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Simon Price, Azure Capital: The current iron ore market – What are investors looking for?
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Simon Price, Azure Capital: The current iron ore market – What are investors looking for?


Simon Price, Director, Azure Capital delivered this presentation at the 2012 FeTECH conference, the leading forum for technical developments evolving around the exploration, mining and beneficiation …

Simon Price, Director, Azure Capital delivered this presentation at the 2012 FeTECH conference, the leading forum for technical developments evolving around the exploration, mining and beneficiation of iron ore.

FeTECH 2013 will focus on the economics of processing and the beneficiation of iron ore. In light of the slowdown in demand for iron ore and pricing decreases, the need to process more efficiently and cost effectively is a challenge. The conference will take a closer look on how we can achieve greater value from the iron ore supply chain, with topics addressing optimisation and streamlining processes, applying improved technologies, understanding the ore body and how to properly characterise it, knowing the steelmakers needs. For more information and to register, please visit the conference website: http://www.informa.com.au/fetechconference.

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  • 1. 3rd Annual FeTech Conference 2012 26 September 2012 Simon Price Director
  • 2. Today’s contents 1. Market and the iron ore price – how are we tracking? 2. Financing iron ore projects in today’s environment 3. Questions? 1
  • 3. Iron ore price While iron ore prices are a lot higher than they used to be… the recent AUD price has made life tough for Australian producers (as bad as the GFC)… Index (rebased to June 2011) 62% Fe Fines (US$/t) 200 135 125 115 160 105 95 120 85 80 75 65 40 55 45 0 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jun-11 Exchange Rate (USD per AUD) 1.10 1.00 160 Dec-11 Gold Mar-12 Silver Copper Jun-12 Nickel Sep-12 Zinc But prices are ~35-40% off their peak, and have fallen harder than other commodity prices... 62% fines today are worth a lot more than in the 70s and 80s... 62% Fe Fines (US$/t) 200 Sep-11 Iron (62% Fines) 62% Fe Fines (A$/t) 200 160 0.90 120 120 0.80 80 0.70 40 Nov-08 0.60 May-09 Nov-09 May-10 Nov-10 62% Fe Fines CFR China May-11 Nov-11 May-12 USD per AUD We had the buffer of a very weak AUD during GFC, but not this time... Source: 80 40 Nov-08 May-09 Nov-09 May-10 Nov-10 62% Fe Fines CFR China May-11 Nov-11 May-12 The AUD iron ore price has fallen to levels comparable to the GFC Bloomberg as at 18 Sep 12 and IMF Research. 2
  • 4. What has caused this sharp drop in price? Slowing global economic growth, rising iron ore inventory levels and reduced steel demand by the construction, infrastructure etc. sectors in China… YOY Real GDP Growth (%) YOY Chinese Steel Consumption Growth (%) China Iron Ore Port Stockpiles (Mt) 16% 35% 120 14% 30% 12% 100 10% 8% 25% 6% 80 4% 20% 2% 60 0% -2% 05A 06A 07A 08A 09A 10A 11A 12F 15% 13F -4% 40 10% 20 -6% 5% -8% -10% US Australia China EU Japan UK 0% 0 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F 14F 15F Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Russia GDP growth has slowed across the globe Source: Iron ore inventories have been rising in China Steel output has stalled as demand wanes WorldBank, Consensus Economics (Jun 12), Bloomberg as at 18 Sep 12, CRU, World Steel Association. 3
  • 5. Will it recover? It did after the GFC!  The sharp drop in seaborne demand due to rising inventories and falling steel demand in 2008 were followed by a re-stocking and demand recovery due to government stimulus  What’s different this time? – The degree of stimulus may not be the same – Any major expenditure / fiscal initiatives are waiting for the pending leadership transition in China – Global demand and sovereign risk concerns remain – Many are beginning to question China’s capital-investment / debt-driven infrastructure and construction model, as the transition is made to a more domestic consumption-driven economy, steel growth may stall  ... But the re-stocking will still come – Sign of a recovery already – Back to “normal” Q1/Q2 next year? 4
  • 6. Long term demand fundamentals – China’s urbanisation The transformation of the iron ore sector has been driven by the step changes in steel demand caused by China’s urbanisation – a process that will continue over many years to come. Steel Consumption per Capita (kg) 1,600 Korea 1,400 HEILONGJIANG JILIN 1,200 XINJIANG Shenyang HEBEI LIAONING NEI MONGOL BEIJING SHI Beijiing TIANJIN 1,000 Japan NINGXIA QINGHAI SHANXI SHANDONG GANSU 800 China (forecast 2011-2040 600 Germany SHAANXI HENAN XIZANG JIANGSU Chengdu HUBEI SICHUAN CHONGQING ANHUI HUNAN JIANGXI Shanghai SHANGHAI SHI ZHEJIANG GUIZHOU 400 USA FUJIAN YUNNAN Guangzhou GUANGXI GUANGDONG HONG KONG MACAU 200 Urban Population (%): 0 0 10 20 30 40 Real GDP per Capital (US$’000) China is still climbing the steel intensity curve... Source: HAINAN The hinterland of China is still awaiting urbanisation... Rio Tinto Presentation “Driving Global Growth” (Jun 12), National Bureau of Statistics of China. 5
  • 7. Rising steel consumption requires more iron ore... from outside China As China’s steel consumption grows, the required supply of iron ore grows. If China’s domestic costs continue to rise / stay high, the solution is to grow imports. 62% Fe N.China Equivalent (US$/t ) Iron Ore Seaborne Exports (Mt) 1,600 200 180 161 160 1,400 150 1,200 136 140 120 1,000 120 100 800 85 80 600 60 400 40 20 200 0 Iron ore production costs in China continue to rise... Source: 2015 F 2014 F 2013 F 2012 F 2011 2010 2009 Others 0 2008 Electricity 2013F 2007 Labour 2012F 2006 Logistic 2011F 2005 Taxes 2010 2004 2008 Seaborne supply of iron ore is forecasted to increase... National Bureau of Statistics of China, China Iron & Steel Association, Econwin, China Metals, Macquarie Commodities Research (Feb 12), CRU. 6
  • 8. Rising costs underpin the iron ore price Capital and operating costs for new iron ore projects have increased around the world over the last 5 years. Capital Expenditure (US$/tonne of capacity)1 195 200 Delivered Cost Advantage over Brazil (US¢ per dmtu, China CIF)2 30 20 180 20 160 150 10 140 0 120 100 96 Established Pilbara 100 (10) 80 Emerging Pilbara (5) Non-Pilbara (20) 60 (30) 40 (40) 20 0 (50) 2007 Rest of the world 2011/2012 Australia Capital costs in Australia have doubled and ROW increased 50% Notes: 1. 2. Source: (48) Australian operating costs have risen also... In 2011-dollar terms. In 2020-dollar terms. Mineral Council of Australia. 7
  • 9. Price outlook After prices recover, there is a likely window of approx. 5 years to bring on new projects before long term prices set in which make attracting finance difficult. Azure Capital view  Demand recovery and a restocking phase will support short term prices Q1/Q2 2013  China’s growth may slow but there is enough urbanisation and ongoing construction that new iron ore projects will need to be developed for another ~5 years until supply catches up  Rising costs will continue to underpin the price... ‒ also new supply has a habit of running late... ‒ ...but the risk is that significant new supply will push the price back down over the long term The counter view? “China's steel demand reached 700 mn tons in 2011. This is likely to be a high watermark for the country. There is a downturn ongoing. Afterwards, the demand will be stuck between 600-700 for the next decade. I see the demand from infrastructure and property will decline.” “$50/ton is probably the price to expect in the long term. It is twice the price in the 1990s. Taking into account of the cost increase, this price is sufficient to keep the mining industry profitable.” Andy Xie, former chief strategist, Morgan Stanley Asia and renowned China commentator 8
  • 10. Capital market conditions Market conditions have improved with QE3 in the past few weeks but remain fragile. Index (rebased to 2005) Index (rebased to 2005) 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Dow Jones Industrial Hang Seng Nikkei 225 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 FTSE100 Euro Stoxx 50 Jan-05 S&P/ASX200 ASX 300 Metal and Mining Major exchanges around the world have generally recovered but are still trading below pre-GFC highs Source: Mining stocks have been heavily sold off over the past 2 years Bloomberg as at 18 Sep 12. 9
  • 11. Putting capital intensity of developing projects into perspective Right now, it would be cheaper to buy existing production assets than to invest in developing greenfield projects in Australia. Enterprise Value (A$m) 3,500 EV/Resource (A$/t) 16 14 3,000 Capex (A$m) 3,500 Capex/Resource (A$/t) 16 14 3,000 12 2,500 12 2,500 10 2,000 10 2,000 8 1,500 6 8 1,500 6 1,000 4 1,000 4 500 2 0 500 2 0 Atlas Mount Gibson Grange¹ BC Iron 0 0 Southdown Marillana Razorback (GRR) (Wah Nam) (ROY) Enterprise value of junior iron ore producers Notes: 1. Source: Mt Ida (JMS) Iron Valley Roper Bar (IOH) (WDR) Capital expenditure of various developing projects in Australia Enterprise Value and Capex Non-capex adjusted multiple excludes Southdown project. Bloomberg as at 18 Sep 12 and company announcements. EV/Resource and Capex/Resource 10
  • 12. Project characteristics Iron ore projects with the following characteristics are more likely to attract capital. Project Characteristics 1 Sufficiently large resource & high Fe grade product  Scale needed to payback capital  Product must be saleable 2 Competitive operating costs  Opex needs to be low enough to generate margins at LT prices of $80-90/t CFR 3 Low capital intensity  Multi-billion capital investments are now hard to finance for all but the most attractive projects 4 Infrastructure solution  Access to existing infrastructure a strong preference to greenfield builds 5 Competent management team  A critical element for attracting capital currently 6 Production within ~3 years  Commence paying back capital before LT iron ore prices settle in 11
  • 13. Beneficiated products Beneficiated products are no longer perceived as the ‘poorer cousin’ as DSO grade falls over time. Although beneficiated products often involve higher costs, these can be offset by a higher selling premium. Higher Pellet (~66% Fe) Quality Magnetite Concentrate (~67% Fe) DSO Lump (~62% Fe) Lower DSO Fines (~58-62% Fe) Lower Source: Price Higher Adapted from Grange Resources Investor Presentation (Jun 12). 12
  • 14. Recent niche investments in beneficiated products Some recent examples of cost-competitive niche beneficiation projects that have attracted capital: Small scale Brazilian mines Iron sands  Centaurus  South American Ferro Metals  Low capital intensity  Domestic market opportunity  Good product quality  Centaurus recently completed a $26m share placement to institutional investors on 6 Sep 2012  Amex  Indo Mines  Very low operating costs  Low capital intensity  Lower quality product yet saleable  Indomines announced a $50m placement to the Rajawali Group on 24 Sep 2012 ...the key issue is total costs (capex and opex), irrespective of the ore type 13
  • 15. Raising funds for iron ore projects today Iron ore was a market-favoured commodity for the past 5 years with some massive transactions taking place. Now investors are more discerning but appetite remains. Exploration stage Feasibility stage Construction / Project Finance  Equity markets  Tough but possible for the best quality opportunities  Equity markets  Strategic investors  Subject to quantum equity markets will support studies for quality orebodies  Strategic investors from Asia for the bigger projects − Chinese SOE appetite has diminished − India, HK, Korea  Equity markets  Debt markets  Strategic investors  Equity markets open but sceptical of high capital intensity / massive scale projects  Debt capital markets currently active – FMG, Newcrest etc  Western bank project finance a bit harder, Chinese development banks active  Strategic investors active but discerning 14
  • 16. Questions? Questions ? 15