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BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA www.billiton.com.

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Presentation on theme: "BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA www.billiton.com."— Presentation transcript:

1 BILLITON’S JUNIOR EXPLORATION STRATEGY IN AUSTRALIA

2 BILLITON UK based, LSE listed diversified mining company (floated July 1997) Roots in Gencor (South Africa) and the metals assets of Shell Number 39 in the Footsie 100 Market capitalisation A$23 Bn (Rio Tinto A$41 Bn BHPA$38 Bn)

3 Summary of Investment Programme Investment breakdown since LSE listing (US$ millions) Source: Annual reports; Group Finance records; Note: Values include expansion capex & acquisition enterprise values

4 Scope of Business in Australia Net Operating Assets: US$3.2B (approx 1/3 of group total) Alumina: Worsley Joint Venture (86% interest) Nickel: QNI (100% owned) Yabulu refinery Manganese: GEMCO & TEMCO (60% owned) Samancor joint venture Coal: COAL (100% owned) Hunter Valley operations Base Metals: New Business Division Initiatives

5 E & D Locations Johannesburg Melbourne Beijing Kunming Santiago Lima Vancouver The Hague London Central West East China Grand Falls

6 Distribution of Exploration Spend US$ M 1999 / / 1999 Latin America614 Africa310 Australasia5 6 China4 3 Other8 3 TOTAL2636 (excl. Rio Algom)

7 Exploration Expenditure/Revenue

8 Discovery Track Record DISCOVERIES PER 5 YEAR PERIOD SENIOR COMPANY EXPLORATION EXPENDITURES DISCOVERIES EXPLORATION, US DOLLARS Sources: CRU, Gamah, 2000

9 Business Environment Drivers, 1998/99 MAJORS Poor industry performance - imperative to cut costs Disillusionment with “big company” exploration Impatience with long lead times Questioning value of exploration JUNIORS Many well managed, with attractive property portfolios Venture capital drying up (post BreX, falling gold price) Even in a tight market funding 50% of global exploration

10 Junior Explorer’s Cash Flow

11 Our Hypothesis The exploration business needs to address: –Discovery costs/rates A route forward - Strategic alliances with quality junior companies Groups establishing strategic alliances now will dominate the marketplace in a few years - look at the pharmaceuticals

12 Discovery Big Pharma & Biotech Junior sector developed in 1973 –Response to high discovery costs and low success rate –Trade-off some discovery value for external R&D investment Sector valued at $US 200 billion today Dominant supplier of new products to Big Pharma

13 US Biotech Performance Source: BioVenture Consultants Stock Report 6/25/99

14 US Biotech Acquisitions By Producers US $MILLIONS Source: BioVenture Consultants, BioWorld PIERINA INDIVIDUAL ACQUISITIONS (Names not shown) VOISEYS BAY

15 Biotechnology vs Exploration companies 4Can. $10 billion expenditure new compounds 45 Stage III tests 4One FDA approved drug 4$250 million per discovery companies 4Can $800 million expenditure new projects 45 discoveries 41 new mine 4$ million per discovery Source: Discovery data Fenton Scott Source: Robbins Roth BIOTECHNOLOGY JUNIOR EXPLORATION 4Fully supported by Big Pharma 6 Partial support from majors

16 Implications for Exploration R&D success rates are improved in small entrepreneurial firms Cost per discovery also reduced Exploration is comparative with biotech R&D from an investing perspective Senior companies must play a lead role in changing market perceptions of junior exploration

17 Deal Structures COMPANY PROJECT EQUITY+JV INTEREST COMPANYPROJECT EQUITY INTEREST MiningCo. MiningCo.. COMPANYPROJECT JV INTEREST MiningCo.

18 The Billiton Australia Generic Deal Billiton subscribes for shares in “A” Billiton subscription funds spent on project “1” Billiton has option to own 70% in “1” by disproportionate funding after expenditure of subscription “A” is manager and charges fee “A” spends other treasury funds at its discretion on “2” etc BillitonInvestors Junior “A” Junior Project “2” etc Junior Project “1” Right to J.V.

19 The Australian Generic Deal Subscription Phase UJV : 51% Earn-in UJV : 70% Earn-in UJV : Pre-FS to production Billiton project equity Partner project equity 0 %51% at vesting51% to 70% 100 %49% at vesting49% to 30% Billiton: enter UJV or ‘walk’ Billiton: earn more, ‘sit’ or sell Partner: opt for royalty or abate Jointly 70 : 30, fund to 90%, or 100% Jointly 30 : 70, abate to 10% & loan carry, or royalty (COPI or NSR)

20 The Alliance Strategy Billiton Partner Financial strengthFast acting TechnologyRisk seeking Project managementLow cost InnovativeVenture capital oriented Respective strengths of large & small companies allied for mutual benefit

21 Due Diligence Criteria Management and Technical Teams - capabilities, history, performance, skills, experience, ethics (business, safety, environmental), personal references, previous jobs Quality of Drill Targets - remodel selected data, field visit, check assays, maps and sections Corporate - ASX compliance, filings, financial status and history, previous deals, liabilities, housekeeping Legal - validity of mineral title, outstanding litigation

22 What’s in it for Billiton Immediate access to capabilities and projects Exploration better valued Possibility to leverage exploration dollars Participation in market response to “bonanza” discovery

23 What’s in it for our Partner Technology - geophysics (covered areas) Billiton’s name, reputation and expertise Equity subscribed at more than current market Ability to leverage the Billiton subscription Pre-agreed terms for funding to commercial production Alliance partnership

24 Existing Deals Minotaur Resources Ltd –Project generation -> Bonython Hill, Mabel Ck., Andamooka, Lake Eyre, Mt Woods JV’s Malachite Resources NL –Project generation -> Dalmuir, Giants Reef Mining Ltd –Bluebush, Barkly, Alexander, Rosella Gunson Resources Ltd –Mt Gunson tenements Pegmont Mines NL –Pegmont Deeps, May Downs, Gun Ck. Equinox Resources Ltd –Norbotten (Sweden), Ethiudna

25 Yabulu Bayswater Worsley TEMCO GEMCO Malachite Minotaur Gunson Ravensthorpe Ni (QNI) Equinox (Sweden) NiS JV’s (QNI) Giants Reef Pegmont Equinox Australia – Operations & Exploration Venture Locations

26 Some Issues Deal Stream for large base metal targets limited Future generative activities? Integrating the Rio Algom philosophy The scale trap Last but not least, merge with BHP

27 The Scale Trap $500 Million MiningCo. –$50 million project is 10%- many to be found $5 Billion MiningCo. –$500 million project is 10%- very rare Future $50 Billion MiningCo. –$5 billion project is 10%- non existent –Exploration becomes irrelevant to growth


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