Africa, a growing heavyweight in iron ore supply

Serafino Capoferri – Consultant, CRU

Prepared for:

Africa Iron Ore

Johannesburg, Tuesday 3rd June, 2014

• A long term market outlook for iron ore

• The cost-competitiveness of African iron ore

• Evaluating risk-reward balance for prospective West African projects

• Conclusions

Agenda

2

• A long term market outlook for iron ore

• The cost-competitiveness of African iron ore

• Evaluating risk-reward balance for prospective West African projects

• Conclusions

Agenda

3

0

500

1 000

1 500

2 000

2 500

3 000

3 500

2012 2015 2018 2021 2024 2027 2030 2033

Possible Probable Committed Demand

Demand far from the peak, but supply to grow faster

4

Iron ore demand and planned supply, Mt

Data: CRU. Note: Gap analysis excludes Chinese domestic production and includes Chinese import demand only.

0 200 400 600 800 1000

Long Run Marginal Cost (LRMC) to set the long-term priceCost curve of incremental supply – Economic Costs, $/t

Data: CRU.

Marginal cost range

Additional supply required by the market

Simandou lowers the LRMC of the industry by $5/tX-axis: cumulative production, Mt

Y-axis: economic costs, real 2012 $/t

6

0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0

Projects cost curve with SimandouProjects cost curve without Simandou

• A long term market outlook for iron ore

• The cost-competitiveness of African iron ore

• Evaluating risk-reward balance for prospective West African projects

• Conclusions

Agenda

7

CRU’s approach to iron ore costs

8

Realizations Costs

Business Costs (BC)

+

=

Resource Costs

Conversion Costs

Site Costs (SC)

+

=

Other Costs

Corporate Costs (CC)

+

=

Capital Costs

Economic Costs (EC)

+

=

≈ FOB C1 costs

≈ (adjusted by product quality) CFR costs

West Africa strength lies in low mining and processing

costs...

9

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

Weighted average in-situ Fe grade

Australia

Brazil

West Africa

South Africa

Mbalam and

Simandou

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 Weighted average strip ratio

Global Average

West Africa

Source: CRU Iron ore cost service

...although competitiveness is lost at the logistics level

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

0 200 400 600 800

Best deposits in West Africa are located the furthest away from coast

Distance to port, Km

In-s

itu

Fe

gra

de

0 200 400 600 800

Europe

Canada

Australia

Brazil

WestAfrica

Weighted average rail distance to port, Km

Source: CRU Iron ore cost service

Overall, West Africa performs well at a Site costs level

Weighted average site costs, $/t, 2023

11

0

10

20

30

40

50

60

70

80

90

100

Brazil Australia West Africa South Africa Canada

General Transportation

Beneficiation Crushing

Mining Resource

Source: CRU Iron ore cost service

And even gains competitiveness against Australia after

quality is taken into accountWeighted average FOB site costs adjusted by Value in Use (VIU), 2023, $/t

12

-20

0

20

40

60

80

100

Marketing + Finance

VIU

Site Costs

Source: CRU Iron ore cost service

But freight costs more than offset this and push West

Africa up on the Business cost curveWeighted average CFR business costs, 2023, $/t

13

-20

0

20

40

60

80

100

120 Freight

Marketing + Finance

VIU

Site Costs

Source: CRU Iron ore cost service

Capital costs are NOT above global average despite the

infrastructure requirementsCapital intensity for selected iron ore projects, $/t

14

0

50

100

150

200

250

300

350

400

450

Source: CRU Iron ore cost service

West African iron ore projects

• A long term market outlook for iron ore

• The cost-competitiveness of African iron ore

• Evaluating risk-reward balance for prospective West African projects

• Conclusions

Agenda

15

Bringing price and cost together: what value in West

African projects?

16

10% 15% 20%

Inc

en

tive

pri

ce

, $

/t

Incentive price at different discount rates for selected West African projects, $/t, 2012 real

- - - Long Term Price Range

Impact of capital on value depends on riskVariation in incentive price for a given 5% change in discount rate

17

0

2

4

6

8

10

12

14

16

18

20

0 50 100 150 200 250

Capital Intensity, $/t

Vari

ati

on

in

in

in

cen

tive p

rice, $/t

BIG is NOT

beautiful in

West Africa!

• West Africa projects have a greater marginal cost of capital (MCC) than Australian or

Brazil due to the higher risk involved in the operations.

• At the conceptual stage, each project faces to a certain extent a trade off between

operating and capital costs.

• The optimal development plan (most efficient from a risk-return prospective) depends

on risk.

• “Big is Beautiful” in Australia but NOT in West Africa, where risk is higher. Smaller

scale operations (“Low-Capex – higher Opex”) are often more valuable for investors.

Do not imitate Australia – A new business model is in order

for West African juniors

18

• A long term market outlook for iron ore

• The cost-competitiveness of African iron ore

• Evaluating risk-reward balance for prospective West African projects

• Conclusions

Agenda

19

• Market Outlook: Low-cost supply to drive down prices

• West Africa’s strength lies in lower mining and processing costs than Australia or

Brazil.

• Longer distances to port and higher ocean freight costs to the growing markets,

however, partly offset this.

• More elevated risk means the marginal cost of capital for West African projects is

greater than its peers in Australia and Brazil.

• Most valuable assets in West Africa are often “low-capex-higher-opex” ventures.

Conclusions

20

Thank you

For more information on the topics

covered, please contact:

serafino.capoferri@crugroup.com

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