Can copper mine supply keep pace with demand? Metal Bulletin Copper Conference Milan March 11 th 2014 www.woodmac.com
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Are miners getting operating costs under control? Average operating cash-flow generated by primary copper mining industry 4.50 4.00 3.50 Cost / Margin ($/lb) 3.00 2.50 2.00 1.50 1.17 2.21 2.37 1.86 1.27 2.20 2.47 1.75 1.35 1.10 0.98 1.59 1.00 0.78 0.50 0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 LONG TERM Mine Site Costs Indirect Costs Operating cashflow Tot. Net Revenue (after realisation costs) Source: Wood Mackenzie 3
Capital expenditure squeezing margins Average residual cash-flow generated by primary copper mining industry 4.50 4.00 0.58 3.50 1.59 0.21 0.23 Cost / Margin ($/lb) 3.00 2.50 2.00 1.50 0.63 0.96 1.93 1.98 1.31 0.76 1.63 0.36 0.87 1.00 0.50 0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 LONG TERM Mine Site Costs Indirect Costs Sustaining Capex Expansion Capex Tot. Net Revenue (after realisation costs) Residual cashflow (pre tax) Source: Wood Mackenzie 4
How will the theoretical supply gap be closed Demand for additional mine production capability 28 Mt Cu 26 24 22 20 Mining companies looking to reduce costs due to downward pressure on metal prices New growth markets Substitution Increased scrap usage Requirement for 6.0Mt of new mine production capability by 2023 18 16 Source Wood Mackenzie 14 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Available from base case mines plus highly probable projects Demand for mine production capability (refined metal) 5
Brownfield projects an important contributor to copper mine supply Demand for additional greenfield projects Mt Cu 28 26 24 22 20 Mine life extensions Restarts Expansions Switch from oxide to sulphide ore 3.8Mt of new production capability needed from greenfield projects 18 16 Source Wood Mackenzie 14 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Brownfield Contribution Available from base case mines plus highly probable projects Demand for mine production capability (refined metal) 6
A LT price of $3.50lb should still incentivise sufficient new capacity Risk adjusted incentive price curve 750 Risk Adjusted PIP 12% IRR (c/lb Cu) 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 8500 Cumulative Production (Paid kt Cu) Source: Wood Mackenzie 7
A shortage of imminent new greenfield projects! Greenfield projects - status, geology, incremental capacity and reserve/resource grade 8
Miners need to be creative to keep the project pipeline flowing Options for project developers Optimise Projects Increase size to maximise economies of scale Reduce size to minimise initial capital Staged development / modular approach Timing to take advantage of easing CAPEX escalation Use limited funds on less contentious projects Finance options Streaming deals Off-take arrangements Partnerships M&A activity Majors divesting smaller assets Miners divesting non core assets / debt reduction Chinese ownership 9
Summary Conclusions A long term copper price of $3.50/lb ($7700/t) should still be sufficient to incentivise enough new mining projects to keep the market in balance over the next decade. With miners scaling back project development in order to conserve costs, supply may be tight towards the end of this decade. Challenges for project developers and barriers to entry make a structural surplus for copper unlikely. 10
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