Mining: opportunities and challenges - Glencore
Mining: opportunities and challenges Mick Davis – CEO MCA Minerals Week June 2011
1
Disclaimer: This presentation and its contents may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part for any purpose without the consent of Xstrata plc (“Xstrata”). The Directors of Xstrata accept responsibility for the information contained in this presentation. Having taken all reasonable care to ensure that such is the case, the information contained in this presentation is, to the best of the knowledge and belief of the Directors of Xstrata, in accordance with the facts and contains no omission likely to affect its import. This presentation does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for any securities, or a proposal to make a takeover bid in any jurisdiction. Neither this document nor the fact of its distribution nor the making of the presentation constitutes a recommendation regarding any securities. This presentation is being provided to you for information purposes only. Certain statements, beliefs and opinions contained in this presentation, particularly those regarding the possible or assumed future financial or other performance of Xstrata, industry growth or other trend projections are or may be forward looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”, “expects”, “intends”, “plans”, “goal”, “target”, “aim”, “may”, “will”, “would”, “could” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond Xstrata’s ability to control or predict. Forward-looking statements are not guarantees of future performance. No representation is made that any of these statements or forecasts will come to pass or that any forecast result will be achieved. Neither Xstrata, nor any of its associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this presentation will actually occur. You are cautioned not to place undue reliance on these forward-looking statements. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Services Authority), Xstrata is not under any obligation and Xstrata expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation contains references to “cost curves”. A cost curve is a graphic representation in which the total production volume of a given commodity across the relevant industry is arranged on the basis of average unit costs of production from lowest to highest to permit comparisons of the relative cost positions of particular production sites, individual producers or groups of producers across the world or within a given country or region. Generally, a producer’s position on a cost curve is described in terms of the particular percentile or quartile in which the production of a given plant or producer or group of producers appears. To construct cost curves, industry analysts compile information from a variety of sources, including reports made available by producers, site visits, personal contacts and trade publications. Although producers may participate to some extent in the process through which cost curves are constructed, they are typically unwilling to validate cost analyses directly because of commercial sensitivities. Inevitably, assumptions must be made by the analyst with respect to data that such analyst is unable to obtain and judgment must be brought to bear in the case of virtually all data, however obtained. Moreover, all cost curves embody a number of significant assumptions with respect to exchange rates and other variables. In summary, the manner in which cost curves are constructed means that they have a number of significant inherent limitations. Notwithstanding their shortcomings, independently produced cost curves are widely used in the industries in which Xstrata operate. No statement in this presentation is intended as a profit forecast or a profit estimate and no statement in this presentation should be interpreted to mean that earnings per Xstrata share for the current or future financial years would necessarily match or exceed the historical published earnings per Xstrata share. The distribution of this presentation or any information contained in it may be restricted by law in certain jurisdictions, and any person into whose possession any document containing this presentation or any part of it comes should inform themselves about, and observe, any such restrictions. Any failure to comply with such restrictions may constitute a violation of the laws of any such jurisdiction. By attending the presentation and/or accepting or accessing this document you agree to be bound by the foregoing limitations and conditions and will be taken to have represented, warranted and undertaken that you have read and agree to comply with the contents of this notice.
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
1
Disclaimer: This presentation and its contents may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part for any purpose without the consent of Xstrata plc (“Xstrata”). The Directors of Xstrata accept responsibility for the information contained in this presentation. Having taken all reasonable care to ensure that such is the case, the information contained in this presentation is, to the best of the knowledge and belief of the Directors of Xstrata, in accordance with the facts and contains no omission likely to affect its import. This presentation does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for any securities, or a proposal to make a takeover bid in any jurisdiction. Neither this document nor the fact of its distribution nor the making of the presentation constitutes a recommendation regarding any securities. This presentation is being provided to you for information purposes only. Certain statements, beliefs and opinions contained in this presentation, particularly those regarding the possible or assumed future financial or other performance of Xstrata, industry growth or other trend projections are or may be forward looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”, “expects”, “intends”, “plans”, “goal”, “target”, “aim”, “may”, “will”, “would”, “could” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond Xstrata’s ability to control or predict. Forward-looking statements are not guarantees of future performance. No representation is made that any of these statements or forecasts will come to pass or that any forecast result will be achieved. Neither Xstrata, nor any of its associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this presentation will actually occur. You are cautioned not to place undue reliance on these forward-looking statements. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules of the Financial Services Authority), Xstrata is not under any obligation and Xstrata expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation contains references to “cost curves”. A cost curve is a graphic representation in which the total production volume of a given commodity across the relevant industry is arranged on the basis of average unit costs of production from lowest to highest to permit comparisons of the relative cost positions of particular production sites, individual producers or groups of producers across the world or within a given country or region. Generally, a producer’s position on a cost curve is described in terms of the particular percentile or quartile in which the production of a given plant or producer or group of producers appears. To construct cost curves, industry analysts compile information from a variety of sources, including reports made available by producers, site visits, personal contacts and trade publications. Although producers may participate to some extent in the process through which cost curves are constructed, they are typically unwilling to validate cost analyses directly because of commercial sensitivities. Inevitably, assumptions must be made by the analyst with respect to data that such analyst is unable to obtain and judgment must be brought to bear in the case of virtually all data, however obtained. Moreover, all cost curves embody a number of significant assumptions with respect to exchange rates and other variables. In summary, the manner in which cost curves are constructed means that they have a number of significant inherent limitations. Notwithstanding their shortcomings, independently produced cost curves are widely used in the industries in which Xstrata operate. No statement in this presentation is intended as a profit forecast or a profit estimate and no statement in this presentation should be interpreted to mean that earnings per Xstrata share for the current or future financial years would necessarily match or exceed the historical published earnings per Xstrata share. The distribution of this presentation or any information contained in it may be restricted by law in certain jurisdictions, and any person into whose possession any document containing this presentation or any part of it comes should inform themselves about, and observe, any such restrictions. Any failure to comply with such restrictions may constitute a violation of the laws of any such jurisdiction. By attending the presentation and/or accepting or accessing this document you agree to be bound by the foregoing limitations and conditions and will be taken to have represented, warranted and undertaken that you have read and agree to comply with the contents of this notice.
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
