UNCERTAINTIES IN THE RESOURCES SECTOR BOARDROOM: IS THE MINERALS BOOM OVER? Allan Trench Department of Mineral & Energy Economics Curtin Graduate School of Business Regional Advisor CRU Strategies [email protected] [email protected] Current Boardroom Debate Exploration & Mining Companies - Understanding the economic turmoil? - The commodity boom over? - “Markets are weak, our shares are too…so”? - Metal price volatility – An opportunity? - “We’re in crisis mode already”…. Underlined issues (covered in presentation) Other issues for discussion Current Boardroom Debate Default response has been to curtail investment Understanding the Economic Turmoil o Eurozone: Two scenarios, bad and terrible o USA: Fiscal cliff likely to be avoided (in part), then back to debt dialogue (again) ... o China: doing OK; will do what’s right for China economically... China’s slowdown – actually good news! Japan’s crisis, 1991=100 • China is aiming to diversify 160 GDP economic growth to 140 Pre-crisis trend maintain the up-trend – and avoid long-term stagnation 120 or hard-landing. 100 • Learning the lessons of the 80 past 60 1982 1987 1992 1997 2002 Developing Asia’s crisis, 190 GDP 170 Pre-crisis trend 150 • Rebalancing means 7- 130 8%pa GDP growth 110 becomes the new norm 90 70 50 1988 1993 1998 2003 2008 Data: CRU 5 Source: CRU Group The Chinese consumer is often overlooked Household consumption, 2007-12 CAGR, % 12 2012-17 10 8 6 4 2 0 USA Japan Eurozone Brazil Russia India China China -2 6 Data: OE, CRU Source: CRU Group Infrastructure Investment will rebalance • Residential and infrastructure investment volumes will be substantial, but growth rates limited • Upward cost pressures and diminishing labour availability will drive investment in automation China Infrastructure investment plateau... Net additions to power generating capacity, GW 600 500 400 300 200 100 0 1996-00 2001-05 2006-10 2011-15 2016-20 Data: Infrastructure CEC, CRU Machinery IFR, CRU 7 Source: CRU Group The OECD is limping out of the GFC…. 160 Copper price (indexed to Jan 2008) Index of OECD IP 140 104 Early 1990s 120 100 100 Early 1980s 80 96 Early 2000s 60 GFC 92 Mid-1970s 40 88 20 It will take over 6 years for Jan 2008 full OECD recovery => mid-2014 0 84 months after cyclical peak 80 -6-4-2024681012141618202224262830323436384042444648505254 …….Metals Prices are reflecting China Source: CRU Group Chinese Metal Consumption is Key Chinese metal consumption growth as a proportion of all metal growth in 21st Century 300% 250% 2000-2010 200% 2008-2010 150% 100% 50% Chinese growth as % global growth 0% Nickel Copper Lead Zinc Tin Aluminium Source: CRU Group Indian Metals Consumption also on the Rise 1400 1200 1000 800 600 400 200 Refined Copper Consumption ‘000t 0 2010 2011 2012 2013 2014 2015 2016 2017 India India x 2 Source: CRU Group But India is no replacement for China 12000 10000 8000 6000 4000 2000 Refined Copper Consumption ‘000t 0 2010 2011 2012 2013 2014 2015 2016 2017 India India x 2 China Source: CRU Group So Is Economic Uncertainty ‘Certain’? • Europe: - Will remain a threat to global recovery - A new Japan? • USA: - Uncertainty to be resolved - Do not expect a rapid rebound • China: - The new norm is 7-8% growth - Rebalancing implies important changes in the mix of metals demanded 12 Investors and Commodities: Is the Boom Over? Do people believe the commodity boom is over? Whether they are right or wrong there has been an impact on sentiment • “Commodities: Supercycle jitters slow projects” (Jack Farchy, FT Oct-12) • “The global boom in commodity prices is over” (Martin Ferguson, Australian Resource Minister, Sep-12) • “Mining boom over in two years” (Deloitte Access Economics Jul-12) • “Sun to set on commodities super-cycle” (Morgan Stanley May-12) • “Commodity ‘Super Cycle’ may be coming to end” (Citigroup Apr-12) 14 This question cannot (or should not) be answered with a single statement The industry needs to be segmented to answer this question Mineral Low cost High cost extraction miners & miners & support developers developers services Smelters, Resource Metals Semis refineries & Sector industry steel mills Investors 15 The commodity boom is not over for low cost miners 1st Quartile mining margins to remain above historical norms 250 Gross margin 1Q iron ore forecast 200 150 100 50 price / cost / margin cents/dmtu (iron ore) 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Data: CRU 16 Source: CRU Group The commodity boom is probably over for high cost miners Some assets in this category will close due to a multitude of threats 450 slower demand 400 growth 350 decline in 300 market prices flexible 250 competitors 200 Cost of production 150 cost 100 new, low cost, pressure 50 production 0 0 100 200 300 400 500 600 700 800 900 1000 Production volume Data: CRU 17 Source: CRU Group Innovative support services will continue to flourish Resulting in investment, increased competition and innovation Global mining truck tyre shortage Capacity Increased Industry investment competition innovation Hengda Tyres 18 There never was a boom for smelters, refiners and mills US secondary lead smelter margin Smelter share of Cu price 140 Gross margin 35% 70 c/lb share Cu price Scrap costs US lead price* % share Cu price 120 30% 60 25% 50 100 20% 40 80 15% 30 60 10% 20 Smelter % share of Cu price Smelter % share 40 smelter c/lb share of Cu price 5% 10 Revenue, cost & margin cents/lb lead 20 0% 0 0 Jul-98 Oct-04 Apr-92 Jan-11 Jun-96 Nov-06 Dec-08 05 06 07 08 09 10 11 12* Aug-00 Sep-02 May-94 Note: Copper Smelter share of monthly LME cash price according to annual contract TCRCs Data: CRU Note:* US lead price: LME cash price + CRU reported US spot premium 19 Source: CRU Group Some, in the semis industry, think the boom will continue Chinese aluminium rolling mill production, capacity & utilisation forecast 20000 100% Production Capacity forecast 16000 Utilisation 90% 12000 80% 8000 70% Utilisation rate % 4000 60% production, capacity 000’s tonnes production, capacity 000’s 0 50% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Data: CRU Note: photo courtesy of Nanshan Light Alloy Co Ltd 20 Source: CRU Group The commodity boom over?… Low cost miners & developers ...is not over for low cost miners High cost miners & developers ...is probably over for high cost miners Mineral extraction support ...will continue for innovators in this sector services Smelters, refineries & steel mills ...never happened for smelters, refineries, etc Semis industry ...will continue for some in the semis industry Resource Sector Investors? 21 Mineral Discovery is Key for Investors Convex minerals: • Gold •Tin • Copper • Nickel sulphide Concave minerals: • Lead •Zinc Value Recognition Value • Nickel laterite • Vanadium • Rare earths! Exploration Mining Processing Refining Marketing Source: A. Trench, 2011; J Sykes 2011 Trench & Packey 2012 ….and understanding sector risk types • Project/Technical risk versus Corporate Risk in the Minerals Sector – Important to understand the difference between the two: Project Risk Managing the Corporate Corporate Risk Risk ‘Peak’ : • Single Asset Risk • Financing mix • Ownership Structure • Asset Performance • External factors • Commodity Price • Capital Markets • Rare earths! Increasing risk Exploration Feasibility Development Production De-commissioning Source: Trench & Packey 2012 Current Boardroom Debate Exploration & Mining Companies - Understanding the economic turmoil? - The commodity boom over? - “Markets are weak, our shares are too…so”? - Metal price volatility – An opportunity? - “We’re in crisis mode already”…. Underlined issues (covered in presentation) Other issues for discussion ..but wait there are more boardroom challenges too of course…… Resource Environmental Ore Grades Infrastructure Scrap Nationalism Concerns Labour Energy & Governance Availability & Consumables and Cost Costs Compliance 25.