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The new paradigm – The impact of supply challenges in the Brazilian iron ore industry
 

The new paradigm – The impact of supply challenges in the Brazilian iron ore industry

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Jayme Nicolato, CEO, from Ferrous delivered this presentation at the 2012 Americas Iron Ore conference. Americas Iron Ore is one of the most respected annual gatherings for North and South American ...

Jayme Nicolato, CEO, from Ferrous delivered this presentation at the 2012 Americas Iron Ore conference. Americas Iron Ore is one of the most respected annual gatherings for North and South American iron ore markets and its agenda features: iron ore industry and market developments; new project developments and expansions in North and South America; overview of steel demand; iron ore spot market price; infrastructure and transport challenges and investment opportunities. For more information on the annual event, please visit www.immevents.com

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    The new paradigm – The impact of supply challenges in the Brazilian iron ore industry The new paradigm – The impact of supply challenges in the Brazilian iron ore industry Presentation Transcript

    • O NOVO PARADIGMA O Impacto dos desafios de fornecimento na indústria brasileira de Minério de Ferro Jayme Nicolato, CEO Ferrous
    • Capítulo 1 2 This presentation and its contents are confidential and 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 written consent of Ferrous. 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. You are responsible for your own investment decisions and for properly analysing and verifying any information or projections you intend to rely upon. You should be capable of evaluating the merits and risks of any investments you intend to make and no reliance may be placed on this presentation in connection with any decisions on your part. Any decision to purchase any securities in any offering should be made solely on the basis of the information contained in the relevant prospectus and specific documentation for that purpose. Certain statements, beliefs and opinions contained in this presentation, particularly those regarding the possible or assumed future financial or other performance of Ferrous or any members of its group (the “Group”), anticipated iron ore demand and consumption, global economic outlook, commodity price forecasts, industry growth or other trend projections are or may be forward-looking statements. 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 Ferrous’s ability to control or predict. Important factors that could cause the Group’s actual results of operations, financial condition and development of the industry in which it operates to differ from the impression created by any forward-looking statement and include, but are not limited to, general economic and business conditions, commodity price volatility, industry trends, competition, changes in government and other regulation, including in relation to the environment, health and safety and taxation, labour relations and work stoppages, changes in political and economic stability and currency fluctuations. Other than in accordance with regulatory requirements, Ferrous is not under any obligation and Ferrous 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. No representation or warranty, express or implied, is given by or on behalf of Ferrous or any other person or their members, directors, officers, advisers, agents or employees as to the accuracy or completeness of the information, opinions, projections or assumptions contained in this presentation and, to the extent permitted by law, no liability whatsoever (in negligence or otherwise) is accepted by Ferrous nor any other person for any loss howsoever arising, directly or indirectly, from any use of such information, projections, assumptions or opinions or otherwise arising in connection therewith. Disclaimer
    • Capítulo 1 3 Iron ore market dynamics Through 2020, China will need an additional 400 Mt in iron ore from the Seaborne Market Seaborne iron ore demand is expected to grow significantly over the next 10 years, mainly driven by demand growth from China. 0 200 400 600 800 1000 1200 2000 2011 2021 111 148 208 275 326 383 444 628 619 687 750 818 898 968 1.045 0 200 400 600 800 1.000 1.200 CHINA CRUDE STEEL PRODUCTION (Mmt) SOURCE: CRU AND MARKET INFORMATION +545Mt + 260 Mt +9% Y-o-Y CHINA IRON ORE ANNUAL IMPORTS (Mmt) CHINA IRON ORE MONTHLY IMPORTS (Mmt) 45 50 55 60 65 70 JAN FEV MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2011 2012 SOURCE: TEX REPORT AND BLOOMBERG SOURCE: TEX REPORT, CRU AND MACQUARIE
    • Capítulo 1 4 Iron ore market dynamics China overcapitcity in aluminium and steel keep the international prices low Since 2000 production of almost every metal has at least doubled, China’s strategy of keeping the production higher than the demand inorder to keep lower prices and cheaper urbanization plan. Source: CRU, SBB and Macquarie 100 200 300 400 0 100 200 300 400 500 600 700 800 100 200 300 400 500 0 50 100 150 200 250 300 350 400 100 200 300 400 500 600 0100200300400500600 Consumption Production Price COPPER ALUMINIUM STEEL Index: 2002 = 100 Index: 2002 = 100Index: 2002 = 100 Steel price: China Domestic HRC
    • Capítulo 1 5 Iron ore market dynamics Iron Ore Seaborne Market - Australia x Brazil 159 172 194 216 231 261 282 310 313 325 335 337 365 370 207 215 216 256 271 296 333 375 420 470 510 563 647 693 100 200 300 400 500 600 700 Brazil Australia F´cast Through 2015, seaborne supply additions are estimated to be above 300Mt, with Australia accounting for around 50% of total growth, and Brazil less than 30%. Australia continues to gain share in the Chinese import market, largely at the expense of India whose market share has slipped to a record low of 8% in Jan-Feb 2012. Stricter environmental rules have been a reality globally, which should result in higher lead times to bring on new capacity. Slow permitting processes in Brazil have fueled even more constant delays (approx. 2 years). SOURCE: BARCLAYS AND FERROUS
    • Capítulo 1 6 Iron ore market dynamics Iron Ore Cost Curve Brazil and Australia are well known for their high quality reserves and efficient logistics solutions. The back end of the cost curve is mainly comprised of high cost Chinese and Indian producers with average cash cost levels above US$120/ton. Poor quality reserves and highly un-mechanized/small mines are the main reasons for high marginal costs in China. SOURCE: DEUTSCHE
    • Capítulo 1 50 70 90 110 130 150 170 190 210 Platts IO Daily 62% Platts IO 62% Average Annual Price Platts IO 62% Average Annual Price YTD Iron ore market dynamics Volatility of prices is high, but the quarterly mean is over $110/dmt 7 2012 - IT MAY BE SLOWING BUT IT´S STILL GROWING USD/dmt Despite all the rhetoric regarding slower Chinese growth and European recession, the reality is that 2012 will be another tight year for global seaborne iron ore supply especially for spot proces below $110/dmt IRON ORE PRICES (USD/DMT) AVERAGE OF THE ACTUAL QUARTER IRON ORE PRICES * QTD: 02/11/2012 SOURCE: PLATTS, DEUTSCHE AND MARKET 142 143 141 113 116 Q4' 11 Q1' 12 Q2' 12 Q3' 12 Q4' 12 (QTD)*
    • Capítulo 1 8 0 20 40 60 80 100 120 140 160 180 Daily Platts 62% CFR China FOB I.O. Price 62%Fe Asia (USD/dmt) BENCHMARK I.O. Price 62%Fe Asia (USD/dmt) QUARTELY MOVING AVERAGE I.O. Price 62%Fe Asia (USD/dmt) MONTHLY AVERAGE I.O. PRICE 62%FE ASIA (USD/DMT) • Increased market confidence • Chinese government supporting growth, Iron ore market dynamics A Challenging Short Term Scenario 85 105 125 145 165 185 USD/dmt Iron Ore Fines 62% CFR North China ($/dmt) 122.00
    • 42 52 55 83 115 155 155 0 20 40 60 80 100 120 140 160 180 50 60 70 80 90 100 110 120 130 140 150 160 170 180 2010 2011 2012 2013 2014 2015 2016 Mt USD/dmt FMG Iron Ore Tonnage Iron Ore Price 62% CFR China Iron Ore Price Forecast 62% CFR China Iron Ore Price 58% FOB China Iron Ore Price Forecast 58% FOB China Iron Ore Price 58% CFR China Iron Ore Price Forecast 58% CFR China WOULD IT BREACH DEBT COVENANTS? Iron ore market dynamics FMG situation USD 120/dmt 62% CFR China? Total Cost USD 95~105/t Total Cost USD 65~75/t ~USD -21/dmt 9
    • Capítulo 1 Sharp fall in steel mills inventories cannot last forever – the depth of destocking has been greater than initially anticipated, his is putting continued downside pressure on iron ore prices. Although it seams similar to last year (September/October/2011), there are some important differences such as level of purchasing activity specifically of imported iron ore against the spot price for imported ore. Iron ore purchasing activity at the smaller mills has not slowed much in recent months but still the iron ore price is falling . Over September-October 2011, the smaller mills reduced inventory by simply buying less iron ore. This year, purchasing activity has hardly been reduced and inventory volumes have been run down instead by increasing the rate of consumption of iron ore – by keeping pig iron and crude steel production volumes at a high level. This goes someway to explaining why the reported crude steel production numbers remain persistently high. 10 Iron ore market dynamics A Challenging Scenario, new paradigm CHINA IRON ORE MARKET SOURCE: MACQUARIE * *the mills produce less than 5mtpa of steel and account for ~30% of Chinese production IRON ORE INVENTORY (DAYS OF USE) HELD BY 50 SMALLER STEEL MILLS * X INTERNATIONAL SPOT PRICES IMPLIED IRON ORE PURCHASING (CONSUMPTION NET OF STOCK CHANGES), VS SPOT PRICE
    • Capítulo 1 20 30 40 50 60 70 80 50 70 90 110 130 150 170 190 Mt USD/dmt TOTAL 367 Mt TOTAL 444 MtTOTAL 384 Mt Vale 25% BHP 14%Rio Tinto 22% FMG; 0% Others 39% Vale 18% BHP 15% Rio Tinto 22% FMG 3% Others 45% Iron ore market dynamics China market share competition IRON ORE PRICE X I.O. TONNAGE IMPORTED BY CHINA CHINA OVERSUPPLY – CHINA MARKET SHARE COMPETITION During previous crisis (2008) some players reduced tonnage offer in an attempt to hold the prices but others continued to sell iron ore to market unrestrainedly. In the 1995–2003 period, anywhere between 20 and 30 countries satisfied the Chinese market. However, as the call on seaborne material increased, so material from additional suppliers was sought, with 30–45 exporters to China through 2010. In 2011, however, this number jumped to 59, with countries such as Kenya, Azerbaijan and even the UK exporting ore to China. This again highlights the ever-expanding horizon of Chinese buyers to source any available iron units. CHINA IMPORTS OF IRON ORE BY ORIGIN 2007 2008 SOURCE: PLATTS, VALE, UMETAL, MACQUARIE AND CRU Vale - 7% 11 Vale 17% Australia 49% Others 34% 1H’12
    • Capítulo 1 0 20 40 60 80 100 120 140 160 180 200 Daily Platts 62% Fe CFR China Daily Platts 62% Fe FOB China Iron Ore Prices SOURCE: PLATTS , THE TEX REPORT, WOODMACQUENZIE E CRU 123 122 127 128 118 117 120 I.O. PRICE 62%FE CHINA (USD/dmt) PROJECTION + USD 33,50 ~ + 38% 97 117116 55 Iron ore prices reached USD 122/dmt CFR China, USD 33,50dmt above the lowest point this year which reflects the fact that, at the beginning of last week the Chinese mills returned to the market after the Chinese new year holiday. Given that Chinese steelmakers currently rely on low stock of iron ore, today are in urgent need to replenish them. 122
    • Capítulo 1 12 Ferrous overview Highlights INCORPORATED IN FEB´07 TO FOCUS ON THE DEVELOPMENT AND OPERATION OF IRON ORE ASSETS IN BRAZIL THE COMPANY HAS INVESTED OVER USD 1BN IN ITS IRON ORE PROJECTS ASSETS COMPRISED OF 5 MINERAL AREAS IN THE IRON ORE QUADRANGLE AND A WHOLLY- OWNED INTEGRATED LOGISTICS SYSTEM IN 2010, FERROUS INITIATED MINING ACTIVITIES AND IS CURRENTLY OPERATING AT A RUN-RATE OF 3.6 MTPA FERROUS HAS ALSO RECEIVED LICENSES FOR ITS INTEGRATED IRON ORE DEVELOPMENT, INCLUDING 15MTPA PRODUCTION AT VIGA MINE, AND ITS PIPELINE AND PORT LOGISTICS SYSTEM FERROUS IS THE 4TH IRON ORE COMPANY IN BRAZIL TO OBTAIN A LICENSE FOR A PRIVATE PORT. VALE, MMX AND SAMARCO ARE THE ONLY OTHERS CURRENTLY PRODUCING AND GENERATING POSITIVE EBITDA 1 2 3 4 5 6 7
    • Capítulo 1 13 Ferrous assets JORC-compliant Resources JORC: Australasian Joint Ore Reserves Committee, provide a minimum standard for reporting of exploration results, Mineral Resources and Ore Reserves, ensure that public reports on these matters contain all the information which investors and their advisers would reasonably require for the purpose of making a balanced judgment regarding the results and estimates being reported.
    • Capítulo 1 Ferrous overview MRS System ATLANTIC OCEAN MRS CENTRAL RAIL LINEMRS STEEL RAIL LINE Mariana Esperança Belo Horizonte Vale Mines Anglo Minas-Rio Itabira IRON QUADRANGLE Third party ports Sepetiba bay Rio de Janeiro Barra do Pirai Port Tubarao Vitoria Viga Port Ubu EFVM RAIL LINE Brismar Port Açu Samarco pipeline Ferrous Proposed Pipeline Route Anglo Ferrous Proposed Pipeline Samarco Pipeline Existing Railways Vitória - Minas 0 50 100 200km Ouro Branco (Gerdau/Açominas) Viga Norte Olhos d´água Andaime Serrinha Viga Viga Norte Esperança Serrinha Santanense FERROUS’ MINES IN THE IRON ORE QUADRANGLE Santanense 14
    • Capítulo 1 16 Ferrous assets Comprised of 5 mineral areas in the Iron Ore Quadrangle VIGA SERRINHA VIGA NORTE EMESA SANTANENSE Source: MMX
    • Capítulo 1 17 • In November 2011, Ferrous completed the construction of a rail terminal at Viga with 18mtpa loading capacity; • The terminal provides a cost advantage of at least $7/t for Viga versus peers without onsite logistics; • Ferrous aims to replicate this success at its other properties in order to reduce logistics costs and sell 3rd-party terminal services. Viga rail terminal
    • Capítulo 1 18 Because of the strategic location of EMESA in the Serra Azul region, we see a significant opportunity to generate returns through the sale of railway terminal loading capacity. EMESA rail terminal Strategic Location
    • Capítulo 1 19 Ferrous Licences Asset Operation LP LI LO EMESA Mine Production of 2mtpa finished products Santanense Mine Mining and processing of 860kt ROM Viga Mine Production of 2mtpa finished products Viga Mine Production of 15mtpa finished products Viga Norte Production of 10mtpa finished products EIA/RIMA Dec’12 LP Dec’13 Serrinha Production of 8mtpa finished products EIA/RIMA Dec’12 LP Dec’13 Pipeline from Viga to Presidente Kennedy Port Transportation of 25mtpa finished products Scheduled to Q2 2013 Presidente Kennedy Port Export of 25mpta finished products Scheduled to Q2 2013 LP: Preliminary License – Validates environmental viability of the project LI: Installation License – Authorizes construction of the project LO: Operational License – Approves completion of construction and authorizes operation of the project
    • Capítulo 1 20 2012 ~ 2015 Chemical (dry basis) Typical % Guaranteed % Fe 62.5 62.0 Min P 0.070 0.090 Max S 0.020 0.040 Max Al2O3 1.50 2.00 Max SiO2 6.50 8.00 Max H2O 8.00 10.0 Max Size (wet basis) Typical % Guaranteed % >6.50mm 15.0 30.00 Max <0.106mm 30.0 40.00 Max 2016 ~ 2020 via railway 2021 onwards via pipeline Chemical (dry basis) Minimum (e) % Maximun(e) % Minimum (e) % Maximun(e) % Fe 65.0 65.5 - P - 0.065 - 0.060 S - 0.025 - 0.025 Al2O3 - 0.7 - 0.60 SiO2 - 3.6 - 3.80 H2O - 10.5 - 10.5 LOI - 2.5 - 2.40 Size (dry basis) ISO standards Typical % Guaranteed % Typical % Guaranteed % < 0.0150 mm 65.0 - 98.0 - < 0.045 mm 20.0 - 75.0 - Blaine (cm2/g) 350 - 1200 - Ferrous overview Product Specification – Iron Ore Fines
    • Long Term Business Plan
    • Capítulo 1 22 A combination of grade degradation, infrastructure risk, difficulty in financing, permitting issues and spiraling capital intensity will cause the supply side to underperform relative to plan. This has been a consistent problem for the past five years and will probably remain until the end of the decade.SOURCE: FERROUS EVOLUTION OF FORECASTS FOR BRAZILIAN SEABORNE SUPPLY (MTPA) EVOLUTION OF FORECASTS FOR AUSTRALIAN SEABORNE SUPPLY (MTPA) 280 350 400 450 500 560 600 660 700 280 330 370 420 470 530 600 670 720 270 270 430 460 510 560 600 670 250 300 350 400 450 500 550 600 650 700 750 2007 2008f 2009f 2010f 2011f 2012f 2013f 2014f 2015f jun/08 set/09 mai/11 abr/12 270 300 350 400 440 490 510 530 540 270 320 350 400 440 500 545 270 270 270 300 320 340 340 365 370 250 300 350 400 450 500 550 600 650 700 750 2007 2008f 2009f 2010f 2011f 2012f 2013f 2014f 2015f jun/08 set/09 mai/11 abr/12 Iron ore market dynamics Seaborne Supply Forecast has been constantly reduced
    • Capítulo 1 Sepetiba Bay Inlet Ship Channel Ship Channel - 21 Miles TIG - Vale Railway - MRS 1- Public Terminal – CDRJ 2- TECAR – CSN 3- CPBS - Vale Sudeste Port – MMX Alternatives of Ports in Sepetiba Bay
    • Capítulo 1 24 SOURCE: MARKET AND FERROUS Iron ore market dynamics MRS System Brazil Iron Ore and Iron Ore Domestic Market Supply Balance Adjusted
    • Capítulo 1 25 • Engineering • Procurement • Construction • Management Start up PROJECT EXECUTION FEL 3FEL 3 FEL 2FEL 2 FEL 1FEL 1 1 MINE 2 GOOD PROJECTS 4 IRON ORE DEPOSITS 15 MINERAL DEPOSITS 100 POSSIBLE TARGETS PROJECTCREATION TARGETCREATION TARGETSTUDIES ADVANCED PROJECTS • Is there a deposit or not? • Deposit sizing (volume, grade..) • Attractiveness evaluation • Scoping Study • Conceptual Engineering • Technical economic feasibility • Basic Engineering Abandoned Projects: 75% Investment expense: 0,5% Abandoned Projects: 50% Investment expense: 1,5% Abandoned Projects: 1% Investment expense: 4,5% 1000 ANOMALIES FERROUS WILL UTILIZE THE FEL 3 METHODOLOGY IN ORDER TO EVALUATE DEVELOPMENT PROJECTS PRIOR TO IMPLEMENTATION FERROUS WILL UTILIZE THE FEL 3 METHODOLOGY IN ORDER TO EVALUATE DEVELOPMENT PROJECTS PRIOR TO IMPLEMENTATION Long Term Vision Feasibility methodology
    • Capítulo 1 3 5 5 5 10 17 33 35 47 - 5 10 15 20 25 30 35 40 45 50 2012 2013 2014 2015 2016 2017 2020 2021 2028 26 Ferrous Time Line Completion of Feasibility Study Completion of Construction Mt Ferrous’ current resource base provides an opportunity to grow annual production to 47 mtpa VIGA NORTE 10 mtpa SERRINHA 8 mtpa SERRINHA 15 mtpa EMESA 2 mtpa LOGISTICS VIGA + EMESA VIGA 4MTPA VIGA 15 mtpa SANTANENSE 5 mtpa
    • Capítulo 1 27 SOURCE: BARCLAYS RESEARCH VIGA 15Mt USD 80/t VIGA 15Mt USD 80/t Industry average Ferrous x iron ore projects Capex Intensity of development Iron Ore Projects
    • 3 17 935 92 2.5Mtpa Expansion 4.0Mtpa Expansion 15Mtpa Expansion FEL 3 & License Maintenance 659 92 80 43 24 36 Plant Mining Equipment Tailings Dam - 7 & 7/A Tailings Dam - 8 Waste Dump Railway Engineering / Other VIGA CAPEX (US$mm) Viga Capex Breakdown – US$mm Real Terms through 2020 28
    • Capítulo 1 29 PRODUCTION • 3Mt production for 2012 • Expansion of production capacity to 5.0mtpa for 2013 • Zero “lost-time” accident rate • Positive recurring EBITDA PROJECT DEVELOPMENT • BFS for Viga 15mtpa project by July 2013 • LI for Pipeline and Port to remain on track for early Q3 2013 • Completion of EIA/RIMA and conceptual engineering for Serrinha 8mtpa by Q2 2013 • Completion of EIA/RIMA and conceptual engineering for Viga Norte 10mtpa by Q2 2013 FERROUS HAS ESTABLISHED A NUMBER OF KEY OPERATIONAL MILESTONES THAT WE EXPECT TO COMPLETE PRIOR TO VIGA 15MTPA IMPLEMENTATION Business plan
    • Thank you