Growth Opportunities and Challenges for the Chilean Copper Mining Industry COCHILCO Seminar Mining in the Bicentennial: The Road Ahead Bicentennial Mining Week, Antofagasta 29th September 2010 David Coombs
Wood Mackenzie Disclaimer This presentation has been prepared by Brook Hunt, a Wood Mackenzie Limited company. The information upon which this presentation is based comes from our own experience, knowledge and databases. The opinions expressed in this presentation are those of Brook Hunt. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. Wood Mackenzie 2
Agenda Can Chile Maintain its Market Share of Global Copper Supply? 1 Chilean Copper Mining Today - Global Context 2 Challenges Facing the Mining Sector 3 Opportunities for Growth 4 Conclusion Wood Mackenzie 3
Agenda 1 Chilean Copper Mining Today - Global Context 2 Challenges Facing the Mining Sector 3 Opportunities for Growth 4 Conclusion Positive Outlook Wood Mackenzie 4
Chile Will Produce 32% of Global Mined Copper in 2010 Can it Maintain its Market Share? % of Glob bal 40% 35% 30% Nitrate t Industry American Investment Tension with Investors - Profit Re- Distribution Formation of CODELCO, Political Reform, Foreign Investment r - Chilean Min ned Coppe 25% 20% 15% 10% 5% 0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source Brook Hunt, M etallgesellschaft, World Non Ferrous M etals Production and Prices - 1700-1976, Schmitz Source: Brook Hunt, Metallgesllschaft, World Non Ferrous Metals Production and Prices 1700-1976, Schmitz Wood Mackenzie 5
Ore Reserves & Resources >10Mt contained Cu Operating Mines Chilean assets 25% In-Situ Cu in Reserves, 75% in Resources www.woodmac.com Rese eource Grade Cu% Equivale nt 4.5 4.0 3.5 3.0 25 2.5 2.0 1.5 1.0 0.5 0.0 Tenke-Fungurume SxEw Kamoto_KOV Cuajone Norilsk KGHM Polish Copper Cerro Verde Olympic Dam Antamina Grasberg Los Bronces Los Pelambres Collahuasi Escondida Cananea SCALE (In-Situ Cu) 50 Mt 20 Mt 5 Mt Andina El Teniente Codelco Norte 0 5,000 10,000 15,000 20,000 Resource Mt Global Chilean Scale Source: Company Disclosure Wood Mackenzie 6
Ore Reserves and Resources Operating Mines & Projects New Scale t Resou urce Grade Cu u% Equivelant 2.0 1.5 1.0 El Morro 0.5 Caserones Antucoya 0.0 Los Sulfatos (Inf) San Enrique Monolito (Inf) Esperanza Sierra Gorda - Cerro Casale Antofagasta Sierra Gorda - Quadra SCALE (In-Situ Cu) 50 Mt 20 Mt 5 Mt 0 5,000 10,000 Resource Mt Other Greenfield Projects in Chile Relincho Vizcachitas Barreal Seco Pascua Elenita Santo Domingo Sur/Iris Inca de Oro El Espino Filipina Grande Andina Codelco Norte El Teniente Source: Company Disclosure Global Base Chile Projects Chile Base Global Projects Wood Mackenzie 7
Chile s Mines are Competitive Wood Mackenzie 8
Limited capacity in the highest cost decile the Vulnerable zone Wood Mackenzie 9
Agenda 1 Chilean Copper Mining Today - Global Context 2 Challenges Facing the Mining Sector 3 Opportunities for Growth 4 Conclusion Positive Outlook Wood Mackenzie 10
Chile Provides a Competitive Policy environment in which to Invest The Fraser Institute Survey of Mining Companies, 2009/10 www.woodmac.com Policy Potential Index 13 Measures incl. Chile USA (Alaska) Mexico Canada (BC) Peru China Zambia PNG Indonesia Mongolia Congo D.R. Philippines 0 20 40 60 80 100 Policy Potential Index Regulation and Enforcement Environmental Regulation Fiscal Regime and Stability Land Title Issues Infrastructure Socioeconomic Agreement Political Stability Labour Regulation and Availability Mineral Potential Security Source: The Fraser Institute - used with permission Wood Mackenzie 11
Key Challenges - Water Wood Mackenzie 12
Key Challenges - Power Courtesy Gas Atacama Wood Mackenzie 13
Chilean Power Costs in 2008 Uncompetitive - Gas Supply Related Future Price Risk considered greater then Supply Risk 2008 Chile hit by gas shortage PNG Canada USA Zambia Chile Philippines Poland Mexico Peru Global Australia Indonesia 0 2 4 6 8 10 12 14 Power Cost (c/kwhr) Global average costs in the mining sector was 7.9c/kWhr in 2008 Power averaged 14.1c/lb of direct mine-site costs globally (12%), 4.5c/lb of direct smelter costs (21%) and energy, predominantly power, 1.9c/lb at refineries (34%) Source: Brook Hunt Wood Mackenzie 14
Future Regional Gas Supply Potentially Leads to Lower Power Prices www.woodmac.com 16,000 450 mmcfd 14,000 12,000 10,000000 8,000 6,000 4,000 2,000 400 350 300 250 200 150 100 50 Mcmd 0 2000 2005 2010 2015 2020 2025 2030 Bolivia Brazil Non-Pre-Salt Brazil Pre-Salt Argentina Conventional Argentina Unconventional Other LNG Regas Capacity Demand EMS 0 Source: Brook Hunt a Wood Mackenzie Company Wood Mackenzie 15
Potential Regional Excess of Gas But will it Reach Chile? Courtesy Gas Atacama Wood Mackenzie 16
Key Challenges - Royalties and Taxation 9000 25% 8000 7000 20% Roy yalties and Tax xes $M 6000 5000 4000 3000 2000 15% 10% 5% Mining as % GDP 1000 0 1994 1996 1998 2000 2002 2004 2006 2008 CODELCO Main 10 Mining Companies Mining % of GDP 0% Source: Cochilco Wood Mackenzie 17
Agenda 1 Chilean Copper Mining Today - Global Context 2 Challenges Facing the Mining Sector 3 Opportunities for Growth 4 Conclusion Positive Outlook Wood Mackenzie 18
The copper price is cyclical and over the period from the 1970s to mid 2000s was in structural decline, this has now reversed. 450 400 350 300 250 200 150 100 50 0 2009$ Cycle average price guidance offered by incentive price analysis, cost relationships are weak This is a schematic not a forecast 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 Trough prices can be gauged by reference to the cost curve Wood Mackenzie 19
Escalations in Nominal Capital Costs in US$ (Compound) Q1 2005 Q1 2010 Costs have increased by between 20 and 40% annually 12% 10% 8% 2005 Qtr Ave 7.4% Annualised 33% 2006 Qtr Ave 8.7% Annualised 40% 2007 Qtr Ave 9 1% 2008 Qtr Ave 9.1% Annualised 42% 2008 Qtr Ave 6.7% Annualised 30% 2009 Qtr Ave 5.0% Annualised 22% Escalation 6% 4% arterly Capex 2% Qu 0% (22) Q1 2005 (23) Q2 2005 (22) Q3 2005 (19) Q4 2005 (25) Q1 2006 (28) Q2 2006 (29) Q3 2006 (35) Q4 2006 (38) Q1 2007 (41) Q2 2007 (39) Q3 2007 (46) Q4 2007 (40) Q1 2008 (41) Q2 2008 (23) Q3 2008 (24) Q4 2008 (21) Q1 2009 (19) Q2 2009 (19) Q3 2009 (12) Q4 2009 (6) Q1 2010 Source Brook Hunt, a Wood Mackenzie Company Period (Number of Data Points) Wood Mackenzie 20
Capital and operating cost escalation has shifted the Incentive Price curve up Required prices at 2009 input costs being double those of 2002 www.woodmac.com R (c/lb Cu Price for 12% IR Incentive 320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 Cumulative Average Production (Cu/kt/a) 2002 2009 Source Brook Hunt, a Wood Mackenzie Company Wood Mackenzie 21
Long Term Demand for Additional Mine Capacity By 2015 we will require a further 2.1Mt mine capacity basis 5% disruptions By 2025 we anticipate the demand for an additional 13Mt/a capacity www.woodmac.com 26 24 Recovera able Mine Coppe er - Mt 22 20 18 16 14 2015 1.2 /2.1 Mt 2020 5.0 / 5.8 Mt 2025 12.5 / 13.11 Mt Base Case Mine Prodn (0% Disruption) Base Case Mine Prodn (5% Disruption) Base Case Mine Demand (3.6% CAGR 2009-2025) 12 10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 So urce: B ro o k Hunt - A Wo o d M ackenzie Company Wood Mackenzie 22
Ore Reserves and Resources Operations & Projects New Scale Resou urce Grade Cu u% Equivelant 2.0 1.5 1.0 El Morro 0.5 Caserones Antucoya 0.0 Udokan 20MtCu @3.2% Cu eq Konkola Deep 8.2MtCu @3.8%Cu eq Aynak Resolution Copper Los Sulfatos (Inf) San Enrique Monolito (Inf) Oyu Tolgoi Reko Diq Esperanza Sierra Gorda - Cerro Casale Antofagasta Sierra Gorda - Quadra La Granja SCALE (In-Situ Cu) 50 Mt 20 Mt 5 Mt Cobre Panama (Petaquilla) 0 5,000 10,000 Resource Mt Pebble www.woodmac.com Andina Codelco Norte El Teniente Source: Company Disclosure Global Base Chile Projects Chile Base Global Projects Wood Mackenzie 23
Chilean & Global Mine Projects Chilean Projects Capex Cu Capital Intensity Cash Cost Global Projects Capex Cu Capital Intensity Cash Cost $Bn kt/a k$/(t/acueq) Quartile $Bn kt/a k$/(t/acueq) Quartile Codelco Norte Agua Rica 2.1 130 11.8 1 - MMH 1.7 165 8.4 3 Antappacay 1.5 160 8.6 3 - Chuqui' UG 1.9 340 4.6 3 Aynak 4.4 320 13.8 - Andina 230kt/d 4.8 320 13.1 2 Cobre Panama 4.3 255 15.0 1 El Teneinte NNM 1.5 100 13.2 2 El Pachon 2.4 200 10.8 Frieda River 4.2 190 20.3 1 Caserones 2.0 165 10.4 4 La Granja 2.5 500 4.7 2 Cerro Casale 4.2 112 26.3 4 Las Bambas 4.2 400 9.6 2 Collahuasi Ph II 2.5 270 8.4 3 Oyu Tolgoi 4.6 550 7.9 1 El Morro 2.5 170 12.8 1 Pebble 2.8 300 6.7 3 Escondida V and VI 5.0 400 12.3 2 Quellaveco 2.8 200 12.5 2 Esperanza 2.3 190 10.4 3 Reko Diq 3.33 190 15.8 - Los Bronces exp 2.2 175 11.6 3 Resolution Copper 2.5 560 4.0 3 Pascua Lama 1.5 4 26.3 - Rio Blanco 1.4 190 6.3 3 Quebrada Blanca 3.0 200 12.9 - Tampakan 5.2 340 13.8 1 Relincho 1.6 160 8.6 - Toromocho 2.2 210 8.6 2 Sierra Gorda - Q-FNX 2 180 9.2 1 Udokan 3.9 150 12.0 - Chile Total 38.7 2951 Global Sample Total 54.3 4845 Chile Average 211 3 Global Sample Average 285 2 Average Wt by Paid Cu 10.9 Average Wt by Paid Cu 9.6 Source: Corporate disclosure, Cochilco estimates for CODELCO- May 2010 Wood Mackenzie 24
Chilean Mine Production Growth 9 8 r Mine Produc ction - Mt Cu Coppe 7 6 5 4 3 2 1 0 1995 2000 2005 2010 2015 2020 2025 2030 Operating In Construction Highly Probable Probable Possible Source: Brook Hunt a Wood Mackenzie Company Wood Mackenzie 25
Agenda 1 Chilean Copper Mining Today - Global Context 2 Challenges Facing the Mining Sector 3 Opportunities for Growth 4 Conclusion Wood Mackenzie 26
Key Policy and Investor Challenges Policy Challenges Maintaining Chiles Competitive Policy Environment Water Sustainability Power Availability and Costs Taxation Investor Challenges Controlling Capital and Operating Costs Decision Making with Price Uncertainty Wood Mackenzie 27
Potential Chilean Global Market Share of Mined Copper Production www.woodmac.com 45% Chiles as % Global Min ne Production 40% 35% 30% 25% 20% 15% 10% 5% 0% 2010 2015 2020 2025 2030 +Possibles + Probable Base Case & High Probability Source: Brook Hunt a Wood Mackenzie Company Wood Mackenzie 28
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