This document discusses factors to consider in project valuation. It notes China's growing importance as both a risk and source of returns for commodity companies. Individual factors like resources, costs, and price volatility must be considered. Capital costs regularly exceed estimates. While uncertainty remains, companies can improve valuations through share buybacks or focusing on quality projects rather than assuming commodity demand will always increase.
1. Factors to Consider in Project Valuation
Beijing, PRC
June 15, 2011
Alexander Lopatnikov
Leading / Thinking / Performing
2. In This Presentation
Exposure to China and changing risk profile
Individual factors that influence project valuation
What can companies (not) do to improve valuations?
Factors to Consider in Project Valuation 2
3. Exposure to China and changing
risk profile
Factors to Consider in Project Valuation 3
4. Exposure to China…
GPD (PPP), US$ trillion (China - Red, USA – Blue)
“The construction of Chinese infrastructure has 20.0
lifted the global intensity of steel use to levels 15.0
not seen since the post-War reconstruction of 10.0
Europe and Japan ended in the early 1970s.” 5.0
FT 0.0
2011 2016
Factors to Consider in Project Valuation 4
5. …Created Most Value in 2000s…
Market Value 2001 – 2011, US$ billion Vale’s Revenue
US$4.3bn
2002
7.70%
18.90% China
Other Asia
ROW
US$46.5bn
2010
33.10%
China
Other Asia
ROW
Source: Thomson Reuters, Datastream, Vale 20.20%
Factors to Consider in Project Valuation 5
6. …and Continues to Create It…
Factors to Consider in Project Valuation 6
7. …Too Much Money May Be a Problem
“…another major factor is the
financialization of commodity
markets. Its importance has
increased significantly since about
2004…
This phenomenon is a serious
concern, because the activities
of financial participants tend to
drive commodity prices away
from levels justified by market
fundamentals, with negative
effects both on producers and
consumers.”
UNCTAD, June 2011
Factors to Consider in Project Valuation 7
8. Individual factors that influence
project valuation
Factors to Consider in Project Valuation 8
9. Key Value Attributes
Resources /Reserves
Deposit characteristics
Mine Dilution and Mill Recovery
Metallurgical recovery
Metal credits and Contamination Charges
Mine and infrastructure costs
Costs to deliver to markets
Fuel, energy and labor costs
Environmental issues
Fiscal and political risks
Factors to Consider in Project Valuation 9
10. Price Volatility
Assuming current (end 2010)
Coal Price Distribution (FOB Europe) 2007-2010 production and transportation costs
20%
thermal coal sales to the market
18% 18%
18%
breakeven at US$100/tonne
16%
Frequency, Price %
14% 13%
12%
12%
10%
10%
8%
8% 7% 7% 7%
6%
4%
2%
0%
< 60 60-65 65-70 70-80 80-90 90-100 100-130 130-150 >150
Coal Price, US$/Tonne
NPV < 0 NPV > 0
Factors to Consider in Project Valuation 10
11. Capital Costs
Real
Dollars
Percentage of
Costs Cost
Size of Project Number of Projects Feasibility Study
Overrun Inflation
estimate*
$0 - $50 Million 11 118%
11% $50 - $100 Million 4 102%
$100 - $1,000 Million 3 137% **
14% Over $1,000 Million 3 110%
* - in real dollars
** - contains an outlier otherwise the difference is only 102%
Source: Pincock, Allen & Holt
100% 125%
Cost inflation, currency and
Feasiblity commodity price volatility
complicate project valuation
Study As-Built
Source: Jasper Bertisen & Graham A. Davis analysis of 63
worldwide mining and smelting projects completed between
1980 and 2001
Factors to Consider in Project Valuation 11
12. Non-Mining Costs
FOB Baltic Ports 110 $/t
35 $/t
FOB Yuzhny 103 $/t NB - 75 $/t
40 $/t
NB - 62 $/t
50 $/t
NB - 64 $/t
FOB Vostochny 112 $/t
Factors to Consider in Project Valuation 12
13. What can companies (not)
do to improve valuations?
Factors to Consider in Project Valuation 13
14. Uncertainty Is Still There
Rising mining costs may trigger sector correction
(Reuters) - Consensus forecasts for miners' earnings are failing
to price in the full impact of rising costs, a gap that could trigger
a correction in the sector's shares after the summer results
season.
Factors to Consider in Project Valuation 14
15. MRR Taxation and Return on Capital
9.00
Return on capital in mining
25%
20%
8.00
15%
10%
7.00 5%
0%
6.00
5.00
Gold
4.00
Iron Ore
3.00 Oil and Gas
2.00
1.00
Replacement
- Cost
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Incremental Value Over Tangible Assets Book Value
Factors to Consider in Project Valuation 15
16. Alternative Ways of Value Creation
Share Buybacks
BHP Billiton ~ $10 billion
Rio Tinto ~ $ 5 billion
Vale ~ $ 2 billion
Potash Corporation of Saskatchewan ~ $ 2 billion
Factors to Consider in Project Valuation 16
17. In Conclusion
Exposure to China remains both a major risk and source
of return
There are factors to consider other than commodity
prices
Investors need to avoid undertaking “subprime” mining
projects even assuming demand and prices will hold
Factors to Consider in Project Valuation 17