those vacancies of 500 people to 1,000 people is going to drive a good portion of that savings.

We think we can run the Company as a leaner organization going forward and only fill critical vacancies going forward, so that -- our moratorium on hiring -- freezing of hiring is going to allow us to see that savings in addition to Phoenix.

That was not the plan under Phoenix. Those positions were going to be filled previously. But from what we're seeing now, and getting into it and analyzing it further, we think we can see a good chunk of the sustainable response plan savings from the vacancies.

And then I think the -- I'm just giving the couple of big ones because Paul mentioned a lot of dogs and cats in there as well. But the other big one are the 200 permanent management people, further structural change to reduce 200 more senior management personnel. That's a big change to what we had over and above Phoenix and we're comfortable that those are sustainable moves as well based on our new structures.

Paul, on targets, response plan and a little more color on the capital, both the capital growth and sustenance?

So, Nishal, basically the reason why we have given the ZAR30b to ZAR50b range is also to take into account, as David also mentioned, that we are also watching and seeing where the market is going in terms of finding a new equilibrium.

So it's also important for us as the market picks up that we will start to also execute growth programs that can add a future sustainable value. So it's really depending also on where share prices -- sorry, where oil prices go now quick and that's why firstly you see the wider range.

Now, in terms of guidance, for every financial year we are providing guidance for this year. You can make a call in terms of the remaining portion of the ZAR30b to ZAR50b over the following two years because effectively these two years that remains. So we'll provide guidance in every financial year as we progress and also as we see where oil prices go and how the macro economics is going to play out.

So there's a lot of dynamics and also flexibility that we built into the response plan to also react quicker or even slower as oil prices picks up or stay at their current levels. So at this stage we don't provide any further guidance on that.

Your second question in terms of what actually makes up the ZAR5b, obviously, there's a lot of projects that we have gone through, the key ones obviously will be all -- US GTL deferral that will be the first one.

Secondly, we've also delayed the spend on clean fuels 2. For example, there's also a couple of other sustenance projects that we've delayed that we can surely later on talk in a little bit more detail about.

And then also in terms of what we originally plan to spend in the Montney versus what we're actually spending in the Montney is also less. So those are really the four big-ticket items making your ZAR5b up.

Okay, and then just -- sorry, just to follow up, so that management -- the 200 further management positions cut, what would be the cost for implementing that, because I assume there will be a cost for that?

Yes, sure. There will be a cost, but that has already been factored in into our response plan activity. You will not see that as being part of the ZAR2.1b cost that we've indicated for Project Phoenix. It will be separate to that.

However, we do believe in terms of the savings potential of the response plan even in this year, specifically with regards to those 200 positions, as well as not filling vacancies and doing all the other things that we've spoken about, it will be self-funding and also contributing already in the 2015 financial year.

Good. Thanks very much for calling in today. Gerhard, we'll get back to you on the CTL, GTL question and how much has been spent over the last decade or so. We'll get into that with you as well some time this week.

And I want to thank everyone for joining us and I look forward to -- Paul and I look forward -- and Bongani -- look forward to visiting with many of you during our upcoming investor and analyst road shows over the next few weeks. So thanks again. Take care. Bye bye.

Thank you.