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

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

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. Tax contagion – spreading Resource Nationalism7 November 2011 Living with Minerals 4, London
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. Our views and opinionswww.ey.com/miningandmetals7 November 2011 Living with Minerals 4, London
  27. 27. 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
  28. 28. 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

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