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Generally, a producers position on a cost curve is described in terms of the particular percentile or quartile in which the production of a given plant or producer or group of producers appears. To construct cost curves, industry analysts compile information from a variety of sources, including reports made available by producers, site visits, personal contacts and trade publications. Although producers may participate to some extent in the process through which cost curves are constructed, they are typically unwilling to validate cost analyses directly because of commercial sensitivities. Inevitably, assumptions must be made by the analyst with respect to data that such analyst is unable to obtain and judgment must be brought to bear in the case of virtually all data, however obtained. Moreover, all cost curves embody a number of significant assumptions with respect to exchange rates and other variables. 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A legitimate conviction
3
6000
5000
30%
90 80 70 60 50 40 30 20 10 0 Apr-11 Jun-11
25%
China requires 10 million housing units a year over the next two decades to meet urban housing demand
4000
20%
3000
15%
2000
10%
1000
5%
Dec-11
Jan-11
May-11
Mar-11
Jan-12
Aug-11
0%
Nominal GDP Growth
Existing housing
New housing
4
Nov-11
Mar-12
Feb-11
Feb-12
Jul-11
Sep-11
Oct-11
40,000
30,000
20,000
Chinas per capita copper demand growth accelerated after the 30% urbanisation mark; India looks like it is set to do the same
10,000
1,000
0 0% 20% 40% 60% 80% Urbanisation ratio
Japan South Korea
100%
India
China
US India China 5
2000
250
50
0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
6
Maintaining supply
7
50 40 2000 2002 2004 2006 2008 2010 Forecast 2012 2014 2016 2018 2020 2022 2024
Zinc
Copper
Nickel
kt Cu difference between planned vs actual production 2005 2006 2007 2008 2009 2010 2011e
8
Majors have announced significant increases in projected capex to ensure continued growth
Top 40 mining companies- planned capex $bn
120
114 107
100
+53% 74 64 76
80
60
51 41
40
20
0 2006 Other 2007 Copper 2008 Coal 2009 2010 Precious Metals 2011 2012 Diversifieds
9
Source: McKinsey
Natural resource companies are compelled to access future resources in new geographies
Highly Prospective New Frontiers
Ukraine (iron ore, thermal coal, coking coal) Russia (copper, iron ore, thermal coal, coking coal, zinc, nickel) Kazakhstan (copper, zinc, oil, FeCr, iron ore) Mongolia (copper, thermal coal, coking coal) China (copper, iron ore, thermal coal, coking coal, zinc, nickel, aluminium) India (copper, iron ore, thermal coal, zinc, nickel) Philippines, Papua New Guinea, New Caledonia (copper, nickel)
Mexico (copper, iron ore, thermal coal, zinc) Colombia (thermal coal) Ecuador (copper) Peru and Chile (copper, iron ore, zinc)
Turkey (copper)
Rep Congo (iron ore) Eq. Guinea, Cameroon (oil/gas) D.R. Congo and Zambia (copper) Tanzania (nickel) Botswana (copper) Mozambique (thermal coal) Indonesia (thermal coal, coking coal, nickel)
Argentina (copper)
South Africa (iron ore, thermal coal, coking coal, zinc, nickel)
10
Latin America
APAC
Africa
Europe
Source: McKinsey
11
Insufficient infrastructure & associated costs in new geographies drive further capex intensity
30000 Capital Intensity 1985-2011 Greenfield + Brownfield copper projects 2012-2015 Greenfield copper projects in construction 2016-2020 Greenfield unapproved copper projects Xstrata Brownfield copper projects Xstrata Greenfield copper projects 2011 US$ $7,700/t $14,970/t $18,600/t $8,920/t $13,315/t
25000
20000
Capital intensity
15000
Oyu Tolgoi Ok Tedi Alumbrera Batu Hijau Antamina Tenke Antapaccay Esperanza
10000
5000
Collahuasi Escondida
1985 1990 1995 2000 2005 2010 2015 2020
0 1980
Source: Wood Mackenzie, Xstrata Estimates Note: bubble size denotes annual copper equivalent production
Start date 1985 to 2011 greenfield projects Xstrata projects under construction-combined position 2012 to 2015 greenfield projects in construction 12
However, the vast majority of mega projects have experienced cost and schedule over-runs
Schedule over-runs (% of estimate)
40% 35% 30% 25% 20% 15% 10% 5% 0% -80 -60 -40 -20 0 20 40 60 80 100 120 40% 35% 30% 25% 20% 15% 10% 5% 0% -80 -60 -40 -20 0 20 40 60 80 100 120
Source: McKinsey
13
Preserving Returns
14
Schedule over-runs
Delays and complexities in permitting and social licence to operate Community resistance/ NGO involvement Complex relocations and land purchase requirements Commissioning delays impact NPV
15
Greenfield projects in new geographies have significant infrastructure requirements Many projects are large and more complex, requiring scale to deliver returns on larger capex
Source: McKinsey
16
the ageing workforce, productivity, and challenges attracting new talent will make it hard to fill vacancies by 2020 Canada will need an additional 100,000 new mining workers
the artisan shortage in the coal sector is severeand will intensity as the demand for energy increases and more coal mines are opened
Source: Minerals Council of Australia- labour in the Australian minerals sector and McKinsey
17
Grinding mills Locomotives Barges Draglines Ship Loaders Crushers Large Haul trucks Tyres Reclaimers Rope Shovels Wagons Gas generators 0 1 2 3 4 5 2007 delivery time Current delivery time Normal delivery time
18
155
165
117 98 105
2006
2007
2008
2011
2012
2013
2014 Supply
2015
2016
Source: McKinsey
19
73%
63%
Technical
21%
0%
20%
40%
60%
80%
Changing regulation gives a stronger voice to community opposition to mining projects, e.g. new IFC Standard 7 Complex re-negotiations and land purchase requirements Increased competition for land between agriculture and mining, e.g. Queensland government are introducing legislation around strategic cropping land NGO involvement Growing activism against mining, e.g. Friends of the Earth legal challenge to coal projects in Australia in respect of climate change Resource nationalism Increased regulations/taxes/ nationalisation
20
Lead times
Cost over-runs
Schedule over-runs
Procurement and sourcing agreements Infrastructure/energy/water solutions Balance NPV and return by staging development of large projects Ability to attract top engineering, technical and operating people through an attractive overall career offering and alliances with EPCM contractors Develop and train local labour in core skills Relevant project design and development technology Demonstrate superior asset stewardship and local benefits Strong relationships based on trust/clear expectations Sustainable and stable agreements Best-in-class sustainability credentials Social licence to operate through strong community relationships, sustainable social investment, communication, employment Trusted reputation and brand, transparency, sustainability practices, appropriate share of value
21
Benefit from:
Investment in country Taxes Employment Infrastructure Products vital to society Security of tenure and a stable investment regime Transparency Infrastructure A skill base Communities
Benefit from:
The Social Licence to Operate Access to diverse sources of capital New resources and business opportunities Key skills
Governments
Mining Companies
In return provide:
In return:
Provide vital products Take on risk of investment Corporate Social Investment Provide skills and capabilities Employ sustainable practices Provide world-class technologies Contribute to national and local coffers
The Social Licence to Operate Employees Suppliers
22
Communities
Benefit from:
New infrastructure and advanced technology Jobs, training and development Corporate Social investment Development of and procurement from local suppliers and enterprises
In return provide: