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CRU STRATEGIES a division of CRU International Limited
Chancery House
53-64 Chancery Lane
London
WC2A 1QS
UK
Tel: +44 20 7903 2000
Fax: +44 20 7903 2172
517, Tower 2
Bright China Chang An
Building
7 Jianguomennei Avenue
Beijing 100005, China
Tel: +86 10 6510 2206
Fax: +86 10 6510 2207
Augusto Leguía Norte
Nº 100 of.506
Las Condes
Santiago
Chile
Tel: +56 2 2231 3900
Fax: +56 2 2231 4314
PO Box 1269
Langley
WA 98260
USA
Tel: +1 360 321 4707
Fax: +1 360 321 4709
B/407, Citi Point, JB Nagar
Next to Kohinoor Hotel
Andheri Kurla Road
Andheri (E) Mumbai 400 059
India
Tel: +91 22 6687 5757
Fax: +91 22 66875758
Canadian Iron Ore
A safer bet for LT iron ore supply?
Century Iron Conference, Toronto, Canada
9 October 2013
Phil Newman
CRU STRATEGIES 2
• Introduction to CRU
• Why iron ore?
• What makes a good project?
• How does Canada fit in?
• Conclusions
Presentation outline
CRU STRATEGIES 3
• Introduction to CRU
• Why iron ore?
• What makes a good project?
• How does Canada fit in?
• Conclusions
Presentation outline
CRU STRATEGIES
Leading research group focused on mining and metals,
chemicals and fertilizers
Analysis Consultancy
(Strategies) Events
• Daily / Weekly news
• Fundamental analysis
• Market forecast
• Cost analysis
• Asset & Project
Valuation
• Negotiation Support
• Market Decisions
• Strategy Development
• Conferences
• Seminars
• Events
• Workshops
• Networking
4
CRU STRATEGIES 5
• Introduction to CRU
• Why iron ore?
• What makes a good project?
• How does Canada fit in?
• Conclusions
Presentation outline
CRU STRATEGIES
Iron ore is the largest metal commodity by volume and
value... Shown by gross consumption in tonnes and by gross value, 2012
1
10
100
1,000
10,000
100,000
1,000,000
Iron ore Aluminium Copper Lead Zinc Nickel
Gro
ss
glo
ba
l c
on
su
mp
tio
n in
to
nn
es
(m
to
nn
es
) &
va
lue
(U
S$
mn
)
Tonnage (m tonnes) Value (US$bn)
6
CRU STRATEGIES
...its a highly consolidated industry with high barriers to
entry... Top ten iron ore exporting companies, 2012 (m tonnes)
Vale, 263
Rio Tinto, 233
BHPB, 174FMG , 64
Kumba, 40
Metalloinvest, 28
LKAB, 23
Samarco, 22
CSN, 20
Assmang, 14
Others, 272
7
CRU STRATEGIES
...and demand is driven by economic growth and highly
leveraged to China. Global iron ore consumption by major region/country, 2000-2011 (m tonnes)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Rest of the world Central & South America North America Europe India China
8 Data: CRU
CRU STRATEGIES 9
42
46
50
54
58
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
USA EU Japan
OECD Purchasing Managers
Indices for manufacturing
42
46
50
54
58
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
China India
Brazil Russia
BRICs Purchasing Managers
Indices for manufacturing
Interestingly the OECD is now leading the recovery...
Note: In theory 50 indicates no change in activity Data: Markit
CRU STRATEGIES
0
2
4
6
8
10
12
2013 2014 2015
China OECD Rest of World World
GDP growth, % y/y
Data: OE, CRU
0
2
4
6
8
10
12
2013 2014 2015
China OECD Rest of World World
IP growth, % y/y
2014 will see both China and OECD add $220 Billion
Total world adds half a trillion dollars of IP next year
...and is expected to begin contributing to global
economic growth again!
10
CRU STRATEGIES Data: OE, CRU. Note: (1) 2005 prices
-30%
-20%
-10%
0%
10%
20%
30%
08 Q1 08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3 12 Q1 12 Q3 13 Q1 13 Q3 14 Q1 14 Q3
China IP Asia exc. China IP
Eurozone IP World IP
China GDP World GDP
Forecast
y/y industrial production and real GDP(1) growth by country/region, %
Chinese growth is expected to moderate although
absolute increases will remain substantial...
11
Looking at absolute IP addition – the metals intensive aspect of growth – the picture still looks good:
+164 +177 +237 +257 +212 +253 +263
CRU STRATEGIES 12
...over the longer term who is picking up the growth
baton?...
CRU STRATEGIES
0 200 400 600 800 1,000
4
5
6
7
8
9
Data: IMF, CRU. Includes only developing countries projected to grow faster than 4.0%pa,
excluding India and China.
GDP, CAGR to 2017 (%)
2012 GDP, US$mns
Bubbles sized according to population
Philippines
Thailand
Malaysia
Indonesia
Turkey
...no individual country is expected to have the same impact
as China... Developing countries projected to grow faster than 4.0%pa
13
CRU STRATEGIES 14
0 200 400 600 800 1,000
4
5
6
7
8
9
Data: IMF, CRU. Includes only developing countries projected to grow faster than 4.0%pa,
excluding India and China.
GDP, CAGR to 2017 (%)
2012 GDP, US$mns
Bubbles sized according to population
Saudi Arabia
Rest of Africa
Bangladesh
Rest of
East Asia
Rest of Mid-East &
Central Asia Philippines
Egypt Vietnam
Colombia
Thailand
Malaysia
Iraq
Indonesia
Turkey
Nigeria
Peru
...but there are a number of small to medium sized
countries that together have a material impact Developing countries projected to grow faster than 4.0%pa
CRU STRATEGIES
0
20
40
60
80
100
120
140
160
180
200
0 10,000 20,000 30,000 40,000 50,000
Chinese Steel intensity Of GDP , plus some Taiwan data points
GDP per capita
Kg
ste
el /$
m G
DP
China’s steel intensity has been superlative.... Steel intensity of GDP v per capita income (1980-2011 data)
Data: CRU, Country data used include: USA, Brazil Japan, Korea, Taiwan, China; 1980-2011
15
CRU STRATEGIES 16
0
100
200
300
400
500
600
700
800
30% 40% 50% 60% 70% 80% 90%
Per capita consumption kg/head
Urbanization
Data: CRU
...and US data suggests peak per capita consumption
comes at 65-70% urbanization
China’s urbanization is at 50%
CRU STRATEGIES
So China’s per capita peak is not expected until 2020, and
consumption remains strong beyond that... The steel industry is not going away!!
17
0
100
200
300
400
500
600
700
800
900
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
2012 consumption of finished steel per capita, kg
China 2012
AP
deve
lop
ing
Rest of
World Latin America
India
Europe North America
AP advanced
(China 2020)
(China 2025)
(China 2035)
2012 GDP per capita, US$(1)
Data: CRU. Note: (1) constant 2005 prices at market exchange rates
CRU STRATEGIES 18
0
20
40
60
80
100
Central & WesternChina
East China OECD
Percent of population living in urban
areas
25
30
35
40
45
50
2000 2002 2004 2006 2008 2010 2012
Industrial production Construction
Central & Western China’s share of
national output, %
Although non-coastal China plays a part...
Data: CRU
CRU STRATEGIES 19
Guangdong government recently earmarked
RMB 672 billion to develop the mountainous
western, eastern and northern parts over next 5
years. Focus on railways and highways
Another example is Zhanjiang becoming a
modern port city
Plans to build prefecture cities of 1 million and
“small towns” of around 500,000 to help
urbanization in rural areas!
Arable land is at a premium, cities tend to
expand up (more steel intensive).
Guangdong is already the leading province in
GDP
...urbanization continues in the populous east.
CRU STRATEGIES
What are the projected needs
for iron ore going forward?
It’s a great business to be in
$20 to $140/t in 10 years – what next? Price for 62% Fe sinter fines, cfr China, US$/tonne
0
20
40
60
80
100
120
140
160
180
200
2000 2004 2008 2012 2016
Real Nominal
20
CRU STRATEGIES
0
5
10
15
20
25
30
35
0%
10%
20%
30%
40%
50%
60%
70%
80%
H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013
Iro
n o
re r
even
ues i
n $
bil
lio
n
EB
ITD
A m
arg
in
Iron ore revenues BHPB Rio Atlas Arrium Cliffs FMG
Established producers are still making excellent returns...
CRU analysis
21
CRU STRATEGIES
Steel production shows steady growth, which becomes
less China centric into the next decade..
0
500
1,000
1,500
2,000
2,500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Africa Middle East
India Asia-Pacific, developing
China CIS
Latin America Asia-Pacific, advanced
Europe North America
Crude steel production, Mt
22
CRU STRATEGIES
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
200
400
600
800
1000
1200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Iron ore imports % of total seaborne trade
Chinese iron ore imports will rise to 1bn tonnes by 2017 or
two-thirds of all seaborne total trade…
23
CRU STRATEGIES
LHS: Seaborne exports of iron ore, Mt
RHS: Australian and Brazilian share of global seaborne market, %
60%
65%
70%
75%
80%
85%
90%
0
500
1,000
1,500
2,000
10 11 12 13 14 15 16 17
Seaborne exports excl. Australia and BrazilAustraliaBrazilAustralia and Brazil share
...and given robust growth from the majors, Australia and
Brazil’s share of total seaborne exports is on the rise...
24
CRU STRATEGIES
Data: GTIS, CRU, company reports.
0
100
200
300
400
500
600
700
800
900
10 11 12 13 14 15 16 17
BHP Billiton Rio Tinto FMG Others
...with Australia leading the way. Australian iron ore exports by company, Mt
25
CRU STRATEGIES 26
• Introduction to CRU
• Why iron ore?
• What makes a good project?
• How does Canada fit in?
• Conclusions
Presentation outline
CRU STRATEGIES
• Project assessment
What is the true level of development of a given project?
• Product assessment
Will a steel mill take it? What value will I receive for it?
• Competitiveness
How does this project compare to its peers? what is the impact of short-
term market fluctuations?
How do we compare different mining projects? Here are a
few ideas
27
CRU STRATEGIES
Project gateways: a project must progress in a number of
different areas before it can reach production
1 2 3 4 5
Speculative Possible Probable Committed Operating
Geology
Metallurgy/
technology
Engineering
Social and
environmental
Marketing/
commercial
Transportation
Ownership/
management
Financial
28
CRU STRATEGIES
• Base price
• Iron adjustment and value-in-use
• Penalties
• Product form
• Energy
• Freight
Product assessment: Iron ore is not a homogenous commodity –
it is important to understand the value of the final product
29
CRU STRATEGIES 30
0.0
0.2
0.4
0.6
0.8
1.0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Copper
Aluminium
Iron ore
Lead
Zinc
Global cumulative production, %
Source: CRU.
It’s wrong to say China is high cost in all commodities
(but you can in iron ore!) Chinese business costs, 2013, normalised (0=global minimum, 1=global maximum)
CRU STRATEGIES
Small, privately-owned Chinese mines occupy the tail of
the global cost curve... Representative global cost curve
Cumulative production
Op
era
tin
g c
ost
Majors
Lower-cost
emerging
producers
China
SOEs/large
private mines China,
small
private
mines
High-cost
emerging
producers
Data: CRU. 31
?
CRU STRATEGIES
0
50
100
150
200
0 10 20 30 40 50 60 70 80
Sp
ot
pri
ces f
or
62%
Fe
Fin
es C
FR
Ch
ina
,, $
/DM
T
Quarterly Chinese iron ore production, Mt
Historic Forecast Expon. (Historic)
...and thus Chinese domestic production is highly price
responsive
32 Data: CRU. Note: Prices assessed at one point mid-month.
CRU STRATEGIES 33
• Introduction to CRU
• Why iron ore?
• What makes a good project?
• How does Canada fit in?
• Conclusions
Presentation outline
CRU STRATEGIES
• Iron ore demand remains strong in absolute terms
• Scarcity is not a relevant word for iron ore resources
• The value of iron ore is in the logistics – always has been always will
be!!
• So – where will supply come from?
• Australia
• Brazil
• West Africa
• Canada
• Things to consider: resources, infrastructure, politics, location,
infrastructure ......oh, and infrastructure.....
Canada – land of opportunity?
34
CRU STRATEGIES
69%
25%
6%
Exploration Feasibility Production
81%
10%
9%
46 projects
Labrador Trough – 29.6Bt
50 projects
West Africa – 27.8 Bt
How does Canada compare?
West Africa vs Labrador Trough Contained Fe (in resources/reserves) by project stage(%)
35
CRU STRATEGIES
W. Africa has better in-situ grades...
“PEOPLE WITH MONEY” “PEOPLE WITH CHOICES”
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Weighted Average Grade Fe contained at >50% in-situ
Labrador Trough West Africa
Origin Distance Units 2012 2020
Canada 14,675 $/wmt 24.6 37.4
West Africa 9,727 $/wmt 18.9 28.8
Add trans-shipping to the West Africa total - $6-8/wmt!
Data: MEG, CRU
...and its closer to China...
36
CRU STRATEGIES
... ...but politically Canada is a long way ahead Policy Potential Index (the “ability to do business” there)
Data: Frasier Institute, Mar 2013
0
20
40
60
80
100
Indonesia
Vie
tnam
Venezuela
DR
C
Zim
babw
e
Kry
gyzsta
n
Boliv
ia
Guate
mala
Philippin
es
Gre
ece
Rom
ania
Madagascar
Hondura
s
Mongolia
Ecuador
India
Kazkkhsta
n
Mali
PN
G
Gunie
a
Russia
Chin
a
Surinam
e
Nig
er
Egypt
Guyana
Colo
mbia
South
Afr
ica
Panam
a
Tanzania
Bra
zil
Dom
inic
an …
Zam
bia
Peru
Pola
nd
Arg
entina
Calif
orn
ia
Burk
ina F
asao
Ghana
Turk
ey
Serb
ia
Bulg
aria
Tasm
ania
Spain
Washin
gto
n
Monta
na
New
Mexic
o
NS
W
Mexic
o
Min
nesota
Nunavut
Idaho
Maurita
nia
Colo
rado
Mic
hig
an
Queensla
nd
BC
NW
T
Nam
ibia
Arizona
New
Zeala
nd
Moro
cco
Vic
toria
Chile NT
Manitoba
Ala
ska
South
Aust
Nfld/L
ab
Canada (
ave)
Bots
wana
Onta
rio
W A
us
Gre
enla
nd
Saskatc
hew
an
Nova S
cotia
Quebec
Norw
ay
Yukon
Uta
h
Nevada
Icela
nd
Wyom
ing
New
Bru
nsw
ick
Alb
ert
a
Sw
eden
Fin
land
4thQ
3rd Q
2ndQ
1stQ
Canada
(ave)
Quebec
Nfld / Labrador
Mauritania
Guinea
37
CRU STRATEGIES
Labrador Trough projects benefit from multi-user
infrastructure...
• Multi-user infrastructure
– QNSL railway
– Port of Sept Îles
• New wharf at Pointe-Noire through a
mixture of public and private investment
– 50-60mtpa
– Completion by March 2014 - on schedule
and budget
– Cape-size vessels (up to 250,000dwt)
– Phase 2 to 100mtpa
38
CRU STRATEGIES
...whilst West African projects face more than a multi-
border challenge.
39
CRU STRATEGIES
And, for large investments, politics impacts all the
decisions...
Multi-user
Cape-size shipping
Low cost power existing
Productive labour
Multi-border
Panamax / trans-shipping
Power infrastructure required
Skills transfer a key challenge
(Guinea is 178/187 on HDi)
Project is often nation building
(involving complex risks)
40
CRU STRATEGIES
91%
0% 6% 3% West Africa
Other Japan China India
72%
1%
20%
7%
Labrador Trough
..and this is apparent when you look at foreign investment Percentage of Fe contained that is owned or optioned by Japan/China/India
41
CRU STRATEGIES
Here we look at new projects from the perspective of an
investor!
• Simple discounted cash flow model and 54 projects
• CRU’s assessment of business costs
• IRRs used by real companies to raise money
• Further assumptions
– Production profile, expenditure profiles
– 100% equity funding
– Excludes government incentives – tax, public infrastructure builds etc.
42
CRU STRATEGIES
IRRs offer on projects differ significantly by jurisdiction...
• 96 projects
• Reported IRRs
• Post-tax
• OECD risk classifications 0-7
• Statistically significant
CRU Analysis
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 1 2 3 4 5 6 7
Po
st-t
ax IR
R
Country risk rank
Post-tax IRR versus Country Risk
43
CRU STRATEGIES
...projects in West Africa require 10% more return than
their Canadian peers...
Rank Country Promotional
IRRs Nominal
Promotional
IRRs Real
0 Canada 18.0% 15.5%
6 Cameroon 26.0% 21.0%
7 Guinea, Liberia,
Congo, Sierra Leone
31.0% 26.0%
44
CRU STRATEGIES
...putting Canadian projects on a level playing field.. West African projects in green
Canadian projects in red
CRU Analysis
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Pro
ject
ince
nti
ve p
rice
/ M
ed
ian
ince
nti
ve p
rice
45
CRU STRATEGIES
Promotional IRR
Risks
• Political
• Capex
• Opex
• Price
Adjusted industry WACC
...tax benefits, public infrastructure and ability to finance
through debt will make the difference...
10.7% + 8.0%
West Africa
10.7% + -0.5%
Canada
46
CRU STRATEGIES
Conclusions
• China is important – their demand and their strategic goals
• Oligopolistic supply provides opportunities for others
• Global demand recovery has an upside (at last!)
• From an investors perspective – the risk-reward balance requires
careful analysis.
• Iron ore is not about mining – it is about infrastructure and that favours
the less risky environments...
47
CRU STRATEGIES
And just to remind you we offer a range of consultancy
services and regular reports on the iron ore industry
48
CRU STRATEGIES a division of CRU International Limited
Chancery House
53-64 Chancery Lane
London
WC2A 1QS
UK
Tel: +44 20 7903 2000
Fax: +44 20 7903 2172
517, Tower 2
Bright China Chang An
Building
7 Jianguomennei Avenue
Beijing 100005, China
Tel: +86 10 6510 2206
Fax: +86 10 6510 2207
Augusto Leguía Norte
Nº 100 of.506
Las Condes
Santiago
Chile
Tel: +56 2 2231 3900
Fax: +56 2 2231 4314
PO Box 1269
Langley
WA 98260
USA
Tel: +1 360 321 4707
Fax: +1 360 321 4709
B/407, Citi Point, JB Nagar
Next to Kohinoor Hotel
Andheri Kurla Road
Andheri (E) Mumbai 400 059
India
Tel: +91 22 6687 5757
Fax: +91 22 66875758
Thank-you
