Serafino Capoferri - CRU Analysis UK - Africa, a growing heavyweight in iron ore supply

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Serafino Capoferri delivered the presentation at 2014 Africa Iron Ore conference.

The Africa Iron Ore conference is the annual gathering for iron ore and stainless steel executives engaged in the African Region.

For more information about the event, please visit: http://www.informa.com.au/africaironoreconference14

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Serafino Capoferri - CRU Analysis UK - Africa, a growing heavyweight in iron ore supply

  1. 1. Africa, a growing heavyweight in iron ore supply Serafino Capoferri – Consultant, CRU Prepared for: Africa Iron Ore Johannesburg, Tuesday 3rd June, 2014
  2. 2. • A long term market outlook for iron ore • The cost-competitiveness of African iron ore • Evaluating risk-reward balance for prospective West African projects • Conclusions Agenda 2
  3. 3. • A long term market outlook for iron ore • The cost-competitiveness of African iron ore • Evaluating risk-reward balance for prospective West African projects • Conclusions Agenda 3
  4. 4. 0 500 1 000 1 500 2 000 2 500 3 000 3 500 2012 2015 2018 2021 2024 2027 2030 2033 Possible Probable Committed Demand Demand far from the peak, but supply to grow faster 4 Iron ore demand and planned supply, Mt Data: CRU. Note: Gap analysis excludes Chinese domestic production and includes Chinese import demand only.
  5. 5. 0 200 400 600 800 1000 Long Run Marginal Cost (LRMC) to set the long-term price Cost curve of incremental supply – Economic Costs, $/t Data: CRU. Marginal cost range Additional supply required by the market
  6. 6. Simandou lowers the LRMC of the industry by $5/t X-axis: cumulative production, Mt Y-axis: economic costs, real 2012 $/t 6 0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 Projects cost curve with SimandouProjects cost curve without Simandou
  7. 7. • A long term market outlook for iron ore • The cost-competitiveness of African iron ore • Evaluating risk-reward balance for prospective West African projects • Conclusions Agenda 7
  8. 8. CRU’s approach to iron ore costs 8 Realizations Costs Business Costs (BC) + = Resource Costs Conversion Costs Site Costs (SC) + = Other Costs Corporate Costs (CC) + = Capital Costs Economic Costs (EC) + = ≈ FOB C1 costs ≈ (adjusted by product quality) CFR costs
  9. 9. West Africa strength lies in low mining and processing costs... 9 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% Weighted average in-situ Fe grade Australia Brazil West Africa South Africa Mbalam and Simandou 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Weighted average strip ratio Global Average West Africa Source: CRU Iron ore cost service
  10. 10. ...although competitiveness is lost at the logistics level 10 0% 10% 20% 30% 40% 50% 60% 70% 80% 0 200 400 600 800 Best deposits in West Africa are located the furthest away from coast Distance to port, Km In-situFegrade 0 200 400 600 800 Europe Canada Australia Brazil West Africa Weighted average rail distance to port, Km Source: CRU Iron ore cost service
  11. 11. Overall, West Africa performs well at a Site costs level Weighted average site costs, $/t, 2023 11 0 10 20 30 40 50 60 70 80 90 100 Brazil Australia West Africa South Africa Canada General Transportation Beneficiation Crushing Mining Resource Source: CRU Iron ore cost service
  12. 12. And even gains competitiveness against Australia after quality is taken into account Weighted average FOB site costs adjusted by Value in Use (VIU), 2023, $/t 12 -20 0 20 40 60 80 100 Marketing + Finance VIU Site Costs Source: CRU Iron ore cost service
  13. 13. But freight costs more than offset this and push West Africa up on the Business cost curve Weighted average CFR business costs, 2023, $/t 13 -20 0 20 40 60 80 100 120 Freight Marketing + Finance VIU Site Costs Source: CRU Iron ore cost service
  14. 14. Capital costs are NOT above global average despite the infrastructure requirements Capital intensity for selected iron ore projects, $/t 14 0 50 100 150 200 250 300 350 400 450 Source: CRU Iron ore cost service West African iron ore projects
  15. 15. • A long term market outlook for iron ore • The cost-competitiveness of African iron ore • Evaluating risk-reward balance for prospective West African projects • Conclusions Agenda 15
  16. 16. Bringing price and cost together: what value in West African projects? 16 10% 15% 20% Incentiveprice,$/t Incentive price at different discount rates for selected West African projects, $/t, 2012 real - - - Long Term Price Range
  17. 17. Impact of capital on value depends on risk Variation in incentive price for a given 5% change in discount rate 17 0 2 4 6 8 10 12 14 16 18 20 0 50 100 150 200 250 Capital Intensity, $/t Variationininincentiveprice,$/t BIG is NOT beautiful in West Africa!
  18. 18. • West Africa projects have a greater marginal cost of capital (MCC) than Australian or Brazil due to the higher risk involved in the operations. • At the conceptual stage, each project faces to a certain extent a trade off between operating and capital costs. • The optimal development plan (most efficient from a risk-return prospective) depends on risk. • “Big is Beautiful” in Australia but NOT in West Africa, where risk is higher. Smaller scale operations (“Low-Capex – higher Opex”) are often more valuable for investors. Do not imitate Australia – A new business model is in order for West African juniors 18
  19. 19. • A long term market outlook for iron ore • The cost-competitiveness of African iron ore • Evaluating risk-reward balance for prospective West African projects • Conclusions Agenda 19
  20. 20. • Market Outlook: Low-cost supply to drive down prices • West Africa’s strength lies in lower mining and processing costs than Australia or Brazil. • Longer distances to port and higher ocean freight costs to the growing markets, however, partly offset this. • More elevated risk means the marginal cost of capital for West African projects is greater than its peers in Australia and Brazil. • Most valuable assets in West Africa are often “low-capex-higher-opex” ventures. Conclusions 20
  21. 21. Thank you For more information on the topics covered, please contact: serafino.capoferri@crugroup.com 21

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