Simon Price, Azure Capital: The current iron ore market – What are investors looking for?
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Transcript of Simon Price, Azure Capital: The current iron ore market – What are investors looking for?
3rd Annual FeTech Conference 2012
26 September 2012
Simon Price
Director
1
Today’s contents
1. Market and the iron ore price – how are we tracking?
2. Financing iron ore projects in today’s environment
3. Questions?
2
Iron ore price
While iron ore prices are a lot higher than they used to be… the recent AUD price has made life
tough for Australian producers (as bad as the GFC)…
Source: Bloomberg as at 18 Sep 12 and IMF Research.
0.60
0.70
0.80
0.90
1.00
1.10
40
80
120
160
200
Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12
Exchange Rate(USD per AUD)
62% Fe Fines (US$/t)
62% Fe Fines CFR China USD per AUD
45
55
65
75
85
95
105
115
125
135
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
Index (rebased to June 2011)
Iron (62% Fines) Gold Silver Copper Nickel Zinc
We had the buffer of a very weak AUD during GFC, but not this time...
62% fines today are worth a lot more than in the 70s and 80s...But prices are ~35-40% off their peak, and have fallen
harder than other commodity prices...
The AUD iron ore price has fallen to levels comparable to the GFC
40
80
120
160
200
Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12
62% Fe Fines (A$/t)
62% Fe Fines CFR China
0
40
80
120
160
200
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
62% Fe Fines (US$/t)
3
What has caused this sharp drop in price?
Slowing global economic growth, rising iron ore inventory levels and reduced steel demand by the
construction, infrastructure etc. sectors in China…
Source: WorldBank, Consensus Economics (Jun 12), Bloomberg as at 18 Sep 12, CRU, World Steel Association.
GDP growth has slowed across the globe Iron ore inventories have been rising in China Steel output has stalled as demand wanes
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
05A 06A 07A 08A 09A 10A 11A 12F 13F
YOY Real GDP Growth (%)
US China Japan
Australia EU UK
Russia
0
20
40
60
80
100
120
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12
China Iron Ore Port Stockpiles (Mt) YOY Chinese Steel Consumption Growth (%)
0%
5%
10%
15%
20%
25%
30%
35%
04A 05A 06A 07A 08A 09A 10A 11A 12F 13F 14F 15F
4
Will it recover?
It did after the GFC!
The sharp drop in seaborne demand due to rising inventories and falling steel demand in 2008 were followed by a
re-stocking and demand recovery due to government stimulus
What’s different this time?
– The degree of stimulus may not be the same
– Any major expenditure / fiscal initiatives are waiting for the pending leadership transition in China
– Global demand and sovereign risk concerns remain
– Many are beginning to question China’s capital-investment / debt-driven infrastructure and construction model,
as the transition is made to a more domestic consumption-driven economy, steel growth may stall
... But the re-stocking will still come
– Sign of a recovery already
– Back to “normal” Q1/Q2 next year?
5
0
200
400
600
800
1,000
1,200
1,400
1,600
0 10 20 30 40
Korea
Japan
China (forecast
2011-2040
Germany
USA
Long term demand fundamentals – China’s urbanisation
The transformation of the iron ore sector has been driven by the step changes in steel demand
caused by China’s urbanisation – a process that will continue over many years to come.
Source: Rio Tinto Presentation “Driving Global Growth” (Jun 12), National Bureau of Statistics of China.
Steel Consumption per Capita (kg)
Real GDP per Capital (US$’000)
Urban Population (%):
XINJIANG
QINGHAI
NEI MONGOL
GANSU
NINGXIA
SHAANXIXIZANG
SICHUANCHONGQING
YUNNAN
GUIZHOU
GUANGXI
HAINAN
HUNANJIANGXI
ZHEJIANG
FUJIAN
GUANGDONG
HONG KONGMACAU
Shanghai
SHANGHAI SHI
Guangzhou
ChengduJIANGSU
ANHUIHUBEI
HENAN
SHANXI
SHANDONG
Beijiing
Shenyang
HEBEIBEIJING SHI
TIANJIN
LIAONING
JILIN
HEILONGJIANG
China is still climbing the steel intensity curve... The hinterland of China is still awaiting urbanisation...
6
0
200
400
600
800
1,000
1,200
1,400
1,600
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
F
20
13
F
20
14
F
20
15
F
Iron Ore Seaborne Exports (Mt)
Rising steel consumption requires more iron ore... from outside
China
As China’s steel consumption grows, the required supply of iron ore grows. If China’s domestic
costs continue to rise / stay high, the solution is to grow imports.
Source: National Bureau of Statistics of China, China Iron & Steel Association, Econwin, China Metals, Macquarie Commodities Research (Feb 12), CRU.
85
120
136
150
161
0
20
40
60
80
100
120
140
160
180
200
2008 2010 2011F 2012F 2013F
62% Fe N.China Equivalent (US$/t )
Taxes Logistic Labour Electricity Others
Iron ore production costs in China continue to rise... Seaborne supply of iron ore is forecasted to increase...
7
Rising costs underpin the iron ore price
Capital and operating costs for new iron ore projects have increased around the world over the last 5
years.
Notes:
1. In 2011-dollar terms.
2. In 2020-dollar terms.
Source: Mineral Council of Australia.
Capital costs in Australia have doubled and ROW increased 50% Australian operating costs have risen also...
96
150
100
195
0
20
40
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80
100
120
140
160
180
200
2007 2011/2012Rest of the world Australia
Capital Expenditure (US$/tonne of capacity)1
20
(5)
(48)(50)
(40)
(30)
(20)
(10)
0
10
20
30
Established Pilbara Emerging Pilbara Non-Pilbara
Delivered Cost Advantage over Brazil (US¢ per dmtu, China CIF)2
8
Price outlook
After prices recover, there is a likely window of approx. 5 years to bring on new projects before long
term prices set in which make attracting finance difficult.
Demand recovery and a restocking phase will
support short term prices Q1/Q2 2013
China’s growth may slow but there is enough
urbanisation and ongoing construction that new
iron ore projects will need to be developed for
another ~5 years until supply catches up
Rising costs will continue to underpin the price...
‒ also new supply has a habit of running late...
‒ ...but the risk is that significant new supply
will push the price back down over the long
term
Azure Capital view The counter view?
“China's steel demand reached 700 mn tons in
2011. This is likely to be a high watermark for the
country. There is a downturn ongoing. Afterwards,
the demand will be stuck between 600-700 for the
next decade. I see the demand from infrastructure
and property will decline.”
“$50/ton is probably the price to expect in the long
term. It is twice the price in the 1990s. Taking into
account of the cost increase, this price is sufficient to
keep the mining industry profitable.”
Andy Xie, former chief strategist, Morgan Stanley Asia and
renowned China commentator
9
Capital market conditions
Market conditions have improved with QE3 in the past few weeks but remain fragile.
0
50
100
150
200
250
300
350
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Index (rebased to 2005)
Dow Jones Industrial Hang Seng FTSE100
Euro Stoxx 50 Nikkei 225 S&P/ASX200
0
50
100
150
200
250
300
350
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Index (rebased to 2005)
ASX 300 Metal and Mining
Major exchanges around the world have generally recovered but are still
trading below pre-GFC highs Mining stocks have been heavily sold off over the past 2 years
Source: Bloomberg as at 18 Sep 12.
10
Putting capital intensity of developing projects into perspective
Right now, it would be cheaper to buy existing production assets than to invest in developing
greenfield projects in Australia.
0
2
4
6
8
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12
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16
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Atlas Mount Gibson Grange¹ BC Iron
Notes:
1. Non-capex adjusted multiple excludes Southdown project.
Source: Bloomberg as at 18 Sep 12 and company announcements.
0
2
4
6
8
10
12
14
16
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Southdown(GRR)
Marillana (Wah Nam)
Razorback(ROY)
Mt Ida (JMS)
Iron Valley (IOH)
Roper Bar(WDR)
Enterprise Value (A$m) EV/Resource (A$/t) Capex (A$m) Capex/Resource (A$/t)
Enterprise value of junior iron ore producers Capital expenditure of various developing projects in Australia
EV/Resource and Capex/Resource
Enterprise Value and Capex
11
Project characteristics
Iron ore projects with the following characteristics are more likely to attract capital.
Project Characteristics
1 Sufficiently large resource &
high Fe grade product
Scale needed to payback capital
Product must be saleable
2 Competitive operating costs Opex needs to be low enough to
generate margins at LT prices of
$80-90/t CFR
3 Low capital intensity Multi-billion capital investments are
now hard to finance for all but the
most attractive projects
4 Infrastructure solution Access to existing infrastructure a
strong preference to greenfield
builds
5 Competent management
team
A critical element for attracting
capital currently
6 Production within ~3 years Commence paying back capital
before LT iron ore prices settle in
12
Beneficiated products
Beneficiated products are no longer perceived as the ‘poorer cousin’ as DSO grade falls over time.
Although beneficiated products often involve higher costs, these can be offset by a higher selling
premium.
Source: Adapted from Grange Resources Investor Presentation (Jun 12).
Lower HigherPrice
Lo
wer
Hig
her
Qu
ali
ty
DSO Fines (~58-62% Fe)
DSO Lump (~62% Fe)
Magnetite
Concentrate (~67% Fe)
Pellet (~66% Fe)
13
Recent niche investments in beneficiated products
Some recent examples of cost-competitive niche beneficiation projects that have attracted capital:
Small scale
Brazilian mines
Centaurus
South American
Ferro Metals
Low capital intensity
Domestic market opportunity
Good product quality
Centaurus recently
completed a $26m share
placement to institutional
investors on 6 Sep 2012
Iron sands Amex
Indo Mines
Very low operating costs
Low capital intensity
Lower quality product yet saleable
Indomines announced a
$50m placement to the
Rajawali Group on 24 Sep
2012
...the key issue is total costs (capex and opex), irrespective of the ore type
14
Raising funds for iron ore projects today
Iron ore was a market-favoured commodity for the past 5 years with some massive transactions
taking place. Now investors are more discerning but appetite remains.
Exploration stage Equity markets Tough but possible for the best quality
opportunities
Feasibility stage Equity markets
Strategic investors
Subject to quantum equity markets will support
studies for quality orebodies
Strategic investors from Asia for the bigger
projects
− Chinese SOE appetite has diminished
− India, HK, Korea
Construction /
Project Finance
Equity markets
Debt markets
Strategic investors
Equity markets open but sceptical of high capital
intensity / massive scale projects
Debt capital markets currently active – FMG,
Newcrest etc
Western bank project finance a bit harder,
Chinese development banks active
Strategic investors active but discerning
15
Questions?
Questions ?