Panorama Global do Mercado de Minério de FerroPrevisão de Produção, Demanda e Preço

Novembro 2012

André Pinheiro+55-11-3073-3028andre.pinheiro@itaubba.com

Marcos Assumpção, CFA+55-11-3073-3021marcos.assumpcao@itaubba.com

2

Agenda

SECTION 1 SUPPLY SIDE: WHAT IS “ACTUALLY” EXPECTED TO COME ON STREAM?

SECTION 2

PRICES: WHAT IS THE OUTLOOK? HOW WILL THEY BEHAVE?SECTION 3

DEMAND SIDE: IS THERE STILL DEMAND GROWTH? WHERE WI LL IT COME FROM?

SECTION 1SUPPLY:WHAT IS “ACTUALLY” EXPECTED TO COME ON STREAM?

0

100

200

300

400

500

600

700

Guided 2010-12 Growth Actual Growth?

(mtpy)

4

SUPPLY GROWING LESS-THAN-EXPECTED

� Australian iron ore production was expected to increase by more than 500 million tons in 2010-12;

?

� But less than 100 million tons was actually delivered…

Source: Rio Tinto and Itaú BBA

522470

~400355

0

100

200

300

400

500

600

700

(mtpy)

2011 Capex Plan 2012 Capex Plan 2013E Capex Plan Itaú BBA Forecast

5

SUPPLY GROWING LESS-THAN-EXPECTED

� Brazilian players have consistently revised their production guidance;

� The new targets are always lower numbers…

Source: Vale and Itaú BBA

Vale’s 2015 Production Target

6

SUPPLY GROWING LESS-THAN-EXPECTED

� The Chinese have invested heavily to expand iron ore capacity;

� However, production has not risen at the same pace…

Source: World Steel Dynamics and Itaú BBA

0

5

10

15

20

25

0

200

400

600

800

1000

2006 2007 2008 2009 2010 2011 2012

(USD bn)(mtpy)

Production (mn tons) Capital Outlays (USD bn)

0%

10%

20%

30%

40%

50%

0

20

40

60

80

100

120

140

Sep-05 Feb-07 Jul-08 Dec-09 May-11

(mn tons)

Chinese Iron Ore Production Chinese Iron Ore Grades

7

SUPPLY GROWING LESS-THAN-EXPECTED

� India’s Government has increased restrictions on iron ore exports over the past few years;

� As a result, India’s share of seaborne supply has decreased…

29%

1%0%

5%

10%

15%

20%

25%

30%

35%

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12

(mn tons)

India

Source: Bloomberg and Itaú BBA

8

WHY IS GUIDANCE DIFFERENT FROM REALITY?

�Environmental Licenses;

�Logistics Constraints;

�Lack of Infrastructure;

�Declining Ore Grades;

�Funding – Price Volatility;

�Political Risk/Higher Taxes;

�Lack of Skilled Labor;

�Capex Inflation.

Source: Itaú BBA

9

SUPPLY: WHO DELIVERED THE CAPACITY INCREASES?

�The Australians delivered more capacity than the Brazilians;

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(mn tons)

Brazil Australia

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011

(mn tons)

Vale Rio Tinto BHP Fortescue

Iron Ore Production: Brazil vs. AustraliaIO Production: Vale, Rio, BHP and Fortescue

Source: BHP, Rio Tinto, Fortescue, Vale and Itaú BBA

10

SUPPLY: WHO DELIVERED THE CAPACITY INCREASES?

2005 2006 2007 2008 2009 2010 2011

Vale Australians (Rio, BHP and Fortescue)

20%

25%

30%

35%

40%

2005 2006 2007 2008 2009 2010 2011

(mn tons)

33%

30%

20%

25%

30%

35%

40%

2005 2006 2007 2008 2009 2010 2011

(mn tons)

31%

37%

IRON ORE SEABORNE MARKET SHARE %

�The Australians delivered more capacity than the Brazilians;

Source: Bloomberg, World Steel Association and Itaú BBA

SECTION 2

DEMAND:IS THERE STILL DEMAND GROWTH?

WHERE WILL IT COME FROM?

12

DEMAND: WHERE DID IT COME FROM?

Apparent Steel Use, Finished Steel (mn tons)

2007 2008 2009 2010 2011

423435

548

576

611+45%

Source: World Steel Association and Itaú BBA

13

DEMAND: WHERE DID IT COME FROM?

Apparent Steel Use, Finished Steel (mn tons): 2007- 2011

+137 mn tons

+188 mn tons

Rest of the World

-51 mn tons

Source: World Steel Association and Itaú BBA

14

DEMAND: WHERE DID IT COME FROM?

�Chinese went from 10% to 50% of global steel production;

15%17%

20%23%

27%

31%35%

37% 38%

47%45% 46% 47%

00%

05%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

100

200

300

400

500

600

700

800

00 01 02 03 04 05 06 07 08 09 10 11 12E

(% o

f Glo

bal S

teel

Pro

duct

ion)

(Ste

el P

rodu

tion

mn

tons

)

China Became The Largest Steel Player

Source: World Steel Association and Itaú BBA

2010 2011 2012 11/10 12/11

World 1,286.2 1,365.3 1,448.8 6.2 6.1 118.4

European Union (27) 144.1 153.8 159.6 6.8 3.8 80.6

Other Europe 29.6 32.8 35.2 11.0 7.3 111.4

C.I.S. 48.4 52.2 56.8 7.7 8.8 100.8

N.A.F.T.A. 110.3 122.0 129.8 10.6 6.4 92.3

Central & South America 45.5 49.3 53.5 8.4 8.5 129.6

Africa 25.9 25.0 27.4 -3.2 9.3 124.6

Middle East 45.3 46.5 49.9 2.6 7.3 113.0

Asia and Oceania 837.2 883.7 936.7 5.6 6.0 135.8

China 576.0 610.5 641.1 6.0 5.0 151.7

mmt %

2012 as % of 2007

15

DEMAND: WHERE DID IT COME FROM?

Apparent Steel Use, Finished Steel

Source: World Steel Association and Itaú BBA

16

DEMAND: HAS CHINESE STEEL CONSUMPTION PEAKED?

Source: Vale, Rio Tinto and Itaú BBA

17

DEMAND: WHERE WILL IT COME FROM?(U

rban

izat

ion

Rat

e %

)

0

10

20

30

40

50

60

70

80

90

100

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Brazil

Korea

China

India

Source: Vale, Rio Tinto and Itaú BBA

Urbanization Rate (%) Shanghai Pudong Financial District

18

DEMAND: WHERE WILL IT COME FROM?

Source: BHP and Itaú BBA

19

Middle-Class – by region (in millions)

Source: AngloAmerican, OECD and Itaú BBA

Europe

Middle East & North Africa

Sub SaharanAfricaCentral &

South America

North America

Asia Pacific

2009

2030

100mn

500mn

1bn

DEMAND: CHINESE MIDDLE -CLASS

SECTION 3

PRICES:WHAT IS THE OUTLOOK? HOW WILL THEY BEHAVE?

21

PRICES: WHY WON’T THEY DROP TOO MUCH IN THE LT?Iron OreCapex/ton USD/ton 110

Lead Time years 6

LT Iron Ore Price (FOB) USD/ton 75

Mining Royalty % 5%

LT Iron Ore Price (FOB) - (ex-royalty) 71

Cash Cost/ton USD/ton 47 Cash Cost Breakdown (USD/ton)

SG&A/ton USD/ton 3 Mining 20

EBITDA/ton USD/ton 21 Railroad 12

Depreciation/ton USD/ton 4 Port 15

Maintenance CAPEX/ton USD/ton 4

Effective Tax Rate % 34%

Perpetual Grow th % 0%

WACC % 7%

Years 1 2 3 4 5 6 7 8 9 10 Pe rpe tuity

CAPEX USD/ton (18) (18) (18) (18) (18) (18) - - - -

EBITDA USD/ton - - - - - - 21 21 21 21

Depreciation USD/ton - - - - - - (4) (4) (4) (4)

EBIT USD/ton - - - - - - 17 17 17 17

Taxes USD/ton - - - - - - (6) (6) (6) (6)

Revenues - - - - - - 75 75 75 75

FCF

CAPEX USD/ton (18) (18) (18) (18) (18) (18) - - - -

EBITDA USD/ton - - - - - - 21 21 21 21

Taxes USD/ton - - - - - - (6) (6) (6) (6)

WK USD/ton - - - - - (4) - - -

CAPEX Maintenance USD/ton - - - - - - (4) (4) (4) (4)

FCF USD/ton (18) (18) (18) (18) (18) (18) 7 11 11 11 159

Discount Factor 1.1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.0

PV FCF (17) (16) (15) (14) (13) (12) 5 6 6 6 81

NPV 16

IRR 9%

+ Mining Cash Cost: USD20/ton

+ Logistics Cost: USD 12/ton

+ 3rd Party Port Cost: USD 15/ton

+ SG&A Expenses: USD 3/ton

+ Royalties: USD 4/ton

22

PRICES: HIGHER CHINESE DEPENDENCY = + VOLATILITY!

�China became the most important buyer;

�The Chinese behave like traders;

�Changes in inventories could have a strong impact on prices.

-10

-8

-6

-4

-2

0

2

4

6

8

10

nov-08 abr-09 set-09 fev-10 jul-10 dez-10 mai-11 out-11 mar-12 ago-12

(USD/ton)

Daily Price Variations

Source: Bloomberg and Itaú BBA

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

nov-08 abr-09 set-09 fev-10 jul-10 dez-10 mai-11 out-11 mar-12 ago-12

(%)

Daily Price Variations

23

PRICES: WHAT IS OUR FORECAST?

� Supply will continue to increase at a slower-than-e xpected pace;

� New projects won’t advance if prices drop too much;

� Demand is expected to increase gradually (China, In dia and EMs);

� Prices sustained by high-cost producers (in China a nd out of China).

128.0 120.0

110.0 100.0

95.0 95.0

0

20

40

60

80

100

120

140

2012E 2013E 2014E 2015E 2016E Long-term

(mn tons)

Itaú BBA

Itaú BBA – Iron Ore Price Curve

THANK YOU