x_speech_201205151.en_XSTRATA.pdf

7/28/2019 x_speech_201205151.en_XSTRATA.pdf

1/23

The

changingface ofsupply


2/23


3/23


4/23


5/23

Indias economy could be larger than the US and Chinas by 2050

5

Other emerging economies are also globalgrowth generators

Sources: Barclays Capital, World Bank

Income Trend Growth Thresholds Commodity Demand Intensity Correlateswith Growth Thresholds

0

10,000

20,000

30,000

40,000

50,000

0% 20% 40% 60% 80% 100%

Urbanisation ratio

GDP per capita (US$ per person)

India China Japan South Korea US

0

1,000

2,000

3,000

4,000

5,000

6,000

0% 10% 20% 30% 40% 50%

Urbanisation ratio

Copper demand per capita (kg per 1,000persons)

Chinas per capitacopper

demand growthaccelerated

after the 30%urbanisation

mark; India looks likeit is set to do the

same

India China


6/23

0

50

100

150

200

250

300

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

Indias domestic supply unable to meet demand in many commodities

6

which translates directly into commoditydemand growth

Source: BP Statistical Review, Barclays Capital

Indias Copper Concentrate Shortfall (Kt) Indias Coal Supply Shortfall (MTOE)

0

500

1000

1500

2000

2500

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025


7/23

Maintaining

supply

7


8/23

40

50

60

70

80

90

100

110

120

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

Zinc Copper Nickel

Forecast

Amid rapidly declining ore grades and aging mines

8

Maintaining supply from existing sources isbecoming increasingly challenging

Source: Wood Mackenzie, Xstrata estimates. Deutsche Bank

Hea

dgrades,indexedt

o2000base

Declining head grades mean producers have to run harder tostand still

-

400

800

1,200

1,600

Apr-03 Dec-04 Aug-06 Apr-08 Dec-09 Aug-11

Mt

Annualised Chinese domesticiron ore ROM productionContained iron

(1,600)

(1,200)

(800)

(400)

0

2005 2006 2007 2008 2009 2010 2011e

kt Cu difference between planned vs actualproduction

Copper supply is falling short of expectations


9/23

9

Majors have announced significant increases inprojected capex to ensure continued growth

Source: McKinsey

41

51

74

64

76

107

114

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011 2012

Other Copper Coal Precious Metals Diversifieds

Top 40 mining companies- planned capex $bn

+53%


10/23

10

Natural resource companies are compelled toaccess future resources in new geographies

Mexico(copper, ironore, thermalcoal, zinc)

Peru and Chile(copper, iron

ore, zinc)

Ecuador(copper)

Brazil(copper, ironore, nickel)

Argentina(copper)

Venezuela(copper,

thermal coal,nickel)

Colombia(thermal coal)

Turkey(copper)

Russia(copper, iron ore,

thermal coal,coking coal, zinc,

nickel)

Ukraine(iron ore, thermalcoal, coking coal)

Kazakhstan

(copper, zinc, oil,FeCr, iron ore)

D.R. Congoand Zambia

(copper)

Botswana(copper)

South Africa(iron ore, thermal coal,

coking coal, zinc,nickel)

Mauritania,SierraLeone,Guinea

(iron ore)

Mozambique(thermal coal)

China(copper, iron ore,

thermal coal,coking coal, zinc,nickel, aluminium)

India(copper, iron ore,thermal coal, zinc,

nickel)

Mongolia(copper, thermalcoal, coking coal)

Indonesia(thermal coal,coking coal,

nickel)

Philippines, PapuaNew Guinea, NewCaledonia

(copper, nickel)

Source: Bloomberg, Wood Mackenzie, WBMS

Eq.Guinea,

Cameroon(oil/gas)

Rep Congo(iron ore)

Tanzania

(nickel)

Highly Prospective New Frontiers


11/23

11

A substantial proportion of future capital is inthese new geographies

Source: McKinsey

6.8

41.6

37.4

100.9

24.8

2.4

24.6

15.2

13.2

6.1

0 20 40 60 80 100 120

Europe

Africa

APAC

Latin America

North America

Previous 5 years Next 5 years

Value of Au, Cu, Ni, Fe projects started $bn


12/23

0

5000

10000

15000

20000

25000

30000

1980 1985 1990 1995 2000 2005 2010 2015 2020

Ok Tedi

Escondida

Alumbrera

Antamina

BatuHijau

Collahuasi

XstrataBrownfield

XstrataGreenfield

Antucoya

Miheevskoye

12

Insufficient infrastructure & associated costs innew geographies drive further capex intensity

Source: Wood Mackenzie, Xstrata EstimatesNote: bubble size denotes annual copper equivalent production

Capitalinte

nsity

2011$US/tCuequivalent

annualproduction

Start date

Salobo I

Caserones

Oyu TolgoiSierra Gorda

Esperanza

Tenke

1985 to 2011 greenfield projects2012 to 2015 greenfield projects in construction

Capital Intensity 2011 US$1985-2011 Greenfield + Brownfield copper projects $7,700/t2012-2015 Greenfield copper projects in construction $14,970/t

2016-2020 Greenfield unapproved copper projects $18,600/tXstrata Brownfield copper projects $8,920/tXstrata Greenfield copper projects $13,315/t

Antapaccay

Xstrata projects under construction-combined position


13/23

13

However, the vast majority of mega projectshave experienced cost and schedule over-runs

Source: McKinsey

0%

5%

10%

15%

20%

25%

30%

35%

40%

-80 -60 -40 -20 0 20 40 60 80 100 120

Schedule over-runs (% of estimate)

0%

5%

10%

15%

20%

25%

30%

35%

40%

-80 -60 -40 -20 0 20 40 60 80 100 120

Cost over-runs (% of estimate)


14/23

Preserving

Returns

14


15/23

15

What makes return preservation difficult?

Size andcomplexity

Lead times Cost over-runsScheduleover-runs

Greenfieldprojects in new

geographies have

significantinfrastructurerequirements

Many projects arelarge and more

complex,requiring scale todeliver returns on

larger capex

Constrainedfoundry and

heavy equipmentmanufacturing

capacity

Competition with

other industriesfor scarcecapacity

Under-estimationof labour/input

inflation

Stretched EPCM

Under-engineering/ poorproject definition

Under-estimationof multiple

project risksSkills shortages

Productivity atcontractor level,especially on-site

Delays andcomplexities inpermitting andsocial licence to

operate

Communityresistance/ NGO

involvement

Complex re-locations and land

purchaserequirements

Commissioningdelays impact

NPV


16/23

16

Engineering contractors are extremelycapacity constrainedGetting the top team in a Tier 1 EPCM is increasingly difficult

Source: McKinsey

50

60

70

80

90

100

110

120

130

140

2007 2008 2009 2010

Backlog of publically listed EPCMs as a percentage of revenues(2007 index)

Jacobs

SNC Lavalin

Fluor


17/23

the artisan shortage in the coal sector issevereand will intensity as the demand forenergy increases and more coal mines are

opened

-Colliery Training College

Resources projects may be short of 36,000trades workers by 2015

-Australia National ResourcesSector Employment Taskforce

Source: Minerals Council of Australia- labour in the Australian minerals sector and McKinsey 17

A dearth of key skills is plaguing the sector inkey commodity geographies

-0.2

0.2

0.8

2.5

1.9

2.3

6.1

5.7

5.7

6.5

5.9

5.4

-1 1 3 5 7

Labourers

Semi-skilled

Trade

Technicians

Professionals

Managers/admin

Demand Supply

Supply and demand growth of labour:per cent CAGR 2005-15

the ageing workforce, productivity, andchallenges attracting new talent will make it

hard to fill vacanciesby 2020 Canada will need an additional

100,000 new mining workers

-Canadian Mining Human Resources Council


18/23

18

0 1 2 3 4 5

Gas generators

Wagons

Rope Shovels

Reclaimers

Tyres

Large Haul trucks

Crushers

Ship Loaders

Draglines

Barges

Locomotives

Grinding mills

2011 lead time outlook (years)

2007 delivery timeCurrent delivery timeNormal delivery time

Heavy equipment lead times are rapidlyreturning to 2007 levels

Source: Rio Tinto/McKinsey


19/23

19

98105

117 120127

135143

155165

175

185

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Global Tyre Supply/Demand (Thousands of 40 to 63 Units )

Demand Supply

+7% pa

Key consumables are also in short supply

Source: McKinsey


20/23

20

Increasingly complex social issues causingschedule over-runs

Changing regulation gives a stronger voiceto community opposition to miningprojects, e.g. new IFC Standard 7

Complex re-negotiations and land purchaserequirements

Increased competition for land betweenagriculture and mining, e.g. Queenslandgovernment are introducing legislationaround strategic cropping land

NGO involvement

Growing activism against mining, e.g.Friends of the Earth legal challenge tocoal projects in Australia in respect ofclimate change

Resource nationalism

Increased regulations/taxes/nationalisation

Source: Goldman Sachs research report, 2011

21%

63%

73%

0% 20% 40% 60% 80%

Survey of 190 Delayed projects;Causes of DelaySustainability (eg stakeholder,community, environment-related)

Commercial (eg cost orcontract related)

Technical


21/23

21

New approaches to project management areessential if returns are to be maintainedXstrata deploys innovative solutions

Size andcomplexity Lead times Costover-runs Scheduleover-runs Procurement and sourcing agreements Infrastructure/energy/water solutions Balance NPV and return by staging development of large projects

OperationalAccess to key inputs/

infrastructure

Key SkillsEPCM and on-the-

ground capabilities

Political; governmentsponsorship

Communityshared value

Ability to attract top engineering, technical and operating peoplethrough an attractive overall career offering and alliances withEPCM contractors

Develop and train local labour in core skills Relevant project design and development technology

Demonstrate superior asset stewardship and local benefits Strong relationships based on trust/clear expectations Sustainable and stable agreements Best-in-class sustainability credentials

Social licence to operate through strong community relationships,sustainable social investment, communication, employment

Trusted reputation and brand, transparency, sustainability

practices, appropriate share of value


22/23

22

Managing risks: a symbiotic relationshipbetween miners, communities & governments

MiningCompanies

Communities

Governments

GovernmentsBenefit from:

Investment in country

Taxes

Employment

Infrastructure

Products vital to society

In return provide:

Security of tenure and astable investment regime

Transparency

Infrastructure

A skill base

Mining CompaniesBenefit from:

The Social Licence to Operate

Access to diverse sources of capital New resources and business

opportunities

Key skills

In return: Provide vital products

Take on risk of investment

Corporate Social Investment

Provide skills and capabilities

Employ sustainable practices Provide world-class technologies

Contribute to national and local coffers

CommunitiesBenefit from:

New infrastructure and advanced technology

Jobs, training and development

Corporate Social investment

Development of and procurement from local suppliersand enterprises

In return provide:

The Social Licence to Operate

Employees Suppliers


23/23

23

Long-term demand for commodities remains intact

The nature of the supply-side is changing fundamentally

Traditional sources of supply are being depleted and are more costly to extract Natural resource companies have to seek resources in the new, highly prospective

geographies

Further pressure on capex intensity

Large capex programmes have been announced and underway

But delays and capex overruns are common-place

New approaches are required to deliver promised returns

Innovative procurement strategies, including modularisation

Standardisation

Approaches to skills procurement and local development

Smart project management, strengthened owners team, EPCM JVs

Licence to operate governments, communities, NGOs

Infrastructure and support service financing and provision

Prioritisation of low capex intensity growth

A new approach to delivering value andreturns is required

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