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William Husband, Citigroup: Key themes in global metals and mining sector
 

William Husband, Citigroup: Key themes in global metals and mining sector

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William Husband, Head of Metals & Mining for Russia and CIS, Citigroup delivered this presentation at the 2013 Russian & CIS Coal Summit. Co-organised with Informa's Adam Smith Conferences, the Summit ...

William Husband, Head of Metals & Mining for Russia and CIS, Citigroup delivered this presentation at the 2013 Russian & CIS Coal Summit. Co-organised with Informa's Adam Smith Conferences, the Summit provides top CEOs, investors, analysts and officials with a platform for debate, analysis and networking with the key representatives from Russia's major coal producing companies. For more information about the annual event, please visit the conference website: http://www.immevents.com/russiaciscoal

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    William Husband, Citigroup: Key themes in global metals and mining sector William Husband, Citigroup: Key themes in global metals and mining sector Presentation Transcript

    • Citigroup Global Markets Inc. | Subgroup Name Citigroup Global Markets | Global Metals & Mining Key Themes in Global Metals & Mining Sector Russian & CIS Coal Summit 2013 William Husband, Head of Metals & Mining for Russia and CIS May 2013
    • Current Metals and Mining Sector Themes 1 2 Uncertainty in Emerging Mining “Hot Zones” 3 Mixed Results from Growth via Acquisitions 4 Stocks Have Largely Underperformed 5 Shifting Priorities Have Led to Major Changes in Leadership 6 Long-Term Thesis Remains Intact: China and India Will Drive Demand 7 Capital Expenditures Will Be Robust, but Strategically Targeted 8 1 Meaningful Cost Escalation Impacting All Regions and Commodities Outlook on Commodity Pricing Remains Constructive
    • 1 Rising Cost Curves Impacting Performance Ten Year Operating Performance (2001 – 2011) EBITDA Margin Comparison Commodity Spot Price ∆ Mining Cash Costs ∆ Coking Coal  388%  260% 2001 39% 2011 55% Thermal Coal  250%  225% 2001 33% 2011 38% Iron Ore  150%  178% 2001 65% 2011 62% Copper  212%  250% 2001 53% 2011 47% Gold  200%  253% 2001 51% 2011 43% Source: Bloomberg and FactSet market data Cost and EBITDA Margin ∆ calculated off index sales weighted average COGS and EBITDA, respectively. Note: Coking Coal represents Pacific HCC benchmark price. Thermal Coal represents FOB Newcastle / Port Kembla. Iron Ore represents CIF Main China Port. Met Index Includes Alpha, Borneo, Mongolian Mining, New World Resources and Walter. Thermal Index includes Adaro, Arch, China Coal, China Shenhua, Coal India and Peabody. Iron Ore Index includes Atlas Fortescue, Mount Gibson, Aquila, Gindalbie, Grange, Ferrexpo, MMX Mineracao, Kumba and Vale. Copper Index includes Augusta Resource, Copper Mountain, Pacific BookerMinerals, Duluth Metals, Freeport Resources, FNX Mining, Inmet Mining, Ivanhoe Australia, Equinox Minerals, Kazakhmys, Antofagasta, Southern Copper, First Quantum 2 and Western Copper and Gold Corp. Gold Index includesAgnico-Eagle, AngloGold Ashanti, Barrick, Goldcorp, Gold Fields, Kinross, Newcrest, Newmont, Polyus, Randgold, Yamana
    • 1 New Supply Focused on Lower Cash Cost Position Commodity Cost Curves Over Time 2012 Cost Curve Coking Coal(1) Cash Cost ($/t) (2012 – 2020E) New Production Below Highest 2012 Cost Quartile 2020E Cost Curve $200 2012 Avg. $69 $150 $100 2020 Avg. $66 160 mt $50 $ Thermal Coal(1) Cash Cost ($/t) -- 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 Cumulative Production (MT) $100 2012 Avg. $34 $75 $50 2020 Avg. $35 375 mt $25 $ Iron Ore(2) Cash Cost ($/t) -- 75 150 225 300 375 450 525 600 675 750 Cumulative Production (MT) 825 900 975 1,050 1,125 $125 2012 Avg. $48 $100 $75 2020 Avg. $44 $50 1,100 mt $25 $ Copper(3) Cu Cash Cost (c/lb) -- 3 Au Cash Cost ($/oz) 675 2012 Avg. 152c 300c 200c 900 1,125 1,350 1,575 1,800 2,025 2,250 2,475 2,700 2,925 3,150 3,375 Cumulative Iron Ore Production (MT) 2020 Avg. 156c 9,000 mlbs 100c -3,750 7,500 11,250 15,000 18,750 22,500 26,250 30,000 33,750 37,500 41,250 45,000 Cumulative Copper Production (Mlbs) $1,600 2012 Avg. $589 $1,200 $800 2020 Avg. $539 350 t $400 $ -- Source: (1) (2) (3) (4) 450 400c -- Gold(4) 225 250 500 750 1,000 1,250 1,500 Cumulative Gold Production (t) 1,750 2,000 2,250 American Mineral Economics and Wood Mackenzie. Represents seaborne metallurgical “hard coking” and thermal “steam” coal C1 FOB cash cost in nominal $ / tonne; cost includes mining, preparatory, transport, port and overhead costs; production in million metric tonnes. Represents iron ore mine FOB cash cost in real 2013 $ / tonne; cost includes mining, processing, administrative & support and freight costs; production in million metric tonnes. Represents copper mine C1 FOB cash cost in nominal c / lb; cost includes c to c, freight, realization and net by-product credits; production in million lbs. Represents gold mine C1 FOB cash cost in nominal $ / oz; cost includes production, realization and net by-product credits; production in tonnes.
    • 2 Significant Resource Potential in Emerging Geographies Expected Production Increase (2012-2020E) Russia Mongolia Coking Coal 8 mt Coking Coal 17 mt Thermal Coal 6 mt Thermal Coal 13 mt Iron Ore Coking Coal Iron Ore Copper Brazil(1) 168 mt Copper 861 kt Gold 2,810 koz 1,102 koz 647 kt 263 kt Gold Gold 19 mt Copper 491kt 17 mt Iron Ore Western Africa(2) 3 mt 28 mt Thermal Coal Iron Ore Copper Southern Africa(3) 20 mt Gold 1,529 koz Indonesia Thermal Coal 3,434 koz 27 mt Coking Coal 1 Iron Ore 2 mt Thermal Coal 28 Copper 225 kt Iron Ore 313 mt Copper 329 kt Gold Gold 401 koz Coking Coal Thermal Coal Iron Ore Copper Gold 2,816 kt 10,183 koz 11% 10% 2012-2020E Absolute Emerging Geography Production Increase 54 mt 92 mt 524 mt 2012-2020E Absolute Increase as % of 2020E Total Global Production 13% 4 Source: (1) (2) (3) 9% 18% American Mineral Economics. Includes Colombian met and thermal coal production. Includes Burkina Faso, Congo, Ghana, Guinea, Ivory Coast, Liberia, Mauritania, Nigeria, Senegal and Sierra Leone. Southern Africa includes Mozambique, Namibia, South Africa, Zambia and Zimbabwe. 877 koz
    • 2 Challenges in Emerging Mining Regions  Development / Execution Risk Associated with Greenfield Projects  Lack of Transportation Infrastructure to Support Growth  Political and Economic Instability  Increased Resource “Nationalism”  Rising Royalty / Tax Requirements  Unstable Labor Situations  Rising Acquisition Valuation and Capital Investment Levels 5
    • 3 2006 – 2011: “Golden Period” of M&A in Metals and Mining M&A Deals in the Metals and Mining Sector Since 2002(1) (US$ in millions) 11 Annual # of Deals 22 17 33 41 83 83 52 120 114 91 Glencore / $143,062 Xstrata Rio / Alcan $132,119 $127,310 $128,145 $122,062 $95,927 Financial Recession $46,321 $38,514 $17,795 $11,074 2002 6 2003 $14,155 2004 2005 Source: SDC. Note: Transaction value including net debt. (1) Transactions in the mining sector above US$250 million. 2006 2007 2008 2009 2010 2011 2012
    • 3 Significant Consolidation Since Mid – 2000’s Diversified Major Acquisitions (2006 – Current) (US$ in billions) $48.0bn $3.5bn $2.9bn Riversdale Ivanhoe $3.9bn $28.5bn $6.4bn $19.6bn $17.0bn $3.8bn $2.5bn De Beers $5.2bn Minas Rio $3.0bn Fayetteville $4.8bn $14.1bn Source: Company filings and SDC. 7 Jubilee Mines $4.7bn BSG Guinea bhpbilliton RioTinto $2.0bn $2.8bn Falconbridge $17.3bn $2.5bn BPI + Fosfertil Petrohawk $11.8bn M.-Rio/Amapá $5.5bn AngloAmerican Prodeco Alcan $37.6bn $3.8bn $3.1bn Vale Norsk Hydro Xstrata
    • 3 Sector Re-ratings Have Led to Large Asset Writedowns Diversified Major Impairment Charges(1) (2006 – Current) (Cumulative charges as % of 2006 to current cumulative acquisition value, US$ in billions) $28.8bn Alcan / Aluminium $8.6bn  60% Alcan $6.7bn  36%  21%  36% Aluminium $10.5bn  12% $6.2bn $5.1bn $2.2bn Minas Rio $4.0bn $4.1bn Fayetteville AngloAmerican Source: Company filings and SDC. (1) Pre-tax charges shown. 8 $1.3bn Mozambique Coal $2.8bn $3.0bn bhpbilliton RioTinto $2.3bn Onça Puma $2.8bn Vale Nickel Assets $3.3bn $1.1bn $2.1bn Xstrata
    • 4 Mining Equity Values Have Seen Mixed Performance Diversified Miner Market Capitalization (US$ in billions, % ∆ in market capitalization from prior period) $258 $180 $172 $152 $118 $107 $86 $74 $75 $69 $61 $47 $69 $47 $35 118% 2007 (30%) 2011 2013 BHP-AU 132% 2007 (38%) 2011 2013 RIO-AU 149% 2007 (44%) 2011 2013 VALE5-BR Source: Company filings and FactSet Market Data as of April 3, 2013. Note: 2007 and 2011 market capitalizations reflect first trading day of respective calendar years. 9 47% 2007 (32%) 2011 2013 XTA-GB (8%) 2007 (50%) 2011 2013 AAL-GB
    • 4 Commodity Prices Have Been Primary Equity Value Driver 2007 – 2009 Price Performance Iron Ore Gold Thermal Coal Coking Coal Thermal Coal (29%) 7% Gold Iron Ore 39% Diversified Miners 58% 163% Copper 2011 – Current Price Performance Coking (34%) Coal Coking (15%) Coal Copper (54%) Diversified Miners 2009 – 2011 Price Performance Diversified (32%) Miners 50% Copper 61% Iron Ore 123% 145% 236% Thermal Coal (24%) (22%) (20%) Gold Source: Bloomberg and FactSet market data as of April 3, 2013. Note: Diversified Miners Index represents the market value weighted average of Anglo American, BHP Billiton, Rio Tinto, Vale and Xstrata. Coking Coal Benchmark represents the Australia – Japan Benchmark HCC contract price. Thermal Coal Spot price represents FOB Newcastle / Port Kembla. Iron Ore Spot represents Fines CFR Main China port. 10 9%
    • 5 Faltering Performance Has Led to Change in Leadership Company Former CEO New CEO Stock Price ∆ Since 2011  (52%) Cynthia Carroll Mark Cutifani (2007– 2012)  (27%) Marius Kloppers Andrew Mackenzie (2007 – 2013)  (34%) Tom Albanese Sam Walsh (2006 – 2013)  (43%) Roger Agnelli Murilo Ferreira (2001 – 2011)  (33%) Mick Davis (2001 – Pending) Source: Company filings and press releases and FactSet market data. 11 Ivan Glasenberg
    • 6 Positive Long-Term Macro Trends in China and India Sustained GDP Growth Accelerating Urbanization (2012 – 2020 CAGR) (China + India) 6.8% Rural Population 6.7% 2000 – 2030 CAGR 2.5% 4.8% 3.2% China India Brazil Urban Population 2.7% Russia 54% 2.7% U.S. R.O.W. 41% 1950 1960 1970 1980 1990 2000 2010 2020 2030 Electricity Demand Relies on Coal Increasing End Market Demand – World Auto Builds (coal fired % of total domestic electricity generation) (2012-2028 world light vehicle assembly CAGR) Coal Non-Coal 11.8% 22% 26% 33% 78% 74% 67% 23% 4.4% 77% 4.2% 3.5% 1.8% 0.9% 2012 2020 China 2012 2020 India Source: American Mineral Economics, Wood Mackenzie and United Nations. 12 India China Russia Brazil R.O.W. USA
    • 6 Commodity Consumption Driven by Chinese & Indian Demand Commodity Consumption Over Time (2012 - 2020) Coking Coal Thermal Coal Iron ore Copper Gold (mm tonnes) (mm tonnes) (mm tonnes) (mm tonnes) (tonnes) Global Coking Coal Demand Growth +50% Global Thermal Coal Demand Growth +29% Global Iron Ore Demand Growth +29% Global Copper Demand Growth +36% Global Gold Demand Growth +9% 2,386 1,058 75 28 149 400 1 4,841 4,449 150 1,844 820 266 112 89 20 1 90 312 12 1,376 32 223 9 54 1,066 4,841 4,449 597 213 14 508 180 860 11 2020 2012 688 2012 2020 2012 Source: AME and Wood Mackenzie. Note: Consumption data reflects seaborne market only. 13 2020 2012 China India 2020 Rest of World 2012 Total World (in bold) 2020
    • 7 Need for Capital Investment to Sustain Operating Platforms ∆ In Average Capex Profile Capex Profile (US$ in billions) Company Historical Projected 2008-2012A 2013-2015E ∆ Average EBITDA Profile 2008-2012A   3% $5.1 $4.6 $5.3 $6.2 $6.0 $6.2 $6.1 '08 '09 '10 '11 '12 '13E '14E $19.8 $18.5 $15.8 $11.6 $9.3 $11.1 $4.5 '15E $5.4 $5.6 $10.5 $10.5 '08-'12 Avg '13-'15 Avg '08-'12 Avg '13-'15 Avg  17%  18% $14.8 $14.3 '09 '10 '11 '12 '13E '14E '15E $28.8 '08-'12 Avg $13.3 $11.8 $11.2 $12.3 '08 $5.4 '10 '11 '12 '08-'12 Avg '13E '14E '15E $24.7 $12.1 $9.7 $21.9 '08-'12 Avg '13-'15 Avg '08-'12 Avg  20% $10.2 '08 $13.4 $16.9 $17.7 '09 $15.9 $13.3 '10 '11 '12 '13E '14E '15E '08-'12 Avg $23.8 $20.9 '13-'15 Avg '08-'12 Avg  (1.7%) $4.8 $3.6 '08 '09 $5.8 '10 $8.1 '11 $10.0 '12 $8.0 '13E '15E Source: Company filings and press releases and Wall Street consensus estimates. 14 $6.4 '08-'12 Avg '13-'15 Avg $4.9 '14E '13-'15 Avg  16% $6.5 $6.2 '13-'15 Avg  14% $16.4 $16.3 $15.0 $8.1 '13-'15 Avg  13% $4.6 '09 '13-'15 Avg  25% $17.4 $8.6 $33.9 $15.8 $13.5 '08 2013-2015E $9.3 $10.8 '08-'12 Avg '13-'15 Avg
    • 7 Shift in Focus to Low Risk, Higher Return Investments Total Capex Including Net M&A for Mining Majors Industry Projections for Composition for Capex(1) (FY2004 – FY2012, US$ in billions) (US$ in billions) $109 $108 $85 $82 $76 25% 45% 52% 49% 46% 31% 33% 36% $67 30% 56% 39% 40% 19% 16% 30% 17% 18% 18% BHPB Rio Anglo 2013 2014 2015 Sustaining Capex Growth Capex Net M&A Source: Company filings and Wall Street research. (1) Industry composition made up of capital expenditure projections represent broader metals and mining industry. 15 Brownfield Maintenance Greenfield
    • 8 Historical Commodity Price Volatility Flattening Out Commodity Price Outlook Commodity Forecast(1) Historical Key Drivers $350 Coking Coal $250 (US$ / tonne) $150 $50 2005 2006 2007 2009 2010 2011 2013 Thermal Coal (US$ / tonne) Iron Ore (US$ / tonne) Copper (US$ / lb) Gold (US$ / ozt) Source: Note: 16 (1) $200 $150 $100 $50 $0 2005 2006 2007 2009 2010 2011 2013 $250 $200 $150 $100 $50 $0 2005 2006 2007 2009 2010 2011 2013 $10,000 $8,000 $6,000 $4,000 $2,000 2005 2006 2007 2009 2010 2011 2013 $2,000 $1,500 $1,000 $500 $0 2005 2006 2007 2009 2010 2011 2013 2013E 2014E 2015E 2016E LT $102 $106 $107 $109 $105 2013E 2014E 2015E 2016E $115  De-stocking / gas impacting near-term Coal remains primary global fuel Volatility created scare amongst producers  Significant new supply deferred  Long-term supply will impact pricing  High cost new supply deferred / cancelled Input costs / China demand are concerns  Focus on interest rates, FX, inflation New supply replacing aging mines  Unique “outside” support buoys market LT $122 Trends: China , US / EUR   $200   $197 Forecast well above past levels  $197 Hard coking coal volatility continues  $202   $198 $81 $120 $122 2013E 2014E 2015E 2016E $7,840 $7,239 $6,930 $6,613 $5,842 2013E 2013E 2015E 2016E $1,468 $1,780 2014E $1,359 LT LT $1,075 $1,630 2014E 2015E 2016E LT Bloomberg, FactSet, Wall Street research and Wood Mackenzie. “LT” represents consensus long-term price forecast in real 2013 US$. Coking coal represents Pacific HCC benchmark contract. Thermal Coal represents FOB Newcastle / Port Kembla. Historical Iron Ore represents 63.5% CIF Main China Port; forecast pricing may differ. Represents median Wall Street consensus forecast in real 2013 US$.
    • 8 Significant Cash Flow Potential Based on Current Outlook Commodity Industry Commentary Coking Coal “Coking coal is going to be a very strong one in the future as China and India’s requirement for imported coking coal increases.” - Ian Kilgour (SVP – Coal) Thermal Coal “The key for urbanizing countries in Asia, thermal coal remains the lowest cost fuel source for power generation.” - Mick Davis (CEO) Iron Ore “High demand growth rates in China associated with that steel intensive phase of development at times have overwhelmed the capacity of the low cost producers to expand.” - Marius Kloppers (Former CEO) Copper “Copper remains a highly attractive business, given the on-go supplying constraints that persist in this sector. As production has struggled to grow due to decline in grades and production disruptions.” - Tom Albanese (Former CEO) Gold “We think the gold price has a long way to run. It is the one currency whose supply is limited and can’t be created by electronic printing presses.” - Russel Ball (CFO) Source: Company transcripts. 17
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