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Historical opportunities for growth of mining companies, Pan Guocheng, CEO, China Hanking


Historical opportunities for growth of mining companies, presented by Pan Guocheng, CEO, China Hanking at Mines and Money Australia, Oct 29 – Nov 1, 2013, Melbourne Convention and Exhibition Centre

Historical opportunities for growth of mining companies, presented by Pan Guocheng, CEO, China Hanking at Mines and Money Australia, Oct 29 – Nov 1, 2013, Melbourne Convention and Exhibition Centre

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  • 1. Presenter Pan, Guocheng PhD Chief Executive Officer and President Over 25 years of experience in mine development, mine operations, and business Management.
  • 2. Presentation to Mines and Money Australia 2013 Chinese Investments in Australia and the Iron Ore Industry Guocheng Pan October 30th 2013
  • 3. DISCLAIMER This material contains certain forecasts and forward-looking information, including regarding possible or assumed future performance, costs, production levels or rates, prices, resources, or potential growth of China Hanking Holdings Limited (“Hanking”) , industry growth, or other trend projections. Such forecasts and information are not a guarantee of future performance and involve unknown risks and uncertainties, as well as other factors, many of which are beyond the control of Hanking. Actual results and developments may differ materially from those expressed or implied by these forwardlooking statements depending on a variety of factors. No representation or warranty, expressed or implied, is made or given by or on behalf of Hanking, any of Hanking directors, or any other person as to the accuracy or completeness or fairness of the information or opinions contained in this presentation and no responsibility or liability is accepted by any of them for such information or opinions or for any errors, omissions, misstatements, negligent or otherwise, or for any communication written or otherwise, contained or referred to in this presentation. Accordingly, neither Hanking nor any of the Hanking directors, officers, employees, advisers, associated persons or subsidiary undertakings shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying upon the statement or as a result of any admission in, or any document supplied with, this presentation or by any future communications in connection with such documents and any such liabilities are expressly disclaimed. Nothing in this material should be construed as either an offer to sell or a solicitation of an offer to buy or sell securities.
  • 4. Chinese ODI in Australia Iron Ore & Steel Industry Hanking Project Development Hanking Business Strategies 2013-10-30 P1
  • 5. Chinese ODI in Australia Outward FDI by Chinese companies has increased 40 times in the past decade. Chinese outbound investors are active in manufacturing, energy & resource sectors, although the industry profile is increasingly diversified. Most outbound direct investment to Australia focuses on energy and resource areas. 100 90 80 70 60 50 40 30 20 10 0 87.8 68.8 74.7 55.9 56.5 21.2 26.5 12.3 2.7 5.5 2.9 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Chinese FDI Distribution (bn USD) Chinese investment in Europe has been aimed at enhancing market access, while manufacturing investment has been in developing economies, ex., Asia. Chinese FDI Growth (bn USD) Chinese FDI Outflows 50 45 40 35 30 25 20 15 10 5 0 75.6% 80% 70% 2011 2010 Change 50.4% 60% 50% 40% 30% 22.1% 20% 10% 13.3% 1.3% Oceania Africa Europe L.America Asia -5.3% 0% -10% N.America Source: Chinese Bureau of Statistics 2013-10-30 P2
  • 6. Chinese ODI in Australia Chinese Outbound Direct Investments 14 60000 ODI Accumulated btw 2005-2012 12 10 50000 Global ODI % 40000 8 30000 6 20000 4 2 10000 0 Investment in USD million Australia is a significant recipient of the Chinese outbound investment, largescale investment began in 2005. By 2012, total accumulated investment reached USD50.8 billion in Australia, just ahead of the USA at USD50.7 billion and USD36.7 billion in Canada. 0 Source: KPMG Chinese ODI Diversifying… Chinese investment is geographically diversifying, and other major recipients included Brazil and Russia. The largest investment destinations in Europe and Africa are UK and Nigeria respectively. 2013-10-30 P3
  • 7. Chinese ODI in Australia Chinese ODI in Different States in 2012 7000 60 6000 50 5000 ODI% in Different State 40 4000 30 3000 20 2000 10 1000 0 ODI% i n Different State Tota l ODI in USD Million ODI Total in Different State 0 WA QLD SA VIC TAS NSW In 2012, WA attracted 56% of the Chinese total ODI, and QLD 33%. Companies officially incorporated in these two states together accounted for 90% of the 2012 investment capital. New South wales and Victoria have captured relatively less Chinese capital compared to their historical shares. Investment in WA and QLD was concentrated in mining and resource sectors; NSW & Victoria’s engagement with Chinese companies was more diversified. Source: KPMG 2013-10-30 P4
  • 8. Chinese ODI in Australia Chinese ODI Diversifying… The 2012 growth rate of Chinese investment into Australia was twice as high as that of global Chinese outbound investment, as the 9th largest FDI in Australia. Chinese investment trends in Australia in 2012 show a diversification towards energy, agriculture, and other sectors, although mining still dominates. Of the total USD11.4 billion invested in 2012, 48% was recorded in mining, 42% in gas, 3% in agriculture and, 2% in renewable energy. 48% Mining USD5471.46mm 42% Gas USD4785.20mm 2% Ren Energy USD182.60mm 8% Others USD944.20mm Accumulated ODI btw 2006-2012 being USD50.79bn 73% Mining USD36875mm 18% Gas USD8867mm 4% Ren Energy USD2213mm 5% Others USD2837mm Source: KPMG 2013-10-30 P5
  • 9. Chinese ODI in Australia Chinese ODI Size and Ownership In 2012, the average size of the completed deals in Australia remained large compared with those of other countries. Over 50% had a transaction value over USD200 million. The 30% of mega investments (over USD500 million) was relatively higher in 2012 than historical averages (19%). Investments by private Chinese companies in 2012 increased to 26% of total, with SOE investment reduced to 74% by number of deals, and 87% by value. Ownership Investment Value Investment Deals in 2012 USD million % Number % SOE 9927.04 87% 20 74% Private 1456.42 13% 7 26% Total 11383.46 27 Source: KPMG 2013-10-30 P6
  • 10. Chinese ODI in Australia Iron Ore & Steel Industry Hanking Project Development Hanking Business Strategies 2013-10-30 P7
  • 11. Iron Ore & Steel Industry China - only driver for the world steel industry … World crude steel production reached 1.548 billion tons in 2012, a new historical high level. The CAGR of world crude steel production was 5.6% over the past decade. Chinese crude steel production was 717 million tons in 2012, accounting for 47.2% of the world total. Almost all growth of steel production worldwide came from China. China has become a net exporter since 2005. As the global economic progressively recovers, Chinese net exports of steel rebounded to 42 million tons last year. World Steel Prod by Region 2001-2012(mt) Chinese Steel Net Exports 2001-2012 (mt) Source: Hatch, UNCTAD 2013-10-30 P8
  • 12. Iron Ore & Steel Industry Largest Iron Ore Producers in the World As the largest iron ore producer, Vale produced 323 million tons of iron ore and gained a market share of 16.3% in 2011. The “Big 3”, Vale, Rio Tinto and BHP Billiton, together controlled 35.6% of world production in 2011. The top ten producers controlled 995 million tons iron ore and 50.3% of the world total production. Iran Canada Iron Ore Production (mt) in 2011 35.5 37.1 USA 52.9 South A rica 53.6 Ukraine 78.6 Russia 103.1 India 196.0 China 321.9 Brazil 391.0 Australia 487.9 0 100 200 300 4 00 500 600 Source: Hatch, UNCTAD 2013-10-30 P9
  • 13. Iron Ore & Steel Industry Global Iron Ore Production Continues to Grow… World iron ore production increased from 934 million tons in 2001 to 1.923 billion tons in 2011 at CAGR of 7.5%. Asia, Americas and Oceania are the major iron ore producing regions which accounted for 84.1% of world total in 2011; China emerged as a country with the fastest growth of iron ore production during 2001-2011 at a CAGR of 12.2%. The top five producing countries are Australia, Brazil, China, India and Russia, which produced 488, 391, 322, 196 and 103 mt of iron in 2011, accounting for 78% of the world total. 2000 World Iron Ore Production (mt) Europe ex CIS Africa 1500 CIS 1000 Asia ex China China 500 Oceania Americas 0 2001 2013-10-30 2003 2005 2007 2009 2011 Source: Hatch, UNCTAD P10
  • 14. Iron Ore & Steel Industry Chinese Iron Ore Production Chinese crude iron ore output increased to 1.31 billion tons in 2012 from 218 million tons in 2001 with a CAGR of 17.7%. The Chinese iron ore concentrate production peaked in 2007 at 369mt, then declined in 2008 and 2009, and resumed to 307mt in 2012. Northern, Northeastern and Southwestern China are the major iron ore producing regions in China which collectively accounted for 81.9% of the national total in 2012. crude Iron Ore 1200 Iron Ore Concentrates 1000 800 600 400 200 0 Chinese Iron Ore Production (mt) 1400 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Hatch, UNCTAD 2013-10-30 P11
  • 15. Iron Ore & Steel Industry Chinese Iron Ore Producers Privately-owned small/medium sized mining enterprises have undergone a significant growth in China at a CAGR of 24% from 2003 to 2012, while keyproducers at only a CAGR of 9.8%. Chinese crude iron ore productions from key and small/medium producers were 224mt (17.1%) and 1.086bt (82.9%) last year, respectively. Chinese Crude Iron Ore Production (mt) Source: Hatch, UNCTAD 2013-10-30 P12
  • 16. Iron Ore & Steel Industry Chinese Iron Ore Imports Chinese iron ore imports in 2012 increased to 747mt from 687mt a year ago, up by 8.3%; the imports increased at a CAGR of 20.9% during 2001 to 2012. Chinese iron ore imports from Australia were 352mt in 2012, accounting for 47.2% of Chinese total iron ore imports. Brazil ranked the second exporting 164mt or 22.1% to China. The two accounted for 69.3% last year. The top five countries, including Australia, Brazil, South Africa, India and Ukraine, represented 81.4% of Chinese total iron ore imports. 800 700 600 500 400 300 200 100 0 Chinese Iron Ore Imports (LHS) Chinese Shares of World Total (%) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Hatch, UNCTAD 2013-10-30 70% 60% 50% 40% 30% 20% 10% 0 P13
  • 17. Iron Ore & Steel Industry Global Iron Ore Consumption Gl obal Iron Ore Consumption (mt) World apparent iron ore consumption increased from 923mt in 2001 to 1.886 billion tons in 2011 at a CAGR of 7.4%. Chinese consumption was 1.05 billion tons in 2012, accounting for 53.5% of the world total; it grew at a CAGR of 16.6% in the past decade. Source: Hatch, UNCTAD 2013-10-30 P14
  • 18. Iron Ore & Steel Industry Cash Costs for Chinese Iron Ore Producers The cash operating cost of Chinese iron ore concentrate in 2012 ranges from RMB200 to 900/t with an average of RMB580/t. 26 key Chinese iron ore companies produced 96mt of concentrate in 2012, accounting for 31.4% of national total. The average cash operating cost of these companies was RMB457/t. Cash Cost Curve for China (RMB/t) Cash Cost Curve for key Procedures (RMB/t) Ca s h Operating Cost (RMB/t) Accumul ated Concentrate Production (mt) Accumul ated Concentrate Production (mt) Source: Hatch, UNCTAD 2013-10-30 P15
  • 19. Iron Ore & Steel Industry Imported Iron Ore Prices Annual average imported iron ore (62% Fe content) CFR price to China for 2009, 2010, 2011 and 2012 were $79.8, $146.5, $168.7 and $131.0/t, respectively. Chinese average imported iron ore prices reached a historical high in Q2 of 2011. The price started declining and fell below $100/t by Q3 of 2012. The import price climbed back to around $140/t in Q3 of 2013. Due to restriction on iron ore export, Indian export of iron ore to China has been quickly diminishing. Source: Hatch, Platts 2013-10-30 P16
  • 20. Iron Ore & Steel Industry Domestic Iron Ore Prices Hebei, the largest iron ore producing and consuming province, is usually viewed as a key reference of domestic spot market. Chinese domestic concentrate prices peaked at RMB1,570/t in July 2008, and then dropped sharply due to the financial crisis in late 2008. Since Q2 of 2009, Chinese domestic prices have been moving out of the haze and remained at a mid-high level. The domestic iron ore price is currently at around RMB1000/t. Source: Hatch, Platts 2013-10-30 P17
  • 21. Iron Ore & Steel Industry On the Supply Side - New Iron Ore Production Capacity From 2013 to 2016, the new annual iron ore capacity introduced from announced projects would surpass 800mt. “Big 3” accounts for around 27%. Emerging iron ore producers led by FMG would accounts for 43% of the total newly added capacity. Remaining new capacity consists of Chinese domestic and overseas investments. New Iron Ore Prod Ca pacity (mt) Source: Hatch, UNCTAD 2013-10-30 P18
  • 22. Iron Ore & Steel Industry On the Demand Side – Pig Iron Production Projection On demand side, the pig iron production of China is estimated to rise from 658mt in 2012 to 750mt in 2016 at a CAGR of 3.3%. Global pig iron production would increase from 1.163 billion tons in 2012 to 1.26 billion tons in 2016, at a CAGR of around 2.0%. Most of the increase would come from China. The annual increase in pig iron production would be around 23mt from 2013 to 2016 and the annual demand for new iron ore would be 37mt. Pig Iron Production (mt) Ha nking Forecast Source: Hatch, UNCTAD 2013-10-30 P19
  • 23. Iron Ore & Steel Industry Chinese Iron Ore Shortage Chinese iron ore shortage is expected to continue with dependence on import to grow from 71% in 2012 to 75% in 2016. Chinese total demand of iron ores by 2016 would grow to 1.2 billion tons; Chinese iron ore imports forecast to grow from 747mt in 2012 to around 900mt by 2016. 1200 Chinese Iron Ore Demand (mt) Import Forecast Import Actual Domestic Forecast Domestic Actual 1000 800 600 383 326 400 0 619 900 328 307 300 300 300 300 275 148 200 444 628 820 890 744 860 687 92 112 102 109 208 208 204 266 328 369 301 251 310 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E Source: Hanking, Hatch, UNCTAD 2013-10-30 P20
  • 24. Iron Ore & Steel Industry Where Would the Iron Ore Price Go? Combining the forecasts from several organisations and in-house analysis, it would be difficult for iron ore price to go back to 2008-2011 level. Hanking forecasts that the global iron ore price (CFR China) fluctuate within a range of US$120-140/t for the period of 2014-2016. Possibility of witnessing an iron ore price below US$120/t still exists in a short term within the next three years. Hanking Hatch Source: Hatch, UNCTAD 2013-10-30 Seaborne Iron Ore Price (USD/t) Forecast Platts 62% Fe Index P21
  • 25. Chinese ODI in Australia Iron Ore & Steel Industry Hanking Project Development Hanking Business Strategies 2013-10-30 P22
  • 26. Hanking Project Development Hanking’s Core Asset Portfolio: Iron Ore, Nickel, Gold Hanking acquired a 2.4 moz gold property in Western Australia and is now under development planning. Iron Ore Business Hanking is one of the largest iron ore producers in China. All of its iron ore mines are located in the famous An-Ben Belt, which hosts about 1/3 of the Chinese iron ore reserves. Gold Business Nickel Business Hanking acquired a world class nickel mine in Indonesia and plan to mine 2 mt nickel ore in 2014 and a smelter is under construction. 2013-10-30 P23
  • 27. Hanking Project Development Hanking Project Summary China Iron Ore Mines Liaoning, China Location Liaoning, China Mines Aoniu, Maogong, Xingzhou, Mengjia, Shangma Mining Method Open pit + Underground Total Resources 220 Mt Indonesia Nickel Mines Location SE Sulawesi, Indonesia Mining Method Open pit JORC Resources 351 Mt ore, 4.80 Mt Ni JORC Resources 90.54 Mt (high Fe low Ni) Sulawesi, Indonesia Australia Gold Mines Western Australia Southern Cross, WA Mining Method Open pit + UG JORC Resources 2013-10-30 Location 2.4 moz Au (75 ton) P24
  • 28. Hanking Project Development Low Cash Operating Cost Advantage One of the lowest cash costs Cash cost RMB320/t, 55% of national average Operating margin over 60% 220mt JORC resources, 175mt JORC reserves Five operating mines in NE China 10mt crude ore, 3mt concentrate capacities Low stripping ratio, simple magnetic processing Proximity to steel mills (75 km radius) Employment of new technologies Sharp cost control on daily basis 1,000 Hanking: RMB320/t 800 人人币 / 吨 RMB/t Current Production Capacity Average in China: RMB580/t 600 400 200 0 0 50 100 150 铁精精铁精( 百百吨 ) 200 Iron concentration Volume (Mt) Attractive cost position relative to global seaborne exporters Global seaborne iron ore cash cost curve (CRF China) (US$/t) 140.00 120.00 100.00 China average (2012): US$95/t 80.00 Global average (2012E): US$77/t 60.00 40.00 Hanking (2012): US$52/t 20.00 0.00 200 Mt 2013-10-30 400 Mt 600 Mt 800 Mt 1000 Mt P25
  • 29. Hanking Project Development World Class Nickel Resource The Hanking Nickel Mine in North Konawe, Southeastern Sulawesi Province, Indonesia ranks in the second largest in the world by metal contents, . JORC Resource and Reserve Estimation Class Resource ( 10 3 T) ) Grade Ni (T) Resources (Ni Metal in 103 T) Metal Ni/% Ranks in Ni Quantity of Nickel Laterite Deposits PT Aneka-Pomalaa 5657 Hanking - N. Konawe 4797 Soroako 4752 Measured 85,818 1.51 1,292,397 Indicated 182,205 1.35 2,460,766 Inferred 83,104 1.26 1,043,744 VNC Total (M+I+I) 351,128 1.37 4,796,907 Gag Island High Fe Resource 90,540 50.27%Fe & 0.79%Ni Halmahera/Weda Bay 4155 3294 3120 Buli 2730 La Sampala Class Reserve ( 10 3 T) ) Grade Metal Ni% Ni (T) 2592 Koniambo 2435 Obi 1584 S.E. Kalimantan Proven + Probable 74,850 1.4 1,046,537 Gebe Island Possible 171,984 1.31 2,256,590 Cycloops Total (P+P+P) 246,834 1.34 3,303,128 840 2013-10-30 594 169 0 1000 2000 3000 4000 5000 6000 P26
  • 30. Hanking Project Development Laterite Nickel Mine Development KS and KKU mines are both in production; Hanking plans to sell 400,000 tons of laterite ores this year and 2mt next year. Major infrastructures, including mine camps, roads, and temporary wharf, have been completed. The primary design for Energy Saving Shaft Furnace (ESSF) completed. Construction of the facility is under way. 2013-10-30 One of the berths of KKU port, which can serve to move 2 million tons of ores annually. P27
  • 31. Hanking Project Development Production and Investment Plans for the Nickel Mine Nickel Project Production Projections 2013 2014 2015 2016 2017 0.4 mt 2.0 mt 3.0 mt 4.0 mt 5.0 mt 10,000 t 20,000 t 30,000 t 40,000 t Mining Smelting Capital Investment Plan in the Nickel Project CapExp in mmUSD 250 Total Capital Investment Investment in Smelting Investment in Mining 200 Mining US$102 mm Smelting US$145 mm TOTAL US$247 mm 150 100 50 0 2013 2013-10-30 2014 2015 2016 2017 Future Total P28
  • 32. Hanking Project Development SXO, about 360km west of Perth, has JORC gold resources of 2.4 Moz and a processing plant of 2.4 mt/a. Total 930 km2 coverage of exploration and mining permits that spans along the famous 150 km long gold belt. Focus on exploration for resource upgrade & target for new discoveries. Mine planning is under way. The 2.4 mt/a processing plant 2013-10-30 P29
  • 33. Chinese ODI in Australia Iron Ore & Steel Industry Hanking Project Development Hanking Business Strategies 2013-10-30 P30
  • 34. Hanking Business Strategies Low Cost Strategy Diversification Strategy Iron ore is the core business, while Ni and Au are developed as parallel. Hanking aims to become an influential iron ore producer. Development of Ni and Au businesses helps reduce risks of market fluctuation. Low cost is the core competitive edge. This strategy is executed in project acquisition and operations. Continue to use the adaptive approach for optimizations of new mining and processing technologies. STRATEGY Establish exploration, mining, processing, & smelting value chain, maximizing values to shareholders. Create benefits from valueadded processes, balance earlystaged and advanced projects. Value-Chain Strategy 2013-10-30 Senior and special talents are sought globally, while operational teams are built locally. Team members must have global visions and experiences of international operations. Talents Strategy P31
  • 35. Hanking Business Strategies 1 CLEAR M%A STRATEGY Assessment of target strategic fit Assessment of benefits from the deal Precise valuation of expected synergies 4 SUCCESSFUL POST INTEGRATION Process/procedure integration Cultural harmonization Identification of managerial skills 2 WELL EXECUTED DUE DILIGENCE M&A Careful and precise due diligence Assessment of potential risks Design of negotiation tactics 3 DISCIPLINED DEAL EXECUTION Definition of the best method of payment Impact on the bidder’s financial situation Definition of the premium to be paid Source: Company Information, Goldman Sachs 2013-10-30 P32
  • 36. Hanking Business Strategies Sustainable Value Creation Model Regardless of market volatility, low-cost has always been Hanking’s key value driver. Hanking remains focused on optimizing its operational cost structures, will maintain our low operating cost advantage, and will continue to grow as a low-cost producer. 2013-10-30 P33
  • 37. Thank You & Questions Guocheng Pan, PhD President/CEO China Hanking Holdings, Ltd. (HKSE 03788) Email: Web: 2013-10-30 P34