Download Mining: opportunities and challenges

Mining: opportunities and challenges
Mick Davis – CEO
MCA Minerals Week
June 2011
1
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2
Agenda
§ A secular trend
§ An industry transformed
§ Mining’s contribution to Australia
§ Challenges ahead
§ Conclusion
3
A secular trend
4
Multi-decade secular change…
Contribution to Global GDP
GDP in 2010 PPP $US
% urbanised
100%
100%
25%
26%
80%
70%
27%
44%
50%
40%
Developing
Asia; 49%
India
40%
48%
2050
52%
70%
79%
Developing economies are expected to
account for almost 80% of global GDP
by 2050
2030
2030
2020
0%
2010
Urban
2010
20%
2000
0%
Advanced
Economies;
21%
1990
30%
10%
Developing
Economies
as of total:
China
60%
1980
20%
80%
1970
30%
Rural
1960
60%
Other
Developing
Economies;
30%
1950
90%
Global urban migration
China will have 221 one million plus
population cities by 2025 – compared to
Europe with 35 today
Source: Citi Investment Research and Analysis, IMF , UN Department of Economic & Social Affairs , McKinsey Global Institute
5
...driving a structural shift in commodity
demand
Growing populous nations have a multiplier effect on commodity demand
Commodity Intensity1
Energy consumption per capita (kWh/capita)
India GDP: China GDP:
~$3.2k/capita ~$7.3k/capita
US GDP:
~$42k/capita
15'000
USA: 3,873bn kWh
100
10'000
75
Japan
Europe
50
Late cycle commodities
e.g. platinum, nickel
Mid-cycle commodities
e.g. copper, lead, zinc
25
0
Early cycle commodities
e.g. steel, iron ore
0
5
10 15 20 25 30 35 40 45 50
GDP per capita (real, 2005 $US)
Increasing intensities driven by a
demand shift for commodities in
emerging markets
Source: IMF, USGS, CIA Factbook
Note: 1 Stylised intensity curves based on developed countries, Indexed to 100 at maximum
5'000
China: ~7,000bn kWh
by 2020
China: 3,438bn kWh
Indonesia
India
0
0
2'000
4'000
Population (cumulative bn)
China’s per capita energy consumption
is expected to double by 2020
6
Commodity supply continues to be constrained
South
America
39%
Australia North
9% America
and
Europe
9%
CIS
4%
Africa
16%
Mt Cu
31
29
27
25
23
21
19
Asia
23%
2007
Copper industry grade decline
1.5
Per cent
1.4
2009
2010
2011
Date of 2020 forecast
Per cent
10
9
1.2
8
1.1
7
0.9
1980 1985 1990 1995 2000 2005 2010 2015 2020
2008
Zinc/lead industry grade decline
1.3
1.0
Despite sustained high prices,
closing the 2020 supply/demand
gap remains challenging
Demand
Cumulative probable
mine project supply
2011 to 2020
2020 Copper supply/demand forecasts
Supply
Geographic origin of new copper supply
Per cent
5
4
Zinc
3
Lead
6
1990
1995
2000
2
2005
2010
2015
2020
More than 80% of new copper supply is from emerging markets with more complex and
challenging environments suffering from a lack of infrastructure to sovereign risk issues
Source: BrookHunt, MEG, Xstrata estimates
7
OVERVIEW
5. INDUSTRY LANDSCAPE
A decade ago, the industry was fragmented
with no clear winning business model
Global mining and metals industry - 2001
3+ regions
GLOBAL
DIVERSIFIEDS
INTEGRATED
MONOLITHS
Rio Tinto
$30bn
Alcoa
Alcan
Teck Cominco
Noranda
1–3 regions
NUMBER OF KEY GEOGRAPHIES
Global
Player
BHP
$26bn
FOCUSED
Billiton
LOCALS
WMC Falconbridge $12bn
Xstrata
Inco
$1bn
Phelps Dodge
Freeport MIM
$7bn
Antofagasta
$2bn
Implats Lonmin CVRD (Vale)
Regional
$12bn
$2bn
$3bn
Player
Single
1–3 commodities
3+ commodities
COMMODITY FOCUS
Source: Bubble sizes represent market capitalisation as 1 January 2001
Anglo
American
$29bn
LOCAL HEROES
8+ commodities
Multi
8
OVERVIEW
Today mining is consolidated, with the Diversified Model
proving best positioned to compete into the future
Global mining and metals industry – 2011*
INTEGRATED
MONOLITHS
BHP
Billiton
$245bn
GLOBAL DIVERSIFIEDS
3+ regions
Xstrata
$70bn
Vale
$158bn
Rio Tinto
$139bn
6
Anglo
American
$66bn
FOCUSED LOCALS
1–3 regions
NUMBER OF KEY GEOGRAPHIES
Global
Player
Xstrata
at IPO
LOCAL HEROES
2
Regional
Player
Single
1–3 commodities
3+ commodities
8+ commodities
Multi
COMMODITY FOCUS
Source: Bloomberg, market capitalisation as at 6 May 2011
9
The Virtuous Circle
Scale and Diversification
- Geographic, commodity, customer and
currency diversification
- Scale to take necessary risks
- High-quality operations
Embedded Optionality
- Proprietary control of
timing, sequencing and
size of options
- Asymmetrical M&A options
- Operational options
- Geographic options
Superior Capabilities
-
Financial acumen
Operating excellence
Marketing capability
Governments and NGOs
‘Licence to operate’
Higher quality earnings
- Strong and stable cash flow
through commodity cycle
- Higher returns
- Lower cost of capital
- Improved funding capacity
Access to External Growth Options
- Ability to shoulder risk
- Licence to operate
- Multiple regional synergy opportunities
10
Mining majors manage the majority of large,
low cost assets
Iron Ore
90%
80%
18.7Mt
8.3Mt
100%
90%
Others
100%
Thermal Coal exports (2010)
Production (2010)
80%
1,162Mt 588Mt
Others
Mined Cu production (2010)
Thermal Coal
100%
Anglo
Vale
90%
80%
70%
70%
60%
60%
60%
50%
50%
50%
40%
Codelco
30%
Freeport
Anglo
Vale
Rio
20%
10%
BHPB
0%
Global Tier 1
Xstrata
40%
Rio
20%
20%
0%
Anglo
Vale
Rio
40%
30%
BHPB
175Mt
70%
30%
10%
639Mt
Others
Copper
BHPB
10%
Xstrata
0%
Global Tier 1
Note: Tier 1 is defined as being in first half of global cost ranked by C1 cost, and upper quartile of the world’s mines ranked by output
*Tier 1 is as production >1.5Mtpa and margin of >USD30 in 2010
Source: Wood Mackenzie (2010), Metalytics (2010), Xstrata estimates
Global Tier 1*
Asset managed by the
major mining companies 11
Majors own most major growth options across
diverse geographic regions
Five largest mine projects by output in 2015
100%
90%
80%
70%
60%
50%
1,264kt
500Mt
Escondida
3rd Mill
Casa de
Pedra Exp
Konkola
Deep
Esperanza
237kt
1,055koz
Koniambo
Impala
#16
Barro-Alto
Garatau
Carajas
Pilbara
RGP 5 & 6
Goro
Pandora
Onca
Puma
Styldrift
Chichester,
Solomon
Ambatovy
Eland
Copper
Iron Ore
Nickel
PGMs
53%
64%
73%
65%
Toromocho
40%
Pilbara
320
30%
20%
Las
Bambas
10%
BHPB,
Vale, Rio,
Anglo and
Xstrata
0%
Ownership
by Majors:
Note: 5 largest projects (greenfield and brownfield) by output in 2015. Copper : “highly probable” or “probable” in Brook Hunt, including projects ramping up in last 6 months.
Nickel; CRU Group Nickel Quarterly; Iron Ore: Metalytics; PGM: Xstrata Estimates. Internal project pipeline assessment made for all Xstrata projects.
Source: Brook Hunt (2011 Q1); Wood Mackenzie; Metalytics; CRU Group; Xstrata estimates
12
Miners are amongst the world’s leading
companies and a core holding for investors
Market cap of world’s largest 100
companies
Mining as a % of UK equity markets
2002
30%
27%
Financials
Oil & Gas
Mining
11%
17%
12% 3%
23%
Miners
Financials
Oil & Gas
Mining
17%
6%
Telecom
Other
2011
34%
Pharma & Bio
7%
13%
Pharma & Bio
Xstrata
Telecom
Other
0
100
200
300
400
Market Capitalisation ($US billion)
Source: Datastream- FTSE All Share, Bloomberg Global Titans-the largest 100 companies globally by market capitalisation
13
Mining makes a major (and growing)
contribution to Australia’s prosperity
Mining sector contribution to Australian economy
9%
Fraction of Economy-wide Total
8%
Contribution by Total
Factor Income
7%
6%
Contribution by Gross
Value Added
5%
4%
3%
2%
1%
Charts from The Economic Contribution
of the Australian Mining Industry,
Deloitte for the MCA, 2010
0%
Average Weekly Earnings, Mining Sector and All
other industries
•
Employment in Metal Ore and Coal Mining
and Mining’s Export Share
100
70%
60%
$2,000
$1,500
$1,000
$500
Mining
All Industries
80
60
40%
50
30%
40
30
20
10
$0
50%
70
Total Employment in Metal Ore Mining
and Coal Mining ('000s, LHS)
20%
Mining Exports as a Fraction of Total
Exports by Value (Per Cent, RHS)
10%
0
Source: Australian Bureau of Statistics, Feb 2010. ABARE, Australian
Mineral Statistics
Fraction of Total Exports (Per Cent)
90
Employment ('000s of persons)
Average Weekly Earnings: Total Earnigs
$2,500
Source: Australian Bureau of Statistics
Source: Australian Bureau of Statistics
0%
14
Xstrata in Australia
In 2010 Xstrata contributed
AUD$8.6bn to the
Australian economy
Xstrata employs around
14,000 people (including
contractors) in Australia
In 2010, Xstrata’s Australian
businesses contributed:
– 39% of Group EBITDA
– 29% of total assets
– 29% of Group revenue
– 41% of Group capex
AUD$10bn of Australian growth projects are in feasibility or implementation
15
More than ever, existing miners must “run
hard to stand still”
Depleting reserves
Recent capex
announcements
Bridging the strategic gap
40000
35000
Export Tonnage
30000
Xstrata
• $21bn approved or soonto-be-approved projects
25000
20000
15000
Shareholder
Demands
10000
Inland
Tonnage
5000
Anglo American
• $16bn approved for next 3
years
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
2001
1999
0
Value $m
Increasing costs
Opex US$/t material moved
(real 2008)
$80
60
Other
Energy
40
Labour
BHP Billiton
• $15bn in 2011
The
Strategic
Gap
20
Consumables
0
2008
2011
Declining grades
Historical
Primary copper head grade, %
1.5
Rio Tinto
• $12bn major capital project
approvals in 2010/11
Future
1.4
1.3
Today
1.2
Time
1.1
1.0
0.9
1980
1985
1990
1995
Source: Company data
2000
2005
2010e
2015e
16
Mining industry faces increasing complexity,
competition and costs
Emerging Challenges
Examples and Potential Impact
Increasing complexity of
public policy
• Windfall taxes, royalties, carried interest, allocation of licences, mining
licence reviews, etc. Potential for unintended, damaging consequences
and loss of relative competitiveness.
Constrained inputs
(especially for project
development)
• Key engineering and project management skills, fabrication capacity,
contractors, etc. – project delays and increased costs
Higher input costs
• Energy, fuel, steel, explosives, labour and contractors, strong producer
currencies – higher long-term costs
Water shortage
• Potential competition with communities for water in arid areas, cost of
providing alternatives (e.g. desalination)
Social licence to operate
• Rising community expectations, NGO activity - delayed mining
expansion, cost of compliance, focus on community involvement
Growing
legislation/regulation
• Increased legislation across the board – UK Bribery Act, transparency
initiatives, anti-trust, etc., growing organisation complexity and cost of
compliance
Environmental/Climate
Change regulation impacts
• Growing complexity, legislation by country rather than global
framework, increased costs, impact on competitiveness
Competition for access to
new resources
• New ‘strategic’ and commercial acquirers - higher price for control,
scarce resources
17
Climate change principles
• Industry has a valid and important role to play in:
•
•
•
Limiting greenhouse gas emissions
Investing in low emissions baseload technology
Participating as a valid and important interlocutor in policy
development
• A consensus is emerging on sound principles for climate
change policy:
•
Clear, predictable and long-term price on greenhouse gas emissions
•
Single objective to reduce emissions with revenues raised applied to
initiatives to support the transition to a low-carbon economy
•
Protection of trade-exposed industries; avoid ‘carbon leakage’
•
Gradual, predictable legislation introduced at an appropriate level
18
Conclusion
• A secular shift in demand for commodities is underway
• Mining industry has consolidated giving rise to global,
diversified miners with the ability to allocate capital across
several jurisdictions
• Significant challenges remain for the industry, including
increasingly complex legislation
• Industry has a legitimate and important role to play in policy
development
19