CRU 7th World Copper Congress April 2008

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Information about CRU 7th World Copper Congress April 2008
Education

Published on April 24, 2008

Author: Camilla

Source: authorstream.com

Copper’s Future and Rio Tinto’s Future in Copper:  Copper’s Future and Rio Tinto’s Future in Copper Bret Clayton – Chief Executive Rio Tinto Copper 9 April 2008 Cautionary statement:  Cautionary statement This presentation has been prepared by Rio Tinto plc and Rio Tinto Limited (“Rio Tinto”) and comprises the slides for a presentation concerning Rio Tinto. By reviewing/attending this presentation you agree to be bound by the following conditions. Forward looking statements This presentation includes forward-looking statements. All statements other than statements of historical facts included in this presentation, including, without limitation, those regarding Rio Tinto’s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to Rio Tinto’s products, production forecasts and reserve and resource positions), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rio Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Rio Tinto’s present and future business strategies and the environment in which Rio Tinto will operate in the future. Among the important factors that could cause Rio Tinto’s actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, levels of actual production during any period, levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and such other risk factors identified in Rio Tinto's most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission (the "SEC") or Form 6-Ks furnished to the SEC. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this presentation. Rio Tinto expressly disclaims any obligation or undertaking (except as required by applicable law, the City Code on Takeovers and Mergers (the “Takeover Code”), the UK Listing Rules, the Disclosure and Transparency Rules of the Financial Services Authority and the Listing Rules of the Australian Securities Exchange) to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Rio Tinto’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Nothing in this presentation should be interpreted to mean that future earnings per share of Rio Tinto plc or Rio Tinto Limited will necessarily match or exceed its historical published earnings per share. Information about BHP Billiton included in this presentation is based on public information which has not been independently verified. Certain statistical and other information about Rio Tinto included in this presentation is sourced from publicly available third party sources. As such it presents the views of those third parties, but may not necessarily correspond to the views held by Rio Tinto. Directors’ Responsibility Statement The Directors of Rio Tinto plc and Rio Tinto Limited accept responsibility for the information contained in this presentation, except that the only responsibility accepted in respect of information relating to BHP Billiton, which has been compiled from published sources, is to ensure that such information has been correctly and fairly reproduced and presented. Subject as aforesaid, to the best of the knowledge and belief of the Directors of Rio Tinto plc and Rio Tinto Limited (who have taken all reasonable care to ensure that such is the case), the information contained in this presentation is in accordance with the facts and does not omit anything likely to affect the import of such information. Subject to the requirements of the Takeover Code, none of Rio Tinto, any of its officers or any person named in this presentation with their consent or any person involved in the preparation of this presentation makes any representation or warranty (wither express or implied) or gives any assurance that the implied values, anticipated results, performance or achievements expressed or implied in forward-looking statements contained in this presentation will be achieved. Subject to any continuing obligations under applicable law, the Takeover Code, the UK Listing Rules, the Disclosure and Transparency Rules of the Financial Services Authority and the Listing Rules of the Australian Securities Exchange, Rio Tinto expressly disclaims any obligation to disseminate, after the date of this presentation, any updates or revisions to any statements in this presentation to reflect any change in expectations or events, conditions or circumstances on which such statements are based. 2007 – records across the board:  Source: Rio Tinto 2007 – records across the board Record underlying EBITDA of $13.9 billion, up 11% Record underlying earnings of $7.4 billion, up 1% Record cash flow from operations of $12.6 billion, up 15% Record capital investment of $5.0 billion, up 25% Record new capital commitments of $8 billion* announced in 2007 Dividend increased by 31% for the 2007 year Commitment to further 20%+ increases in 2008 and in 2009 Alcan transaction completed establishing industry leadership from bauxite through to aluminium Seamless transition in executive team *100% basis Rio Tinto has an outstanding position across aluminium, iron ore and copper:  Rio Tinto has an outstanding position across aluminium, iron ore and copper Notes: a) Source: Rio Tinto 26 November 2007 investor seminar. b) Based on 2006 attributable production. Source: Seaborne iron ore - Iron ore Outlook July 2007 from AME Mineral Economics. Aluminium - attributable production data from Brook Hunt, adjusted for merger and acquisition activity and calculated on the basis that Rusal includes Sual and Glencore assets; Alcoa includes 60% of AWAC; Alumina includes 40% of AWAC and 2006 data is aggregated for Rio Tinto and Alcan. Copper – attributable production data from Brook Hunt, calculated on the basis that Freeport includes Phelps Dodge and Xstrata includes Falconbridge. c) Source: Rio Tinto annual report 2007; Rio Tinto Iron ore Pilbara media visit, 15th January, 2008 d) Iron ore on 100% basis, aluminium and copper on an attributable basis. e) Years of equivalent production calculated as (reserves + resources) / 2007 production. f) The targeted additional mineralisation is based on Rio Tinto’s exploration and production experience in the region, including an assessment of tenure areas using surface mapping, drilling results and other information. The potential mineralisation is conceptual in nature – there has been insufficient exploration to define a mineral resource and it is uncertain if further exploration will result in the determination of a mineral resource. Global GDP growth forecast to accelerate:  CAGR % 5.0 2.6 2005-25 forecast 1975-05 actual 20 1975 54 2005 125 2025 Rest of world India China South America Asia Pacific developed Europe North America 4.3% 3.5% 6.5 2.7 Source: World Bank for 1975 and 2005 data; Global Insight for growth estimates to 2025; Rio Tinto Economics World GDP 2000 terms, PPP basis, USD Trillions Developing Developed Global GDP growth forecast to accelerate Copper is expected to be one of the fastest growing major commodities as income levels rise in developing countries:  Aluminium GDP per capita (in 2000 US$) Expenditure per capita US$ (2007 terms) 2007 Population Distribution Copper Average income per capita 2007 2022 Iron ore Nickel Hard coking coal Strong expected rise in copper consumption 2007-2022 Note: Expenditure profiles are based on Rio Tinto estimates of global income and consumption relationships and average real terms prices between 1990-2006. Iron ore and hard coking coal expenditure calculated based on crude steel demand projections, assuming all met by blast furnace production at historical average export prices Source: Global Insight for population distribution: Rio Tinto estimates for commodity expenditure profiles. Copper is expected to be one of the fastest growing major commodities as income levels rise in developing countries China is the new force in commodity demand:  Share of global consumption Source: AME for aluminium, copper and iron ore. 2001-2006 oil data source is BP Statistical Review of World Energy 2007 Note: Consumption data for aluminium, copper and iron ore represents "apparent" consumption rather than actual consumption and is determined by: apparent consumption = domestic production + imports - exports - change in stocks (where available) ¹ Forecast available only 2 Seaborne ³ Data for 2007 and 2011 is calculated by applying expected consumption growth rates from IEA (International Energy Outlook) to historical data Aluminium Copper Iron ore2 China is the new force in commodity demand + Chinese share increasing - US share declining Oil3 Direct trade effects on China from a US slowdown are expected to be small:  Direct trade effects on China from a US slowdown are expected to be small Source: Global Insight estimates, China Customs Statistics Composition of Chinese GDP 2007 Chinese copper tube production 2007 Domestic 82% Exported non-US 12% Exported to US 6% Government Spending 14% Net Trade 6% Consumption 35% Investment 45% Modelling suggests Chinese GDP would fall by less than 1% if US demand were to slip to recessionary levels Domestic demand remains the primary contributor to GDP Industry experts have consistently overestimated supply coming online:  Overestimation of short-term mine forecasts % gain/loss from best forecast* Source: Brook Hunt; company reports; press searches Key drivers of lack of supply Until the last three years a large part of forecast error has been due to unpredictable “events” (such as the collapse of Central African output) Recent high shortfalls due to: Slower than planned ramp up at expansions/new mines Strikes Political issues Natural events/disasters Supply chain Average over-estimation over past 6 years: 3.3% Industry experts have consistently overestimated supply coming online * Forecast including allowance for disruptions 27 Supply forecasts have been pushed back for some major new projects:  Supply forecasts have been pushed back for some major new projects Source: Brook Hunt Mansa Mina, Chile Olympic Dam expansion, Australia Alemao, Brazil Galore Creek, Canada Projected production (annual kt Cu) Projected production (annual kt Cu) Projected production (annual kt Cu) 2007 08 09 10 11 12 13 14 2015 2006 07 08 09 10 11 12 13 14 2015 2007 08 09 10 11 12 13 14 2015 2006 projections 2007 projections 2004 projections 2005 projections ~6 years late ~4 years late SUS- PENDED 2006 07 08 09 10 11 12 14 13 2015 Construction suspended in 2007 due to large capital cost increases; now a possible project with start-up not before 2016 ~7 years late The supply environment is challenging due to a number of factors :  Q1 Q2 Q3 Q4 The role of technology is increasing – especially block caving & automation for underground Capital is expected to become more expensive for new developments … The average grade of mill throughput is decreasing … as are operating costs 1 2 3 4 Average grade of mill throughput for all mines Percent Cu -1% Capital costs for mine developments $/t Cu 2007 08 09 10 11 12 2013 +11% Position of the new projects along the cash cost curve % capacity in each quartile * CAGR is for production from each source Source: Brook Hunt; Rio Tinto Copper Business Development; Rio Tinto Technology & Innovation The supply environment is challenging due to a number of factors 2007 08 09 10 11 12 2013 Copper production by source % 2007 2013 2019 2025 Under- ground Open pit 9.6% 3.5% Production CAGR,'07-25* 43 Copper High quality assets continue to deliver:  Copper High quality assets continue to deliver Record EBITDA Copper, gold and molybdenum markets remain very strong Refined copper and gold sales at record levels By product credits reduce unit cash costs to less than zero Source: Rio Tinto Rio Tinto’s strong cost curve position is enhanced through by-product credits – where the outlook is strong:  Gold market outlook Rio Tinto produced 1.4% of global gold in 2007, or 1.2m oz Analysts predict gold prices will be flat to rising in the medium term “Flight to safety” around credit crunch and market uncertainties likely to keep prices high in the short term Molybdenum market outlook Rio Tinto was the 3rd largest moly producer in 2007, with 33m lbs Strong demand outlook - moly consumption driven by stainless steel demand which is well exposed to China and India growth Copper sales 3.2 Total costs 3.0 Copper contrib. Moly contrib. Gold contrib. Other by-products margin 3.0 5.3 Total contribution Rio Tinto’s strong cost curve position is enhanced through by-product credits – where the outlook is strong Source: Rio Tinto, Mining Journal Oct 2007, McKinsey analysis Copper Group EBIT, $ billions, 2007 Copper fundamentals Byproduct contribution 6.2 0 Bingham shows how Rio Tinto can extend the production of existing mines:  Bingham shows how Rio Tinto can extend the production of existing mines Source: Rio Tinto Exploration, team analysis Add life of mine predictions then and now - ?? Add x years of production for then and now -?? Bingham mine c1950 Bingham mine 2007 Mining started in the 19th century Utah Copper Company established in 1906 Mining at Bingham revolutionised the copper industry, setting the precedent for large open-pit mines World’s biggest cumulative producer ~ 16Mt Cu 2006 underlying earnings of $1.8b Current options include: Underground and/or open pit pushbacks Extending life of operation to 2036 Significant molybdenum potential at depth 0.7% Cu shell Bingham Pit 0.15% Mo shell 1119-1390m: 271m @ 0.95% Cu 0.7% Cu shell Exploration targets Barneys Canyon and Melco gold deposits Approximate outline of 2007 pit There is great operational upside in the portfolio:  There is great operational upside in the portfolio KUCC Bulk Flotation Upgrade Short-term (earnings) Medium/long-term (growth) 17 Northparkes E48 footprint extension KUCC MAP (Molybdenum Autoclave Project) Palabora Western Extension Palabora Magnetite Options Escondida Options Grasberg Options Source: Rio Tinto There is great operational upside in the portfolio:  There is great operational upside in the portfolio KUCC Bulk Flotation Upgrade Short-term (earnings) Medium/long-term (growth) 17 Northparkes E48 footprint extension KUCC MAP (Molybdenum Autoclave Project) Palabora Western Extension Palabora Magnetite Options Escondida Options Grasberg Options Source: Rio Tinto Current assets are expected to provide substantial growth – through planned production and potential upsides:  Current assets are expected to provide substantial growth – through planned production and potential upsides +8% CAGR Copper production – 2008 to 2015 Thousand tonnes per annum; Attributable basis CAGR is compound annual growth rate Sources: * Rio Tinto plans; ** Expansion case – assumes Rio Tinto exercises all options to 46% and that Mongolian Government takes a 34% stake; *** Northern Dynasty Minerals website Nov 07 presentation – Pebble West open pit production; Rio Tinto has an unmatched pipeline of future projects:  Rio Tinto has an unmatched pipeline of future projects * Copper projects include those in scoping, prefeasibility and feasibility stage ** Preliminary cash cost estimates net of by-product credits *** Includes estimate of future upside (other projects listed are based on publicly available data) Sources: 1 External company reports, 2. Rio Tinto Comparison of greenfield copper projects* - including top 6 copper players Cash cost** c/lb Potential Capacity kt of Cu p.a. Rio Tinto interests Other Bubble size denotes size of resources (contained Cu): Smallest: <5 mt Middle: 5-10 mt Largest: >10 mt Pebble Resolution*** Oyu Tolgoi*** La Granja*** Xstrata Freeport Anglo American Codelco BHP Billiton Tenke Fungurume Tampakan Quellaveco El Morro Antapaccay Safford El Pachon Gaby (Better) (Worse) Summary – continued value creation:  Summary – continued value creation Attractive copper market in the medium term Existing high-performing large-scale, low-cost operations with substantial brownfield expansion potential A strong future in copper through a strong portfolio The Rio Tinto Copper portfolio is excellently positioned for decades of rapid demand growth from developing economies

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