Metals and mining market overview

Mining Philippines Conference and Exhibition

Ian Hiscock, CRU Consulting

September 2017
 Mining Philippines Conference and Exhibition

Presentation overview

Part 1: Industry overview and near-term outlook

Industry sentiment and themes
Market fundamentals
Investment and prices

Part 2: Supercycles and long-term trends

Commodity supercycles
Megatrends
 Mining Philippines Conference and Exhibition

Part 1
Industry overview and near-term outlook
 Mining Philippines Conference and Exhibition

Market sentiment
CRU Metals & Mining* Market Size Index, Q1 2014 Q1 2018

400 + 41% - 9% Metals & mining sector is currently

350
300 worth around USD 250 billion
250
200
150
100 In 2016/17, mining shares
50
- outperformed other sectors, chiefly
driven by a rebound in steelmaking
raw material and coal prices
Ferrous Base metals Precious metals Steam coal Fertiliser

Industry participants are cautiously

* CRU Metals & Mining Market Size Index - volume x average price ($bn)

CRU Metals & Mining Sentiment Indicator for the next 12 months
optimistic, although no expectations of
60%

50%
a return to the boom years
40%

30%
Prices for bulk commodity continue to
20%
cool. Better outlook for base metals
10% and raw materials tied to Green
0% Future.
Very Negative Negative Passive Optimistic Very
Optimistic
* Based on 221 responses

Producers are more confident than in previous years

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 Mining Philippines Conference and Exhibition

Current market and corporate themes

Top market themes in mining & metals over the next 12 months Top corporate themes in mining & metals over the next 12 months

Chinese investment slowdown Technology innovation and automation

Balance sheet consolidation
Trade policy and geo-political risk
Increased acquisitions activity
Divergent commodity price performance
Portfolio restructuring and diversification
Resource nationalism and social licence
Portfolio restructuring and diversification
Environment and climate change policy
Increased acquisitions activity
Return to cost inflation
Access to energy, water and
Fed rate hikes Enhanced shareholder dividends
Other Delivery of divestment plans

0% 10% 20% 30% 0% 5% 10% 15% 20%

* Based on 221 responses * Based on 221 responses

Efficiency and costs remain a top management priority, but many companies now
looking for post-China boom opportunities.

More nationalistic trade policy for many jurisdictions. Trade wars could have a
significant Winners and losers.

Reveals a mixed outlook on financial and investment strategies for FY 2017/18

More nationalistic trade policy in some jurisdictions

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 Mining Philippines Conference and Exhibition

Macroeconomic backdrop
Regional outlook for GDP (q-q % change) Solid outlook economic growth in the
8%
7% USA and Eurozone, but still below pre-
6%
5%
2009 long-term trends. Russia and
4% Brazil entering recovery. US monetary
3%
2% policy becoming more hawkish
1%
0%
Metals demand indicators are
supportive of metals demand in the
World Japan China Eurozone USA
coming quarters and years
Global outlook (base case) for key demand drivers (y-y % change)
8
7
Chinese governments short-medium
6 term plans for the economy expected
5
4 to emerge at 19th Party Congress. The
3
2
detail important for understanding
1 changing metal use.
0

Construction - global Industrial production - global Geopolitics a key risk factor to outlook
Construction - China Industrial production - China

Growth in many regions supporting metals demand growth

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 Mining Philippines Conference and Exhibition

Metals demand over the next few years

Demand outlook by commodity 2016-17 (y-y % change)
Lithium Divergence between metals linked
Cobalt
Aluminium consumer demand and construction
Potash
Stainless steel
/ heavy industry
Copper
Phosphates
Steel
Big increases in tech metals
Steam coal demand - notably lithium and
-5% 0% 5% 10% 15%
cobalt - driven by stronger uptake
Construction Transport Consumer goods Industrial
Infrastructure Energy Agriculture Other of electric vehicles
Demand outlook (base case) by commodity, China and RoW
Transportation exceeds
Global demand CAGR 16-21 (%)

Chinese demand
underperforming RoW
Chinese demand
outperforming RoW
construction as main driver of
8%
7% Cobalt aluminium and steel consumption
6% Lithium
5%
China plays diminishing role in
Increasing global

4% Gold
demand

Fertilisers Aluminium
3%
2% Steel Copper
global bulks and fertilizer demand
1%
0%
Steam coal over medium term
-10% -5% 0% 5% 10%
change to Chinese share of global demand 16-21 (%)

Growth in all metals use. Tech metals leading the pack.

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 Mining Philippines Conference and Exhibition

Key points on metals supply

Forecast mineral production changes (base case) in $bn (using
average 2016 prices), 2016-2017 Global production of iron ore by
Global majors continues to grow
RoW
Australasia
Latin America Export policy reversal sees some
CIS
Africa
return to Indonesian nickel volumes
North America
China Copper output will not recover
-5 0 5 10 15
output losses from Q1 labour and
Iron ore Copper Bauxite Coal Gold Nickel Potash Phosphate rock
export licence disruptions
Supply risks production shares (%) and weighted country risk*
Increasing concentration of supply base
China coal production driven off by
policy. But growth in India.
Risk (1 lowest; 5 highest)

4.1
Gold Potash Cobalt Increasing risk profile
of production base
3.9
3.7 Copper
3.5 Zinc
Bauxite America First Energy Plan may
Nickel
3.3
Steam coal Met. Coal temporary slow structural decline in
3.1
2.9 Iron ore Lithium US coal
2.7
2.5
0% 20% 40% 60% 80% 100%

*See glossary for more info

Share of top 2 producing countries (%)

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 Mining Philippines Conference and Exhibition

Mining costs have stabilised, moderate inflation ahead

Key mining cost* drivers by region, controllable (red) versus non-
controllable (blue), 2016-17 (%) Costs declined for a 4th consecutive
World year in 16 particularly in the
China
Australia
Western Hemisphere
Russia
Brazil But some inflation projected to
United States
Canada
return in 2017, fairly consistently
-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% across markets
FX Fuel Consumbles Royalties Capex Productivity Other
* Weighted average cost changes across coal, iron ore, gold, copper and nickel Continued productivity gains
Gross margins and price-cost intersect, Q1 17 Q1 18 anticipated, but price related
50% Increasing number of profitable assets
pressures from capex & royalties
Average gross margin*

40% Copper Gold

Met. coal
Iron ore
Steam coal
Nickel
Steepening curve Cash positions to moderate
30%
Q1 17 Q1 18 particularly in bulks but overall
20%

10%
reasonably healthy
0%

-10%
50% 60% 70% 80% 90% 100%
* (Average price / CRU Business Costs) 1 Price-cost intersect, percentile of supply (%)

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 Mining Philippines Conference and Exhibition

Investment has declined every year since 2011

Mining capex ($bn) changes by region and commodity, 2016-2017
Development capex* down in 2017
Global (against a low base), particularly in
Australasia
Latin America bulks and copper
RoW
North America
China
Robust cash flows chasing few
Asia projects could yield an uptick in
Africa
-10 -8 -6 -4 -2 0 2 4
valuations
Copper Iron ore Coal Gold Other
Prices insufficient to encourage
Investment requirements by commodity (base case) significant new investments across
many commodities
Last 6 months price as % of LRMC

180% More projects required

Met. coal
160%

Near term incentive yielding potential medium term

140% Iron ore Copper
Gold **
120%
100%
80% Bauxite supply gaps, particularly in copper
(%)

60% Potash
Thermal coal
40%
20% Nickel
0%
-10% 0% 10% 20% 30%
Forecast supply gap in 2026/27*
* % of 2027 demand and committed production (i.e. operating & construction); ** Not based on supply gap
Size of bubble denotes forecast new project development capex over the 2017-2021 period * Development and sustaining capital expenditure only

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 Mining Philippines Conference and Exhibition

Price upside for copper and nickel over the next year
'Heat Chart' recent and forecast price performance (%)
Projected decline Projected appreciation Price correction in bulks following a
120%
Met. coal
price fly-up in 2016 - adjustments to
Price change, Q1 16 Q1 17

100%
China coal policy & a return to iron

Strong 16
Cobalt
80%
60% Steam coal
Zinc
ore fundamentals
40%
20%
Iron ore Lead
Aluminium
Copper
Nickel
Supply constraints contribute to
Lithium Gold sustained elevated prices in zinc

Poor 16
0%
Potash Phosphate DAP
-20%
-40% -20% 0% 20% 40%
and cobalt
Forecast price change, Q1 17 Q1 18

Price flare-risks inventory changes* (weeks) and production Lithium and cobalt prices expected
exposure (%) to remain at historical highs on the
Share of top 2 producing countries

90% Copper Aluminium

Met. coal Steam coal back of strong demand growth, but
80% Iron ore Nickel
70%
Zinc Cobalt cool slightly from recent years.
Q3 16 Q1 17
60%
Long-run investment required in
(%)

50%

40%
new copper and nickel capacity
30% provides support for higher prices
0 5 10 15
Inventory (weeks of consumption)
20 25
in the future
* Note: Some stock information uses mill data only (e.g. coal, iron ore) while other reflects value chain estimates

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 Mining Philippines Conference and Exhibition

Part 2
Supercycles and long-term trends
 Mining Philippines Conference and Exhibition

Typical supercycle story

Break in Lag in
Price spike
demand investment

Price Too much Demand

collapses investment destruction

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 Mining Philippines Conference and Exhibition

Nickel price spike example

3,000 50,000

Existing capacity Price spike to Forecast

$41,780
Global demand
2,500 40,000
Ni Price

Ni Price (Real 2015 USD/t)

2,000 Lag in supply 30,000
000t Ni

Fundamentals response
extremely tight

1,500 20,000

1,000 10,000
$17,265

$11,839
$7,869
500 0
2000 2005 2010 2015 2020

Demand outstrips supply in 2006. Investment lags.

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 Mining Philippines Conference and Exhibition

Capital investment in nickel by major company

9 45,000
8 40,000
7 35,000
6 30,000
Billion $

2015$
5 25,000
4 20,000
3 15,000
2 10,000
1 5,000
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Vale Glencore Xstrata Norilsk Nickel
Sherritt International Corporation BHP Billiton Jinchuan
First Quantum Pacific Metals Eramet
Anglo American Western Areas PT ANTAM (Persero) Tbk
Price (RHS)

Overinvestment result in price collapsing

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 Mining Philippines Conference and Exhibition

Behavioural biases
Over extrapolation 20 Model of behavioural biases

10

% deviation of price from trend

0
1 6 11 16 21 26 31 36 41 46 51 56 61 66

-10
price informed
Competition neglect
-20 price extrapolation bias

price competition neglect

-30
price both biases

-40
Years after shock

Overextrapolation+Competition neglect=BIG overreaction

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 Mining Philippines Conference and Exhibition

Copper price decomposition 100 years

Grade decline.
10,000 Marginal costs
9,000 Technology increase 1.4% p.a.
drives down
8,000
costs
7,000 Bio leaching
Grade decline and SX/EW
6,000
drives up holds down
$/t

5,000 costs costs

4,000

3,000

2,000

1,000

0
1951
1954
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948

1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
Net effect of technology/scale versus resource scarcity
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 Mining Philippines Conference and Exhibition
2

Aluminium versus copper value chain Alumina refining

Aluminium: processing dominated costs Copper: mining dominated costs

Mining 1

Recycling
3
Aluminium smelting

2 4 Processing
Alumina refining
Extrusion
Mining has become more efficient over time, with increased machine sizes
Rolling
and more automation. However, geology/depletion provides significant
upwards pressure on prices
Casting & forging
Smelters and refineries Technology improvement has substantially
open and close at relatively reduced the cost of production
short notice and low cost Recycling
3
Aluminium smelting

4 Processing
Extrusion

Rolling

Casting & forging

Copper mines have long lead

times, operate for decades and
are very expensive to set up. They
cannot react quickly to sudden
price changes

Technology/scale wins more in processing value-chains

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 $/mt $/mt

100
200

150

0
50
1900

2,000
4,000
6,000
8,000

0
10,000
12,000
14,000
1907 1900
1914 1907
1921 1914
1928 1921
1935 1928
1942 1935
1949 1942
1956 1949

Iron Ore
1963 1956
Aluminium

1970 1963
1977 1970
1984 1977
1991 1984
1998 1991
Mining Philippines Conference and Exhibition

2005 1998
2012 2005
2012

$/mt
Price decomposition comparison

0
10,000
20,000
30,000
40,000
2,000
6,000
8,000

4,000

0
10,000

1900
1900
1908
1907
1916 1914
1924 1921
1932 1928
1935
1940
1942
1948 1949
Copper

1956 1956
Nickel

1964 1963
1972 1970
1977
1980
1984
1988 1991
1996 1998
2004 2005
2012 2012
Resource scarcity matters in mining value chains
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 Mining Philippines Conference and Exhibition

Copper price decomposition 100 years

10,000
China becomes
9,000
USA becomes Post-war a manufacturing
manufacturing reconstruction giant
8,000 giant
7,000

6,000
$/t

5,000

4,000

3,000
?
2,000
OPEC embargo and
1,000 Great depression and world wars
deindustrialisation
0
1924

2005
1900
1903
1906
1909
1912
1915
1918
1921

1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002

2008
2011
2014
Supercycles driven by economics, geopolitics and policy
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 Mining Philippines Conference and Exhibition

Recent spike in tech metal prices linked to green policy

8,000

7,000
Supply response
Aggressive
Supercycle?
Lithium Carbonate Pirce $/t

6,000 Moderate
Muted
5,000

4,000

3,000

2,000

1,000

0
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
Electric Vehicles reshaping value chain for some metals
 Mining Philippines Conference and Exhibition

Trend towards more nickel in EV battery cathodes

Tesla Powerwall Batteries Current NCM cathodes use a 1:1:1 ratio of
Cathode Chemistry nickel, cobalt and manganese.
Future research focused on reducing
cobalt proportion of the cathode.
Battery manufacturers are working to
Nickel Cobalt Manganese produce batteries that use 8:1:1 ratio (Ni,
Tesla S Battery Cathode
Co, Mn). Higher power density, safety and
Chemistry supply chain.
NCA batteries contain a greater amount of
nickel compared to NCM. The ratio can be
Nickel Cobalt up to 80% Ni, 15% Co and 5% Al.
Aluminium Lithium Oxide
High energy density and long life span
Tesla 3 Cathode Chemistry
used in use in electric vehicles, especially
? at high end.

EVs also use >3 times the amount of copper wire

 Mining Philippines Conference and Exhibition

Conclusions
Mining companies have been retrenching since commodity prices began to decline in
2011-2012. Some have succeeded in reducing costs and restructuring their business for
more normal trading conditions. There have been higher prices in 2016-17 and industry
sentiment is notably higher than the period since 2011-12.

Notable shift in the geopolitical balance of power has resulted in nation states becoming
more assertive. Higher risk of serious friction between powerful regions / states, which is
a key risk to the macroeconomic and industry outlook.

Urbanisation and modernisation will continue to be a theme going forward. Metals

intensive economic growth will now come from India, SE Asia and Africa.

Green future has critical mass. A number of key technologies now mature and
commercially viable and have some interesting interactions with the internet of things.
Disruptive change to the transport sector will reshape the value-chains for raw materials
resulting in opportunities and threats for mining and metal industry participants.
 Mining Philippines Conference and Exhibition

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Thank you for listening

Ian Hiscock
Principal Consultant
CRU Consulting, Hong Kong
( +852 6213 3475
* ian.hiscock@crugroup.com

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