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for expert investors
Dr Victor Rudenno
Mining 101 - An overview
Conducted by Dr Victor Rudenno, the guest author of our May 2006 CLSA U Blue Book Mine School Mining basics and equity valuation, this is an essential course for investors in the resources sector who wish to understand the basics of mining. The programme provides details and simple examples of the processes involved from exploration and mining, to processing and marketing a mineral resource, as well as the basics of commodity-price forecasting and equity valuation. Underinvestment in mineral exploration and strong demand growth from developing economies has driven commodity prices to all-time highs in some cases. In the past three years, the global mining sector has grown from a market capitalisation of about US$180bn to more than US$500bn, according to some estimates. An understanding of all of the critical steps required to find a mineral commodity and ultimately produce a saleable product, is critical for investors to successfully value resource equities.
Victor Rudenno holds a Bachelor of Mining Engineering, a Master of Commerce and was awarded a PhD for his thesis on Mining Economics. During his academic career he lectured at the University of New South Wales and the University of Sydney on mining economics, geostatistics, operations research and minerals processing. Published in numerous academic journals, Dr Rudenno is author of The Mining Valuation Handbook (2004). He is Principal Lecturer and Fellow of the Financial Services Institute of Australasia and a Member of the Australasian Institute of Mining and Metallurgy. Dr Rudenno entered the investment banking and stockbroking industry in 1984. He was a Director of Research at CIBC World Markets; a Director of the Investment Banking Division of Hartley Poynton Limited; Head of Resources, Corporate Finance at Deutsche Bank and an Associate Director at McIntosh Corporate. He was Chief Operating Officer and co-founder of ECM Limited, a corporate advisory firm, which merged with InterFinancial Limited (www.interfinancial.com.au) in 2005, where he is currently an Executive Director.
! Exploration ! Resources and reserves ! Feasibility studies ! Mining methods ! Mineral processing ! Marketing ! Commodity-price forecasts ! Equity valuation
Defining drill targets
Explore for economic mineralisation: Explore for economic mineralisation: structure, alteration, rock type, mineralisation structure, alteration, rock type, mineralisation
Review information Analyse data from the air, surface and subsurface Define most likely location for drillable target
Physical Physical properties properties
Geologic models: Geologic models: descriptive, genetic descriptive, genetic
Existing information Existing information
Remote sensing Remote sensing
Regional geology Regional geology
Regional geophysics Regional geophysics for buried structure for buried structure
Drill to discover if orebody exists
Geologic interpretation Geologic interpretation
Generate drillable Generate drillable targets targets
Source: The Mining Valuation Handbook, CLSA Asia-Pacific Markets
Some things to look out for
! ! ! ! ! !
Exploration near known economic occurrence Previous success Adequate money to be spent Depth and value of target Proximity to infrastructure Availability of water
Airborne magnetic survey
least expensive but least reliable Reverse circulation (RC) .more expensive but more accurate ! RC drilling 5 .Exploration ! ! ! ! Obtain samples of the orebody at depth Determine the shape. size and location of the orebody Determine the ore density and grade distribution Rotary air blast (RAB) .
65% Cu from 235m Core tray 6 .most expensive but most accurate as core of rock recovered Core cut to provide samples for assaying and a competent piece for geological interpretation and geophysical tests ! Underground Diamond Drilling Copper strike .Drilling cores from end 06 at Einasleigh 50m @ 6.Exploration ! Diamond drilling .
4g/t gold equivalent ¹SG = specific gravity 7 .000 tonnes With a weighted average grade of 28.7m x 3SG¹ = 255.7 metres Total combined depth of mineralisation is about 210 metres Length along strike of mineralisation is about 150 metres Thus. 210m x 150m x 2.Exploration ! ! ! Drilling designed to intersect orebody at right angles to get true width Often only the best results released Analysts need to interpret the results to get an idea of tonnage and grade Average thickness is about 2.
economic. CLSA Asia-Pacific Markets 8 . 334 Source: Adapted from various company IPO Prospectus. legal. 122. 112. Source: The Mining Valuation Handbook. 2S21. CLSA Asia-Pacific Markets ! Classification guide JORC Code Measured resource Indicated resource Inferred resource Previous Chinese Category A B C D New Chinese Category 111. metallurgical. 121. social and governmental factors (the “Modifying Factors"). 331 2S11. 2S22. 2M11.Resources & reserves Defining drill targets Exploration results Mineral resources Inferred Increasing level of geological knowledge and confidence Indicated Probable ! Ore reserves Increasing knowledge (primarily through drilling) and confidence move resources from inferred to measured and reserves from probable to proven Applying physical and economic factors moves a resource to a reserve A reserve usually results in higher grades but lower tonnage as subeconomic material is disregarded when computing the reserve Determination ultimately relies on a “competent person” who must have adequate experience in the type of mineralisation being quantified ! Measured Proved ! Consideration of mining. 2S22. 2M21. environmental. marketing. 332 333.
CLSA Asia-Pacific Markets Met-15 Met-16 Met-17 Drill-hole plan 500E 10.100 10.100 10.150 10.5 3.1 3.200N 600E 700E 800E Met-06 6 metre interval @ 3.5 Met-26 Source: The Mining Valuation Handbook.100 10. Met-25 Met -26 Met-27 Met-1575 Met-15 Met-16 Met-17 Met-05 Met-06 Northing 10.to (metres) 50-60 53-62 55-60 58-64 60-66 63-69 66-70 69-72 71-73 Intercept metres 10 7 5 6 6 6 4 3 2 Grade units/tonne 4.Resources & reserves Sample of drill holes Hole No.9 2.0 3.1 2.8 3.000 Easting 500 600 700 750 500 600 700 500 600 Interval from .100N 10.1 g/t average 10.200 10.200 10.8 2.000 10.2 3. CLSA Asia-Pacific Markets 9 .200 10.000N Source: The Mining Valuation Handbook.
000 190.5 4. CLSA Asia-Pacific Markets (%) ! The tonnage of ore above the 1.5% and the new grade would be 3.000 30.000 60.5 Metal content (kg) 1.0 3.000 150. Met-25 Met-26 Met-27 Met-1.000 468.5g per tonne Source: The Mining Valuation Handbook.5 5.3g/t If the cut-off was 2.298 ! By determining the grade and tonnage for all blocks in the orebody.000 175.0 Source: The Mining Valuation Handbook.73/tonne/0.125 665 388 608 450 465 290 182 125 4.73/0.5g/t then the tonnage above cut-off would be 66.5g/t cut-off grade is 93% of the original tonnage.000 40.000 60.0 4.0 5. CLSA Asia-Pacific Markets Ore grade distribution 35 30 25 20 15 10 5 0 1.5 6.000 38.5 3.9 2.000 50.5 3.0 2.95/US$48.000 70.255.0 1.95/48.1 2.8 3.0 3.23/gram = 68.0 6.5 2.000 20.575 Met-15 Met-16 Met-17 Met-05 Met-06 Total Volume (metres) 100.5 7.23g per tonne = 1.000 100.2g/t of gold to 3.1 3.2 3.7g/t 10 Cut-off ! ! Ore grade (g/tonne) .000 1.000 150.000 Tonnes 250.000 50. while the average grade of the remaining ore must increase The average grade increases from 3.8 2.000 Grade (g/tonne) 4. a distribution of grade vs tonnage can be derived as shown below Cut-off grade = total cost/recovery/price per unit of metal = US$68.000 65.Resources & reserves Mineral content Hole No.000 125.
100N 0.2 1.2 10.000N Source: The Mining Valuation Handbook.0 Log distance (h) 0 2 4 6 8 10 12 14 16 18 20 Variogram ! ! ! ! ! Grade result for one hole over one metre might represent grade applied to 6000t of ore Better approach is to take the average or distance-weighted average of nearby grades Geostatisitics and the Kriging method optimally weight the nearby grades First determine if there is spatial correlation between the grades using a variogram Next solve simultaneous equations to minimise the error 11 .Resources & reserves Ore block grade determination 500E 10.200N 600E 700E 800E Variogram: AU_azm180pln = 60 1.8 0.6 Variogram Y(h) 10.4 0. CLSA Asia-Pacific Markets 0.0 0.
shape and depth of the ore. the grade of the ore and distribution. secondary processing costs. how long to first production – the quicker the better Construction cost – Minimum expenditure to get the project operating. open cut. any major faults or intrusions Mining method and schedule – Surface. disposal of tailings Permits – Right to mine and discharge waste and make good Construction schedule – Timing. concentrate grade. how homogeneous. price for product quality sold. shorter mine life – what is the optimum?) Metallurgy/concentrator/washery design – Recovery factor. annual production rate vs life of mine (High production rate. which varies depending on type and size of mine Markets and marketing – Transport to market (FOB or CIF). capital and operating cost.Feasibility studies Geology and ore reserves . power and environmental issues – Source. adequate demand for product Financial analysis – Put all of the above together to determine if the project is financially viable 12 .Size. underground. product quality Water. high capital expenditure.
000/tonne 13 ! In early stages emphasis is on reserves.250/ounce 10-75/tonne 250-860/tonne 4.000-6. .000s $m $10m variable Time months months year(s) year(s) Accuracy low fair good very good can use rule of thumb ! Aim is to derive an economic valuation for the project Capital cost /annual production Black coal Copper Gold Iron ore Lead-zinc Nickel (US$) ! Most common methodology relies on determining the annual profit or cashflow later on capital and operating costs 10-95/tonne 875-1.350/tonne 165-1.Feasibility studies Feasibility studies Back of the envelope (scoping study) Pre-feasibility Final/bankable feasibility Construction phase Cost $100.
market costs. mine recovery etc) Annual milling rate x milling cost per tonne = milling or washing cost (milling rate <= mining rate) Annual mining rate x administration cost per tonne = administration cost Pretax cashflow Revenue less annual costs = pretax cashflow (may need to take account of interest if project geared) Cashflow Pretax cashflow less tax = cashflow (need to take account of allowable depreciation and adjustments for tax and any project debt repayments) Profit Cashflow less depreciation = profit after tax 14 .Feasibility studies Annual revenue Product sold x product price received = revenue (net of royalties. smelter & refining costs etc) (Need to determine the cashflow that the project gets from the sale of the product not the value in the ground) Annual costs Annual mining rate x mining cost per tonne = mining cost (adjust for stripping ratio. dilution.
349 $21.926 ($64.000.382 $3.000 48.999 ($38.000 340.400 ($5.250 311.26 0.000 933.222 $80 $24.667 1.467 327.200 $0.538) $123.004 99.430 $0 $0 $55.26 0.Rehabilitation = "Gross Profits" (Cash) .760) $117.724 $3.538 $68.089) $0 $0 $0 ($112.519 $188.950 $400 $626 $626 $367.02 0.27 0.009) $67.449 ($5.454) $110.711 $188.914 ($65.721 $25.454) $0 $110.667 1.67 1.445 $5.190 $215.392 ($626) ($177) $0 $0 $95.977 96.441 $191.267 $0 $103.473 ($55.515) $101.938 $0 $226 $226 $366.575 $16.000 91.082 $64.650 $1.089) ($363.724 $3.933 $0.400 $101.733 $39.150 185.004 99.380 $15.000 30.327 357.00 0.933 $0.596 $2.136) $46.517 $23.046 $4.590 $57.009) $68.55 0.000 $366.880 213.926 ($64.575 SMELTER TERMS AND METAL PAYMENT Tonnes Copper Metal (lb 000) Tonnes Concentrate @ 5% mc @ Tonnes Concentrate dry Copper Price US$/lb Gold Price US$/oz Molybdenum Price US$/lb Gross Revenue Smelter Payment Treatment Charge US$/t Treatment Charge Refining Charge US$/lb Refining Charge Total Net Revenue ($000) INCOME TAX CALCULATIONS Net Smelter Return .454 0.089) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 ($251.000 48.635) ($112.683 $232.901 $1.926 0.128 $6.000.Operating Costs = Profit Before Royalties Excise Tax = Profit After Royalties .430 $174.14 418 10 $241.150 185.705 $0.380 $15.046 $4.880 96.639 $5.000.607 $191.515 $65.000.778 $1.000 1.577) $0 $122.575 $16.467 327.538 0.000 48.Capital Costs + Working Capital + Salvage .838 $1.000 18.575 $16.441 $0 $10.186 $10.449 ($55.08 $17.590 $0 $95.914 CAPITAL COSTS ($000) Site and General Utilities Process Plant Infrastructure Structures Tailings Mining Power Plant Construction indirects Freight EPCM Subtotal Indirects Ongoing Subtotal Ongoing Total Capital Cost Accumulated WORKING CAPITAL $112.015 OPERATING COSTS Mining Cost Owner Total Mining Milling Labour Consumables Power Maintenance Total Milling General & Administration Admin & OH ($000) $/tonne mined 0.60 0.884 $174.987 ($68.225 ($226) $0 $0 $0 $104.542 $13.573) Continues next right 15 .826 $4.501 $5.577 0.527 $122.000 0 0 0 0 5.920 $14.914 ($65.815 1.534 $55.104 ($65.635) $0 $0 $0 ($251.000 18.02 0.379 $23.056 $20.635 $363.000 84.299 $80 $28.000 84.421 $13.67 0.67 1.Operating Costs + Salvage Sub-Total Net Income Net Income Before Depreciation .987 0.000) ($11.538) $0 $123.000.000.577) $122.000 1.Feasibility studies – Scoping study JUNE YEAR END 2008 2009 2010 2011 2012 2013 PRODUCTION Mined Waste & LG S/Pile Ore Mined Ore From LG S/Pile Total (Tonnes) Waste to Ore Ratio Grades Copper High Grade Copper Low Grade Gold Grade Molybdenum Grade Contained Tonnes Copper Mill Recovered Copper/Au/Moly 4.800 91.500 $37.100 399 10 $215.229 $238.611 $13.016 $80 $27.02 0.250 311.524 376.263 $0 $0 $46.501 $5.08 $15.000.11 459 10 $248.000 18.000.000.281 $7.884 $0 $116.363 $166.423) $0 $0 $103.150 84.104 ($65.643) $116.724 $0 $366.60 0.089) ($251.473 $110.046 $4.007) $96.515) $0 $101.175 $65.724) ($260.457) ($143.627 $9.67 1.602 0.756 358.08 $16.527 ($55.004 0 0 0.000 30.813 $34.400 ($55.500 $37.441 $0 $0 $68.Income Tax = "Net Profit" (Cash) Accumulated Cash $/tonne $/tonne $/tonne $/tonne $/tonne milled milled milled milled milled $/tonne milled Sub-Total Operating Costs Total Operating Cost $0 $0 ($112.000.690 ($3.15 399 10 $224.248) $105.454 $64.577 $65.000.267 $188.Depreciation Net Income Before Losses + Losses: Current Year Prior Years Taxable Income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 ($112.26 0.366 $22.000 30.250 $4.987 ($68.527 ($5.367 $22.363 $174.657 $17.042) $55.473 ($5.02 0.844 $207.307 $17.089 $112.443 $68.210 $80 $24.175 $65.004 113.000 48.515 PROJECT CASHFLOW ($000) + Net Smelter Return .229 $15.000.150 84.449 $123.884 $0 $0 $0 $0 $116.500 $37.004 108.067.519 $0 $0 $67.263 $166.501 $5.999 $0 $104.02 0.08 $15.635) $191.000 18.000 30.800 202.280 $27.380 $15.175 $64.000.089 $251.104 0.574) $166.517 $19.55 0.
Feasibility studies NPV sensitivity analysis 200 NPV (US$m) Gold price Mining cost 150 Milling cost ! ! Consideration must be given to the risks associated with a project Sensitivity analysis shows the sensitivity of project economics to variation in critical parameter values Probability analysis defines distributions of likely outcomes for each critical variable and generates random NPVs to produce a probability distribution of the possible results 100 ! 50 Change from base case (20%) (10%) 0% 10% 20% 30% 0 (30%) Source: The Mining Valuation Handbook. CLSA Asia-Pacific Markets 50 45 40 35 30 25 20 15 10 5 0 -8 4 16 28 41 53 NPV $m 65 77 89 101 114 0 40 60 Cumulative probability (RHS) 80 (%) Probability (LHS) 100 (%) 120 100% Probability 0% min Gold price max min 20 Milling cost max min max Mining cost 16 .
Mining methods Mining companies need to get access to the orebody ! If underground. by pipe Headframe Open cut Oil & gas exploration well 17 . by open cut ! If oil or gas. by shaft or decline ! If near surface.
CLSA Asia-Pacific Markets Blasted zone in open cut 18 .Mining methods ! ! ! May need to drill and blast waste rock and ore if it is too hard If an open cut. must move waste material to access economic ore Ratio of waste to ore can greatly affect the project economics Drilling rig for blast holes Open-cut cross-section surface mined ore blocks 1 mined waste block 2 3 waste block 4 ore blocks Source: The Mining Valuation Handbook.
so economies of scale count Underground – minimise dilution and maximise recovery.Mucking Front.end loader and dump truck Underground load haul dump (LHD) vehicle ! Aim is to move dirt (waste or ore) as cheaply as possible.Mining methods . maintain support integrity while minimising costs Electric shovel ! 19 .
CLSA Asia-Pacific Markets waste ! Moving the processing plant saves on transport and rehandling costs Sand dredge 20 . CLSA Asia-Pacific Markets ! Economies of scale allow large volume of waste or overburden to be moved Dragline Alluvial mining suction cutter head dredge plant heavy mineral sands pond Source: The Mining Valuation Handbook.Mining methods Strip mining next overburden cut waste surface co al s e am Source: The Mining Valuation Handbook.
CLSA Asia-Pacific Markets Drying Flotation cells Grinding – Rod-and-ball mills 21 .Mineral processing ! ! Physical reduction via crushing and grinding to allow liberation Concentration of mineral via separation from waste ORE Concentrator process Primary crusher Source: Falconbridge.
CLSA Asia-Pacific Markets Gold pour Issues ! ! ! ! ! Tailings dam – Mine waste can be an environmental issue Consumption of consumables Energy costs for grinding Mill recovery Adequate supply of water Disposal of tailings 22 .Mineral processing Smelting process ! Downstream smelting and refining Source: Falconbridge.
North Mara.Mineral processing ! Development of mine site Tailings Water Mill Ore body Waste requires statutory approvals and sufficient land tenements to allow for numerous onsite activities capital and operating costs ! Remoteness can impact ! Discharge and location of waste and tailings storage can be a major issue Site accommodation Placer Dome . Tanzania 23 .
tungstic oxide or mineral-sand concentrates. nickel. product aluminium scrap. limestone.Bauxite.Steel scrap. lead. tin. pig ! Final refined product . hot briquetted iron. aluminium. coke ! Crude smelted ore .Marketing Chief saleable products ! Crude ore . recovered tin and silver 24 . unwashed coal.Copper. crude lead. scrap copper. titanium oxide iron. clay ! Concentrated ore .Refined metals. nickel matte. iron-ore lumps and fines. scrap lead. washed coal. zinc. alumina. iron pellets. steel ! Secondary or scrap .Blister copper. ferro-alloys.
Marketing Major minerals can be grouped into the following six classes depending on market and price characteristics ! Precious metals .Oil and gas ! Non-metallics .Ferro-alloys.Uranium.Aluminium.Gold. diamonds and mineral sands. magnesium. fertilisers and construction materials ! Other . silver and platinum ! Base metals .Iron ore and coal ! Speciality metals . zinc. lead. nickel and tin ! Steel and fuel minerals .Salt. 25 . bismuth. copper. tantalum and cadmium ! Hydrocarbons . cobalt.
90/lb.1% above 0.Treatment charge (tonne of concentrate) and refining ! Price participation .02/lb copper for each 10% above US$0.Marketing Treatment terms ! Payable metal .2% content in the concentrate may be payable. A typical formula may state US$0. charge (pound of metal) can be quoted separately or as combined charge per tonne of concentrate or pound of refined metal. Penalties are varied and negotiable.Payability for the metal contained in the concentrate typically varies from 70-95%.Added to the TC/RC so smelter participates in ! Refining & penalties . metal prices above and below a base rate.Other charges for payable gold can be of the order of US$3-7 and for silver US25-50¢ per ounce. For arsenic. such as 1g/t gold or 50g/t silver. an additional charge of US$3 for each 0. ! TC/RC . 26 . Any precious metals content may also be paid by percentage or net of a minimum deduction (the off).
5% of the original value 27 . or a charge of US$152. and copper price of US$2.7/tonne or 81.Marketing Treatment terms . the resultant payment to the mine would be US$880.5lbs = US$1.7/tonne ! Assuming all other credits and charges net out to zero.6% of the metal content.00 per pound ! Therefore the gross value per tonne of concentrate is US$2.4/tonne ! But the mine might only get paid for 95.081/tonne US$1.033.00 x 540.Sample calculation ! Assume copper concentrate of 25% metal. or ! The treatment charge (TC) might be US$100/tonne of concentrate and the refining charge US10¢/pound of copper.
510 2.450 2.530 2.470 2. which can be highly variable LME aluminium forward price curve 2. Those that do will set certain product standards which need to be met ! Therefore commodities such as refined metal are more common than commodities such as coal.390 2.350 0 3 Months 15 27 28 buyer seller (US$/t) .Marketing ! Forward markets allow sellers to hedge prices by selling products at a fixed price at a certain date in the future ! Not all contracts require physical delivery.370 2.490 2.430 2.410 2.
Commodity price forecasts Price setters ! Open-market price .Sellers that report sales Producer price .Governments ! ! ! ! ! ! 29 .One or more large producers Consumer price .Individual buyers and sellers Controlled price market .One or more large consumers Contract price . traders Published price quotation .Terminal buyers and sellers.Guided by pools Fixed price .
more 15 10 Poland China 0 0 10000 20000 $ per capita 30000 40000 substitution likely 5 ! Oil price still below 1980 real price level of around US$100/bbl account deficit ! US economy and current 30 .Commodity price forecasts Aluminium intensity of usage 30 Japan 25 US ! New economies catch up with increasing intensity of usage economies kg per person 20 SKorea ! Synchronised world ! Old economies.
000 1.400.000 1.000 0 LME 3M Copper Price (RHS) ! Movements in inventory levels can be a reasonable leading indicator of changes in commodity prices ! But not all world inventories are identifiable.000 5.Commodity price forecasts Smelting process 1. so terminal markets might decrease but fabricator inventories might increase The relationship between stocks and prices can be quite strong However the slope of the relationship and hence the price forecast can change as the market becomes more attuned to the changing situation Source: Falconbridge.000 1.000 3.000 1.000 400.000 200.000 800.000 1.200.000 2.000 0 Jan 00 SHFE Jan 01 LME Jan 02 Jan 03 COMEX Jan 04 Jan 05 Jan 06 (tonnes) (US$/tonne) 6.600.800.000. CLSA Asia-Pacific Markets Scattergram of LME stocks and prices 6400 6200 6000 5800 5600 5400 5200 5000 4000 6000 8000 10000 12000 14000 Stocks (tonnes) Last eight months Price (US$/tonne) Previous eight months ! ! 31 .000 4.000 600.
000 14.0 30.42 2001 (est) 165.8 8.000 202.0 9.000 11.500 44.000 12.000 6.000 49.321 2.000 8.808 2.0 21. which is a reasonable predictor of demand adequately predict growth in the China market has failed to foretell significant increases in commodity prices ! On the supply side it is ! On the demand side it is ! In recent times the failure to 32 .386 45.000 11.000 31.48 1999 (est) 15.659 2.000 185.280 43.507 1.404 3.000 1.516 10.500 51.003 4.167 2.000 8.000 28.0 8.2 8.1 2.000 10.000 11.001 2.000 47.0 22.200 3.000 3.0 29.000 11.000 11.000 12.624 13. closures and new developments necessary to estimate the likely growth in industrial production.000 12.984 2.000 14.0 21.929 2.618 2.367 2.073 1.4 8.0 27.500 53.0 11.384 4.000 20.000 6.000 206.499 2.000 8.1 20.55 2.163 2.915 12.000 204.000 11.0 10.000 197.000 26.000 8.000 29.000 54.9706 2.0 28.55 1998 (est) 15.000 14.4 10.700 60.000 20.000 20.6 2.748 1.000 14.000 11.917 48.8325 5.0 26.0 29.000 15.252 2.000 42.000 52.000 205.000 6.and demand-side forecasting aims to determine the likely change in inventory necessary to forecast mine expansions.000 30.00 ! Supply.0 11.8 21.877 1.8 22.000 20.000 50.9 2.500 20.707 11.000 10.491 11.70 2.500 6.000 25.896 48.5 23.295 2.200 197.077 2.2 25.9 2.42 2000 (est) 16.000 214.0 11.259 11.521 2.000 6.000 23.500 41.000 22.000 200.077 3.Commodity price forecasts 1997 Supply (tonnes Sn) Bolivia Brazil Indonesia Malaysia Peru Thailand Other China exports CIS exports USA strategic Total supply Demand (tonnes Sn) USA IP growth (%) Japan IP growth (%) Germany IP growth (%) UK IP growth (%) France IP growth (%) Rest of Europe Other industrials Developing countries Total Reported stocks LME stockpiles Stock/demand (weeks) LME price (US$/lb) Actual price (US$/lb) 15.80 2.800 63.000 10.000 17.60 2.600 57.568 12.3 28.067 49.1 2.000 19.000 21.889 11.000 35.869 10.000 8.000 28.
bauxite and iron ore ! Evergreen contracts are ! Most prices for bulk commodities are on a free on board basis (FOB) at the port of loading 33 .Commodity price forecasts ! Quality differentials can result in different prices for the same commodity usually set on a yearly basis such as coal.
000m US$7.870m 34 .200m US$600m US$120m US$1. market multiples Discounted cashflow. expected monetary value. resource or reserve multiples Expenditure commitments.Equity valuation Rio Tinto Resource projects currently producing profit and cashflow Resource prospects or deposits under current evaluation Exploration acreage which may provide prospects Other asset investments Less net debt Net asset value (NAV) Discounted cashflow. market comparable. recent sale transactions. other companies in same area Market or inferred valuation Financial accounts Sum of the above values US$68.050m US$74.
Equity valuation ! Determine future cashflow (negative and positive) on yearly basis .that is. the amount generated from a project after all costs. or the surplus funds that a company could pay its shareholders capital has to be deducted from the cashflow ! For a company or project.for the company or a project ! Cashflow should be discretionary . the market’s cost of equity might rise ! The internal rate of return (IRR) is the maximum rate of return achievable from (hurdle rate) .for companies this is the weighted average cost of capital (WACC) the cashflow 35 . “stay in business” capital expenditure and working ! The resultant cashflow is then discounted by the appropriate discount rate ! WACC is the weighted average of the cost of debt and the cost of equity ! The cost of equity is the after-tax return expected for that class of company ! If a firm takes on a more risky project.
very similar to NPV but more meaningful for industrial stocks market cap ! Exposure to a commodity .Value of exposure to commodity price volatility 36 .Avoids the vagaries of accounting.Equity valuation ! Price earnings ratio " Is the PE a surrogate for shareholder discretionary-cashflow ratio? " PE is used as a gauge for comparison against other similar companies " PE is a snapshot in time so there can be many reasons for differences between like companies ! Price to cashflow ratio . therefore can be more reliable ! Enterprise value/Ebitda .Value of reserve or production per ! Option value .Ungeared ratio that can provide a more “stable” comparison between stocks ! Economic value added (EVA™) – Ultimately.
in the right areas ! A successful exploration track record ! Projects with good grades and hence medium-to-high value per tonne of ore . if all other ! Companies with projects where production likely to start in the near to medium term 37 .grade is king factors equal ! Open cut preferable to underground.Conclusion What to look for ! Good management with plenty of experience getting resource projects off the ground ! Strong ratio of exploration ground to firm’s size.
Contact: Angelique Marcil at angelique.com 38 .CLSA U is an ongoing executive education programme designed to bring you firsthand information.all in a conducive learning environment reminiscent of university days. Draw your own conclusions and make more informed investment decisions .marcil@clsa.
Notes 39 .
Such information has not been independently verified and we make no representation or warranty as to its accuracy. Lumpini Pathumwan. its affiliates and any third party involved in. their advisors and/or any other connected parties. O-PF = Expected to outperform the local market by 0-10%. Level 25 China World Tower 2 China World Trade Centre 1 Jian Guo Men Wai Ave Beijing 100004.C. Neither the publication/ communication nor any portion hereof may be reprinted. sold or redistributed without the written consent of CLSA. capital markets and/or other services to. merchantability or fitness for a particular purpose with respect to any of this information. The information and statistical data herein have been obtained from sources we believe to be reliable. 117. in no event shall MSCI. also persons of a kind to whom the unregulated CIS may lawfully be promoted by a person authorised under the Financial Services and Markets Act 2000 (“FSMA”) by virtue of Section 238(5) of the FSMA. 1-Ka. 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