Mining: opportunities and challenges

Mick Davis CEO

MCA Minerals Week
June 2011
1
Disclaimer:

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2
Agenda

A secular trend
An industry transformed
Minings contribution to Australia
Challenges ahead
Conclusion

3
A secular trend
4
 Multi-decade secular change

Contribution to Global GDP Global urban migration

GDP in 2010 PPP $US % urbanised
100% 100%
Other
90% 25% Developing
26% Rural
Economies;
80% 80%
30%
70%
60% 27%
60% China
50% 44%
Developing
Asia; 49%
40%
India
40%
30%
48%
20%
30% Advanced
10% Economies; 20%
21% Urban
0%
2010 2030 2050 0%
Developing
1950

1960

1970

1980

1990

2000

2010

2020

2030
Economies
52% 70% 79%
as of total:

Developing economies are expected to China will have 221 one million plus
account for almost 80% of global GDP population cities by 2025 compared to
by 2050 Europe with 35 today
Source: Citi Investment Research and Analysis, IMF , UN Department of Economic & Social Affairs , McKinsey Global Institute 5
 ...driving a structural shift in commodity
demand

Growing populous nations have a multiplier effect on commodity demand

Commodity Intensity1 Energy consumption per capita (kWh/capita)
India GDP: China GDP: US GDP: 15'000
~$3.2k/capita ~$7.3k/capita ~$42k/capita
USA: 3,873bn kWh
100

10'000
75
Japan

Europe China: ~7,000bn kWh

50 by 2020
Late cycle commodities 5'000
e.g. platinum, nickel
China: 3,438bn kWh
25 Mid-cycle commodities
e.g. copper, lead, zinc
Indonesia
Early cycle commodities
India
e.g. steel, iron ore
0 0
0 5 10 15 20 25 30 35 40 45 50
0 2'000 4'000
GDP per capita (real, 2005 $US) Population (cumulative bn)
Increasing intensities driven by a Chinas per capita energy consumption
demand shift for commodities in is expected to double by 2020
emerging markets
Source: IMF, USGS, CIA Factbook
Note: 1 Stylised intensity curves based on developed countries, Indexed to 100 at maximum 6
 Commodity supply continues to be constrained

Geographic origin of new copper supply 2020 Copper supply/demand forecasts

Cumulative probable Australia North Mt Cu Despite sustained high prices,
mine project supply 9% America 31 closing the 2020 supply/demand
2011 to 2020 and 29 gap remains challenging
Europe
27

Demand
9%

Supply
CIS 25
4%
23
South
America Africa 21
39% 16%
19
Asia 2007 2008 2009 2010 2011
23% Date of 2020 forecast

Copper industry grade decline Zinc/lead industry grade decline

1.5 Per cent Per cent Per cent
10
1.4 5
1.3 9
4
1.2 8
1.1 Zinc 3
7
Lead
1.0 6 2
0.9
1980 1985 1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020

More than 80% of new copper supply is from emerging markets with more complex and
challenging environments suffering from a lack of infrastructure to sovereign risk issues
Source: BrookHunt, MEG, Xstrata estimates 7
 5. INDUSTRY LANDSCAPE
OVERVIEW

A decade ago, the industry was fragmented

with no clear winning business model

Global mining and metals industry - 2001

Global GLOBAL
INTEGRATED
Player DIVERSIFIEDS
MONOLITHS
NUMBER OF KEY GEOGRAPHIES

Alcoa Rio Tinto

$30bn
3+ regions

Alcan
Teck Cominco
BHP
Noranda $26bn Anglo
FOCUSED American
LOCALS Billiton $29bn
WMC Falconbridge $12bn
13 regions

Xstrata
$1bn Inco
Phelps Dodge Freeport MIM LOCAL HEROES
$7bn
Antofagasta
$2bn
Regional Implats Lonmin CVRD (Vale)
$3bn $2bn $12bn
Player
Single 13 commodities 3+ commodities 8+ commodities Multi
COMMODITY FOCUS
Source: Bubble sizes represent market capitalisation as 1 January 2001 8
 OVERVIEW

Today mining is consolidated, with the Diversified Model

proving best positioned to compete into the future

Global mining and metals industry 2011*

Global INTEGRATED BHP

GLOBAL DIVERSIFIEDS
Player MONOLITHS Billiton
$245bn
Xstrata
NUMBER OF KEY GEOGRAPHIES

$70bn
3+ regions

Vale
$158bn Rio Tinto
$139bn
6
Anglo
FOCUSED LOCALS
American
$66bn
13 regions

Xstrata
at IPO

LOCAL HEROES
2

Regional
Player
Single 13 commodities 3+ commodities 8+ commodities Multi
COMMODITY FOCUS
Source: Bloomberg, market capitalisation as at 6 May 2011 9
 The Virtuous Circle

Scale and Diversification

- Geographic, commodity, customer and
currency diversification
- Scale to take necessary risks
- High-quality operations

Embedded Optionality Higher quality earnings

- Proprietary control of
timing, sequencing and
size of options
- Asymmetrical M&A options
- Operational options
- Geographic options
Superior Capabilities
- Financial acumen
- Operating excellence
- Marketing capability
- Governments and NGOs
- Licence to operate
- Strong and stable cash flow
through commodity cycle
- Higher returns
- Lower cost of capital
- Improved funding capacity

Access to External Growth Options

- Ability to shoulder risk
- Licence to operate
- Multiple regional synergy opportunities
10
 Mining majors manage the majority of large,
low cost assets

Copper Iron Ore Thermal Coal

Mined Cu production (2010) Production (2010) Thermal Coal exports (2010)

18.7Mt 8.3Mt 1,162Mt 588Mt 639Mt 175Mt

100% 100% 100%

90% 90% 90%

Others
Others

Others
Anglo
80% 80% 80%

70% 70% Vale 70%

60% 60% 60%

50% 50% 50%

Anglo
40% 40% 40% Vale
Codelco Rio Rio
30% 30% 30%
Freeport BHPB
20% Anglo 20% 20%
Vale
Rio
10% 10% BHPB 10% Xstrata
BHPB
0% Xstrata 0% 0%
Global Tier 1 Global Tier 1 Global Tier 1*

Note: Tier 1 is defined as being in first half of global cost ranked by C1 cost, and upper quartile of the worlds mines ranked by output
Asset managed by the
*Tier 1 is as production >1.5Mtpa and margin of >USD30 in 2010
Source: Wood Mackenzie (2010), Metalytics (2010), Xstrata estimates
major mining companies 11
 Majors own most major growth options across
diverse geographic regions

Five largest mine projects by output in 2015

1,264kt 500Mt 237kt 1,055koz
100%
Escondida Casa de
3rd Mill Pedra Exp Impala
90% Koniambo
#16
Carajas
80% Konkola
Deep
Barro-Alto Garatau
70% Pilbara
RGP 5 & 6
BHPB,
Esperanza Vale, Rio,
60%
Goro Anglo and
Pandora
50% Xstrata
Toromocho Pilbara
40% 320 Onca
Puma Styldrift
30%
Las
20%
Bambas Chichester,
Ambatovy Eland
10% Solomon

0%

Copper Iron Ore Nickel PGMs

Ownership
by Majors: 53% 64% 73% 65%

Note: 5 largest projects (greenfield and brownfield) by output in 2015. Copper : highly probable or probable in Brook Hunt, including projects ramping up in last 6 months.
Nickel; CRU Group Nickel Quarterly; Iron Ore: Metalytics; PGM: Xstrata Estimates. Internal project pipeline assessment made for all Xstrata projects.
Source: Brook Hunt (2011 Q1); Wood Mackenzie; Metalytics; CRU Group; Xstrata estimates 12
 Miners are amongst the worlds leading
companies and a core holding for investors
Market cap of worlds largest 100
Mining as a % of UK equity markets
companies
2002

Financials
30%
27%
Oil & Gas
Mining
Pharma & Bio
17%
11% Telecom
12% 3% Other

Miners
2011
Financials
23% Oil & Gas
34%
Mining
Pharma & Bio
17% Xstrata
Telecom
6%
7% Other
13% 0 100 200 300 400
Market Capitalisation ($US billion)

Source: Datastream- FTSE All Share, Bloomberg Global Titans-the largest 100 companies globally by market capitalisation 13
 Mining makes a major (and growing)
contribution to Australias prosperity
Mining sector contribution to Australian economy
9%

8% Contribution by Total

Fraction of Economy-wide Total

Factor Income
7%
Contribution by Gross
6% Value Added

5%

4%

3%

2%

1%

0%
Charts from The Economic Contribution
of the Australian Mining Industry, Source: Australian Bureau of Statistics
Deloitte for the MCA, 2010
Average Weekly Earnings, Mining Sector and All Employment in Metal Ore and Coal Mining
other industries and Minings Export Share
$2,500 100 70%

90
Average Weekly Earnings: Total Earnigs

60%

Fraction of Total Exports (Per Cent)

80

Employment ('000s of persons)

$2,000
Source: Australian Bureau of Statistics

Mining All Industries

70 50%

$1,500 60
40%
50
30%
$1,000 40
Total Employment in Metal Ore Mining
30 and Coal Mining ('000s, LHS) 20%

$500 20 Mining Exports as a Fraction of Total

Exports by Value (Per Cent, RHS) 10%
10

0 0%
$0

Source: Australian Bureau of Statistics, Feb 2010. ABARE, Australian

Mineral Statistics 14
Xstrata in Australia
In 2010 Xstrata contributed
AUD$8.6bn to the Xstrata employs around
Australian economy 14,000 people (including
contractors) in Australia

In 2010, Xstratas Australian

businesses contributed:
39% of Group EBITDA
29% of total assets
29% of Group revenue
41% of Group capex

AUD$10bn of Australian growth projects are in feasibility or implementation

15
 More than ever, existing miners must run
hard to stand still
Depleting reserves Recent capex
Bridging the strategic gap
40000

35000
announcements
Export Tonnage
30000

25000
Xstrata
20000 $21bn approved or soon-
15000

10000 Shareholder to-be-approved projects

Demands
Inland
5000
Tonnage

Anglo American
0
1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

$16bn approved for next 3

Increasing costs years
Value $m

Opex US$/t material moved

(real 2008)

BHP Billiton
$80

60 Other
Energy $15bn in 2011
Labour

The
40

20 Strategic Rio Tinto

$12bn major capital project
Consumables

0 Gap
2008 2011
approvals in 2010/11
Declining grades
Primary copper head grade, %
1.5
Historical Future
1.4

1.3

1.2
Today Time
1.1

1.0

0.9
1980 1985 1990 1995 2000 2005 2010e 2015e

Source: Company data 16

Mining industry faces increasing complexity,
competition and costs

Emerging Challenges Examples and Potential Impact

Increasing complexity of Windfall taxes, royalties, carried interest, allocation of licences, mining
public policy licence reviews, etc. Potential for unintended, damaging consequences
and loss of relative competitiveness.
Constrained inputs Key engineering and project management skills, fabrication capacity,
(especially for project contractors, etc. project delays and increased costs
development)
Higher input costs Energy, fuel, steel, explosives, labour and contractors, strong producer
currencies higher long-term costs
Water shortage Potential competition with communities for water in arid areas, cost of
providing alternatives (e.g. desalination)
Social licence to operate Rising community expectations, NGO activity - delayed mining
expansion, cost of compliance, focus on community involvement
Growing Increased legislation across the board UK Bribery Act, transparency
legislation/regulation initiatives, anti-trust, etc., growing organisation complexity and cost of
compliance
Environmental/Climate Growing complexity, legislation by country rather than global
Change regulation impacts framework, increased costs, impact on competitiveness
Competition for access to New strategic and commercial acquirers - higher price for control,
new resources scarce resources

17
Climate change principles
Industry has a valid and important role to play in:
Limiting greenhouse gas emissions
Investing in low emissions baseload technology
Participating as a valid and important interlocutor in policy
development

A consensus is emerging on sound principles for climate

change policy:
Clear, predictable and long-term price on greenhouse gas emissions
Single objective to reduce emissions with revenues raised applied to
initiatives to support the transition to a low-carbon economy
Protection of trade-exposed industries; avoid carbon leakage
Gradual, predictable legislation introduced at an appropriate level

18
Conclusion

A secular shift in demand for commodities is underway

Mining industry has consolidated giving rise to global,
diversified miners with the ability to allocate capital across
several jurisdictions
Significant challenges remain for the industry, including
increasingly complex legislation
Industry has a legitimate and important role to play in policy
development

19