Post on 25-Dec-2015
transcript
GROUP 2 PRESENTATION: MINERAL AND MATERIALS
Prepared by: Haili Yin Li Regan Sun Fai Yi He
AGENDA
• Introduction to Industry:• Copper• Petroleum• Aluminium
• Companies:• Freeport-McMoRan• BHP Billiton• Rio Tinto
COPPER
• Conductor of heat and electricity, a building material, and a constituent of metal alloys
• International traded commodity
• Prices of copper:
• Reflect the worldwide balance of copper supply and
demand
• Volatile
• Cyclical
COPPER
• Prices are determined by the major metals exchanges:
• London Metal Exchange (LME)
• New York Mercantile Exchange (NYMEX)
• Shanghai Futures Exchange
COPPER PRICES
• Spot price ranged from a low of $2.86 per pound to a high of $3.38 per pound
• $2.88 per pound at December 31,2014
COPPER DEMAND
• By end-use market:
• Construction (30%)
• Consumer products (28%)
• Electrical applications
(19%)
• Transportation (12%)
• Industry machinery (11%)
COPPER PRODUCTION
• Key point: Copper usage increased 12% in 2014 while mine production increased just 3%
POTENTIAL RISKS
• Operating Risks:• Laws and
Regulations• Equipment
shortage• Environmental
condition• Technology
• Market Risks:– Copper price– Interest rate– Foreign exchange
risk – Substitutes– Economic and
political issue
POTENTIAL HEDGING ACTIVITIES
• Energy Prices
• Copper Prices
• Exchange Rates
• Interest Rates
PETROLEUM
• Comes from Latin: “petra” (meaning “rock”) and “oleum” (meaning “oil”).
• Colour: from yellow to black
• Formed by a large number of dead organisms, compressed in intense heat and pressure
PETROLEUM
• It consists of hydrocarbons of different molecular weights, but they all contain element C!
• Uses fluid catalytic cracking to change complex molecules into simpler ones
• Used in the modern day era as fuel during combustion
PETROLEUM PRICES
PETROLEUM DEMAND
PETROLEUM SUPPLY
• OPEC is a major factor in supply and price (Organization of the Petroleum Exporting Countries)
PETROLEUM--RISK AND UNCERTAINTIES
• Business Risks:• Failure to discover
new resources• Increased cost and
schedule delay
• External Risks:• Change in demand
in major markets• Changes in
currency exchange rates• Laws and
regulations (for by-product as well!)
PETROLEUM--POTENTIAL HEDGING STRATEGIES
• Possible methods:
• Contracts• Interest Rate Swaps• Cross Currency Rate swaps
ALUMINUM
• Final product of a three-stage production process• Bauxite: natural ore• Alumina: refining process• Aluminum
• Light, strong, flexible, corrosion-resistant and infinitely recyclable• One of the most widely-used metals • Transportation • Machinery• Construction
ALUMINUM
• An Internationally traded commodity• New York Commodities Exchange• London Metal Exchange
• Worldwide Production• China is the largest aluminum producer and has the
highest growth rate
• Prices • Contango • Cyclical• Price affected by demand and supply
ALUMINUM PRICE
ALUMINUM DEMAND
• Factors affecting demand• Global Economic Conditions• Instability Decreases Demand (US. and Europe)
• Industrialization• Changes in demand transportation vehicles• Changes in the construction market• Changes in containers and packaging
• Energy Costs
GLOBAL ALUMINUM DEMAND - INDUSTRIES
GLOBAL ALUMINUM SUPPLY
GLOBAL ALUMINUM DEMAND AND SUPPLY
FREEPORT-MCMORAN
COMPANY BACKGROUND
One of the world’s largest producers of copper and gold
Headquarters in Phoenix, Arizona Operating location: North America, South
America, Indonesia, Africa Traded as NYSE:FCX and S&P 500 Component
LOCATIONS OF OPERATING MINES
OWNERSHIP INTEREST OF FCX
PRODUCTS AND SALES
• Sales of copper (60%):
• Copper concentrate (44%)
• Copper cathode (31%)
• Continuous cast copper rod (25%)
• Sales of oil (20%)• Sales of gold (7%)• Sales of molybdenum (6%)• Others (7%)
RISK FACTORS
• Financial risks
• Market prices of copper, gold and/or oil
• Debt and other financial commitments may limit the
financial and operating flexibility
• Mine closure and reclamation regulations impose
substantial costs on operations
• Financial assurance is required to support their
obligations (e.g. Bonds)
RISK FACTORS
• International risks
• International operations are subject to political, social
and geographic risks
• The company’s business may be adversely affected by
political, economic and social uncertainties in Indonesia
• Tenke minerals district may be adversely affected by
security risks and political, economic and social instability
in the DRC
RISK FACTORS
• Operational risks
• Mining and oil and gas operations are subject to operational risks
• Labor unrest and activism could disrupt the operations
• The mining production depends on the availability of sufficient
water supplies
• Indonesia and Africa mining operations involve additional risks
because of the difficult location
• Development projects are inherently risky and may require more
capital than anticipated
• Others
RISK FACTORS
• Environmental risks
• Subject to complex and evolving environmental laws, such
as CERCLA
• Remediation of environmental conditions on mining
properties that have not been operated in many years
• Unexpected environmental impacts from Indonesia mining
operations could incur increased costs
• Regulation of greenhouse gas emissions and climate change
issues may adversely affect the company’s operations
RISK FACTORS
• Other risks
• Holding company structure may impact the ability to
service debt and stockholders’ ability to receive
dividends
• Anti-takeover provisions in the company’s charter
documents and Delaware law may make an acquisition of
the company more difficult
DISCLOSURES ABOUT MARKET RISKS
• Commodity Price Risk
• Foreign Currency Exchange Risk
• Interest Rate Risk
COPPER PRICE VS. FCX STOCK PRICE
INCOME STATEMENT
CASH FLOW STATEMENT
CASH FLOW STATEMENT CONT’D
BALANCE SHEET
BALANCE SHEET CONT’D
RISK MANAGEMENT PHILOSOPHY
“FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation, or it anticipates a future activity that is likely to occur and will result in exposure to market risks, which FCX intends to offset or mitigate. FCX does not enter into any derivative financial instruments for speculative purposes, but has entered into derivative financial instruments in limited instances to achieve specific objectives. ”
FINANCIAL INSTRUMENTS
• Commodity Contracts:• Forward, futures and swap contracts• A variety of crude oil and natural gas commodity
derivatives, such as swaps, collars, puts, calls and various combinations of these instruments
• Derivatives do not contain credit risk-related contingent provisions• As of December 31,2013 and 2012, FCX had
no price protection contracts relating to mine production
FAIR VALUE HEDGES
• Using Copper Futures and Swap Contracts• FCX receive the COMEX average price in the month
of shipment• The customers pay the fixed price they requested
• Three steps to follow:• Determine the fair value of both hedged item and
hedging instrument at reporting date • Recognize any change in fair value on the hedging
instrument in profit or loss• Recognize the hedging gain or loss on the hedged
item in its carrying amount
FAIR VALUE HEDGE TRANSACTIONS
Realized gains (losses) & Unrealized gains (losses)
FINANCIAL INSTRUMENTS
• Derivatives not designated as hedging instruments
• Embedded Derivatives
• Crude Oil and Natural Gas Contracts
• Copper Forward Contracts
EMBEDDED DERIVATIVES
• A provision in a contract that modifies the cash flow of a contract by making it dependent on some underlying measurement
• Incorporated into a host contract
• Accounted for separately form the host contract when it is not closely related to the host contract
• Provides price certainty
EMBEDDED DERIVATIVES
Summary of FCX’s embedded derivatives at December 31,2014
Crude Oil and Natural Gas Contracts
• FCX has crude oil options, crude oil and natural gas swaps as a result of the acquisition of PXP
• Not designated as hedging instruments
• In order to limit the effects of crude oil price decreases
• Composed of crude oil put spreads consisting of put options with a floor limit
CRUDE OIL AND NATURAL GAS CONTRACTS
The outstanding crude oil option contracts at December 31,2014
• The deferred option premiums and accrued interest associated with the crude oil option contracts totaled $210 million
COPPER FORWARD CONTRACTS
• Entered by Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain
• Designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match
• Hedge against changes in copper prices
• Market-to-market hedging gains or losses recorded in cost of sales
• Net forward copper purchase contracts for 13 million pounds at average contract price of $2.9 per pound
SUMMARY OF (LOSSES) GAINS
Recognized in income before income taxes
UNSETTLED DERIVATIVE FINANCIAL INSTRUMENTS
CREDIT RISK• Exposed to credit loss when financial institutions
with which FCX has entered into derivative transactions are unable to pay
• FCX uses counterparties that meet certain credit requirements
• Review the creditworthiness of these counterparties
• The maximum amount of credit exposure associated with derivative transactions was $379 million at December 31, 2014
BHP BILLITON
BHP BILLITON
• Multinational mining, metals and petroleum company (top producers in major commodity)
• Headquarter: Melbourne, Australia
• Was Created in 2001, by merging of Australian Broken Hill Proprietary Company Limited (BHP) and the Angelo-Dutch Billiton plc. (dual-listed company in London and Melbourne)
• As of 30 June 2014, the market capitalization of BHP Billiton reached US $179 billion.
• Around 123,800 employees and contractors in 21 countries (130 locations around the world.
• Products include: Iron Ore, coal, manganese, gold, petroleum, aluminium, silver, copper, etc.
BHP BILLITON REVENUE AND EBIT
BHP BILLITON INCOME STATEMENT
BHP BILLITON BALANCE SHEET
BHP BILLITON CASH FLOW STATEMENT
BHP BILLITON RISK FACTORS
• External risks:• Fluctuations in commodity prices and ongoing global
economic volatility• Currency exchange rate fluctuations• Reduction in Chinese demand
• Business risks:• Failure to discover/acquire new resources, maintain them
or develop new operations• Potential change to their portfolio of assets through
acquisitions and divestments
BHP BILLITON RISK FACTORS CONTINUED
• Financial risks:• If the liquidity and cash flow available to the company severely
decreases, then major capital programs cannot be properly funded.
• May not recover their investments in mining, oil and gas assets due to change in industry structure or price of commodities.
• Operational risks:• Cost pressures and reduced productivity
• Sustainability risks:• Safety, health, environmental and community issues, along with
incidents/accidents and regulations may also affect the company’s people, operations and reputation, etc.
BHP BILLITON FINANCIAL RISK MANAGEMENT
BHP BILLITON STATEMENTS
• “The natural diversification in our portfolio of commodities, geographies, currencies, assets and liabilities is a key element in our risk management approach.”
BHP BILLITON RISK EXPOSURES
• Market risk: movements of • interest rates• foreign currencies• commodity prices
• Liquidity risk• Credit risk
BHP BILLITON MARKET RISK MANAGEMENT
BHP BILLITON MARKET RISK: INTEREST RATE RISK AND FOREIGN
CURRENCY RISK
• The risk in which the value of investment may change due to altering the future cash flow
• Methods used by BHP:• Interest rate swaps• Cross currency interest rate swaps
BHP BILLITON MARKET RISK: INTEREST RATE RISK AND FOREIGN CURRENCY RISK
BHP BILLITON MARKET RISK: INTEREST RATE RISK AND
FOREIGN CURRENCY RISK• However, the company is still subject to translational exposure, which is the foreign
exchange gains and losses on foreign currency denominated provisions for closure and rehabilitation at operating sites, capitalized in property, plant and equipment.
BHP BILLITON MARKET RISK: COMMODITY PRICE RISK
BHP BILLITON MARKET RISK: COMMODITY PRICE RISK
BHP BILLITON LIQUIDITY RISK
• Liquidity risk: Risk of not being able to settle obligations when they are due.
BHP BILLITON CREDIT RISK
• Credit risk: non-performance of the counterparties’ contract
BHP BILLITON FAIR VALUES
BHP BILLITON FAIR VALUES
BHP BILLITON SENSITIVITY ANALYSIS
COMPANY OVERVIEW
• British-Australian multinational corporation with headquarters in London, UK, and a management office in Melbourne, Australia• A leading global mining and metals company • Focus on finding, mining and processing the
Earth’s mineral resources in order to maximize value for shareholders• Dual-listed company traded on the London Stock
Exchange and the Australian Securities Exchange
EXECUTIVES
Chairman: Jan du Plessis•Director of Rio Tinto since 2008, he was appointed chairman in 2009•Chairman of British American Tobacco plc. between 2004-2009•From 1998 to 2001, President and CEO of Ford Motor Company
CEO: Sam Walsh AO (Melbourne)•Director of Rio Tinto since 2009, he was appointed chief executive in 2013•Joined Rio Tinto in 1991, following 20 years in the automotive industry at General Motors and Nissan Australia
OPERATION
• Operating in 5 major businesses • Aluminum product group• Copper product group• Diamonds & Minerals product group• Energy product group• Iron ore product group
OPERATION LOCATIONS
GENERAL PERFORMANCE
GENERAL PERFORMANCE
CONSOLIDATED INCOME STATEMENT
FINANCE INCOME AND FINANCE COSTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEET - ASSETS
OTHER FINANCIAL ASSETS
CONSOLIDATED BALANCE SHEET- LIABILITIES AND EQUITY
CONSOLIDATED CASH FLOW
CONSOLIDATED CASH FLOW
RISK MANAGEMENT FRAMEWORK
• Managing risk effectively is an integral part of how we create value, and fundamental to our business success• “Three lines of defense” model • Ownership of risk by the operations• Control of risk by Group functions and management
committees• Assurance of our systems by Group Audit & Assurance
FINANCIAL RISK MANAGEMENT
• Funding and exposure management • Fundamental part of long-term strategy of the Group
• Treasury operations • Treasury policy
FINANCIAL RISK FACTORS
• Foreign exchange rate risk • Interest rate risk• Commodity price risk• Credit risk• Liquidity and capital risk management
FOREIGN EXCHANGE RISK
• Geographic diversity of sales and operations• Important currencies• US dollars• Australian dollars• Canadian dollars
• Cross currency interest rate swaps
FOREIGN EXCHANGE RISK• Net debt of the Group
FOREIGN EXCHANGE RISK
• Hedging strategy• Not believe in active currency hedging • Review its exposure on a regular basis • Reserves the right to enter into hedges • Monthly treasury report
INTEREST RATE RISK
• Risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates• Borrow and invest at floating interest rate• Based on historical correlation between interest rates
and commodity prices
INTEREST RATE RISK
• Hedging strategy • Interest rate derivatives• Hedging result
COMMODITY PRICE RISK
• Normal policy is to sell products at prevailing market prices • Products sold under contracts and spot market• Copper, aluminum
• Products that are “ provisionally priced”• Copper concentrate
CREDIT RISK
• The risk that a counterparty will not meet its obligations, leading to financial losses• Exposed to credit risks• Operating activities• Financing activities
CREDIT RISK
• Maximum credit risk exposure of financial assets
LIQUIDITY AND CAPITAL RISK MANAGEMENT
• Objective is to safeguard the business as a going concern whilst maximizing returns of shareholders• Provide the Group a high degree of financial
flexibility at a low cost of capital• Maintain an “A-” credit rating
SENSITIVITIES ANALYSIS
• Foreign exchange risk
SENSITIVITIES ANALYSIS
• Interest rate risk
• Commodity price risk