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Living with Minerals 4 - Shaping UK minerals policy - Part 3

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  • The mining and metals sector rebounded quickly from the global financial crisis, and there were fears of dutch disease / 2-speed economy (i.e. That the success in exploitation of natural resources would cause rapid exchange rate appreciation against other major currencies; increases in inflation; cheaper imports and hence inability for local manufacturing sectors to compete). To combat this the mining sector became a target to replenish national treasuries (governments increased taxes on the mining sector, and provided tax relief to other sectors.) This increase in government take manifests itself in several ways:Imposition of resource rentAmendments to royalty or other tax ratesImposition of greater controls on foreign participationEncouraging in-country beneficiationInstitution of new mining codesUse it or lose it (access to secure title) – often included in lease agreement. If company slows production/investment, governments fear of a deferral in revenues so invoke rights to titlePreference for state exploitation of own mineralsMandated beneficiation is a recent ‘sub-trend’ appearing in Indonesia, Vietnam, South Africa and Brazil.
  • Increased political risk in investment destinationsFor those companies that chose to grow, there was a propensity to take on greater political risk, with an acceptance to share the upside with host governments. More companies ventured back into riskier regions, such as West Africa, South America and Asia- specifically PNG and MongoliaDeal activity was often driven by the need for partners to help fund the infrastructure to support these projects.This expansion into emerging and frontier markets also created a greater focus on sovereign risk, notably security of tenure and changes in mining, tax and royalty regimes.These higher risk countries are often conducted in countries more prone to fraud and corruptionThis alongside new fraud and corruption regulations heightens need for increased focus in this space as there are severe consequences.Payments that were tolerated a few years ago may now be illegal and any one payment may be covered by laws from multiple jurisdictions, additionally enforcement activities are increasingly coordinatedThe new UK act is quite different in it concerns public and private; and payment or receipt of bribes, it contains no exemptions and applies to all companies not just publically traded ones.Director liability under the UK Bribery Act is causing strong concern of inherent exposure to corruption in high risk locations.
  • In 19th Century UK was leading world supplier of iron, tin, copper and leadProduction declined as costs escalated and competition increased from low cost overseas producersIron ore mining remained important until 1950s and continued until 1980s.The last lead and zinc mine closed in 1978 in WalesThe last tin mine closed in Cornwall in 1998Currently there are plans to open two new gold mines in Scotland and Ireland, and a tungsten mine in Devon, last operational in WW IINew developments relating to exploiting shale gas are commencing E of BlackpoolHowever, environmental issues raise the barriers to entry for new mining projects in UK and elsewhereUK only self sufficient in industrial mineralsSelf sufficient in construction minerals including aggregates, agricultural dolomite, brick clay, potash, kaolin, salt and silica sand. According to Department of Energy and Climate change the number of offshore exploration wells has fallen by 82% from 157 in 1990 to 28 in 2010Now UK more dependant on imported natural gas and oil. Shale gas potential now being investigated on west coast Coal reserves are plentiful but present challenging deep extraction problems that future technologies may address UK wholly dependant on imports for all metals except steel, lead and aluminiumUK reliant on imports of metallic minerals, ferrous and non-ferrous ores and alloys including steel, coal, cement, aluminium, copper, zinc, manganese, chromium, nickel, tin, cobalt, vanadium, gold and PGM Environmental issues raise the barriers to entry for new mining projects in UK
  • UK has long and proud mining history with many major metals from gold to tin being produced domestically at some timeDespite its size UK has important indigenous resources of wide range of minerals, including energy and industrial mineralsMost deposits are sub-economic at this timeConstruction minerals, notably aggregates, and energy minerals are dominant minerals in which UK is self sufficient Coal and natural gas provide around a third of fuel for electricity generation. Gas demand has risen sharply leading to imports as resources are depletedCoal output has been in decline for years with closure of uneconomic deep mines.Coal imports now supply half UK demand – net coal importer since 2002Critical sectors of UK economy are reliant on domestic and increasingly international extractive industriesAs heavy industries gave way to service industries UK reliance on imports of ferrous and non ferrous metals declinedAdd notes from ‘UK only self sufficient...’ slide
  • UK has long and proud mining history with many major metals from gold to tin being produced domestically at some timeDespite its size UK has important indigenous resources of wide range of minerals, including energy and industrial mineralsMost deposits are sub-economic at this timeConstruction minerals, notably aggregates, and energy minerals are dominant minerals in which UK is self sufficient Coal and natural gas provide around a third of fuel for electricity generation. Gas demand has risen sharply leading to imports as resources are depletedCoal output has been in decline for years with closure of uneconomic deep mines.Coal imports now supply half UK demand – net coal importer since 2002Critical sectors of UK economy are reliant on domestic and increasingly international extractive industriesAs heavy industries gave way to service industries UK reliance on imports of ferrous and non ferrous metals declinedAdd notes from ‘UK only self sufficient...’ slide
  • Within the EU, the exploration and extraction of minerals faces increased competition from other land uses, and a highly regulated permitting environment – including potential bans on use of cyanide in gold processing. Specific challenges face European and UK companies regarding future supply of strategic mineralsThe risks in the mining and metals sector are increasing and include changes to legislative regimes, mining regulations, political systems, social and environmental issuesIn turn the rising risks are affecting availability of funding to explore for and develop new minesAs a consequence of lack of investment and complacency, the EU is increasingly exposing itself to a range of increasing risks that have the potential to interrupt the supply chain
  • The UK Government’s response to the house of lords report was that the impact on the UK is likely to be less than in countries such as Japan and Germany, due to its smaller high technology manufacturing base. There will be some direct impacts, but Government believes that the impacts will be indirect through suppliers in other countries:An example is the defence supply chain, which is rightly concerned about restrictions of supply based on geopolitical issues, and where countries such as the USA are far more exercised on this issue than the UK. House of Lords is not aware of studies to define the significance of the risk to the UK, apart from an upcoming Defra report. Hence it is currently difficult for Government to comment on the degree of vulnerability. However, energy security issues in opinion of House of Lords could have a far greater direct impact on the UK than strategic material security issues.
  • There are four responses possible to material security issues:Negotiate privileged access.Stockpile.Substitute.Resource efficiency measures such as minimise use, extend product lifetime and recycle.Possible stockpiling at an EU level, similar to what occurs in Japan has been proposed, but is generally not preferred in free market economies such as the UK.
  • There are four responses possible to material security issues:Negotiate privileged access.Stockpile.Substitute.Resource efficiency measures such as minimise use, extend product lifetime and recycle.Possible stockpiling at an EU level, similar to what occurs in Japan has been proposed, but is generally not preferred in free market economies such as the UK.

Living with Minerals 4 - Shaping UK minerals policy - Part 3 Living with Minerals 4 - Shaping UK minerals policy - Part 3 Presentation Transcript

  • A UK view of mineral geopolitics -strategic material risksMichael D Lynch-BellPartner, Global Mining & Metals, Ernst & Young LLPLiving with Minerals 4: Shaping UK Minerals PolicyLondon, 7 November 2011
  • Mineral geopolitics: the global context► Rapid economic development in 4 out of the 5 most populated countries is driving global demand for minerals and metals Growth in copper production and consumption, 1960-2010 20,000 CAGR 2.8% 18,000 16,000 14,000 12,000 ‘000t 10,000 8,000 6,000 4,000 2,000 0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Refined production Refined usage Source: ICSG7 November 2011 Living with Minerals 4, London
  • Mineral geopolitics: the global context► But supply is persistently constrained, sustaining long-term prices► While industry costs are ever-increasing► Leading to a global focus on security of supply: ► Mining industry moving into frontier geographies ► Resource-rich nations demanding greater control over, and economic rent from, their natural resources (resource nationalism) ► Resource-dependent nations and industries competing for security of supply All of these factors increase geopolitical risk7 November 2011 Living with Minerals 4, London
  • The top 10 business risks in mining and metals –    Up from 2010 Down from 2010 Same as 2010 New entry7 November 2011 Living with Minerals 4, London
  • Globally, resource producing nations taking controland greater value from resources► Resource supplying nations have rising deficits which is putting pressure on mining companies to contribute more to treasury► Mining sector is seen as potential cash-cow► Slowed capital expenditure used as a trigger for “use it or lose it”► Preference for exploitation of own minerals► Significant number of countries considering tax reform to increase royalty rates► Increase in mandated beneficiation7 November 2011 Living with Minerals 4, London
  • Tax contagion – spreading Resource Nationalism7 November 2011 Living with Minerals 4, London
  • Fraud and corruption – regulated change impactingcapital flows► Regulatory changes will make M&A target destination by risk level companies increasingly responsible (2009 v 2010) for fraud and corruption activities. ► UK Bribery Act — Offence to fail to prevent bribery unless there are ―adequate procedures‖ (1 July 2011) ► US Foreign Corrupt Practices Act — A focus on ―proper books and records and internal controls‖ ► Dodd-Frank Act — Whistleblower bounty 10% to 30% of financial sanction ► Impacts for risk weightings of capital allocation Source: Ernst & Young analysis7 November 2011 Living with Minerals 4, London
  • Stimulating regulatory responses among consumingnations► Nations with potential for Rare Earths deposits are increasingly focused on investing in sustainable and competitive development of domestic resources► Nations without Rare Earths deposits are focused on securing supply: ► EU – information gathering, recycling, open trade policy ► Japan – information gathering, cross-border funding, stockpiling ► South Korea – financing, partnerships with resource-rich nations, stockpiling7 November 2011 Living with Minerals 4, London
  • Mineral geopolitics: the UK contextA long and proud history of mining...► Important indigenous resources of wide range of minerals, including energy and industrial minerals► In 19th Century, UK was leading world supplier of iron, tin, copper and lead► But production declined as costs escalated and competition from low cost overseas producers Value of UK mineral production: £29.9b in 2009 Construction & Coal, 973 Gold, 4 industrial Miscellaneous ► The last lead and zinc mine closed in minerals, 48 1978 in Wales while the last tin mine minerals, 2,303 closed in Cornwall in 1998 ► Currently there are plans to open two new gold mines in Scotland and Ireland and a tungsten mine in Devon Natural Gas, 7,570 Crude ► New developments relating to petroleum, exploitation of shale gas east of 19,075 BlackpoolSource: BGS United Kingdom Minerals Yearbook 2010 7 November 2011 Living with Minerals 4, London
  • With a vital role in the financing of the global resourcesindustries...► The London Stock Exchange is host to 26% of the listed mining market value on key international resources exchanges* Value and number of mining & metals companies by primary exchange of listing 400 1,400 350 1,200 Number of companies Market value US$b 300 1,000 250 800 200 600 150 400 100 50 200 0 0 Market value Number of companies Source: Ernst & Young, Thomson Datastream. Value of primary listing converted to US$, as at 30 September 2011. *Value on major international exchanges. Does not include domestic-only exchanges.7 November 2011 Living with Minerals 4, London
  • With a vital role in the financing of the global resourcesindustries...► The London Stock Exchange hosts the second largest share of listed oil & gas market value on key resources exchanges Value and number of oil & gas companies by primary exchange of listing 1,200 300 1,000 250 Number of companies Market value US$b 800 200 600 150 400 100 200 50 - 0 New York London Main Toronto Hong Kong Australian London AIM TSX Venture Market value Number of companies Source: Ernst & Young, Thomson Datastream. Value of primary listing converted to US$, as at 30 September 2011. Upstream E&P companies only, excludes oilfield services.7 November 2011 Living with Minerals 4, London
  • And growing economic importance to UK► UK-listed mining companies have become increasingly important to the UK economy, accounting for 17% of the FTSE 100 by value at 31 December 2010. Value and weighting mining companies in the FTSE 100, 2000-2010 300,000 18% 16% 250,000 14% Weighting in FTSE 100 Market value £m 200,000 12% 10% 150,000 8% 100,000 6% 4% 50,000 2% - 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Mining market value Weighting % Source: Ernst & Young, Thomson Datastream. As at 31 December each year.7 November 2011 Living with Minerals 4, London
  • And growing economic importance to UK► UK-listed oil and gas companies have consistently accounted for between 16 and 22% of the FTSE 100 by value over the past five years 350,000 25% 300,000 20% Weighting in FTSE 100 250,000 Market value £m 200,000 15% 150,000 10% 100,000 5% 50,000 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Oil & Gas market value Weighting Source: Ernst & Young, Thomson Datastream. As at 31 December each year. Upstream E&P companies only, excludes oilfield services.7 November 2011 Living with Minerals 4, London
  • London is the primary exchange of choice for largeinbound IPOs ●Talvivaara ●Evraz ●UC Rusal New ●Vimetco York ●ENRC London ●Xstrata ●New World Resources ●Glencore ●Kazakhmys ●Ferrexpo Hong ●Fresnillo Kong ●Vedanta Resources ●Hochschild Mining ●African Barrick Gold ●Gem Diamonds ●Ternium7 November 2011 Living with Minerals 4, London
  • But today, the UK is dependent on imports of many ofits key minerals...► UK is major consumer of minerals, essential raw materials for its key industries ► Construction ► Manufacturing ► Electricity generation ► Transportation ► Agriculture7 November 2011 Living with Minerals 4, London
  • But today, the UK is dependent on imports of many ofits key minerals► But the UK imports most of its mineral supply ► Self-sufficient only in construction minerals ► Increasing reliance on imported natural gas and oil ► Coal imports now supply half of UK demand ► Reliant on imports of metallic minerals, ferrous and non-ferrous ores and alloys The UK’s substantial and increasing dependence on foreign mineral supply exposes its economy to supply risks7 November 2011 Living with Minerals 4, London
  • Including the strategic minerals needed to supply itskey growth industries► Strategic minerals play an essential role in UK‟s potential to become a world leader in low carbon technologies. Selected materials and applications: ► Magnesium Compounds – casting alloys ► PGMs – Catalysts, electronics, fuel cells, glass and green industrial applications ► Cobalt – Rechargeable batteries, specialised alloys ► Niobium – Specialised steels ► Antimony – Flame retardant ► Tungsten – Specialised steels ► REE – Automotive, electronics, renewables technology ► Fluorspar – Chemicals and steel ► Tantalum – Telecommunications, IT ► Germanium – Telecommunications, solar energy applications ► Gallium – Semi-conductors, renewables technology ► Beryllium – Electronics ► Indium - Electronics7 November 2011 Living with Minerals 4, London
  • Centres of production are not aligned withcentres of demand► Centres of strategic mineral production are generally not aligned with the UK‟s traditional strategic partners► Overdependence on supply from China and higher risk geographies such as DRC, South Africa China USA •Antimony •Beryllium •Fluorspar •Tantalum •Germanium •Graphite •Indium •Magnesium DRC •Rare earths •Cobalt •Tungsten •Tantalum Brazil •Niobium South Africa •PGM7 November 2011 Living with Minerals 4, London
  • The EU’s response to the growing strategicminerals risk► Over the past decade, the European Union (EU) has increasingly realised that strategic raw materials are vital for the future growth of the region‟s economy► In June 2010, the European Commission (EC) identified 14 raw minerals materials as critical to European industry► Insufficient investment has been made in securing sustainable supplies either domestically or offshore, exposing the EU to increasing geopolitical risks to supply► A Raw Materials Strategy has been established to explore options for improving resource efficiency and security across the region, including: ► Reducing intensity of use ► Substitution ► Stockpiling ► Recycling ► Potential development of European sources of strategic materials7 November 2011 Living with Minerals 4, London
  • The UK’s response to the growing strategicminerals risk House of Commons Science & Technology Committee report, May 2011: ► Strategically important metals for the UK include rare earths, PGMs and other specialist metals ► But there is some level of disagreement about the extent of the UK‟s vulnerability to supply and the degree of direct impact ► Important sectors of UK economy rely on wide range of metals at stable prices ► A stable supply will be important in the transition to a low carbon economy7 November 2011 Living with Minerals 4, London
  • Key recommendations focused on informationgathering► Establish departmental responsibility for: ► Identifying which metals are of strategic importance to UK ► Information gathering on existing resources and future demand ► Knowledge sharing across government and dissemination to business► Understand and assess potential impact of supply and price volatility on SMEs► Identify more effective scrap recycling methods to capture strategic metals lost in the current process► Minimise exports of valuable waste materials► Explore potential for economically viable domestic extraction of mineral resources ► Work with UK Geological Survey to identify domestic natural reserves of strategic minerals ► Classify mines as nationally significant infrastructure to speed up planning process7 November 2011 Living with Minerals 4, London
  • Potential Approach for UK► UK Government to enter into bilateral agreements to secure supplies► The correct investment framework / incentives to foster sustainable supplies from less problematic, lower risk nations► Greater resource efficiency and increased recycling.► Research into greater substitution with viable alternatives► Create national strategic stockpiles for emergency use7 November 2011 Living with Minerals 4, London
  • The Global response► European Union – Published a report “Critical Materials for EU” which highlighted critical strategic metals that EU must consider in terms of supply security. EU has adopted a Geo-political approach and is investing in R&D to find alternatives► USA – Developed a strategy focussing on core technologies: batteries, photovoltaic films, permanent magnets and phosphors. Intends to develop domestic resources where possible for production of strategic metals. Technology advances to recycle metals to reduce dependence► Japan – Seeking to secure alternative supplies supported by State financing. Government has earmarked $1bn to secure supplies, including funding research and projects such as robotic deep sea mining. Creation of national stockpile.7 November 2011 Living with Minerals 4, London
  • In conclusion...► Declining production of domestic resources of non industrial minerals has increased UK exposure to imports and therefore supply chain and geopolitical risks► Strategic minerals have been identified as critical to UK industry and vulnerable to supply interruptions► The UK‟s growth industries and low carbon potential require a stable supply of these strategic raw materials► The potential for future supply disruptions exposes SMEs to price and supply volatility► UK Government must act now to secure supplies of strategic metals necessary for a technological and environmentally responsible future► This includes greater emphasis on recycling, substitution and reduced intensity of use► May include incentives to resource sector to stimulate exploration in prospective geographic localities7 November 2011 Living with Minerals 4, London
  • In conclusionNow is the time for government and industry to act:►Information gathering and sharing►Incentivised investment framework►Cross-border and cross-sector partnering7 November 2011 Living with Minerals 4, London
  • Our views and opinionswww.ey.com/miningandmetals7 November 2011 Living with Minerals 4, London
  • Our mining experience► We work with 25 of the top 30 mining companies globally. Our mining team are market leaders for inbound London main market listings in the sector. ► We audit 8 of the 23 FTSE All- ► We have the lion‟s share of ► We have advised on major transactions in the share listed mining companies in inbound London listings in the mining sector London mining sector ► Xstrata‟s $5.9bn rights issue and associated ► Aquarius Platinum ► Ruukki Group acquisition of Prodeco coal mine ► Ferrexpo ► International Ferrous ► Proposed merger of Vale and Xstrata ► Fresnillo Metals ► Proposed Xstrata and Anglo American „nil ► Gem Diamonds ► Ferrexpo premium merger of equals‟ ► Hochschild Mining ► Fresnillo ► Proposed West Africa iron ore joint venture ► International Ferrous ► Gem Diamonds ► Falconbridge takeover by Xstrata Metals ► Hochschild Mining ► Inco takeover by Vale ► Kazakhmys ► Kazakhmys ► Phelps Dodge takeover by Freeport ► Xstrata ► Xstrata McMoran ► Ferrous Resources ► Kazakhmys‟ investment in ENRC (aborted during 2010) ► Rio Tinto‟s defence of BHP Billiton‟s $150bn hostile takeover approach ► CITIC‟s $185m investment in Oxus Gold plc7 November 2011 Living with Minerals 4, London
  • Thank youMichael D Lynch-BellPartner, Global Mining & Metals, Ernst & Young LLP+44 (0)20 7951 3064mlynchbell@uk.ey.comUN Expert Group on Resource Classificationhttp://live.unece.org/energy/se/reserves.html