Mineral Commodities Outlook

UNSW
October 2013

Allan Trench

31 Mount Pleasant, 517, Tower 2, Augusto Leguía Norte PO Box 1269, Level 2, Kalpataru Synergy, Opp.
London Bright China Chang An Nº 100 of.506, Langley, Grand Hyatt
WC1X 0AD Building, Las Condes, WA 98260 Santa Cruz (East),
UK 7 Jianguomennei Avenue, Santiago, USA Mumbai 400055,
Beijing 100005, China Chile India

Tel: +44 20 7903 2000 Tel: +86 10 6510 2206 Tel: +56 2 231 3900 Tel: +1 360 321 4707 Tel: +91 22 3953 7395
Fax: +44 20 7278 0003 Fax: +86 10 6510 2207 Fax: +56 2 231 4314 Fax: +1 360 321 4709 Fax: +91 22 3953 7200

CRU STRATEGIES a division of CRU International Limited

Uranium

“Uranium is the next great China story.

What China did for iron ore in the last decade,
it will do for uranium in the coming decades”.

A Trench & D Packey

Australia’s Next Top Mining Shares – Major Street Press

CRU STRATEGIES
 Uranium

Uranium demand to 2035

180,000

120,000
tonnes U3O8

60,000

0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
USA Japan Europe China - Mainland India Russia RoW

CRU STRATEGIES

Iron Ore

“Our demand versus long-run marginal cost analysis out to

2035 suggests that only those tonnes that lie within the first
and second cost quartiles of
the project universe will be required to meet demand”.

CRU Group
Long-Term Outlook for Iron Ore

CRU STRATEGIES
 Copper

“Copper prices are supported by demand from China which

never fails to deliver – and by supply from the miners –
which frequently fails to deliver”.

John Sykes
Principal, Greenfields Research

CRU STRATEGIES

Many immediate challenges facing mining industry

decision-makers

Resource
Ore Grades & Environmental Non-mine
Nationalism & Infrastructure &
Labour/Mining Concerns & Supply Factors
Public Energy
Costs Governance e.g. Scrap, ETF s
Perception

CRU STRATEGIES
 Grade decline can result from a combination of geological,
mining and economic factors acting together...
GEOLOGY MINING

Grade Enhancement Near Surface Mined First Preferential ‘Bring-Forward’ of High Grade

General Surface
grade
decline Enrichment zone
with
depth
Low High
grade grade
(blind) High grade
taken first
Pit outline 2013
ECONOMICS
High Prices ‘Creates’ Low Grade Ore So Grade Must Fall Over Time....

% Mine design brings

Cu Enriched this forward
(eq) cap

High
Final pit grade pod
outline

Economic low-grade 7

CRU STRATEGIES
CRU STRATEGIES CRU Strategies

……Copper’s future grade challenge is well known

1.0 % Cu
Forecast of ore grades at
0.9 currently operating mines
Average ore
grade in
0.9 2002:
0.81%
0.8 Cu

0.8
Average ore
grade in
0.7 2022:
0.60%
0.7 Cu
Average ore
0.6 grade in
2012:

0.6 0.65%
Cu
0.5
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

CRU STRATEGIES Data - CRU

 …with a coming shift in the geology of copper mine supply
Geology by production from existing operations; geology by potential capacity at 97 major copper
projects

Existing Cu mine operations Major Cu mine projects

VMS Other
0.4% 6.2%

Other
11.1% Porphyry
Sediment IOCG
61.7%
12.4% 7.0%

IOCG
6.2% Porphyry
86.5%

VMS
8.5%

CRU STRATEGIES

The future grade (& scale) challenge is not limited to

copper - Uranium example

1000

Closed Mine
Operating Mine
100
Development
Grade (kg U3O8/t)

Feasibility
Exploration
10 Stalled

0.1
0.1 1 10 100 1000 10000

Pre-Mined Resource (mt ore)

CRU STRATEGIES
 The Future of Mining

The Economic Context

CRU STRATEGIES CRU

The OECD still reeling from the Global Financial Crisis (GFC)
104 index of OECD IP

Early 1990s
100

Early 1980s
96
Early 2000s
GFC
92 Mid-1970s

88

84

months after cyclical peak

80
-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54

CRU STRATEGIES
Steady economic recovery forecast…..

World GDP forecasts 2013 and trend growth, y/y %

4.0
February May August Long-run trend
3.5

3.0

2.5

2.0

1.5

1.0
2012 2013 2014

Data: CRU

CRU STRATEGIES 13

Growth to no longer be just a China story

GDP growth, % y/y IP growth, % y/y

12 12
China OECD China OECD
Rest of World World Rest of World World
10 10

8 8

6 6

4 4

2 2

0 0
2013 2014 2015 2013 2014 2015
Data: OE, CRU Data: OE, CRU

14

CRU STRATEGIES 14
 India has a strong demand outlook too, take
copper….
1400

Refined Copper Consumption ‘000t

1200

1000

800

600

400

200

0
2010 2011 2012 2013 2014 2015 2016 2017

India India x 2
CRU STRATEGIES
Source: CRU Group

But India is no replacement for China….

12000
Refined Copper Consumption ‘000t

10000

8000

6000

4000

2000

0
2010 2011 2012 2013 2014 2015 2016 2017

India India x 2 China

CRU STRATEGIES
Source: CRU Group
However not just the economy drives prices:
Investor influence can accentuate fundamentals
LME Copper Cash Price Constituent Analysis – 2013 Example
Copper Fundamentals $6,075/t Investment Factors $1,625/t

9,000

8,000
High stocks
7,000 in China
6,000

5,000 Macro uncertainty

stronger US$
4,000

3,000 Stronger dollar

Weaker energy
2,000

1,000

0
Stocks/ Short
Demand Currency Energy China Physical term Hedge Index Total
Relationship Balance ETFs Investors Funds Funds Price

CRU STRATEGIES
Source: CRU

The Future of Mining

Selected Market Outlooks

18

CRU STRATEGIES CRU

Copper – price battered, but solid support seen at $6,650/t 19

Consumption of copper Global balance

2.0 12% 1.4

1.5 9% 1.2
million tonnes

1.0

million tonnes
1.0 6%
0.8
0.5 3%
0.6
0.0 0%
0.4
yoy change (mt)
-0.5 -3% 0.2
yoy change %
-1.0 -6% 0.0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

CRU calculated value of Executive Summary

$151bn global copper metal
production in 2013 • CRU has increased its 2013 refined market surplus after adjusting for lower
consumption projections and a large drawdown of Chinese bonded stocks.
Chinese copper production
30% as a proportion of global
production in 2013
• CRU’s market balances remain unchanged from 2015. Lower consumption and
lower prices are offset by delays to production increases.
Chinese copper consumption • CRU’s mine output growth has been lifted from 2.4% to 3.7% in 2013. Despite
43% as a proportion of global
consumption in 2013
the Bingham Canyon wall collapse in April, there have been few mine disruptions
this year.

www.crugroup.com

CRU STRATEGIES

Nickel – fundamentals to improve after 2015

Consumption of nickel Global balance

250 25% 120
yoy change (000kt)
200 20% 100
yoy change % 80
thousand tonnes

thousand tonnes

150 15%
60
100 10% 40
50 5% 20
0
0 0%
-20
-50 -5% -40
-100 -10% -60
2001 2003 2005 2007 2009 2011 2013 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

CRU calculated value of Executive Summary

$28.5bn global nickel metal
production in 2013 • The nickel market is in oversupply, with little sign of any significant production
response outside of China. The only supply response, from Chinese nickel pig iron
Chinese nickel production as producers, not been sufficient to address the market imbalance.
33% a proportion of global
production in 2013 • The low nickel price environment is slowing development in new capacity
outside China. This will result in a need for higher NPI production to limit the
Chinese nickel consumption
shortfall.
50% as a proportion of global
consumption in 2013
• CRU has increased primary nickel demand growth to 7.1% in 2013. CRU
expects stronger Chinese consumption, due to robust stainless steel output.

Source: CRU Nickel Market Outlook, Jul 2013 www.crugroup.com

CRU STRATEGIES
Zinc – squeeze still in sight 21

Consumption of zinc Global balance

2.0 20% 1.00
yoy change (mt) 0.75
1.5 15%
yoy change %
million tonnes

0.50

million tonnes
1.0 10%
0.25
0.5 5%
0.00
0.0 0%
-0.25
-0.5 -5% -0.50
-1.0 -10% -0.75
2001 2003 2005 2007 2009 2011 2013 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

CRU calculated value of Executive Summary

$24.8bn global zinc metal
production in 2013
• CRU’s expectation that mine exhaustions will lead to a late-decade metal
squeeze remain intact. This will happen without further mine closures or cutbacks.
Chinese zinc production as a
• With their profitability under pressure, Chinese smelters are presently unwilling
39% proportion of global
production in 2013 to produce any metal for which there is no domestic market. This has again
delayed the commissioning of new capacity and led to renewed cutbacks.
Chinese zinc consumption as
43% a proportion of global
consumption in 2013
• The new Chinese leadership confirm is serious about rebalancing its economy.
This has caused CRU to trim estimates of current zinc consumption and, more
importantly, our expectation for the period ahead.

Source: CRU Zinc Market Outlook, Jul 2013 www.crugroup.com

CRU STRATEGIES

Iron Ore – 3 digit prices hold 22

Iron Ore Demand Iron Ore Exports

180 18% 1,400
yoy change (mt) Australia
160 16%
1,200 India
140 yoy change % 14%
Brazil
million tonnes

1,000
Million tonnes

120 12%
100 10% 800
80 8%
60 6% 600
40 4% 400
20 2%
200
0 0%
-20 -2% 0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

Chinese seaborne iron ore Executive Summary

62% imports as a proportion of global
seaborne exports in 2013
Chinese iron ore production
17% as a proportion of global
production in 2013
Chinese iron ore consumption
57% as a proportion of global
consumption in 2013
• To 2017, further price falls are forecast as demand growth eases and low-cost
supply ramps up, squeezing marginal Chinese production, despite new capacity
being planned.
• Oversupply in the Chinese steel sector, negative EBITDA margins at mills and
bearish sentiment pressurized miners into lowering Q2 2013 ore prices.
• Aggressive growth in low-cost Australian supply has added downward price
pressure to ore. In part, however, this ramp up has offset a weak performance in
Brazilian and Indian exports.

Source: CRU Iron Ore Market Outlook, Jul 2013 www.crugroup.com

CRU STRATEGIES
Commodities to heat up again by 2017: Prices will increase
17% on average.*
This is a relative story, prices will still be down by ~20% from their cyclical
peaks†

Sulphuric Acid, Uranium, Tin, Palladium, Zinc, Nickel,

Hot
> 15% Coking Coal, Cobalt, Lead, Platinum, Aluminium, Coke
Warm
5% to 15%
Molybdenum, Alumina, Phosphate DAP, Bauxite

Mild Oil, Ferrochrome, Urea

0% to 5%

Cool
0% to -5% Copper, Manganese
Cold Gold, Potash
-5% to 15%
Sulphur, Ammonia, Iron Ore, Phosphate Rock, Silver
Freezing
< -15% * 2017 annual average price forecast over 2013 Q2 average actual prices
† annual average price high 2014-2017 over quarterly average 2000-20013Q4

CRU STRATEGIES

Questions?

31 Mount Pleasant, 517, Tower 2, Augusto Leguía Norte PO Box 1269, Level 2, Kalpataru Synergy, Opp.
London Bright China Chang An Nº 100 of.506, Langley, Grand Hyatt
WC1X 0AD Building, Las Condes, WA 98260 Santa Cruz (East),
UK 7 Jianguomennei Avenue, Santiago, USA Mumbai 400055,
Beijing 100005, China Chile India

Tel: +44 20 7903 2000 Tel: +86 10 6510 2206 Tel: +56 2 231 3900 Tel: +1 360 321 4707 Tel: +91 22 3953 7395
Fax: +44 20 7278 0003 Fax: +86 10 6510 2207 Fax: +56 2 231 4314 Fax: +1 360 321 4709 Fax: +91 22 3953 7200

CRU STRATEGIES a division of CRU International Limited

 Back-up slides

31 Mount Pleasant, 517, Tower 2, Augusto Leguía Norte PO Box 1269, Level 2, Kalpataru Synergy, Opp.
London Bright China Chang An Nº 100 of.506, Langley, Grand Hyatt
WC1X 0AD Building, Las Condes, WA 98260 Santa Cruz (East),
UK 7 Jianguomennei Avenue, Santiago, USA Mumbai 400055,
Beijing 100005, China Chile India

Tel: +44 20 7903 2000 Tel: +86 10 6510 2206 Tel: +56 2 231 3900 Tel: +1 360 321 4707 Tel: +91 22 3953 7395
Fax: +44 20 7278 0003 Fax: +86 10 6510 2207 Fax: +56 2 231 4314 Fax: +1 360 321 4709 Fax: +91 22 3953 7200

CRU STRATEGIES a division of CRU International Limited

Aluminium – inventories ahoy

Consumption of aluminium Global balance

8 20% 4.0

6 15% 3.0
million tonnes

million tonnes

4 10%
2.0
2 5%
1.0
0 0%
yoy change (mt) 0.0
-2 -5%
yoy change %
-4 -10% -1.0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

CRU calculated value of

Executive Summary
$95.1bn global aluminium metal
production in 2013
• Following LME proposals to address queuing warehouses have reduced
incentives to attract metal. Premiums are poised for a downward correction.
Chinese aluminium
• CRU has downgraded its Chinese consumption growth in 2013 to 8.7% from
48% production as a proportion of
global production in 2013 10%. Lower GDP and industrial production growth has caused the revision.
• CRU believes that 1.0m tpy of production have been curtailed in China in 2013
Chinese aluminium
47% consumption as a proportion
of global consumption in 2013
in response to low SHFE prices. CRU expects that a further 325,000tpy of capacity
will be curtailed by the end of the year.

Source: CRU Aluminium Market Outlook, Jul 2013 www.crugroup.com

CRU STRATEGIES
 27
Lead – firmer market yet to fire prices

Consumption of lead Global balance

800 12% 150
yoy change (000kt)
600 9% 100
yoy change %
thousand tonnes

thousand tonnes
50
400 6%
0
200 3%
-50
0 0% -100

-200 -3% -150

2001 2003 2005 2007 2009 2011 2013 2015 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017

Executive Summary
CRU calculated value of
$23.6bn global lead metal
production in 2013
• Mine cuts on lower metal prices (notably silver) have moved centre stage,
adding to the already hard fight for raw materials between smelters, particularly
Chinese lead production as a scrap.
44% proportion of global
production in 2013
• CRU’s new lead/zinc mine cost model shows that about 90% of mined lead
benefits from a precious metals revenue stream, mostly silver.
Chinese lead consumption
• After five years of surplus, CRU expects a greater rise in consumption over
44% as a proportion of global
consumption in 2013 production will finally move the market balance into deficit next year. The scale of
the shortfall will be modest.

Source: CRU Lead Market Outlook, Aug 2013 www.crugroup.com

CRU STRATEGIES