The nickel market outlook - can the laterite revolution continue?

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Jim Lennon, Chairman, Commodities Research, Macquarie Securities delivered this presentation at the New Caledonia Nickel conference in July 2013. For more information about the event, please visit www.newcaledonianickel.com

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The nickel market outlook - can the laterite revolution continue?

  1. 1. The nickel market outlook – can the laterite revolution continue? July 2013 Jim Lennon Consultant to: Macquarie Capital Securities (Europe) Ltd +44 203 037 4271 jim.lennon@macquarie.com In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer. Page 1
  2. 2. The changing face of the nickel market  Huge needs for new capacity driven by explosion in Chinese demand since 2000  Nickel shortage up to 2006/07 led to three responses:  Growth in 200-series stainless steel (1-2% Ni) as a substitute for 300-series (8-9% Ni)  Processing of low-grade laterite nickel ores into nickel pig iron in China  $30bn+ spent by non-Chinese industry to expand production (including New Caledonia)  In the face of declining sulphide reserves, solution to growth was mainly from using low-grade laterites (limonites) by pressure acid leach processes (PAL) or from higher- grade laterites (saprolites) using conventional ferronickel smelting.  Soaring capex and major technical challenges have made this “solution” economically unviable in the eyes of the industry.  The “new” solution has been the development of low-capex/high opex nickel pig iron (NPI) in China.  Main questions for the market are: Economics of NPI now and into the future – when does this end?; What are the economics of the alternatives? Will we revert back to PAL/FeNi “solution” or there alternatives (e.g., low grade sulphides?). Page 2
  3. 3. Take-off of Chinese demand stretched the nickel supply chain to breaking point in 2006/07 China's nickel demand 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 '000tprimaryNi Stainless steel Non stainless applications Page 3 Source: LME, Antaike, Macquarie Research, July 2013 LME nickel stocks and price 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 LMEstocks:tonnes 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 55000 60000 Price:$/tonne LME stocks LME price
  4. 4. Nickel demand growth is all about China Changes in stainless steel output by region, 2000-12 -681 -530 -382 -255 1 665 1632 11257 -5000 0 5000 10000 15000 Japan Europe N.America Taiwan S. America Korea India China '000t SS Changes in global nickel use by region, 2000-2012 -65 -50 -42 -19 1 9 20 676 -200 0 200 400 600 800 Europe Japan Taiwan N.America Korea S.America India China '000t Ni Source: INSG, ISSF, Macquarie Research, July 2013 Page 4
  5. 5. World Ex-China has not recovered from 2008 global financial crisis World stainless steel output dominated by China 0 5000 10000 15000 20000 25000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f '000tSS China World Ex-China Stainless steel production by region ('000t SS) 2007 2012 % change China 7108 16000 125% Asia w/o China 9387 8875 -5% W.Europe/Africa 8017 7329 -9% Americas 2694 2369 -12% Central+Eastern Europe 333 362 9% World ex-China 20431 18935 -7% World 27539 34936 27% Source: ISSF, Macquarie Research, July 2013 Page 5
  6. 6. Primary nickel supply has also been all about China since 2008 – surge in supply too much for market 7 -1 3 12 13 18 7 8 103 62 64 102 86 9268 50 18 20 49 1 25 6 -37 -103 27 76 55 -7 -110 -90 -70 -50 -30 -10 10 30 50 70 90 110 130 150 170 190 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F '000tni China Rest of world Total YoY growth in nickel production Source: INSG, Macquarie Research, July 2013 Page 6
  7. 7. The short term – still awful with more cuts needed – LME stocks up 51kt in 2012 and 46kt in 2013 YTD LME nickel stocks and prices over the past year - surplus! 13000 14000 15000 16000 17000 18000 19000 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 LMEcashprice:$/t 100000 110000 120000 130000 140000 150000 160000 170000 180000 190000 LMEstocks:tonnes LME price LME stocks Page 7 Source: LME, Antaike, Macquarie Research, July 2013
  8. 8. Need for new nickel capacity – subdued in 2000-10 mainly by use of 200 series stainless, but lots of supply growth now needed • Major surge in nickel use from 2000-2006 driven mainly by china • Shortage of nickel prompted switch to 200- series stainless in China •Collapse in global demand in 2009, combined with substitution led to major deceleration in demand growth •Past three years has seen surging demand (and supply) once again Source: INSG, CSSC, Macquarie Research, July 2013 Nickel consumption growth 120 270 93 238 215 369 310 59 294 900 370 80 290 105 125 -100 100 300 500 700 900 1100 1950- 60 1960- 70 1970- 80 1980- 90 1990- 00 2000- 10 2000- 06 2006- 10 2010- 13F 2010- 20F '000t Primary use Demand "lost" by substitution Page 8
  9. 9. Chinese found two ways of avoiding an absolute shortage of nickel after 2007 Source: ISSF, CSSC, Macquarie Research, July 2013 Nickel "shortage" from 2005 led to Chinese "solutions" 0 0 0 18 68 137 80 274 297 300 368 393 431 0 0 0 18 68 139 100 345 399 410 525 686 776 0 100 200 300 400 500 600 700 800 900 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 '000tni 0 100 200 300 400 500 600 700 800 900 Ni use displaced by Chinese 200 SS Chinese nickel pig iron production Page 9 Global ratio of 300-series stainless in total 55% 57% 59% 61% 63% 65% 67% 69% 71% 73% 75% 1990 1993 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 %oftotal 2003
  10. 10. The changing face of nickel – stagnation in sulphide production as laterites take off – mine production basis Page 10 Source: INSG, Macquarie Research, July 2013 Laterite nickel mine production takes off -100 100 300 500 700 900 1100 1300 1500 2007 2008 2009 2010 2011 2012 '000tcontainedni Indonesia Philippines Turkey Ukraine Albania Papua New Guinea Madagascar Venezuela Serbia Dominican Rep. FYROM Aust Laterite Cuba Colombia Brazil New Cal. (France) Sulphide ore production stops growing 0 100 200 300 400 500 600 700 800 900 2007 2008 2009 2010 2011 2012 '000tcontainedni Norway Kazakhstan United States Zambia Zimbabwe Botswana South Africa China, P.R. Aust Sulph Canada Russian Fed. New Caledonia has not participated in the laterite ore surge
  11. 11. The growing role of Indonesia and the Philippines Source: Philippines Mines and Geosciences Bureau, INSG, GTIS, Macquarie Research, July 2013 Mine production overstates the actual impact due to massive ore stocking in China and also >50% of ore from Philippines not being used as nickel, but iron ore Page 11 Indonesia and Philippines share in global mine production 5% 10% 15% 20% 25% 30% 2007 2008 2009 2010 2011 2012 %ofworldmineproduction Nickel ore production in Indonesia and the Philippines -100 100 300 500 700 900 1100 2007 2008 2009 2010 2011 2012'000tcontainednickel New Caledonia Indonesia Philippines
  12. 12. The picture on type of ores used in finished nickel production shows a major shift up in laterites Finished nickel production by ore type - % share of total 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F %oftotal Sulphide Laterite Page 12 Source: Company data, INSG, Macquarie Research, July 2013
  13. 13. Current main production processes for nickel Note: excludes leaching processes for sulphides (Talvivaara bioleach in Finland) and limonites (in Guangxi and Jiangshi in China) Page 13 ORE TYPE UPGRADING PROCESSING INTERMEDIATE PROCESSING PRODUCT SULPHIDE OXIDE (LATERITE) LIMONITE SAPROLITE CONC. PYRO HYDRO PYRO HYDRO PYRO MATTE NiS NiCO3 MATTE HYDRO HYDRO HYDRO CLASS 1 FeNiCLASS 1 CLASS 1 Ni-OXIDE CLASS 1/2 SMELT PAL PROCESS CARON PROCESS NPI Source: INSG, Macquarie Research, July 2013
  14. 14. Our estimates and forecasts of nickel production by process route Finished nickel production by main process 0 500 1000 1500 2000 2500 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F '000tNi Sulphide - conventional Sulphide bioheapleach Laterite - ferronickel Laterite - Caron Laterite - PAL Other laterite Laterite - nickel pig iron Page 14 Source: Company data, INSG, Macquarie Research, July 2013
  15. 15. Laterite growth dominated by FeNi, PAL and NPI  Much of major sulphide mine investment over past 20 years (Voisey’s Bay, Raglan, Nickel Rim, Mount Keith, Cosmos, Santa Rita, Flying Fox, Nkomati, Lanfranci, FNX, Kevista, etc) was essentially defensive, to offset falling reserves elsewhere.  New mines such as Enterprise, Dumont, etc, will help replace ongoing reserve depletions.  Growth in laterites has come mainly from conventional ferronickel, high-pressure acid leach and Chinese nickel pig iron.  Still further scope for growth in Indonesia, Korea and China (latter two with help of New Caledonian ore?). Page 15 Source: Company data, INSG, Macquarie Research, July 2013 Finished nickel production from sulphide ores 0 100 200 300 400 500 600 700 800 900 1000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F '000tNi Conventional sulphide smelting/refining Bioleach Finished nickel production from laterite ores 0 200 400 600 800 1000 1200 1400 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F '000tNi Laterite - ferronickel Laterite - Caron Laterite - PAL Other laterite Laterite - nickel pig iron
  16. 16. Where the finished nickel supply growth has come from and could come from Page 16 Source: Company data, INSG, Macquarie Research, July 2013 '000t Ni Level Level Level Level 1990 2000 2012 2017F* Sulphide - conventional 658 692 769 829 Sulphide bioheapleach 0 0 13 25 Laterite - ferronickel 178 209 333 493 Laterite - nickel pig iron 0 0 351 370 Laterite - Caron 48 83 82 81 Laterite - PAL 20 53 142 319 Other laterite (leach&smelt/refine) 40 70 82 104 Total 944 1108 1772 2221 % share % share % share % share % share 1990 2000 2012 2017F Sulphide - conventional 70% 62% 43% 37% Sulphide bioheapleach 0% 0% 1% 1% Laterite - ferronickel 19% 19% 19% 22% Laterite - nickel pig iron 0% 0% 20% 17% Laterite - Caron 5% 8% 5% 4% Laterite - PAL 2% 5% 8% 14% Other laterite (leach&smelt/refine) 4% 6% 5% 5% Total 100% 100% 100% 100% * 2017f forecast is before disruption allowance Share of nickel production by process 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1990 2000 2012 2017F Other laterite (leach&smelt/refine) Laterite - PAL Laterite - Caron Laterite - nickel pig iron Laterite - ferronickel Sulphide bioheapleach Sulphide - conventional
  17. 17. Strong growth ahead for FeNi and PAL…but that has been the case for some time now! Ferronickel production by producer -50 50 150 250 350 450 550 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F '000tNi 0% 5% 10% 15% 20% 25% Onca P uma B arro A lto Ko niambo Kwangyang P ristina Kavadarci Laryma P o bugsko ye Lo mo do N iquel P rato po lis N iqualandia P o malaa Oheyama H achino he H yuga C erro M ato so D o niambo F alco ndo % o f wo rld to tal PAL production by producer 0 50 100 150 200 250 300 350 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F '000tNi 0% 2% 4% 6% 8% 10% 12% 14% 16% %shareofworldproduction Moa Bay* Ambatovy Ramu River* Taganito* Coral Bay* Ravensthorpe* Cawse* Bulong Murrin Murrin VNC %of world supply * intermediate product only Page 17 Source: Company data, INSG, Macquarie Research, July 2013
  18. 18. Stainless industry getting lots more nickel and (mainly free) iron units now Source: Company data, INSG, Macquarie Research, July 2013 Page 18 Nickel-iron units for the stainless steel industry 0 200 400 600 800 1000 1200 1400 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F '000tNi 30% 35% 40% 45% 50% 55% 60% 65% %ofallniusedbystainlesssteel FeNi NPI Purchased SS scrap FeNi/NPI/SSS ni as % all of all ni in SS
  19. 19. NPI accounted for major share of nickel used in China in 2012 – replacement for scrap use in ROW Chinese nickel use by type 17% 38% 7% 38% Ni in scrap NPI FeNi Metal/utility/oxide Nickel use ex-China by type 40% 0% 18% 42% Ni in scrap NPI FeNi Metal/utility/oxide Source: INSG, Macquarie Research, July 2013 Page 19
  20. 20. Main recent PAL and FeNi projects – late and expensive PAL '000tpa $m Ferronickel '000tpa $m Start-up Capacity Capex $/t cap Acid plant Refinery Start-up Capacity Capex $/t cap Murrin Murrin 1999 40 1700 42500 x x Gwangywang 2008 30 720 24000 Coral Bay Stage 1 2005 12 220 18333 Onca Puma 2011 52 3200 61538 Ravensthorpe original 2007 40 3000 75000 x x Barro Alto 2011 40 1900 47500 VNC (Goro) 2010 60 6000 100000 x x Koniambo 2013 60 5500 91667 Ramu 2012 32 1800 56250 x Taguang Taung Nickel 2012 22 850 38636 Ambatovy 2012 60 5500 91667 x x Taganito 2013 30 1600 53333 Total above 274 19820 72336 Total above 204 12170 59657 Ravensthorpe reopening 2011 40 740 18500 •Projects running many years late, capex mostly rose 2-4 times above original estimates and commissioning problems have been major •Too early to be precise on operating costs but we think the PAL projects will range from $8,000-15,000/t with an average of $12-13,000/t while the ferronickel projects range from $8,500-13,000/t with an average of $10,000/t. Opex estimates much higher than in feasibility. Page 20 Source: Company data, INSG, Macquarie Research, July 2013
  21. 21. Nickel pig iron progress by contrast has been miraculous! The "economics" of new capacity - based on today's parameters 80000 60000 5000 1500013000 10000 17000 13500 29000 22000 18000 16500 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 PAL (recent) FeNi (recent) Old NPI New NPI (RKEF) $/tonne Capex Opex Incentive price This is a very rough guide to the economics of new capacity Page 21 Source: Company data, Wood Mackenzie, Macquarie Research, July 2013
  22. 22. Long run prices need to be higher…depending on NPI! Page 22 Source: Wood Mackenzie, Macquarie Research, May 2012 How industry costs and incentive prices have evolved Excluding NPI 0 5000 10000 15000 20000 25000 30000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $/lbpricesandcosts 0 10000 20000 30000 40000 50000 60000 70000 $/lbcapitalintensity Average cash costs Incentive price (with 20% capital charge) 90th percentile cash costs Capital intensity new projects ($/lb capacity) RHS
  23. 23. Nickel pig iron – the big unknown  Estimates for 2012 output (still!) vary from 290kt to 370kt – very little reporting, lots of guessing.  Cash costs range from $12-20,000/tonne ($5.45-9/lb) depending on process and location. Costs vary widely.  Costs do vary with nickel price so there is no single price below which supply shuts – indeed costs have fallen sharply (15-20%) since March 2012 (lower carbon and ore prices and new power rebates in Inner Mongolia).  Capacity potential is massive – OVER 400,000 tpa NEW capacity due, mostly Greenfield rotary kiln/electric arc furnace and integrated with stainless mills. Costs will rise as energy prices rise and RMB appreciates but new plants have 30-50% less energy consumption and stainless mills get significant energy and iron credit benefits.  Ore supplies from Philippines and Indonesia are critical in determining the future output limits. Many Chinese producers trying to backwardly integrate into ore.  If new supply outside China comes on successfully, capping prices, NPI production will be limited – if new supply fails, there will be more NPI. Page 23
  24. 24. Lots of new rotary kiln electric furnace (RKEF) capacity coming on stream in 2013! Source: Industry estimates, Macquarie Research, July 2013 Page 24 Chinese RKEF Capacity by month 0 50000 100000 150000 200000 250000 300000 350000 400000 450000 2010 2011 2012 2013 Capacity:tonnesNIayear Liande ( LISCO) Beihai Chengde Ningbo W angxiang Shangdong X inhai Tenlong Hejin Hongda Nieye Changjiang Nieye Suqian X iangxiang Jinguang ( SW ) Baogang Desheng Fuf eng Shiye Delong Nieye Shangdong Jinaihui Shangdong X inhai Y ichuan Nieye Haigan Keji Tsingshan Siji Shangai Haihe Tsingshan Changqing Beihai Chengde Ningbo W anxiang Delong Nieye Chinese nickel pig iron production 1 20 71 87 106 159 282 350 394 0 50 100 150 200 250 300 350 400 450 2005 2006 2007 2008 2009 2010 2011 2012 2013f '000tNi 0 50 100 150 200 250 300 350 400 450 0.5-2%Ni blast furnace 4-8%Ni blast furnace 9-15%Ni electric arc furnace 9-15%Ni RKEF
  25. 25. Ore, carbon and electricity main cost drivers for NPI – 2012 averages Cost breakdown for 4-6% Ni blast furnace NPI 47% 30% 5% 3% 15% Ore Coke Coal Electricty Other Cost breakdown for 10% Ni electric arc furnace NPI 50% 5% 6% 31% 8% Ore Coke Coal Electricty Other Source: Industry estimates, Macquarie Research, July 2013 Page 25
  26. 26. NPI costs for electric furnace producers – big differences in costs according to location and furnace types – costs fall as raw material and power costs fall Page 26 Source: SMM, Macquarie Research, July 2013 12000 14000 16000 18000 20000 22000 24000 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 $/lbex-VAt Price: 8-13% NPI Costs: 10% Ni - Coastal Costs: 10% Ni - Inner Mongolia 12000 14000 16000 18000 20000 22000 24000 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 $/lbex-VAT Price: 8-13% NPI Costs: 12% Ni - Conventional Costs: 12% Ni - RKEF
  27. 27. Low Ni NPI blast furnace producers still profitable 12000 14000 16000 18000 20000 22000 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 $/lbex-VAT Price: 4-6% NPI Costs: 6% Ni in blast furnace 20000 22000 24000 26000 28000 30000 32000 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 $/lbex-VAT Price: 1.5-2% NPI Costs: 1.7% Ni in blast furnace Source: SMM, Macquarie Research, July 2013 Page 27
  28. 28. Cost of ore from Indonesia has plunged in 2013 Indonesia ore price plunges in 2013 $/ wet tonne for 1.8% Ni in dry ore 25 30 35 40 45 50 55 60 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 $/tonne CIF FOB Ore cost in making one tonne of nickel in 10% Ni pig iron 2500 3000 3500 4000 4500 5000 5500 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 $/tonne CIF FOB Source: NPI producers, Macquarie Research, July 2013 Page 28
  29. 29. Key factors in NPI Indonesian ore ban planned for end-2013. No-one thinks this will happen! Quotas and taxes more likely? 20% export tax (adds 35-40c/lb to costs if passed on…but it was not!) from May 2012…maybe higher? Longer term cost pressures – breakeven for NPI could rise from $12,000- 17,000/t currently to $19,000-25,000/lb over next 4-5 years as ore costs, electricity costs rise and RMB appreciates? Competition for higher-grade ore (1.8%+Ni) will intensify as more RKEF comes on and high grade reserves deplete – price of these ores could rise sharply. Still unclear how long the resources can last at current rates. We don’t think ore supply from Indonesia to China will stop in 2014 – it will become (a lot) more expensive and there will probably be some NPI capacity built in Indonesia from 2015 onwards. Page 29
  30. 30. Page 30 Nickel supply/demand summary – surplus to 2015? Source: INSG, Macquarie Research, July 2013 `000t 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f Total SS production 33666 35440 38045 40458 43077 45581 47748 49737 % Change 5.7% 5.3% 7.4% 6.3% 6.5% 5.8% 4.8% 4.2% Ni-containing SS prod. 25080 26831 28707 30523 32632 34510 35986 37564 % Change 9.3% 7.0% 7.0% 6.3% 6.9% 5.8% 4.3% 4.4% Nickel Consumption 1597 1669 1771 1861 1968 2055 2108 2165 % Change 7.4% 4.5% 6.2% 5.1% 5.7% 4.5% 2.5% 2.7% Nickel Supply 1630 1772 1843 1938 1986 2042 2065 2090 % Change 12.3% 8.7% 4.0% 5.1% 2.5% 2.8% 1.1% 1.2% (of which NPI) (282) (351) (396) (378) (360) (360) (360) (360) World Market Balance 33 103 72 77 18 -14 -43 -75 LME/Producer stocks 186 227 299 375 394 380 338 262 Weeks' world demand 5.9 6.9 8.6 10.3 10.2 9.4 8.2 6.2 LME Cash Price (cents/lb) 1036 795 746 817 953 1134 1300 1400 LME Cash Price ($/tonne) 22831 17527 16455 18001 21001 25000 28660 30864
  31. 31. In conclusion – on the medium term The laterite “revolution” has arrived – it is built on the shaky ground of low-cost Indonesian ore/Chinese NPI and VERY high-cost non-Chinese PAL/FeNi capacity Failure of major Greenfield projects outside China and massive rises in construction costs of non-Chinese Greenfield projects likely to deter future investment Next two years will be challenging for the nickel industry – unless the Indonesians ban ore exports in 2014 Growing deficits by mid-decade will lead to need for new capacity…new capacity needs prices significantly above $22,000/t ($10/lb) Huge reliance on Indonesian ore to feed RFEF plants in China – unlikely to stay as “cheap” as it is today? Page 31
  32. 32. Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return > 3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected <-10% Macquarie First South - South Africa Outperform – return > 10% in excess of benchmark return Neutral – return within 10% of benchmark return Underperform – return > 10% below benchmark return Macquarie - Canada Outperform – return > 5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return > 5% below benchmark return Macquarie - USA Outperform – return > 5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return > 5% below benchmark return Volatility index definition* This is calculated from the volatility of historic price movements. Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30-40% in a year. Low–medium – stock should be expected to move up or down at least 25-30% in a year. Low – stock should be expected to move up or down at least 15-25% in a year. * Applicable to Australian/NZ stocks only Recommendation – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit /efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions – For quarter ending 31 March 2013 AU/NZ Asia RSA USA CA EUR Outperform 45.12% 53.24% 50.00% 40.70% 62.98% 43.30% (for US coverage by MCUSA, 10.55% of stocks covered are investment banking clients) Neutral 41.52% 28.01% 41.43% 55.01% 32.60% 34.10% (for US coverage by MCUSA, 9.05% of stocks covered are investment banking clients) Underperform 13.36% 18.74% 8.57% 4.29% 4.42% 22.60% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients) Page 32
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