BRICS Metals & Mining Conference Beyond the Dreams of Avarice. 12 November 2004

Transcription

1 2004 Anglo Interim American Results plc BRICS Metals & Mining Conference Beyond the Dreams of Avarice 12 November 2004

2 What impact will the industrialisation of Brazil, Russia, India, and China have on copper prices? What is Anglo American doing in response to these changes? 2

3 Beyond the dreams of avarice? There will be seasons when demand will follow so closely on the heals of supply that prices will go skywards, and the fool will say in his heart that the market must forever advance. There will also be periods when the supply will far exceed demand, and the faint of heart will say that copper mining is overdone, and never more can be profitable. But in aggregate, the great law of averages, immutable as the law of gravitation, will give to the world the copper for its imperative requirements, at prices not prohibitive to the consumer, yet sufficiently high to provide, for the well-managed mines, profits beyond the dreams of avarice. 3

4 Beyond the dreams of avarice? There will be seasons when demand will follow so closely on the heals of supply that prices will go skywards, and the fool will say in his heart that the market must forever advance. There will also be periods when the supply will far exceed demand, and the faint of heart will say that copper mining is overdone, and never more can be profitable. But in aggregate, the great law of averages, immutable as the law of gravitation, will give to the world the copper for its imperative requirements, at prices not prohibitive to the consumer, yet sufficiently high to provide, for the well-managed mines, profits beyond the dreams of avarice. Horace Stevens (The Copper Handbook, 1903) 4

5 A Secular Change in Metal Prices? Copper Prices (e) 'Real' 2004 and Nominal c/lb MSU 'Real' 'Best Fit' minus 3.1%/yr c/lb 50 Nominal

6 Price forecasting: An exercise in futility? Mean, Max and Min of ~20 Forecasts of the Copper Price made in January of the Previous Year Compared with the Outturn (c/lb) +42.4c/lb max c/lb eg, Forecast for 2001 (made in Jan 2000) mean c/lb c/lb 80 min c/lb -21.8c/lb Source: Reuters, FT (MSU ) 6

7 : Increasing real metal prices Copper Prices (e) 'Real' 2004 and Nominal c/lb MSU 'Best Fit' plus 1.8%/yr 'Real' 'Best Fit' minus 3.1%/yr c/lb 50 Nominal High MEC industrial production growth rates Industrialisation of Japan and rebuilding of Europe Accommodative monetary and fiscal policies Commodities as inflation hedge 7

8 : Decreasing real metal prices Copper Prices (e) 'Real' 2004 and Nominal c/lb MSU 'Best Fit' plus 1.8%/yr 'Real' 'Best Fit' minus 3.1%/yr c/lb 50 Nominal Reduction in MEC growth rates Reduction in structural sources of demand from Europe and Japan Central banks fight inflation Price induced over-investment in mining industry Industry-wide cost reductions 8

9 Secular upturn: Demand-side arguments Industrialisation of China (and Russia, India, Brazil) Synchronised growth in OECD Reflationary bias of Central Banks Commodities as a hedge against US dollar Structural or cyclical? 9

10 What changed: China or OECD? Change in Annual Refined Copper Consumption (kt) MSU /OECD+China Growth OECD China Contributions to Global Refined Copper Consumption, (kt) OECD and China and Copper Price (c/lb) 'Nominal' LME Copper Price (c/lb) 10

11 Major demand-side uncertainties China: Hard or soft landing? OECD: US deficits Oil price Wealth effect of asset price decreases US dollar weakness/higher interest rates Geopolitical events/terrorism 11

12 Secular upturn: Supply-side arguments Improved capital discipline and concentration in mining industry Exploration expenditure cuts Trend increase in costs as grades decline and mines deplete 12

13 Supply-side response: Mine production Global Mine Production, 2000 to 2005 (est) million tonnes MSU /Mine Production 15 million tonnes Cutbacks & Closures Mine Production

14 Supply-side response:treatment charges 'Term' Treatment Charges - $/tonne Copper 'Term' TCs Long-term TC of $85 per tonne 40 MSU /TCs

15 Is the cycle dead? Demand correlated to Industrial Production Inventory build-up during upturn/destocking during downturn Long lead times: New supply decisions made in anticipation of, not in response to, demand growth Industry fragmented: Competitor behaviour hard to forecast New mines lower grade and/or underground and/or remote: Need economies of scale to be viable, so supply side changes are lumpier Incentive to increase production to reduce unit costs even during times of oversupply and low prices Single asset companies cannot afford to reduce production; free-riders deter others Mothballing expensive High barriers to exit 15

16 Investing over the cycle: Ideal profile Downturn Commence greenfield projects Assess acquisitions Increase capex Bottom of cycle Make acquisitions Commission projects Commence debottlenecking projects Peak capex borrow Upturn and peak Sell non core assets Ramp up projects to full production Reduce long lead time capex repay Downturn Bottom Upturn and peak US$ Capex Metal price Free cashflow Time 16

17 Investing over the cycle: Actual profile 3,000 2,500 Base Metals Equity Issuance Copper Price (Smoothed) 3, , Proceeds Amount (US$mm) 2,000 1,500 1,000 2, , , , Copper Price (US$/ t) Source: CIBC World Markets

18 Investing over the cycle: Actual profile $US million Copper Price Copper Mine Projects and Debt Financing Capex on Major Copper Mine Projects Nominal LME Price - c/lb 1000 Project Finance Source: Anglo Base Metals 18

19 A secular change in metal prices? A secular change is possible, but appears to be a low probability outcome More probable outcome is that structural increase in demand arising as a result of the industrialisation of BRIC will moderate the trend reduction in real metal prices Current prices reflect a strong cyclical upturn that may be expected to last until the supply-side response comes through (subject to no major demand shocks) Will industry capital discipline be maintained? 19

20 How is Anglo American responding? Maintain focus on cost reduction and operating efficiencies Prudently grow production to meet demand Maintain capital discipline 20

21 Maintain cost discipline Cost reduction and efficiency improvements: Base Anglo Metals Group 2002 $14m $279m 2003 $48m $335m 2004 (H1) $39m $248m But significant upward pressure on costs: TC/RCs Energy Steel Acid Labour 21

22 Project pipeline: Collahuasi Rosario project Production * Throughput increased from 69ktpd to 110ktpd. Maintains production at over 400,000tpa Cu Capital cost * US$654m Status Commissioned * 100% basis. Anglo has 44% interest. 22

23 Project pipeline: El Soldado pit expansion Production Life extended to over 20 years. Production maintained at 63,000tpa Capital cost US$80m Status In progress 23

24 Project pipeline: Chagres expansion Production Capacity increased from 162,000 tpa to 184,000 tpa Capital cost US$22m Status Approved. Commissioning Q

25 Project pipeline: Los Bronces expansion Production Doubling of throughput to 130,000tpd. Additional ~200ktpa Cu Capital cost ~US$800m Status Conceptual study underway 25

26 Project pipeline: Collahuasi expansion II Production * Increase production to 600,000tpa? Status Conceptual study * 100% basis. Anglo has 44% interest. 26

27 Project pipeline: Quellaveco project Production 200,000tpa Cu in concentrate Capital cost ~US$850m Status Feasibility study completed. On hold 27

28 Beyond the dreams of avarice? There will be seasons when demand will follow so closely on the heals of supply that prices will go skywards, and the fool will say in his heart that the market must forever advance. There will also be periods when the supply will far exceed demand, and the faint of heart will say that copper mining is overdone, and never more can be profitable. But in aggregate, the great law of averages, immutable as the law of gravitation, will give to the world the copper for its imperative requirements, at prices not prohibitive to the consumer, yet sufficiently high to provide, for the well-managed mines, profits beyond the dreams of avarice. Horace Stevens (The Copper Handbook, 1903) 28

29 2004 Anglo Interim American Results plc BRICS Metals & Mining Conference Beyond the Dreams of Avarice 12 November 2004