The Melbourne Mining Club Melbourne Town Hall 10 February 2005 TheThe AustralianAustralian MiningMining IndustryIndustry CarpeCarpe DiemDiem SeizeSeize thethe Day!Day! Peter Johnston Managing Director Minara Resources Limited Research by Metal Bulletin METALMetal BULLETIN Bulletin is published by the Metals, Minerals and MiningMETAL division BULLETIN of Metal is Bulletin published plc. by the Metals, Minerals and Mining division of Metal Bulletin plc. ZestZest forfor zinczinc Goldman Sachs JBWere RESOURCES STOCKS - Priced for Peak; NOT for Perfection! The Australian Mining Industry - Outline What can we learn from the past? Where are the opportunities in the future? What will impact success? 4 Resources & Australia small on the global scene The World Australia Economic 2.1% of world GDP Economic 4.2% of GDP Contribution (over 3% with primary processing) Contribution (5.1% with primary (2004) (2004) processing) Revenue > US$ 1,600 billion (E) Revenue A$ 65 billion + (2004) (F2005) (F) Exports US$ 206 billion Exports A$ 35 billion (2003) (>$300b with primary (2004) processing) IBISWorld 17/01//05 5 Australian Mining Industry Lifecycle Value Added Share of GDP 20 2nd Cycle 18 Gold 16 14 12 3rd Cycle Gold/Coal 6th Cycle 10 Energy (Gas & U O ) 8 2 3 5th Cycle ? Metals/Energy Percent of GDP Percent of GDP 6 1stCycle 4th Cycle (Coal & Oil) 4 Quarrying Gold/Metals & Coal 2 0 1800 1810 1825 1835 1845 1855 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015 2025 2035 2045 Year ended June IBISWorld 17/01//05 6 Importance Of Mineral Exports Shares of Current Account Credits F1970 F2004 Manufactures 22.6% 30.8% 8.3 of this 30.8% is primary processing of minerals 15.6% 21.1% Minerals 39.0% 15.0% Rural 14.6% Tourism 4.8% 6.3% Other services 10.2% 3.2% 9.7% Incomes (dividends etc.) 4.6% 2.6% Transfers $5.15 billion $163.3 billion Source: ABS BOP 7 Profitability by Industry, Australia’s Top 1000 5-year weighted average ROSF (after tax) to F2004 Mining 14.9% Previous 5 years to F1999, 5.4% Prop. & Bus. Serv 14.5% Retail Trade 14.2% Cultural & Rec. 13.8% Finance & Ins. 13.5% Manufacturing 13.2% W’Sale Trade 13.1% Communications 12.4% Construction 11.5% Average 11.4% Transport 9.4% Utilities 7.5% Agriculture 6.6% Hospitality 4.7% Personal & Other 4.3% Health 2.5% Education 2.2% Govt. Admin . 1.3% 0% 5% 10% 15% 20% 25% 30% ROSF (%) 8 IBISWorld 17/01//05 Australia’s Changing Mining Industry Mix Share of total revenue basis F1960 F1980 F2004 17.4% Oil & Gas 30.8% 26.2% 27.7% 3.5% Coal & Uranium 4.2% 24.4% 8.0% 14.3% 10.7% 22.8% Iron Ore 3.7% 2.0% 4.0% Copper 3.0% ` 8.4% Gold 10.0% 10.4% 3.7% Nickel 3.0% Silver, Lead & Zinc 12.2% 9.7% 6.5% Other Ores 4.0% Construction Materials 5.3% 3.9% Exploration 8.3% 6.5% 6.1% Contract Mining $0.35 billion $8.8 billion $56 billion 9 IBISWorld 17/01//05 What have we learnt? Cycles of the peaks and troughs will continue Resources & Australia are small on the global scene Overall resource returns in the past have been average Resources economic contribution growing - exports Industry profitability is growing New opportunities always have and will emerge 10 Where are the opportunities in the future? What can we learn from the past? Where are the opportunities in the future? What will impact success? 11 New opportunities World growth Æ demand for resources Industrialisation of nations – China Changing industry – scale, mix, technology Mergers & Acquisitions – divestments Supply side – need for investment 12 Global Top 10 Mining Enterprises By Revenue 2003 Company Revenue ($ US bill.) 1. BHP Billiton (2004) 26.0 Aust. 2. Alcoa (2003) 21.5 U.S. 3. Anglo American 18.6 S.A. (U.K.) 4. Rio Tinto (2004) 14.1 U.K. 5. Alcan 13.6 Canada 6. CVRD 5.3 Brazil 7. Norilsk 5.2 Russia 8. Noranda 4.7 Canada 9. Phelps Dodge 4.1 U.S. 10. Xstrata 3.5 Swiss 13 Source:IBISWorld Australian Top 20 Mining Enterprises By Revenue 1983 Company Revenue Company Revenue (A$ bill.) (A$ bill.) 1. BHP 4.59 11. WMC 0.37 2. CRA 1.91 12. Coal & Allied 0.35 3. Utah Development 0.88 13. EZ Industries 0.29 4. Esso Exploration 0.85 14. North BH 0.28 5. MIM 0.80 15. Bougainville 0.28 6. Esso Australia 0.80 16. Energy Resources 0.26 7. Hamersley 0.59 17. Oakbridge 0.16 8. Peko-Wallsend 0.59 18. Austen & Butta 0.14 9. Robe River 0.69 19. Renison Gold 0.14 10. Santos 0.69 20. Griffin Coal 0.07 Total Revenue 13.5 Source:IBISWorld 15 Australian Top 20 Mining Enterprises By Revenue 2004 Company Revenue Company Revenue (A$ bill.) (A$ bill.) 1. BHP Billiton 34.1 11. Newmont Australia 0.9 2. Rio Tinto 15.7 12. Iluka Resources 0.8 3. Xstrata 5.7 13. Newcrest Mining 0.7 4. WMC Resources 3.1 14. Apache Energy 0.7 5. Woodside Petrol. 2.2 15. Sons of Gwalia 0.6 6. Mitsubishi Dev. 1.7 16. Harmony Gold 0.6 7. Santos 1.6 17. Centennial Coal 0.5 8. Placer Dome 1.2 18. Barrick Gold 0.5 9. Anglo Coal 1.2 19. Oil Search 0.5 10. Coal & Allied 0.9 20. Alusuisse Aust 0.5 Total 75.0 21. Minara Resources 0.4 Source:IBISWorld 16 Opportunities ahead Mergers & Acquisitions – will not stop 12 will go in the next 20 years Creates a vacuum Where are the $5-10 billion new players? 17 Factors for success What can we learn from the past? Where are the opportunities in the future? What will impact success? 18 What will impact success 1. Resources 2. Technology 3. Energy 4. Competitiveness 5. Markets 6. Labour 19 1. Resources No shortages of resources in next 20 years (except oil?) Rate and quality of new discoveries are diminishing This will drive exploitation of large/lower grade ore bodies Global competition for where you explore Exploration in Australia – access 20 2. Technology Technology will be a key driver of success For example Nickel >70% of the world’s nickel is laterite <30% world’s production Future belongs to hydrometallurgical technology This technology will become more competitive Pyrometallurgical processing will be challenged 21 3. Energy High Prices (Today US$50, 2 years ago US$25) The one commodity that perhaps supply will decline Enormous impact throughout the global economy Large impost on energy intensive processes eg. smelting Project development - access, supply & costs Alternative energy supplies will be developed 22 Crude oil prices ($US/barrel) 100 10 20 30 40 50 60 70 80 90 0 1900 1905 1910 1915 Real CrudeOilPrices 1900-2004 1920 1925 (constant 2004prices) $US/ barrel(constant2004 prices) 1930 Real price 1935 1940 1945 1950 23 1955 1960 1965 $69.80/barrel 1970 (1977) 1975 1980 1985 1990 1995 Source: IBISWorld 2000 2005 * Oct. 2004 2010 2015 2020 Known oil reserves declining by 2007 Billion barrels (Gb/a) 24 Source: Financial Review 3. Energy High Prices (Today US$50, 2 years ago US$25) The one commodity that perhaps supply will decline Enormous impact throughout the global economy Large impost on energy intensive processes eg. smelting Project development - access, supply & costs Alternative energy supplies will be developed 25 4. Competitiveness Exchange rates – large impacts on profitability Hedging – currency / commodity Pricing – super cycle debate – supply/demand equation Customers – we do have them! Shareholders – balancing Æ dividends - capital management - cashflows Investment opportunities – growth vs margins 26 Exchange Rate - US$ to A$ 12 month progressive average, to December 2004 1.60 1.50 1.40 1.30 1.20 1.10 1.00 Forecast 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: Reserve Bank of Australia (17/01/05) 27 4. Competitiveness Exchange rates – large impacts on profitability Hedging – currency / commodity Pricing – super cycle debate – supply/demand equation Customers – we do have them! Shareholders – balancing Æ dividends - capital management - cashflows Investment opportunities – growth vs margins 28 5. Markets Dominance of China – is India next? Have we forgotten Japan? Free trade agreements, e.g. Singapore, Thailand, U.S.A. Trading blocks – expanded EU, ASEAN Restrictions – regulations, tariffs, duties, taxes, royalties 29 World’s 20 Largest Economies 2003 (E) Canada 1.9% Mexico 1.8% Spain 1.7% Purchasing Power Parity (PPP) terms Brazil 1.4% Korea S 1.7% Indonesia 1.5% Australia 1.0% Taiwan 0.9% Iran 0.9% Thailand 0.9% Netherlands 0.9% Rest of World (208 Nations) th 21.3% USA 11 –2 th 20.5% 0 Nations 13.4% y 12.5% China Italy e an ranc ain m F rit er Japan B G India 3.0% 3.2% 3.2% 4.4% 5.9% 7.0% Russia 2.5% Brazil 2.7% World’s 228 nations: US$ 51.5 trillion CIA World Fact Book 29/11/04 30 5. Markets Dominance of China – is India next? Have we forgotten Japan? Free trade agreements, e.g. Singapore, Thailand, U.S.A. Trading blocks – expanded EU, ASEAN Restrictions – regulations, tariffs, duties, taxes, royalties 31 6. Labour Skills shortage threatens exports No one wants to go bush any more Source: Australian Financial Review 32 6.