Fourth International Mining and Maritime Conference 4-7 October 2011 / DURBAN SOUTH AFRICA

STATE OF CURRENT GLOBAL MINERALS AND EXTRACTIVE INDUSTRIES

GLEN MPUFANE ICEM GLOBAL MINING AND DGJOP OFFICER:
ICEM

INTRODUCTION. GLOBALISATION

Globalization has greatly impacted the ability of workers to organize and bargain collectively.

International trade and capital flows have increased, along with foreign direct investment and cross-border M&A
Transnational corporations, which employ increasing numbers of the worlds workers, have become the dominant economic actors,

a focal force in integrating national and international economies in global and regional production networks and in coordinating and controlling these production chains and networks (Riisgaard, Lone , at http://www.ilo.org/public/english/).
As a result of these changes, the paradigms and patterns of labor relations have also changed

The political economy of the extractive industry is constantly undergoing change. Consolidation plus super-profits plus resource scarcity in mining has shifted power from mining consumers to producers. A trend to greater resource taxation because of the super-profits The imperatives of climate change and Sustainability Trend towards increased use of migrant/temporary/overseas labour

(INTRO. CONT.)

Influence of China Influence of India Trends of State Activism

EXAMPLES OF GOVERNMENT INTERVENTION

AUSTRALIA BRAZIL GUINNEE SOUTH AFRICA VENEZUELA NAMIBIA PERU ZIMBABWE CANADA

RESOURCE

NATIONALISM

TOUGHER

WAGE NEGOTIATION

The mining and metals sector led the global economy to recovery as commodity prices soared on the back of buoyant demand from emerging markets. While it was the financial sector that led the world into a recession, the mining and metals sector was leading the world out of the recession (Michael Lynch-Bell, Global Mining & Metals Transactions Leader, Ernst & Young, UK: 2011)

The emerging economies, particularly resource rich developing countries are changing the rules of the game against the background of a historical shift in mining.

Distribution of global mine production among regions, %

Source: Calculations by Raw Materials Group

Historical Shift of Mining

a combination of a large and growing demographic profile, rising incomes, above-average GDP growth and government-led policies aimed at developing infrastructure and industry

GLOBAL DISTRIBUTION OF MINERAL RESERVES

Mine and Metal Production

Emerging Economies Dominating Metal/Mining Production

According to the BMI special report on frontier mining, their forecast is that this trend (shift) is set to continue, largely driven by the increase in the GDP of the emerging economies. In about 2016, the GDP of the developed economies and the emerging economies will cross over and the share of the GDP of emerging economies will overtake that of the developed economies This will, accordingly, have a significant impact for the mining sector from both a demand and supply side perspective.

Emerging markets will be the largest drivers of demand growth for industrial commodities over the forecast period, and this will have a significant impact on the demand for services from global mining and extraction companies. This will be as a result of a combination of a large and growing demographic profile, rising incomes, aboveaverage GDP growth and government-led policies aimed at developing infrastructure and industry

Emerging markets are forecast to grow by an average 5.5% per annum out to 2020, whereas, developed countries will lag significantly by 2.2% per annum over the same period. These high growth rates in emerging markets will be led by the BRIC (Brazil, Russia, India & China) countries, but frontier markets will also play a key role.

According to the BMI forecast, emerging markets will account for 50.6% of global GDP by 2016 from 37.8% in 2010 and in the process will surpass that of developing countries. Moreover, by the end of the forecast period in 2020, emerging markets will account for 56.5% of global GDP.

Strong growth in emerging markets will fuel demand for consumer durables, housing, infrastructure as well as telecommunication all of which, will in turn stimulate the mining sector. For example, Steel and steel-related products account for about 55% of a light vehicle, Similarly growth in the infrastructure sector will be driven by India, Indonesia China and Brazil, which will see average growth of 9.4%, 7.8%, 6.4% and 6.3% respectively. In terms of the power sector, an increase in electricity generation is forecast as rapid rates of urbanization in emerging markets put a strain on existing capacity

Combined, the infrastructure and power sector will provide a boon to iron ore, steel, copper, zinc and lead as well as other commodities. Already emerging markets and particularly China have dramatically increased their share of consumption of raw materials, and this will continue to see both local and international mining companies branch out into frontier countries in search of large, high-grade deposits.

MINERALS AS DRIVERS OF DEVELOPMENT

Uses of the major metals

Aluminium: Transport, packaging, construction, high tension power lines Copper: Electrical conductors, construction, transport Gold: Investment, jewellery, electronics Lead: Batteries, pigments, ammunition, radiation shielding Nickel: Stainless steels, electroplating Platinum: Jewellery, catalysts Silver: Electronics, sterlingware Tin: Tinplate in packaging, solder, pigments Zinc: Galvanizing, brass and bronze

According to data from the World Bureau of Metals Statistics, in 2000 China accounted for a very small share of global consumption for a host of metals, but by 2010 China was the single largest consumer of several base metals, accounting for 35-40% of the global total.

China in the world iron and steel economy: per cent of world

PROJECTIONS FOR CHINAS COMMODITY IMPORT DEMAND UP TO 2020

Annual Commodity
Iron Ore Oil Soy

Demand 2020
710 1860 50

2006-2020 Total
380 1940 80

% Change Avg.p.a
10 20 4

Unit
M tonnes M tonnes M tonnes

Latest
148 91 26

Coal
Copper Manganese

M tonnes
M tonnes M tonnes

11
3 3

810
20 13

7 400
600 360

20
10 10

Meat
Wood

M tonnes
M cubic meters

0.3
34

4
150

1 260
330

20
10

Chinas continued achievement of its five year plans growth targets over the past 30 years, and the likelihood of the achievement of the current 12th five year plan growth target makes China a certain bet to continue to be the driver of the commodity boom

WORLDS TOP MINING COMPANIES

(BHP Billiton, Vale and Rio Tinto) The market capitalisation of third place Rio Tinto is double the size of the next largest player, China Shenhua, which declined 25% in value during 2010. BHP Billitons market capitalisation further strengthened, putting it clearly above the rest. Price and production increases in iron ore were major drivers of the growth by the top three. The total, at US$510bn, comprises no less than 26% of the aggregate US$2 trillion market value of the world's biggest 100 mining companies, measured by value.
Source: Capital IQ.

The factor most common to the three super groups is iron ore; the three account for about two-thirds of the world's lucrative seaborne iron ore market. Vale used to be the biggest, but in early June 2009, Rio Tinto and BHP Billiton announced an iron ore joint venture for the two companies' Pilbara, Australia iron ore operations. The value of the full joint venture, now formalized, is no less than US$116bn

SEABOURNE IRON MARKET

The global seaborne iron ore market (i.e., iron ore that is exported by ocean trade routes to coastal or near coast steel making plants) represents approximately 42% of total iron ore production and totalled approximately 944 million t in 2009. Australia (384 million t) and Brazil (266 million t) dominate the export market with just over 68% of total exports in 2009 India (119 million t) and South Africa (44 million t) are also significant contributors to the seaborne market. Vale, BHP Billiton Limited and Rio Tinto plc produced 596 million t of iron ore in 2010, representing approximately 63% of the seaborne market These three companies largely dictate the price of seaborne iron ore through negotiations with some of the world's largest importers including mills in China and Japan

Iron Ore Trade and Production

GLENCORES INITIAL PUBLIC OFFERING

The pricing of Glencore's public offer implies the commodities trading company would have a market value of $61 billion or R403.8 billion. In fact the company's listing is one of London's largest ever with Glencore set to be the first company in 25 years and only the third ever to enter the FTSE 100 index on the day of listing Glencore's equity makes it slightly bigger than Anglo American and puts it among the world's top-five commodities groups, which also include BHP Billiton, Rio Tinto and Vale.

INTEGRATION IN THE MINING AND METAL EXTRACTIVE RESOURCES INDUSTRIES

Concentration on core competencies (Outsourcing) to integration - horizontal integration ( M&A) and vertical integration (Supply Chain) Vertical integration trends have been shaped by an increase in global demand for metals and the growing importance of securing stable supplies of increasingly scarce resources. Additional objectives often include gaining greater control over the price of production inputs and to provide for future growth prospects.

CONTINUED

Xstrata Rio Tinto Vale BHP Billiton Anglo American Arcelor Metal

Vale has taken a 27% stake in the Brazilian steel production assets owned by ThyssenKrupp CSA. This equity investment is combined with an exclusive iron ore supply agreement, solidifying a domestic buyer for Vales Brazilian iron ore. Vale is also adding a number of bulk iron ore ships to their in-house fleet Vale is also involved in downstream vertical integration, which involves huge investments in infrastructure build, such as roads, ports, etc

Mergers and Acquisitions

Emerging economies and Frontier Mining countries Across Asia Pacific, deal value surged on 2009 levels, targeting gold, coal and steel In Africa, deals grew 407% as companies from every region in the world turned to the continent in a bid to secure future supply Failed attempted deal by BHP Billiton for Rio Tinto Failed attempted Xstrata move on Anglo American Glencores Initial Public Offering

(Continued)

On the back of re - capitalisation and excess capital from stronger prices, most companies are venturing into riskier regions such as West Africa, South America and Asia-Pacific, especially Papua New Guinea and Mongolia. Besides the focus on infrastructure support (Downstream Vertical integration), this expansion into emerging and frontier markets also created a greater focus on sovereign risk, notably security of tenure and changes or fluctuations in commodity prices, tax and royalty regimes. Dramatic escalation in the size of sovereign wealth funds which by some estimates put it at $3 trillion.

2010 saw record levels of financing, the revival of IPO and the return of share buybacks and dividends. (E&Y MA and Capital Raising in Mining and Metals 2010 report) Total proceeds raised by the sector in 2010 reached $329.5b, a record figure and a 54% on 2009 Australia and Toronto held the highest share of IPOs by volume, while London recovered from its 2009 obscurity Emerging exchanges, notably Hong Kong, and Mongolia, with its partnership with the London stock exchange, came to their own, as globally competitive resource exchanges.

SOME RECENT DEVELOPMENTS

Canada: Xstrata has purchased First Coal for US$153mn. Part of Xstrata's increasing coal focus. Chile: Codelco plans to sell US4bn worth of bonds over the next 12 months. Codelco plans to develop new projects to increase output.

Peru: Newmont Mining and Buenaventura plan to invest US$4bn in their Conga mine. The mine is expected to produce 580kozpa of gold in 2015.
South Africa: China's Wing Hing plans to purchase South African gold company Taung Gold for US$580m. One of many Chinese companies purchasing assets overseas. USA: Sutter Gold Mining plans to restart its Mother Lode gold mine. Elevated gold prices have made old mines economically viable again.

Source: BMI, Reuters

M&A IN AFRICA

Merger and acquisition (M&A) activity targeting subSaharan Africa reached an all-time record in 2010. Thomson Reuters '2010 sub-Saharan Africa Investment Banking Analysis' reports that South Africa was the most targeted sub-Saharan country. The country was also the most active issuer of equity, and issued the top sub-Saharan bond in 2010, worth $1,98billion.

. Mining Mergers and Acquisitions 2005 to 2008

NUMBER, VALUE AND SIZE OF DEALS 2010

2000
No. Value ($m) Av. V ($m) Med. V($m 392 38,747

2001
380 66,745

2002
475 56,347

2003
475 46,182

2004
596 26,350

2005
564 65,430

2006
701 175,713

2007
903 210,848

2008
919 126,884

2009
1,047 60,035

2010
1,123 113,706

Y/Y growth
7% 89%

99

176

119

97

44

116

251

233

138

57

101

77%

8.9

5.9

4.4

3.1

4.8

6.2

7.2

3.2

5.2

62%

COMMODITY PRICES TRANSLATE INTO SUPER PROFITS

In 2010, post the financial crises the Top 40 mining companies rebounded with operating cash flows breaking through the $100 billion Higher commodity prices and increased production contributed favourably to the $51 billion, or 59%, increase in operating cash flow With this windfall, more than $300 billion worth of capital programs, have been announced, of which more than $120 billion was planned for this year, doubling last year's capital expenditure.

At $435 billion, revenue exceeded the $400 billion barrier to reach the highest level ever reported, a 34% increase over 2009. This has been driven by increases in prices in major commodities and a return to growth in production, illustrating the mining industrys come-back since the global financial crisis.

IMPLICATIONS FOR TRADE UNION STRUGGLES AND GLOBAL SOLIDARITY

The issue of control and the enormous boom in the mining and metals sector (extractive industries) raises serious issues for trade unions as to how the benefits of the enormous mineral wealth possessed by many developing countries can be shared, since the profits from metal mining are largely exported along with minerals themselves Already governments have staked their claims through resource nationalism This is a critical question for countries in which metal mining makes up the largest share of export

Dependence on Metal Mining as a Percent of Total Exports by Country

Global Solidarity is a function of trade union power. Building power in the mining sector will require the shifting of global union resources to countries in Asia, Africa and Latin America and consolidating union power to overcome fragmentation A more pronounced union organizing strategy to recruit and organize both regular and contract workers. Building Capacity in Campaigns and Joint action around the value chain Mining and Maritime Initiative must be rooted on the ground

STRIKES COULD THREATEN GLOBAL COPPER & PLATINUM SUPPLIES

.

According to the BMIs Global Mining Report, the elevation in metals prices would result in greater conflict between companies and their workers.

In addition to South Africa, it is expect that the greatest industrial action would occur where unions are most powerful and thus Australia, Peru, Chile and Mexico were highlighted as hotspots for industrial action.
These countries account for 45% of global copper output and thus sustained industrial action could be price supportive. Conversely, countries where union participation and influence is weak, notably in Brazil and much of Africa the potential for strikes is far lower.

Fourth International Mining and Maritime Conference 4-7 October 2011 / DURBAN SOUTH AFRICA

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