Transcript Diapositiva 1

Industry Capital, Operating and
Geopolitical Developments
Sector Case Example in Iron Ore
Rebecca Gordon
CRU Strategies
June 2013
Chancery House
53-64 Chancery Lane
London
WC2A 1QS
UK
517, Tower 2
Bright China Chang An
Building
7 Jianguomennei Avenue
Beijing 100005, China
Augusto Leguía Norte
Nº 100 of.506
Las Condes
Santiago
Chile
PO Box 1269
Langley
WA 98260
USA
B/407, Citi Point, JB Nagar
Next to Kohinoor Hotel
Andheri Kurla Road
Andheri (E) Mumbai 400 059
India
Tel: +44 20 7903 2000
Fax: +44 20 7903 2172
Tel: +86 10 6510 2206
Fax: +86 10 6510 2207
Tel: +56 2 2231 3900
Fax: +56 2 2231 4314
Tel: +1 360 321 4707
Fax: +1 360 321 4709
Tel: +91 22 6687 5757
Fax: +91 22 66875758
Presentation Outline
Preamble – what is the world worried about?
… and what does it mean for our industry?
» Capital – the scarcest of all commodities?
» Focus on iron ore
- What happened last year?
- Outlook for 2013 and beyond
- Kazakhstan vs West Africa : high level comparison
2
What is keeping investors awake at night?...
World Economic Forum Top 10 predictions suggest worst is behind us...
1. US Fiscal Fight
Fears abating, economy warming
2. Eurozone
CRU base case improved from ‘terrible’ to ‘bad’
3. Chinese Growth
Transition continuing–slow and steady is good
4. Emerging Markets
Domestic demand in ASEAN staying strong
5. Commodity Prices
Sideways movement on average, slightly –ve for oil
6. Inflation
Money looking for a home, but wary = easing inflation
7. Central Banks
“Aggressive easing” – what does this mean?
8. General Fiscal Policy
Developed economies need austerity
9. US$
US$ strengthening vs. €/Yen, staying flat elsewhere?
10. General Risks
Risks are more balanced than in previous 5 years
Data: World Economic Forum, CRU.
3
...and what might this mean for mining?
Rising tide that floats all boats has receded – but opportunities exist...
1. US Fiscal Fight
Fears abating, economy warming
» Lower % growth is still big absolute volume growth
2. Eurozone
CRU base case improved from ‘terrible’ to ‘bad’
» Other populous areas may enter more metal
intensive phase, albeit slowly
3. Chinese Growth
Transition continuing–slow and steady is good
» We are now used to $100/bbl oil, our forecasts see
this as stable, +ve for costs
4. Emerging Markets
Domestic demand in ASEAN staying strong
» Easing inflation good for most, might be bearish for
gold?
5. Commodity Prices
Sideways movement on average, slightly –ve for oil
» Finance is still a big issue
6. Inflation
Money looking for a home, but wary = easing inflation
7. Central Banks
“Aggressive easing” –what does this mean?
8. General Fiscal Policy
Developed economies need austerity
» US$ relatively flat – removing a potential price
driver – but US economy has low metal intensity
Demand is there for new projects
9. US$
US$ strengthening vs. €/Yen, staying flat elsewhere?
10. General Risks
Risks are more balanced than in previous 5 years
But investors have more choice now
4
CRU Commodity Heat for 2013: prices remain flat
CRU expects a lacklustre year for commodity prices: 9of 22 commodity
prices will rise over 2013 while 13 will see declines. None of the
commodity is expected to sit in Hot & Freezing extremes
Hot
> 15%
Warm
5% to 15%
Cobalt
Alumina, Sulphuric Acid
Mild
0% to 5%
Cool
0% to -5%
Cold
-5% to 15%
Platinum, Manganese, Aluminium, Gold, Phosphate DAP, Met Coke
Zinc, Copper, Silver, Palladium, Sulphur
Coking Coal, Tin, Lead, Nickel, Urea, Potash, Ammonia
Iron ore
Freezing
< -15%
DATA: CRU, 2013 annual average price forecast (nominal $ or benchmark) versus 2013 Q1 average actual prices
5
CRU Commodity Heat for 2017
CRU expects commodity prices to increase 14% on average out to
2017. 13 of 22 commodity prices will rise out to 2017 while other 9 will
see declines.
Hot
> 15%
Warm
5% to 15%
Coking Coal, Alumina, Cobalt, Nickel, Platinum, Palladium, Zinc, Tin, Met
Coke, Sulphuric Acid
Aluminium, Lead, Phosphate DAP
Mild
0% to 5%
Urea, Manganese
Cool
0% to -5%
Ammonia
Gold
Cold
-5% to 15%
Iron Ore, Silver, Potash, Copper, Sulphur
Freezing
< -15%
DATA: CRU, 2013 annual average price forecast (nominal $ or benchmark) versus 2013 Q1 average actual prices.
6
But – The scarcest of all commodities is $$$
“Worst conditions for 40 years”
What are the sources for finance for the mining industry?
“PEOPLE WITH MONEY”
“PEOPLE WITH CHOICES”
Once bitten, twice shy...
…twice bitten, invest in ABM!
7
Raising money is tough: number of new listings related to mining has fallen...
Number of new listings related to mining
250
HKSE
200
AIM
150
100
TSX
50
TSXV
0
2007
2008
DATA: HKE (2012 no data), TSX, AIM.
2009
2010
2011
2012
8
...and equity raised has fallen even further
$M of equity raised
50,000
AIM
40,000
ASX
30,000
20,000
TSX
10,000
TSXV
0
2008
2009
DATA: TSX, ASX (mining & metals), AIM [$ million].
2010
2011
2012
9
The money is there and as confidence returns, investors make choices to
switch to riskier assets
01/06/12=100
Commodities
Equities
Gold
Bond yields (RHS)
130
%
1.0
1.1
120
110
100
90
1.2
1.3
1.4
Rising bond
yield =
falling bond
price
1.5
1.6
1.7
1.8
80
DATA: MSCI World Equities; S&P GSCI Commodities: bond yields are the average of German and US 10 year govt debt; Haver Analytics, CRU
1.9
10
...but we have seen this before
» This search delivers a news story from Australia dated Feb 21, 1928
- “Exceptional condition of the money market”
- “Heavy fall in tin stocks”
» But don’t worry (!!) – the option holders are “still very hopeful” of achieving
success before the deadline of March 14...
DATA: Google, Sydney Morning Herald, 1928
11
Exploration is mining’s “R&D” department...
» As of December 2012: 600 companies on TSX with < $200k working capital
» Feb 2013: 45 of 146 mining companies in AIM have “barely... a year”
» As for ASX: rough estimate of ~100 companies running on “fumes”
“It is not the strongest of the species that
survives, nor the most intelligent that survives.
It is the one that is most adaptable to change”
Charles Darwin
Will companies fold?
Experience shows that it’s the
weakest that adapted fastest...
DATA: Personal communication.
12
..and time has shown it to be resilient
» Single asset exploration companies : is this
the best use of talented management?
» Size does matter–but large is a turn-off for
the markets right now…
» Opportunities exist out there and we will see
small deals as the junior market “adapts”...
“SMART MONEY IS SORTING
THROUGH THE WALKING DEAD...”
13
What are the majors doing?
» Raising money just fine
» Meeting the new boss...
Bond Proceeds and Volume (2000 – 9m 2012)
100
200
Proceeds
Number
80
100
40
50
Number
60
- May 2013
- Apr. 2013
– Oct, 2012
– Sep, 2012
– Sep, 2012
– May, 2012
€1.75 Bln fixed rate notes
– Dec, 2012
US$3.0 Bln fixed rate bonds – Aug, 2012
US$2.5 Bln fixed rate bonds – Mar, 2012
20
DATA: Ernst &Young,(2012) Company sources
9m2012
9m2011
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
2001
0
2000
Proceeds $b
150
C$0.75bln
€0.75bln bond
A$1.0 Bln note issue
€2.0 Bln bond
£1.75 Bln bond
€2.0 Bln bond
US$1.5 Bln notes
€0.75 Bln notes
– Sep, 2012
– Jul, 2012
14
So – a capital strike or a timely pause?
» Capital raising in 2012, lowest since 2008/9
» M&A down – hardly surprising after the last decade binge cost
$1.1 trillion and a trinity of CEOs at Rio, BHP and Anglo...
» Consumers (of resources) are investing
15
The big consumers are active overseas, China >> Japan >> India…
Of 6,276 active projects in production, feasibility or reserves development: China has involvement in
206, Japan 135 and India 29
What
Where
80
China
70
Japan
India
60
50
40
30
20
10
0
Aus
Asia
FSU
Note: Exploration involvement not included
DATA: Metal Economics Group.
North
America
Iron ore
copper
Coal
Zinc
Nickel
Uranium
Gold
Other
16
Let’s look at iron ore
A market that is great to be in, but if “your
name’s not on the list, you can’t come in...”
Volatility
Weakening prices?
New supply regions emerging?
Kazakhstan vs West Africa
Chancery House
53-64 Chancery Lane
London
WC2A 1QS
UK
517, Tower 2
Bright China Chang An
Building
7 Jianguomennei Avenue
Beijing 100005, China
Augusto Leguía Norte
Nº 100 of.506
Las Condes
Santiago
Chile
PO Box 1269
Langley
WA 98260
USA
B/407, Citi Point, JB Nagar
Next to Kohinoor Hotel
Andheri Kurla Road
Andheri (E) Mumbai 400 059
India
Tel: +44 20 7903 2000
Fax: +44 20 7903 2172
Tel: +86 10 6510 2206
Fax: +86 10 6510 2207
Tel: +56 2 2231 3900
Fax: +56 2 2231 4314
Tel: +1 360 321 4707
Fax: +1 360 321 4709
Tel: +91 22 6687 5757
Fax: +91 22 66875758
Through December 2012, steel mill profitability in China improved, lifting
sentiment among raw materials buyers…
National EBITDA margin for a sample of Chinese steel mills, %
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Note: (1) EBITDA margin is based upon mills selling 50% of their material to contract buyers and 50% on the spot market.
DATA: CRU.
18
…and encouraging iron ore restocking, alongside a quarter on quarter uptick
in underlying demand
Imported iron ore inventory on hand on a weekly basis at a sample of Chinese steel mills, days
45
40
35
30
25
20
15
10
5
0
Note: Sample of 55 small and medium sized steel mills where production in each is less than 5 Mt/y (covering mills in Tangshan, Handan,
Xingtai, Shandong, Shanxi).
DATA: CRU, MySteel.
19
Although Australian exports have surged as majors post robust gains, supply
concerns have mounted elsewhere…
Australian exports of iron ore, Mt
Australian iron ore exports by company, Mt
50
300
45
40
35
Rio Tinto
BHPB
FMG
250
200
30
25
150
20
15
10
100
50
5
0
0
06
DATA: GTIS, Company reports, CRU.
07
08
09
10
11
12
20
…as Indian tonnages drop, along with a fall in availability of Chinese port
stocks and Brazilian spot cargos in December
y/y change in Indian exports of iron ore, %
Exports of iron ore from Goa, India, Mt
60%
60
40%
50
20%
40
13 Q1
12 Q4
12 Q3
12 Q2
12 Q1
11 Q4
11 Q3
11 Q2
11 Q1
10 Q4
10 Q3
10 Q2
10 Q1
09 Q4
09Q2
09 Q3
-20%
09 Q1
0%
30
20
-40%
10
-60%
0
-80%
DATA: CRU, GTIS.
09
10
11
12
21
In fact, 2012 has been a poor year for Brazilian production given near zero
growth in Vale’s output
LHS: y/y change in Brazilian production of iron ore, Mt
RHS: Production of iron ore from Vale, Mt
50
400
25
300
0
200
-25
100
y/y change in Brazil production
Vale production
-50
0
08
DATA: CRU, GTIS, CompanyReports.
09
10
11
12
22
Worries over supply tightness led to a buying frenzy in China and a spike in
prices - iron ore and coal are at near parity
Differential between spot iron ore(1) and spot coking coal prices (2), $/t
Iron ore spot prices, CFR China, $/t
62% Fe fines, CFR China
63.5% Fe fines, CFR China
200
180
200
180
160
160
140
140
120
120
100
100
80
80
60
60
Apr/13
Jan/13
Oct/12
Jul/12
Apr/12
Jan/12
Oct/11
Jul/11
Apr/11
Jan/11
Oct/10
Jul/10
Apr/10
Jan/10
Oct/09
0
Jul/09
0
Apr/09
20
Jan/09
20
Jan/10
Mar/10
May/10
Jul/10
Sep/10
Nov/10
Jan/11
Mar/11
May/11
Jul/11
Sep/11
Nov/11
Jan/12
Mar/12
May/12
Jul/12
Sep/12
Nov/12
Jan/13
Mar/13
40
40
Note: (1) Spot iron ore refers to 62% Fe fines, CFR China. (2) Spot coking coal refers to hard coking coal, FOB Australia
DATA: CRU.
23
Iron Ore price ceiling found at $141/t – why no higher?
» CRU believes that underlying demand in China is not as strong as the sharp
price decline suggests (Chinese crude steel production higher than demand).
» Iron ore restocking has, temporarily, ceased in China as stock levels are
healthy and even on the high side, at near 40 days on hand.
» Mills were becoming increasingly unwilling to accept the higher raw materials
prices, given the impact that this is likely to have on margins thanks to the far
slower increase in steel prices.
» The beginnings of a reversal in mood emerged in mid-January as many
buyers felt the iron ore prices had overshot – some of this was fuelled by
market speculation itself.
24
Going forward, we anticipate the strongest gains in Chinese, and thus world,
hot metal production next quarter (for 2013)
q/qchange in world and Chinese hot metal production, Mt
20%
World
China
2013
World = 5.5%
China = 6.3%ç
15%
10%
5%
0%
-5%
-10%
-15%
11 Q1
11 Q2
DATA: CRU, WSA.
11 Q3
11 Q4
12 Q1
12 Q2
12 Q3
12 Q4
13 Q1
13 Q2
13 Q3
13 Q4
14 Q1
14 Q2
14 Q3
14 Q4
25
2013 will be plagued by pockets of weak supply from Brazil and India,
keeping market fundamentals tight…
Exports of iron ore from Brazil and India, Mt
500
450
Brazil
400
India
2009 – 2011
India CAGR = -17%
Brazil CAGR = 11.5%
2011 – 2013
India CAGR = -39%
Brazil CAGR = 1.1%
350
300
250
200
150
100
50
0
09
DATA: GTIS, CRU.
10
11
12
13
26
…however, the effects of this will be tempered by rapid growth from
Australian miners
LHS: Exports of iron ore from Australia, Mt
RHS: q/q changes in exports of iron ore from Australia, %
200
20%
Australia
180
Growth
Seasonal dip in supply due
to adverse weather
160
15%
10%
140
120
5%
100
0%
80
60
-5%
40
-10%
20
0
-15%
11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4 14 Q1 14 Q2 14 Q3 14 Q4
DATA: GTIS, CRU.
27
Prices will hold steady y/y in 2013, but beyond –
prices will weaken...
» Growth in steel production (globally) will ease…
» ...so, increases in iron ore demand will also slow
» Europe and Japan will recover (i.e. re-visit 2008 levels by mid-decade), and
Middle East growth will be strong
» Q3 price crash knocked the juniors back...
» ...but the majors are expected to continue their expansion (Aus and Brazil >
72% share of total exports by 2017; mainly exploiting India’s reversal from
net exporter to net importer (!))
» West African juniors have aggressive plans, although it will be modest by
comparison to traditional sources
» Plentiful supply of lower cost ore will increase China’s reliance on imported
ore and...
SOURCE: CRU.
28
...this will knock out Chinese marginal production from the market, leading
to expectations of falling prices
Chinese production of iron ore, indexed, 2008 = 100
X-axis: Quarterly Chinese iron ore production, Mt
Y-axis: Spot prices for 62% Fe fines, CFR China, $/t
120
200
Historic
Forecast
Expon. (Historic)
110
150
100
90
100
80
50
70
60
0
08
09
10
11
12
13
14
15
16
17
0
10
20
30
40
50
60
70
80
Note: prices shown are real, 2012 US dollars.
DATA: CRU, GTIS.
29
Although smaller mines will close, the government will support consolidation
and modernisation...
Representative global cost curve
Operating cost
Real prices just slipping below $100 CFR
China (62% Fe) by 2017
With potential to fall lower into the 2020’s
China,
Small private mines
China SOEs/large
private mines
X
High-cost emerging
producers
Lower-cost
“PEOPLE WITH CHOICES”
emerging producers
“PEOPLE WITH MONEY”
Majors
DATA: CRU.
30
So –what about the next supply region?
West Africa vs. Kazakhstan
Contained Fe by project stage(%)
12 projects
Kazakhstan– 0.9 Bt
68 projects
West Africa – 31.6 Bt
9%
14%
9%
27%
Exploration
Exploration
Feasibility
Feasibility
Production
82%
Production
59%
Note: All projects reporting a resource are included
DATA: MEG, ENRC,Arcelor Mittal, CRU.
31
On in-situ grade: Africa leads… ...and it’s cheaper to ship iron ore to China
from West Africa than from Kazakhstan
40%
Kazakhstan
West Africa
35%
30%
25%
20%
15%
10%
“PEOPLE WITH MONEY”
“PEOPLE WITH CHOICES”
5%
Origin
0%
Weighted Average Grade
DATA: MEG. CRU.
Fe contained
>50% in-situ
Distance
Units
2012
Kazakhstan
5,000
$/wmt
100
West Africa
9,727
$/wmt
18.9
2020
28.8
32
0
DRC
DATA: Fraser Institute Data, March 2013
NSW
Finland
Sweden
Alberta
New Brunswick
Wyoming
Iceland
Nevada
Utah
Yukon
Norway
Quebec
Nova Scotia
Saskatchewan
Greenland
W Aus
Ontario
Botswana
Canada (ave)
Nfld/Lab
South Aust
Alaska
Manitoba
80
NT
Chile
Victoria
Morocco
New Zealand
Arizona
Namibia
NWT
BC
Queensland
Michigan
Colorado
Mauritania
Idaho
Nunavut
Minnesota
60
Mexico
2ndQ
New Mexico
Montana
Washington
Spain
Tasmania
Bulgaria
Serbia
Turkey
Ghana
Burkina Fasao
California
Argentina
Poland
Peru
Zambia
Dominican Republic
Brazil
Tanzania
Panama
South Africa
Colombia
Guyana
Egypt
Niger
Suriname
China
Russia
Guniea
PNG
Mali
Kazkkhstan
India
Ecuador
Mongolia
Honduras
Madagascar
Romania
Greece
Philippines
Guatemala
Bolivia
Krygyzstan
Zimbabwe
20
Venezuela
Vietnam
Indonesia
...even politically Africa is ahead of Kazakhstan
Policy Potential Index (the “ability to do business” there)
PPI Score
100
1stQ
Canada
Mauritania
3rd Q
40
Guinea
Kazakhstan
4thQ
33
...and politics does impact investment
Percentage of Fe contained that is owned or optioned by Japan / China / India
West Africa
Kazakhstan
6%
3%
39%
61%
91%
Kazakhstan
DATA: MEG, CRU.
Other
Japan
China
India
34
Summary
Juniors
» Investors are exercising choice
» Exploration juniors are survivors...
Majors / Operators
» Operating costs are the focus and they will come down
General
» China and Japan need resources, and it will ever be thus…
Iron Ore
» Short term picture looks good, but incumbents hold all the cards…
» Kazakhstan starts at a disadvantage to other countries when trying to attract
finance:
» Policy climate is non-favourable
» Logistics pose great challenge for accessing China etc. Total freight for
iron ore from Kazakhstan to Tianjin port is ~$100/t leaving less profit
margin to miners.
35
Thank-you
Rebecca Gordon
Managing Consultant CRU Strategies
[email protected]
Chancery House
53-64 Chancery Lane
London
WC2A 1QS
UK
517, Tower 2
Bright China Chang An
Building
7 Jianguomennei Avenue
Beijing 100005, China
Augusto Leguía Norte
Nº 100 of.506
Las Condes
Santiago
Chile
PO Box 1269
Langley
WA 98260
USA
B/407, Citi Point, JB Nagar
Next to Kohinoor Hotel
Andheri Kurla Road
Andheri (E) Mumbai 400 059
India
Tel: +44 20 7903 2000
Fax: +44 20 7903 2172
Tel: +86 10 6510 2206
Fax: +86 10 6510 2207
Tel: +56 2 2231 3900
Fax: +56 2 2231 4314
Tel: +1 360 321 4707
Fax: +1 360 321 4709
Tel: +91 22 6687 5757
Fax: +91 22 66875758