Presentation on theme: "Effects of Global Economic Crisis on Mineral Exploration April, 23 rd 2009."— Presentation transcript:
Effects of Global Economic Crisis on Mineral Exploration April, 23 rd 2009
Scope of presentation 1.Introduction – Votorantim Group and Votorantim Metais 2.Irrational exuberance 3.Metal prices 4.Aluminum, Zinc and Nickel Industry Fundamentals 5.Price forecast 6.Capital erosion after crisis 7.Exploration budget estimates for 2009 8.Opportunities on the new global scenario 9.Concluding remarks
Votorantim Group 60,000 Employees Net Revenue in 2008 US$18.7 Billions Revenue Distribution - 2007 Metals 31% Finance 26% Cement 19% Pulp & Paper 11% Energy 5% Agribusiness 5% New Business 2% Chemicals 1% 4.0 5.1 6.4 9.7 13.3 15.6 200220032004200520062007 18.7 2008 Integrated industrial conglomerate with 08 business, operating since 1918. Among the largest zinc and aluminum producers in the world. Among the ten largest cement producers in the World. World leader producer in pulp and paper. Second largest (non governmental) electrical energy producer in Brazil. Started the internationalization process in 2001 with the cement business. The metals division started internationalization in 2004 with acquisition of Cajamarquilla in Peru. Votorantim is present in 15 countries with industrial operations in 07 countries. Internationalization process is still active and is part of the growth strategy.
Exploration Offices: Brazil, Argentina, Peru, Bolivia, Colombia, Mexico and Canada.
Votorantim Metais – Business Units ALUMINUM ENERGY NICKEL ZINC Integrated business from mining to smelting. Three metals in the portfolio. Energy generation to increase competitiveness. Mineral exploration intense for the three metals with 12 advanced projects in the portfolio. Investments of US$85MM in 2008 and US$30MM in 2009. Copper is the target metal for the near future.
Mining industry is complacent to cycling periods “Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy. “ Allan Greenspan
Metal prices 1989 – 2009 daily Period of irrational exuberance Today’s metal prices are in historical levels with unrealistic operational and project costs.
Metal prices return to 2004 scenario Hedge funds acting intensely in the metals market combined with strongly demanding Chinese market. Metal prices to date are leveled at historical averages of the early 2000 years or above. In comparison to the years previous to 2003 nickel and copper are performing at considerably better prices. Operation and project costs were drastically inflated recently cutting down margins. This month, metal prices started climbing up, but fundamentals to support this recovery are very poor. Metal prices apparently will stable in the present level and will not recover before clear signs of USA economy recovery.
Aluminum fundamentals indicate poor price recovery ALUMINUM PRICE FORECAST (US$/) Institution20082009F2010F2011F Barclays - 1,433 1,896 2,293 BMO Capital Markets - 1,698 1,984 2,425 Commerzbank - 1,653 2,094 - Deutsche Bank - 1,367 1,477 1,742 Economist Intelligence Unit - 1,367 1,587 - Societe Generale - 1,433 1,742 2,491 Standard Chartered - 1,499 1,742 - UniCredit - 1,499 1,698 - Westpac - 1,257 1,323 2,557 Average 2,557 1,467 1,727 2,302 Continued global demand weakness, particularly in aluminum intensive automotive and constructions sectors. Lower raw material pricing significantly reducing marginal production costs. Production cuts logging decline in demand globally. ~ 6 million tones production cut to date (50% Western producers, 50% China). Lower production costs encouraging some to continue output. LME inventories record approaching 4 million tones ( 10% of annual production ). Chinese Government intervening to pop up prices and protect domestic markets. End-market demand expected to begin recovery in 2010, in line with global economic growth. Substantial capacity overhang expected to limit meaningful price recovery over medium-term. Stocks Price
Zinc fundamentals indicates poor price recovery ZINC PRICE FORECAST (US$/) Institution20082009F2010F2011F Barclays 1,345 2,403 2,998 BMO Capital Markets 1,433 1,874 2,205 Commerzbank 1,367 1,609 - Deutsche Bank 1,146 1,345 1,786 Societe Generale 1,213 1,521 1,742 Standard Chartered 1,190 1,323 - Westpac 1,058 1,080 1,543 Average 1,874 1,250 1,594 2,055 Stocks Price Continued global weakness in automotive and construction markets limiting demand. Inventories continue to increase, currently at 413kt tones globally. Global producers are reacting strongly, with 1.1 million-tones annual production cuts announced to date and an additional 300kt tones expected by end of 2009. Timing of demand recovery in question given continued uncertainty in global galvanized steel market. Market projected to remain in surplus through 2012 given supply rigidity. Price recovery expected to benefit from potential concentrate shortage as permanent mine closures take effect in 2010.
Nickel fundamentals indeicates poor price recovery NICKEL PRICE FORECAST (US$/) Institution20082009F2010F2011F Barclays - 10,869 13,007 13,999 BMO Capital Markets - 12,258 15,432 17,637 Commerzbank - 12,919 17,394 - Deutsche Bank - 9,634 9,921 11,244 Societe Generale - 10,031 12,632 14,506 Standard Chartered - 10,604 11,993 - Westpac - 9,987 10,097 13,492 Average 21,010 10,900 12,925 14,176 Depressed global real estate, automotive, tool and appliance markets continue to limit nickel demand. Majority of producers losing money at current price levels. Supply rigidity has led to record inventories. LME inventory higher than 100kt ( highest since 1995 ). Global producers are reacting with sizeable production cuts in 2009. 360kt annual cuts announced to date ( 25% of 2008 production ). Major expansion projects, particularly those with high production costs, being dalayed or canceled. Market projected to remain in surplus through 2012.
Market Capitalization Erosion 225.3 179.5 176.8 93.1 79.5 52.4 28.6 21.41 126.4 48.8 79.9 27.8 25.7 18 8.9 5.6 BHP BilitonRio TintoValeAnglo American XstrataFreeportAlcoaTeck Cominco US$ Billions -44% -73% -55% -70% -68% -66% -69% -74% US$515 billions of capital erosion Average erosion of 65% The market cap in April 2009 is considerably better than some positions between this period. Several Companies recovered part of the bottom erosion position of this period. June 2008 April 2009 Source: Bloomberg and internal research in Companies information.
Budgets estimates for 2009 are substantially lower 455 326 247 240 225 180 153 115 110 89 85 84 80 74 63 57 53 50 49 39 34 28 27 26 25 20 1514 8 5 334 240 170 75 155 95 100 112 44 30 48 56 10 40 18 6554 17 0 20 34 14 10 18 11 25 5 15 8 14 12 11 BHP Billiton Vale Newmont Mining Freeport-McMoRan Barrick Gold Goldcorp Rio Tinto Gold Fields Alrosa Polyus Gold Mining Votorantim Metais Iamgold Yamana Gold FNX Mining Newcrest Mining Shore Gold Kinross Gold Agnico-Eagle Mines Fresnillo Zinifex Lundin Mining Randgold Resources Lonmin First Quantum Minerals Coeur d'Alene Mines Western Areas Centerra Gold Petra Diamonds Zhaojin Mining Sino Gold MAG Silver Central African Mining Mineros US$ Millions 2008 Budgets 2009 Budget estimates Budget estimates for 2009 indicate a minimum reduction of 37% base on research developed internally by Votorantim Metais team. Only the Companies listed here represent a cut of US$1.15 billion. Taking into account the reduction observed in the 33 Companies listed in the research, total World Exploration Budget would reach a maximum of US$9.2 billions against to US$13.9 billions in 2008. For the coming years, taking into account, the effects of metal prices for the long term, total World Exploration Budget would return to levels of 2005-2007 in the order of US$5-8.0 billions. Cash crunch in the TSE and ASX also indicate much lower levels of budgets for the next three years. Copper and gold might have better scenarios for exploration for the next 03 years. More positive scenarios for the mineral exploration sector will start in 2012 together with USA economy recovery. Source: 2008 Metals Economics Group. 2009 estimates based on research develop by Votorantim Metais exploration team. Low level of accuracy is considered for this data.
Investments in mineral exploration in Brazil Major 64.7% Junior 33.4% Intermediate 1.5% Government 0.4% Gold 62% Base Metals 17% Diamond 15% PGM 3% Other 2% Uranium 1% Base Metals 69% Gold 23% Other 7% PGM 1% CLASSES OF COMPANY JUNIOR INVESTMENT MAJOR INVESTMENT Junior Company exploration market in Brazil is strongly affected and will remain for next 03 years. Gold will be an exception to this cycle, but cash crunch will still affect Junior players. Major Companies are cutting investments in Brazil, with Rio Tinto, Teck Cominco, and Xstrata reducing activities in the country. The 2008 investment of US396.5 millions will reach at most of US$220 millions in 2009.
Opportunities in the new Global scenario. The economic crisis is an excellent opportunity to improve your competitiveness cutting cost and increasing productivity. A extremely aggressive/competitive and booming market in mineral exploration, in recent years, turned a large source of deals to improve future project pipeline. It is time to improve the quality of your team. The shortage of people from the recent years turned into professionals surplus. Improve your commercial relations to gain new markets. Market will have to consolidate even more and to survive Companies must improve competitiveness. Continues investing in training your team. That is the most valuable asset of the Company and will make things happen. Increase and improve communication efficiency using your expensive remote conference system you already have and save costs.
Concluding remarks Metal price cycle will become virtuous soon. Companies that improve efficiency in the crisis will take better advantage of it. Recent reaction of metal prices is caused by China optioning to metals instead American Bonds ( similar to Hedge Funds ). Industry fundamentals does not support this price recovery. Production cuts causing operation shut downs, project delays and cancellation will cause a shortage of metal when economy reacts. Operations restart and project development takes long to happen and demand will not be supplied on time, once economy recovers. Around 2015 or before another high price cycle might happen but will not last long. Major Companies with cash are taken great advantage of the present crisis to create an excellent future project pipeline with Juniors insolvency. Mining sector will consolidate even more, and this process will start along the coming years once the fog goes down.