x_speech_201205151.en_XSTRATA.pdf
Transcript of x_speech_201205151.en_XSTRATA.pdf
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
1/23
The
changingface ofsupply
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
2/23
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
3/23
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
4/23
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
5/23
Indias economy could be larger than the US and Chinas by 2050
5
Other emerging economies are also globalgrowth generators
Sources: Barclays Capital, World Bank
Income Trend Growth Thresholds Commodity Demand Intensity Correlateswith Growth Thresholds
0
10,000
20,000
30,000
40,000
50,000
0% 20% 40% 60% 80% 100%
Urbanisation ratio
GDP per capita (US$ per person)
India China Japan South Korea US
0
1,000
2,000
3,000
4,000
5,000
6,000
0% 10% 20% 30% 40% 50%
Urbanisation ratio
Copper demand per capita (kg per 1,000persons)
Chinas per capitacopper
demand growthaccelerated
after the 30%urbanisation
mark; India looks likeit is set to do the
same
India China
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
6/23
0
50
100
150
200
250
300
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
Indias domestic supply unable to meet demand in many commodities
6
which translates directly into commoditydemand growth
Source: BP Statistical Review, Barclays Capital
Indias Copper Concentrate Shortfall (Kt) Indias Coal Supply Shortfall (MTOE)
0
500
1000
1500
2000
2500
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
7/23
Maintaining
supply
7
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
8/23
40
50
60
70
80
90
100
110
120
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
Zinc Copper Nickel
Forecast
Amid rapidly declining ore grades and aging mines
8
Maintaining supply from existing sources isbecoming increasingly challenging
Source: Wood Mackenzie, Xstrata estimates. Deutsche Bank
Hea
dgrades,indexedt
o2000base
Declining head grades mean producers have to run harder tostand still
-
400
800
1,200
1,600
Apr-03 Dec-04 Aug-06 Apr-08 Dec-09 Aug-11
Mt
Annualised Chinese domesticiron ore ROM productionContained iron
(1,600)
(1,200)
(800)
(400)
0
2005 2006 2007 2008 2009 2010 2011e
kt Cu difference between planned vs actualproduction
Copper supply is falling short of expectations
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
9/23
9
Majors have announced significant increases inprojected capex to ensure continued growth
Source: McKinsey
41
51
74
64
76
107
114
0
20
40
60
80
100
120
2006 2007 2008 2009 2010 2011 2012
Other Copper Coal Precious Metals Diversifieds
Top 40 mining companies- planned capex $bn
+53%
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
10/23
10
Natural resource companies are compelled toaccess future resources in new geographies
Mexico(copper, ironore, thermalcoal, zinc)
Peru and Chile(copper, iron
ore, zinc)
Ecuador(copper)
Brazil(copper, ironore, nickel)
Argentina(copper)
Venezuela(copper,
thermal coal,nickel)
Colombia(thermal coal)
Turkey(copper)
Russia(copper, iron ore,
thermal coal,coking coal, zinc,
nickel)
Ukraine(iron ore, thermalcoal, coking coal)
Kazakhstan
(copper, zinc, oil,FeCr, iron ore)
D.R. Congoand Zambia
(copper)
Botswana(copper)
South Africa(iron ore, thermal coal,
coking coal, zinc,nickel)
Mauritania,SierraLeone,Guinea
(iron ore)
Mozambique(thermal coal)
China(copper, iron ore,
thermal coal,coking coal, zinc,nickel, aluminium)
India(copper, iron ore,thermal coal, zinc,
nickel)
Mongolia(copper, thermalcoal, coking coal)
Indonesia(thermal coal,coking coal,
nickel)
Philippines, PapuaNew Guinea, NewCaledonia
(copper, nickel)
Source: Bloomberg, Wood Mackenzie, WBMS
Eq.Guinea,
Cameroon(oil/gas)
Rep Congo(iron ore)
Tanzania
(nickel)
Highly Prospective New Frontiers
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
11/23
11
A substantial proportion of future capital is inthese new geographies
Source: McKinsey
6.8
41.6
37.4
100.9
24.8
2.4
24.6
15.2
13.2
6.1
0 20 40 60 80 100 120
Europe
Africa
APAC
Latin America
North America
Previous 5 years Next 5 years
Value of Au, Cu, Ni, Fe projects started $bn
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
12/23
0
5000
10000
15000
20000
25000
30000
1980 1985 1990 1995 2000 2005 2010 2015 2020
Ok Tedi
Escondida
Alumbrera
Antamina
BatuHijau
Collahuasi
XstrataBrownfield
XstrataGreenfield
Antucoya
Miheevskoye
12
Insufficient infrastructure & associated costs innew geographies drive further capex intensity
Source: Wood Mackenzie, Xstrata EstimatesNote: bubble size denotes annual copper equivalent production
Capitalinte
nsity
2011$US/tCuequivalent
annualproduction
Start date
Salobo I
Caserones
Oyu TolgoiSierra Gorda
Esperanza
Tenke
1985 to 2011 greenfield projects2012 to 2015 greenfield projects in construction
Capital Intensity 2011 US$1985-2011 Greenfield + Brownfield copper projects $7,700/t2012-2015 Greenfield copper projects in construction $14,970/t
2016-2020 Greenfield unapproved copper projects $18,600/tXstrata Brownfield copper projects $8,920/tXstrata Greenfield copper projects $13,315/t
Antapaccay
Xstrata projects under construction-combined position
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
13/23
13
However, the vast majority of mega projectshave experienced cost and schedule over-runs
Source: McKinsey
0%
5%
10%
15%
20%
25%
30%
35%
40%
-80 -60 -40 -20 0 20 40 60 80 100 120
Schedule over-runs (% of estimate)
0%
5%
10%
15%
20%
25%
30%
35%
40%
-80 -60 -40 -20 0 20 40 60 80 100 120
Cost over-runs (% of estimate)
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
14/23
Preserving
Returns
14
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
15/23
15
What makes return preservation difficult?
Size andcomplexity
Lead times Cost over-runsScheduleover-runs
Greenfieldprojects in new
geographies have
significantinfrastructurerequirements
Many projects arelarge and more
complex,requiring scale todeliver returns on
larger capex
Constrainedfoundry and
heavy equipmentmanufacturing
capacity
Competition with
other industriesfor scarcecapacity
Under-estimationof labour/input
inflation
Stretched EPCM
Under-engineering/ poorproject definition
Under-estimationof multiple
project risksSkills shortages
Productivity atcontractor level,especially on-site
Delays andcomplexities inpermitting andsocial licence to
operate
Communityresistance/ NGO
involvement
Complex re-locations and land
purchaserequirements
Commissioningdelays impact
NPV
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
16/23
16
Engineering contractors are extremelycapacity constrainedGetting the top team in a Tier 1 EPCM is increasingly difficult
Source: McKinsey
50
60
70
80
90
100
110
120
130
140
2007 2008 2009 2010
Backlog of publically listed EPCMs as a percentage of revenues(2007 index)
Jacobs
SNC Lavalin
Fluor
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
17/23
the artisan shortage in the coal sector issevereand will intensity as the demand forenergy increases and more coal mines are
opened
-Colliery Training College
Resources projects may be short of 36,000trades workers by 2015
-Australia National ResourcesSector Employment Taskforce
Source: Minerals Council of Australia- labour in the Australian minerals sector and McKinsey 17
A dearth of key skills is plaguing the sector inkey commodity geographies
-0.2
0.2
0.8
2.5
1.9
2.3
6.1
5.7
5.7
6.5
5.9
5.4
-1 1 3 5 7
Labourers
Semi-skilled
Trade
Technicians
Professionals
Managers/admin
Demand Supply
Supply and demand growth of labour:per cent CAGR 2005-15
the ageing workforce, productivity, andchallenges attracting new talent will make it
hard to fill vacanciesby 2020 Canada will need an additional
100,000 new mining workers
-Canadian Mining Human Resources Council
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
18/23
18
0 1 2 3 4 5
Gas generators
Wagons
Rope Shovels
Reclaimers
Tyres
Large Haul trucks
Crushers
Ship Loaders
Draglines
Barges
Locomotives
Grinding mills
2011 lead time outlook (years)
2007 delivery timeCurrent delivery timeNormal delivery time
Heavy equipment lead times are rapidlyreturning to 2007 levels
Source: Rio Tinto/McKinsey
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
19/23
19
98105
117 120127
135143
155165
175
185
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Global Tyre Supply/Demand (Thousands of 40 to 63 Units )
Demand Supply
+7% pa
Key consumables are also in short supply
Source: McKinsey
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
20/23
20
Increasingly complex social issues causingschedule over-runs
Changing regulation gives a stronger voiceto community opposition to miningprojects, e.g. new IFC Standard 7
Complex re-negotiations and land purchaserequirements
Increased competition for land betweenagriculture and mining, e.g. Queenslandgovernment are introducing legislationaround strategic cropping land
NGO involvement
Growing activism against mining, e.g.Friends of the Earth legal challenge tocoal projects in Australia in respect ofclimate change
Resource nationalism
Increased regulations/taxes/nationalisation
Source: Goldman Sachs research report, 2011
21%
63%
73%
0% 20% 40% 60% 80%
Survey of 190 Delayed projects;Causes of DelaySustainability (eg stakeholder,community, environment-related)
Commercial (eg cost orcontract related)
Technical
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
21/23
21
New approaches to project management areessential if returns are to be maintainedXstrata deploys innovative solutions
Size andcomplexity Lead times Costover-runs Scheduleover-runs Procurement and sourcing agreements Infrastructure/energy/water solutions Balance NPV and return by staging development of large projects
OperationalAccess to key inputs/
infrastructure
Key SkillsEPCM and on-the-
ground capabilities
Political; governmentsponsorship
Communityshared value
Ability to attract top engineering, technical and operating peoplethrough an attractive overall career offering and alliances withEPCM 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
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
22/23
22
Managing risks: a symbiotic relationshipbetween miners, communities & governments
MiningCompanies
Communities
Governments
GovernmentsBenefit from:
Investment in country
Taxes
Employment
Infrastructure
Products vital to society
In return provide:
Security of tenure and astable investment regime
Transparency
Infrastructure
A skill base
Mining CompaniesBenefit from:
The Social Licence to Operate
Access to diverse sources of capital New resources and business
opportunities
Key skills
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
CommunitiesBenefit from:
New infrastructure and advanced technology
Jobs, training and development
Corporate Social investment
Development of and procurement from local suppliersand enterprises
In return provide:
The Social Licence to Operate
Employees Suppliers
-
7/28/2019 x_speech_201205151.en_XSTRATA.pdf
23/23
23
Long-term demand for commodities remains intact
The nature of the supply-side is changing fundamentally
Traditional sources of supply are being depleted and are more costly to extract Natural resource companies have to seek resources in the new, highly prospective
geographies
Further pressure on capex intensity
Large capex programmes have been announced and underway
But delays and capex overruns are common-place
New approaches are required to deliver promised returns
Innovative procurement strategies, including modularisation
Standardisation
Approaches to skills procurement and local development
Smart project management, strengthened owners team, EPCM JVs
Licence to operate governments, communities, NGOs
Infrastructure and support service financing and provision
Prioritisation of low capex intensity growth
A new approach to delivering value andreturns is required