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Omesh Motiwalla, Director-Corporate Finance, Deloitte - Australia from a Global Investors’ Perspective
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Omesh Motiwalla, Director-Corporate Finance, Deloitte - Australia from a Global Investors’ Perspective


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Omesh Motiwalla, Director-Corporate Finance, Deloitte delivered the presentation at the 2013 Mining NSW Conference. …

Omesh Motiwalla, Director-Corporate Finance, Deloitte delivered the presentation at the 2013 Mining NSW Conference.

The 2013 Mining NSW Conference looked at mine exploration and development opportunities in Central NSW and the Northern Tablelands with a spotlight on capital raising outlook and overseas investment.

For more information about the event, please visit:

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  • 1. Australia from a Global Investor’s Perspective Gold, Copper and Nickel 26 June 2013 Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Touche Tohmatsu Limited
  • 2. Contents 1. Macro-economic environment 2. Commodity markets - Gold - Copper - Nickel 3. What are the options ? 4. Inbound investors - China - Japan - India 5. Summary
  • 3. Macro-economic environment
  • 4. With commodity markets under stress due to falling prices, weakening demand and miners struggling to add value in a high cost environment, it’s no surprise to see mining stocks underperform in the market relative to other sectors Tough times for mining equities 50 70 90 110 130 150 170 190 05/10 08/10 11/10 02/11 05/11 08/11 11/11 02/12 05/12 08/12 11/12 02/13 05/13 Total Returns Comps by Global Industry Mining Retail Telecoms Real Estate Healthcare Banks Aerospace Technology 50 60 70 80 90 100 110 120 130 140 150 05/10 08/10 11/10 02/11 05/11 08/11 11/11 02/12 05/12 08/12 11/12 02/13 05/13 Diversified Miners 3 year Total Shareholder Returns BHP Billiton Rio Tinto Anglo American Xstrata Source: S&P Capital IQ
  • 5. 3. Areas of Diligence FocusWhat are the miners saying about the global economy 5 Cautious statements regarding future growth, cost reduction is critical and potential M&A activity due to compelling valuations • “The global economy continues to strengthen, despite broader imbalances and underlying volatility” (Andrew Mackenzie) • Global growth is expected to underpin commodities demand, risks of persistent commodity oversupply have been “overstated” particularly given the slowdown in capital projects • “A cyclical slowdown, not the end of the secular change in demand” • “Chinese fiscal policy easing and clear statements by the US Federal Reserve regarding their intention to continue stimulating the US economy have boosted confidence in these economies and are supportive of a marginally improved environment for commodity demand in 2013” • “Cheap resource acquisition remains as a key driver of value for the industry. You can build great companies from quality acquisition acquired cheaply” • “Industry focus has changed with companies now focusing on maximising returns, reducing costs, cutting capital and driving productivity” BHP Billiton Xstrata Newcrest
  • 6. 3. Areas of Diligence FocusThe current situation • Mining companies have been negatively impacted by multiple factors: - falling commodity prices - high AUD / USD exchange rate - increasing capital and operating costs - inability to access capital – equity or debt • However, we have seen mining companies start to proactively address these factors through: - cost optimisation strategies - geographic diversification - divestment of non-core projects - an increase in mergers and acquisitions Explorers, developers and producers have all been negatively impacted in recent times, however, they are rising to the challenge 6
  • 7. Commodity markets
  • 8. 3. Areas of Diligence FocusGold • The gold price has declined sharply over the last twelve months – due to lessening fears of the collapse of the Eurozone and inflation, as well as strong growth in US equity markets and recent statements made by the former US Reserve Bank chairman • However, we need to keep perspective as 13 years ago the gold price was US$400 per ounce. • Whilst it was tough back in those days, the cost environment was very different – as the mining boom was still in its infancy and the AUD/USD exchange rate was weaker. • Gold producers are shifting focus to cost optimisation and M&A activity to provide value for their shareholders. Apart from falling gold prices, the sector has been impacted by high costs and a strong AUD / USD exchange rate 8 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Gold prices (USD/ounce)
  • 9. 3. Areas of Diligence FocusCopper • The market appears to be getting more bearish on copper’s short term outlook – as underlying supply demand fundamentals appear to be changing. • Mine capacity growth and improving ore grades are leading to a big increase in global copper inventories. • Producer margins are under pressure as costs rise and copper prices decline. • We are also seeing increased interest in M&A activity in copper producers in Africa. • However, there are positives – the Chinese government’s commitment to accelerate infrastructure projects provides a solid function for copper demand going into 2014 and the improving US automotive sectors is also a positive demand story. Copper prices have been declining, however, there are potential catalysts for growth in the medium term 9 15.55 15.97 16.05 16.03 16.75 17.14 18.38 19.42 19.85 21.23 22.05 -2% 0% 2% 4% 6% 8% 0 5 10 15 20 25 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 World Copper Mine Production World Copper Mine Production (mt) y-on-y % change
  • 10. 3. Areas of Diligence FocusNickel • Nickel prices have fallen significantly over the last two years. • Nickel inventories are also increasing significantly which will have a dampening effect on any potential upside in nickel prices. • Nickel consumption in emerging economies is expected to continue to grow faster than developed economies as a result of growth in stainless steel production – however, this is based on China’s demand for nickel pig iron which is lower on the nickel cost curve. Nickel inventories have growth significantly which will have a dampening effect on any potential upside in nickel prices. 10 14000 17000 20000 23000 26000 29000 LME-Nickel Cash U$/MT
  • 11. What are the options ?
  • 12. Whilst it is a tough market to raise capital, there are multiple options for advanced exploration companies, developers and producers Option Potential Considerations Equity raising • Value / dilution Debt / project financing • Access / terms External / inbound investors • Value / multiple structures / access to financing 100% divestment / merger of equals • Value / best interests of shareholders Other forms of financing • Commodity streaming / royalty arrangements Divesting non-core projects • Value What are the options ? 12
  • 13. Inbound investors
  • 14. 3. Areas of Diligence FocusChina • There has been a significant number of transactions in recent times by Chinese SOEs and private enterprises in the gold, copper and nickel space. This is not a new phenomenon and is likely to continue in the short to medium term. • The key drivers of acquisitions / investments have included: - securing supply - strategic considerations - financial returns. • Chinese investors generally focus on the following criteria when considering M&A: - low cash costs - large resource / long life of mine - development certainty - supply of offtake - % of acquisition – typically control Chinese investors have a strong track record of M&A in the gold, copper and nickel space in Australia 14
  • 15. 3. Areas of Diligence FocusJapan • There has been increasing M&A activity from Japan as its economy continues to improve. • Japanese trading houses have a long history of acquiring interests in Australian oil and gas, iron ore, coal (thermal and coking) and copper assets. • The key driver of acquisitions / investments in the mining space is to secure supply via offtake – this is generally through the acquisition of minority interests at the equity or asset level or via JV agreements. • Board representation is less important relative to Chinese and Indian investors. • Copper is still a key focus of Japanese trading houses, however, we have not seen significant interest in the gold / nickel space. The key driver of acquisitions / investments in the Australian mining sector is to secure supply 15
  • 16. 3. Areas of Diligence FocusIndia • India is a relatively new entrant to the mining sector in Australia, and the focus has mainly been in the coal sector • India is one of the world’s largest consumers of gold. In 2012, India dominated the world market with 27% of the total global demand. • This has not translated into Indian companies investing in / acquiring gold projects in Australia or overseas. • This is fundamentally different from the coal space where the focus has been on securing supply of long life coal projects / long term offtake agreements. Gold can still be readily acquired on the spot market. • Copper is still of interest to the Indian majors, however, the focus appears to have shifted to Africa. • We have seen limited interest in the nickel space. Indian corporates have focused on the thermal / coking coal space in Australia to satisfy a shortage of domestic coal supply 16
  • 17. Summary
  • 18. 3. Areas of Diligence FocusWhere to from here ? • The long term trend is growth but short term dynamics are interfering: - commodity prices have been falling - tight access to favourable terms for capital - higher capital and operating costs - high exchange rate – AUD/USD. • As capital markets have deteriorated, equity and debt investors have been largely opposed to financing advanced exploration and development assets. • For the vast majority of junior and mid-tier companies, this means that their best recourse for financing is to look to Asia for sources of capital. Set an unwavering course: tactics may change but strategy should not 18
  • 19. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. “Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannot obligate each other. DTTL and each DTTL member firm are liable only for their own acts or omissions and not those of each other. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in its territory through subsidiaries, affiliates, and/or other entities. Confidential – this document and the information contained in it are confidential and should not be used or disclosed in any way without our prior consent. Liability limited by a scheme approved under Professional Standards Legislation. Deloitte Touche Tohmatsu © 2013. All rights reserved. General information only This presentation is provided as general information only and does not consider your specific objectives, situation or needs. You should not rely on the information in this presentation or disclose it or refer to it in any document. We accept no duty of care or liability to you or anyone else regarding this presentation and we are not responsible to you or anyone else for any loss suffered in connection with the use of this presentation or any of its content. 19