The mining industry: looking beyond the crisis Washington D.C. Fabio Barbosa March 4, 2009

Transcription

1 The mining industry: looking beyond the crisis Fabio Barbosa Washington D.C. March 4,

2 Disclaimer This presentation may include declarations about Vale's expectations regarding future events or results. All declarations based upon future expectations, rather than historical facts, are subject to various risks and uncertainties. Vale cannot guarantee that such declarations will prove to be correct. These risks and uncertainties include factors related to the following: (a) the countries where Vale operates, mainly Brazil and Canada; (b) the global economy; (c) capital markets; (d) the mining and metals businesses and their dependence upon global industrial production, which is cyclical by nature; and (e) the high degree of global competition in the markets in which Vale operates. To obtain further information on factors that may give rise to results different from those forecast by Vale, please consult the reports filed with the Brazilian Comissão de Valores Mobiliários (CVM), the French Autorité des Marchés Financiers (AMF), and with the U.S. Securities and Exchange Commission (SEC), including Vale s most recent Annual Report on Form 20F and its reports on Form 6K. 2

3 Looking beyond In a highly uncertain environment, it is useful to understand the long term industry trend. The long cycle in minerals and metals: is it dead or it is just a pause? Even the deepest downturns create opportunities for financially sound companies with the right ideas and strategy. 3

4 A sharp declining global industrial production has caused an unprecedented demand contraction for minerals and metals 11.0 Global industrial production % 3mma, saar Source: Vale and JP Morgan 4

5 A powerful negative demand shock: base metal prices have fallen deeper and faster than in past global recessions Base metal prices Decline from peak to trough Nickel 83% 64% 59% 84% Copper 57% 58% 34% 69% Aluminum 76% 47% 29% 62% Time from peak to trough # of months Nickel Copper Aluminum

6 Despite their structural strength, growth in EM is under strong deceleration. However, relative decoupling is expected to continue 10.0 GDP growth % E 2009E 2010E Sources: IMF and Vale Global Emerging economies Developed economies IMF projections Jan 28,

7 With the exception of Russia, short term slowdown in BRIC s GDP growth does not reflect major structural weaknesses¹ 14.0 GDP growth % annual E Brazil Russia India China ¹ BRICs represent 22.2% of global GDP and almost 50% of EM GDP at PPP exchange rates Sources: IMF and Vale IMF projections Jan 28,

8 Growth deceleration in Brazil, China and India is mainly driven by cyclical factors. Terms of trade shock => Brazil and India. Export performance => Brazil, China and India. Tightening of external credit moderate dependency on international capital inflows => Brazil and India. Tightening of domestic credit supply => China. Banks in Brazil, China and India remain sound. No overleveraging and asset price bubbles. 8

9 Notwithstanding its severity, the global recession is not expected to cause a disruption of long term fundamentals of mineral and metals Given their metal intensiveness, infrastructure spending, urbanization and industrialization are the main underlying forces of demand growth for minerals and metals. The UN estimates that EM population in urban areas will increase by 1.2 billion over the next twenty years.¹ The urbanization move will require significant investment in infrastructure in EM economies. In addition, EM economies are expected to increase in infrastructure spending to pursue productivity gains and to fight poverty. Per capita income growth in EM will continue to generate demand growth for consumer durables, another driver of the expansion of metals consumption. ¹ Source: UN Department of Economics and Social Affairs 9

10 Urbanization is expected to remain a major source of demand growth for minerals and metals Chinese urban population % of total population 73% 70% 60% 60% 50% 44% 40% 30% 20% 18% 10% % E 2050E Sources: Vale, CEIC and UN 10

11 EM have been the drivers of global consumption growth of metals Steel Contribution to global consumption growth Developed economies Emerging market economies China 3.5% 62.2% 96.5% Aluminum 3% 74% 97% Copper 61% 106% 161% Nickel 10% 106% 110% Sources: Vale and WBMS 11

12 On the supply side, a meaningful response from the mining industry to price incentives has been limited by institutional and geological factors Increasing difficulties in environmental permitting. Natural resources nationalism. Easy discoveries are gone. New world class assets are increasingly dependent on more complex regions of the world. New mines tend to produce ores with lower grades, higher impurities and higher stripping ratios. In certain segments, such as coal and copper, there is a trend towards underground mining, which implies higher fixed costs. Technological challenges in processing ores into metals. 12

13 Nevertheless, liquid global financial markets contributed to reshape the mining industry Financial conditions supported the supply expansion of minerals and metals At the same time, they facilitated efficiency gains and better risk management at the high end and greater competition at the low end of the mining industry. 13

14 Consolidation at the high end of the mining industry took place Mid sized monoline companies across the globe were the main targets of M&A transactions. Several mid sized mining companies have been acquired over the last 10 years by large mining companies: Brazil Caemi, Samitri, Ferteco; Canada Inco, Falconbridge, Noranda, Alcan, Canico; US Phelps Dodge, Asarco, Cyprus, Stillwater, Reynolds Metals; Europe Alusuisse, Pechiney, OMX; Australia North, Comalco, MIM, WMC, Jubilee. There was a consolidation of a small group of large diversified companies, which represent now 60% of the industry market cap against 48% in

15 as well as the emergence of new competitors at the low end A strong demand for IPOs fueled the creation and expansion of small mining companies. Junior mining companies led the recent boom in global mineral exploration. New entrants with new projects. 15

16 Reforms followed major US financial crises with implications well beyond the financial services industry The panic of 1907 led to the creation of the Federal Reserve Bank. Reaction to the Great Depression resulted in the creation of the FDIC and SEC and the enactment of the Glass Steagall act. Corporate governance problems of gave rise to the Sarbanes Oxley law. Changes in the regulatory framework, new institutions with new roles and lower risk tolerance are expected to take place on a worldwide base. In addition, financial crises use to be followed by major public debt increases, crowding out private savings. 16

17 A major structural change: financial conditions shift from a supportive to a restrictive role Many mining projects have already been cancelled or postponed. Higher risk aversion and higher public debt increasingly crowding out private savings will make the supply of capital more scarce. Cost of capital is expected to be higher and access to capital more limited. Expansion of small and financially weak companies severely constrained by financial conditions. 17

18 Global exploration investment likely to suffer a major decrease US$ billion Source: Metal Economics Group 18

19 A US$200 billion shortfall in mining investment is estimated to take place over the next five years US$ billion E 2010E 2012E 2014E Planned Estimated Source: Credit Suisse 19

20 Anchored on discipline in capital allocation, Vale has invested to maximize its exposure to the structural changes in EM economies Capex in US$ billion Average ROIC¹ % ¹ pre tax Acquisitions Maintenance, R&D and project development 20

21 Excellence in project execution: 29 major projects delivered between January 2002 and February 2009 São Luís Trombetas Mo I Rana Pier III PDM Capão Xavier Taquari Vassouras Fábrica Nova Brucutu Capim Branco I Carajás 100 Mtpy Fazendão Zhuhai Corredor Norte UHC Funil Alunorte 3 Carajás 70 Mtpy Sossego Candonga Aimorés Alunorte 4&5 Carajás 85 Mtpa Capim Branco II Dalian Alunorte 6&7 Paragominas II Itabiritos Paragominas I Samarco III 21

22 In addition to project development, Vale has acquired assets to pursue growth and diversification Acquisitions: US$ 25.1 billion Consolidation of iron ore leadership Growth platform in coal Becoming a global leader in nickel 22

23 We used our strong natural resources base in Brazil to expand into a major global diversified mining company Namibia 23

24 Fast growth and significant shareholder value creation consolidated our position as the world s second largest mining company Market capitalization Dec 31, 2001 Feb 20, BHPB ALCOA RIO TINTO US$ 9.2 billion ANGLO ALCAN VALE BARRICK AMPLATS ANGLOGOLD NEWMONT BHPB VALE US$ 69.2 billion RIO TINTO BARRICK ANGLO NEWMONT FREEPORT NORILSK XSTRATA ANGLOGOLD

25 Currently, Vale s market cap is bigger than the total of a group of major mining companies¹ Net earnings² US$ billion Vale US$ 69.2 billion Anglo American US$ 19.6 billion Rio Tinto US$ 35.7 billion ¹ Market cap as of February 20, ² Net earnings and EBITDA for 2008 Source: Credit Suisse Xstrata US$ 9.1 billion EBITDA² US$ billion Reference US$ 10 billion 25

26 Vale is uniquely positioned to create shareholder value across the cycles Financial strength: large cash holdings, availability of medium and long term credit lines, strong balance sheet, long average debt maturity. World class low cost long lived assets. An excellent track record of delivery: 29 major projects concluded over the last six years. A wealth of growth options: current pipeline under development comprises 23 major projects. 134 mineral exploration projects across the globe to support long term growth. 26

27 Continuing to exploit organic growth: 23 major projects under development Greenfield Tubarão VIII Oman Apolo Karebbe CSA Tres Valles Iron ore and Pellets Nickel Coal Copper Bauxite and Alumina Phosphate Logistics Onça Puma Estreito Salobo I Power generation Steel Goro Serra Sul Barcarena Moatize CAP Bayovar Litorânea Sul Totten Carajás 130 Mtpy Carborough Downs Paragominas III South corridor Salobo (expansion) Carajás 10 Mtpy Brownfield US$ 1 billion 27

28 Sowing the seeds of long term growth: 154 mineral exploration projects under development around the world Iron ore Potash Copper Coal Manganese Phosphate Nickel Uranium Bauxite Natural gas 28

29 Vale: a global leader 29