Platts 4 th Steel Raw Materials Asia Conference 2013 Will Magnetite Development Ever Threaten the Big Iron Ore Players? 30 th May 2013
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Contents Building the Case For and Against Magnetite The Cost of Capacity and Production Recent Challenges for Magnetite Projects Improving the Business Case and Decreasing the Risk of Magnetite Projects The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 3
Building the case for and against magnetite includes technical and economic issues - pricing and competition and diversification of supply sources Why Magnetite? Direct Shipping Ore grades are in decline Premium price for product value in use for the steelmaker Diversification of sources of supply Why NOT Magnetite? Higher Capital Expenditure Higher Operating Cost Increased processing complexity Magnetite ores account for 40% of iron ore production worldwide (Source: Geoscience Australia) The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 4
Globally iron ore resource grades are in decline as steel industry expansion consumes the easily accessible high grade deposits Source: Metalytics The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 5
2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 WILL MAGNETITE DEVELOPMENT EVER THREATEN THE BIG IRON ORE PLAYERS BHPB and Vale grades have declined at the expense of increasing reserves. Rio Tinto s increase brings the logistics and political challenges of Africa Iron Ore Reserves (Bt) and Average Fe Grade (%) for Major Producers 2007 2012 BHPB RTIO Bt %Fe Bt %Fe 5 62.0 5 66.0 Bt 20 Vale %Fe 62.0 4 60.0 4 64.0 16 60.0 3 2 58.0 56.0 54.0 3 2 62.0 60.0 58.0 12 8 58.0 56.0 54.0 1 52.0 1 56.0 4 52.0 0 50.0 0 54.0 0 50.0 Reserves (Bt) %Fe Grade Reserves (Bt) %Fe Grade Reserves (Bt) %Fe Grade Source: Companies The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 6
After a brief period 2008 2011, average Fe grade of global iron ore production is forecast to continue its long term decline Global Iron Ore Production (billion tonnes per year) and Average Percentage Fe grade 2005-2020 Source: CSIRO The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 7
Steelmakers are not prepared to pay much of a premium for high Fe ore and expect a higher discount for lower grade material 2.4 Platts March 2013, monthly average iron ore prices, CFR North China port, U$ per 1% Fe The penalty on low Fe content is significantly greater than the premium on higher Fe content over the index price (62% Fe). On an average for every 1% additional Fe translates into just $2.25 per dry metric tonne unit. This is an asymptotic price relationship 2.3 2.2 2.1 2 1.9 1.8 1.7 1.6 Actual data points 1.5 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Source: Platts, Hatch The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 8
Seaborne market remains dominated by the major producers and by direct shipping ores. Pellet production is growing rapidly but is only 10% of trade Seaborne traded iron ore, by Country / Company, (Mt) Country Company 2012 Australia Rio Tinto 233 BHP-B 174 FMG 64 Others 33 Total 504 Brazil Vale 266 Samarco 22 CSN 25 Others 14 Total 327 India various 35 Canada IOC 12 QCM 11 Cliffs 3 Others 2 Total 28 Chile CMO 11 S. Africa Kumba 40 Assmang 10 Total 50 Mauritania SNIM 11 Sweden LKAB 20 Others 114 Total 1,100 PF/Conc 7% Seaborne iron ore trade by product 2012 total 1,100 Mt Lump 14% Pellet 10% Fines 69% The seaborne iron ore market was 1,100 Mt in 2012 and was 90% non-agglomerated i.e. fines, pellet feed/concentrate and lump Source: Sinferbase, Tex Report, Company Reports and Hatch The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 9
Diversification of iron ore imports away from the major DSO producers is a major driver of investment in magnetite projects, particularly in Australia China is targeting a reduction in iron ore from the three iron ore majors, currently they provide 60% of imports. The 95 mtpa Simandou project is a JV between Rio Tinto (50.35%) and Chinalco subsidiary Chalco (44.65%). Citic Pacific s Sino Iron Ore Project is targeting 24 mtpa magnetite concentrate shipped. Chinese investments in Australian iron ore include Grange Resources (Shagang), Weld Range (Sinosteel Midwest), Karara (Ansteel), Extension Hill (Asia Iron), Eyre Iron (Wuhan Iron and Steel), Mindax (Perpetual Mining, Hong Kong) The ratio of China's iron ore imports from independent miners will rise to 50 percent of total imports in the following years. Wang Xiaoqi, Vice-chairman of the China Iron and Steel Association, Aug 2012. The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 10
Contents Building the Case For and Against Magnetite The Cost of Capacity and Production Recent Challenges for Magnetite Projects Improving the Business Case and Decreasing the Risk of Magnetite Projects The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 11
The cost of new iron ore capacity has risen dramatically in the last five years, but new magnetite projects are considerably more costly $/tonne of capacity Comparison of Capital Costs ($/t of annual capacity) for Iron Ore Projects in the Rest of the World, Australia and Selected Australian Magnetite Projects 2007 96 100 Rest of the World Australia Australian Magnetite Projects 2011/2012 150 195 Southdown Extension Hill Karara 288 300 320 Sino Iron > 320 Source: Mineral Council of Australia, Companies; Hatch The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 12
Realised magnetite projects in Australia have FOB cash costs above those of the major exporters CFR China Costs Comparison of Cash Costs ($/t) CFR China for Iron Ore Majors and Australian Magnetite Projects Majors Australian Magnetite Projects RTIO, BHPB and Vale cash costs are established and well understood. RTIO BHPB Vale 47 51 63 Magnetite projects are reporting cash cost estimates in line with DSO operations. But they are unlikely to be on a like-for-like basis given the increased process complexity and power requirements for magnetite. Extension Hill 55 Southdown Karara Sino Iron 59 75? Not disclosed The ramp up delays currently being experienced by magnetite projects will impact further on cash costs. Source: Companies; Hatch 13
About 500 Mt of Chinese seaborne supply is at around$50 - $60/t landed cost. So with higher capex and opex how can magnetite investors get a return? Source: Companies and Hatch The disclaimer and limitation of use on page 2 is incorporated onto this page as all Hatch commentary is subject to the conditions set forth therein 14
Low cost expansion by the majors will further flatten the cost curve by 2016 when Hatch forecasts China will import 850 million tonnes of iron ore Hatch 2016 Forecast for Chinese Seaborne Imports (850million tonnes) Source: Companies and Hatch 15
Contents Building the Case For and Against Magnetite The Cost of Capacity and Production Recent Challenges for Magnetite Projects Improving the Business Case and Decreasing the Risk of Magnetite Projects 16
Magnetite Projects in common with mining projects in Australia and elsewhere have had development, engineering and construction challenges Companies operating in an unfamiliar and foreign market. Junior miners trying to execute mega projects. Increased competition for capital in a reduced capital pool. Increasingly lengthy approvals process. Lack of access to existing and/or cost effective infrastructure. Skilled labour shortage causing schedule delays and increased labour costs. Project fast tracking which leads to poor scope definition in early project phases, increasing the risk of cost escalation. MCC is very experienced but working in the Australian environment is very challenging for them indeed. Chang Zhenming, Chairman Citic Pacific, Aug 2012. 17
As a result projects have been seriously over budget and behind schedule, with unforeseen operating challenges appearing during ramp up Significant cost and schedule over runs were experienced by both the Karara and Sino Iron projects in Australia. All eyes will continue to be on Karara and Sino Iron to see whether they achieve production targets and what the cost of production will be. There are valuable lessons to learned from the Karara and Sino Iron projects. 18
Contents Building the Case For and Against Magnetite The Cost of Capacity and Production Recent Challenges for Magnetite Projects Improving the Business Case and Decreasing the Risk of Magnetite Projects 19
Time spent understanding the resource, its chemistry, physical properties and metallurgy and optimising the process flow sheet saves money in the end Desirable Features of a Magnetite Development Coarse grained deposit with low strip ratio Favourable head grade with good mass yield Low cost energy Access to existing infrastructure or ability to develop infrastructure at a low cost Engineering and fabrication in low cost, experienced centres with necessary skills Grow production incrementally where the business case permits Know what you are fast tracking: detailed project definition; realistic estimate and schedule and ramp up; ongoing risk assessment, monitoring and management 20
Magnetite resources are increasingly attractive so long as magnetite projects are professionally executed. Speed and innovation at the beginning! Value in use make beneficiated magnetite concentrates and pellets attractive to the steelmaker. Longer term beneficiation will be the only way to go Continuing demand for iron ore and declining grades of direct shipping ores will make those magnetite deposits attractive with the right combination of: Physical properties near the surface, easy to grind Chemistry grade, low in gangue Location low cost infrastructure Opportunity for process flow sheet innovation: Are there low energy alternatives to SAG mills and magnetic separation to release the iron from the ore? 21
Conclusion: not in the short or medium term, but they will be a factor in the changed dynamics of the iron ore market longer term Questions? 22
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