www.pwc.com III Congresso de Mineração da Amazônia Mine 2012 The growing disconnect Felipe Gomes
A crescente desconexão A indústria de mineração no mundo Mine 2012 The growing disconnect
A look at 2011 s Top 40 1
Section 1 A look at 2011 s Top 40 Closing the year at $1.2 trillion in market capitalisation, the Top 40 lost $400 billion in value from yearend 2010 Change in 31 December market capitalisation ($ trillion) 1,7 1,6 1,5 1,4 1,3 1,2 1,1 Source: Capital IQ Market capitalisation for the Top 40 dropped 25% in 2011 Only six of the Top 40 increased in value: Randgold (up 25%) Industrias Penoles (up 20%) Yamana Gold (up 16%) China Shenhua (up 7%) Ivanhoe Mines (up 7%) Goldcorp (up 6%) 4
Section 1 A look at 2011 s Top 40 The Top 4 lost a total of almost $225 billion in market capitalisation in both 2011 and 2012 (August) The Top 4 companies constitute 38% of the Top 40 by market capitalisation at the end of 2011 (down from 44%) Top 4 market capitalisation 30 August/2012 ($ billion) 250 200 150 China Shenhua up 29% regaining some of its 2010 losses and continuing to move in the opposite direction to the other three 100 50 BHP Billiton Vale Rio Tinto China Shenhua 2007 2008 2009 2010 2011 2012 Source: Capital IQ 5
Section 1 A look at 2011 s Top 40 Emerging markets continue to have a larger presence in the Top 40 Composition of Top 40 continuing to shift to emerging markets 100% 90% 80% 70% 60% 50% 19 of the Top 40 are 40% either from or 30% primarily 20% concentrated on 10% emerging markets 0% Mine Composition of the Top 40 2003 2004 2005 2006 2007 2008 2009 2010 2011 Traditional Markets Emerging Markets Source: Analysis 6
Section 1 A look at 2011 s Top 40 Among the Top 5 Diversified miners there is much more iron ore and comparatively less diversity Top 5 Diversifieds 2007 and 2011 Segment Revenue ($ billion) 250 200 150 100 50 Source: Analysis 15% 10% 17% 13% 25% 20% 5% 10% 12% 15% 16% 42% 2007 2011 Nickel Aluminium Others Coal Copper Top 5 Diversifieds 2007 and 2011 Segment EBIT($ billion) 100 90 80 70 60 50 40 30 20 22% 7% 11% 6% 30% 2% 1% 6% 10% 15% 66% Iron Ore 10 24% 2007 2011 Source: Analysis Nickel Aluminium Other metals Coal Copper Iron Ore Due to Glencore s significant marketing activity, they have been excluded from this particular analysis, although they are a large diversified company. 7
...and the growing disconnect 7
Section 2...and the growing disconnect The mining industry diverged from the broader markets Global indices (January 2011 = 1) 1,2 1,1 1,0 0,9 0,8 0,7 0,6 jan fev mar abr mai jun jul ago set out nov dez jan fev mar abr 2011 2012 Source: Bloomberg 11 March Fukushima nuclear disaster 26 September US president, Barack Obama, says the debt crisis in Europe is "scaring the world" and that leaders in the Eurozone are not dealing with issues quickly enough 5 August S&P downgrades US credit rating for the first time in the history, from AAA to AA+ Ongoing Concerns of a slowdown in China s economic growth Dow Jones Industrial Average FTSE 100 HSBC Global Mining Index Mining industry stocks started strong in 2011, But, as the year progressed, significantly underperformed the broader markets HSBC Mining Index fell by 29% over the year The Top 40 did marginally better, falling by 25% 8
Section 2...and the growing disconnect from historical earnings In 2011 the Top 40 posted record profits of over $130 billion, an increase of 21% from 2010 Top 40 pricetoearning ratios 30 29 25 Strong earnings, but a 25% drop in market capitalisation, drove Top 40 s PE ratio for 2011 down to 9 20 15 10 19 10 14 9 Lower than the dismal PE ratio seen in 2008 during the global financial crisis 5 2007 2008 2009 2010 2011 Source: Capital IQ, Analysis 9
Section 2...and the growing disconnect and from the prices of its own commodities Monthly average coal, copper, gold, iron ore commodity prices, HSBC Global Mining Index (2007 = 1) 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2007 2008 2009 2010 2011 2012 Gold Coal (Australian thermal) Iron ore (CFR 63.5%) Copper In December 2012 gold was up 260% on January 2007 prices Coal, iron ore, and copper are all also up But, the HSBC Global Mining Index was up only 16% over the same period Source: Bloomberg, The World Bank 10
Section 2...and the growing disconnect Despite record commodity prices, the industry has faced challenges in bringing on new supply Annual average AME gold prices, total global gold production (2005 = 1) 4.0 3.0 2.0 1.0 Source: The World Bank, World Gold Council 350% increase 11% increase 2005 2006 2007 2008 2009 2010 2011 Gold price Global gold production Annual average Australian thermal coal prices, total global thermal coal production (2005 = 1) 3.0 2.5 2.0 1.5 1.0 0.5 245% increase 20% increase 2005 2006 2007 2008 2009 2010 2011 Thermal coal price Global thermal coal production Annual average AME copper prices, total global copper production (2005 = 1) 2.5 2.0 1.5 1.0 0.5 Source: The World Bank, International Copper Study Group Annual average CFR China iron ore prices, total global iron ore production (2005 = 1) 5.0 4.0 3.0 2.0 1.0 429% increase 30% increase 2005 2006 2007 2008 2009 2010 2011 Iron ore price Global iron ore production 240% increase 10% increase 2005 2006 2007 2008 2009 2010 2011 Copper price Global copper production Source: The World Bank, BP Statistical Review of World Energy June 2011 Source: The World Bank, AME Outlook 12
...despite strong 2011 results... 13
$ billion % Section 3...despite strong 2011 results... Net profit up in 2011, but the Top 40 s net profit margin down as expenses increased faster than revenue Net profit and net profit margin ($ billion) (Excluding 2011 Glencore marketing and nonmining) 140 120 100 80 60 40 20 2002 2004 2006 2008 2010 Net profit ($) Net profit margin (%) 30% 25% 20% 15% 10% 5% 0% Revenue and Operating expenses Yearoveryear increase/decrease (Excluding 2011 Glencore marketing and nonmining) 70% 60% 50% 40% 30% 20% 10% 0% (10%) 2002 2004 2006 2008 2010 Revenue Operarting expenses Source: Analysis Source: Analysis 14
Section 3...despite strong 2011 results... Iron ore lead the way, representing the bulk of 2011 s EBIT gains Revenue by commodity ($ billion) 120 100 80 60 40 20 EBIT by commodity ($ billion) 70 60 50 40 30 20 10 2011 2010 2011 2010 Source: Analysis Source: Analysis 15
Section 3...despite strong 2011 results... Production was up almost across the board, but given record prices, many would have wanted to produce more Commodity (measure) Gold (oz) Iron ore (tonnes) Copper (tonnes) Therm. Coal (tonnes) Met. Coal (tonnes) Zinc (tonnes) Source: Analysis Top 40 production (million) Change from prior year (%) 40 9 755 6 11 16 1,285 2 124 (5) 3 (10) Except for metallurgical coal and zinc production was up across the board Copper production up 16% in 2010 copper production was impacted by a number of labour strikes in Chile and Peru, so 2011 benefited from quieter year Gold production up 9%, but given 2011 s record prices, producers would have wanted to produce more 18
Section 3...despite strong 2011 results... Using yearend 2011 spot prices and reserves, the Top 40 s reserves are worth over $18 trillion Gold (mill. oz) Iron ore Copper Therm. coal (million tonnes) Met. coal Number of cos. 24 9 24 12 10 9 2011 reserves Zinc 765 29,262 323 66,746 7,326 45 Change 8% 8% 4% 9% 2% 1% 2011 Rem. life (years) 19 39 29 52 59 14 Out of the ten commodities analysed, reserves decreased for five out of ten, but decreases were minor and increases were strong Huge value retained in the ground for the future Source: Analysis 19
...but is the industry giving shareholder's what they want? 20
Section 4...but is the industry giving shareholder's what they want? Total cash returns to shareholders increased to $59 billion (up 156%) but capital development exceeded 50% of cash use Uses of available cash ($ billion) Uses of available cash (%) 2011 2010 2009 2008 2007 2011 2010 2009 2008 2006 2005 2004 2003 100 (100) Net increase in cash (200) (300) 2007 2006 2005 2004 2003 Capital development 0% 20% 40% 60% 80% 100% Debt repayments Distributions to shareholders Capital development Distributions to shareholders Debt repayments Source: Analysis Source: Analysis 22
Section 4...but is the industry giving shareholder's what they want? Capital expenditure up to $98 billion, with big increases in coal, copper and iron ore Capital expenditures by commodity ($ billion) 25 20 15 10 5 Capital expenditures by location ($ billion) 35 30 25 20 15 10 5 2011 2010 201 1 Source: Analysis Source: Analysis 23
Outlook 24
Section 5 Outlook Outlook Continued shareholder pressure for capital discipline Future will be about bringing on supply through the right projects Demand will be there % increases may not be as high as before, but will off a larger base Continued structural change to historically high commodity prices, underwritten by higher production costs and lower grades. However, this does not guarantee increasing gross margins The market doesn t seem to be buying the industry s longterm growth story, sending share prices lower 2011 has shown the growing disconnect 25
Publicações pwc.com.br/mineração Temas Empresariais Mining a virtuous cycle thatneeds to be taken advantage of Mine 2012 The growing disconnect Mining in the Americas Brazil Country Profile On the road again? Global Mining 2011 Deals Review & 2012 Outlook 23
Obrigado! 2012 PricewaterhouseCoopers. Todos os direitos reservados. Neste documento, referese a PricewaterhouseCoopers Auditores Independentes, firma membro da PricewaterhouseCoopers International Limited, constituindose cada firma membro da PricewaterhouseCoopers International Limited. pessoa jurídica separada e independente.