dr allan trench - university of western australia - commodities outlook for the northern territory

Allan Trench

Associate Consultant - CRU GroupProfessor, Mineral & Energy Economics – Curtin University

Research Professor - UWA

Mining The Territory, DarwinAugust 2015

Commodities Outlook for the Northern Territory

2

“..You cannot be serious”…

“2015 commodity prices…..”

3

“Sorry to tell you that …..”

Photo Source: Getty Images

….weeks of metals in decline with no real sign of relief. With US manufacturing, housing and inflation data the feature of stronger $ may well be set to remain……making any kind of price recovery even less likely….

RBC August 2015

….. The Mining World in a Nutshell - Falling commodities, rising US$

…. Investors are (even) selling the biggest winners of

2015. Companies that have come to be known as the

Fab Five - Netflix, Facebook, Amazon.com,

Google and Apple - have seen $US97 billion in

market value erased over two days. ……Apple

dropping 20 percent from a February high.

August 22nd 2015; Bloomberg

4

“Gold: A resurgence in Australian margins or in danger of a rise

and stall”.

“Iron Ore – Survival as the new discovery”

“Base Metals – The search for new supply continues”

“Uranium – Still playing the long-game”

Hot

> 15%

Warm

5% to 15%

Cold

-15% to -5%

Freezing

< -15%

Mild

0% to 5%

Cool

-5% to 0%

Zinc, Tin, Nickel, Cobalt, Sulphuric Acid, Palladium, Coal Tar Pitch,

Met Coal, Copper, Potash, Aluminium Platinum, Thermal Coal, Bauxite,

Alumina

Ferrochrome, Chrome Ore, Met Coke, Urea

Phosphate Rock , Brent Crude

Lead, Silicon

Manganese

Phosphate DAP, Ammonia,Steel HRC, Gold

Molybdenum, Iron Ore, Sulphur, Silver

Base metal prices lead recovery by 2019*CRU basket of mining, metals and fertilizer commodities

Source: CRU *2019 annual average price forecast over 2014 actual prices 5www.crugroup.com

http://www.crugroup.com/

ASEG-PESA 2015 Workshop: Geophysical signatures of mineral systems; more than bumps

A Case Study: The ‘Geological-Economics’

of Australian Gold

0

2

4

6

8

10

12

1989 1994 1999 2004 2009

Mil

lio

ns

of

ou

nc

es

Australian Production of Gold (1989-2013)

0

200

400

600

800

1000

1200

1400

1600

1800

US

D/o

un

ce

Increases in costs over time

GrowthCapex Cost

All-In-Costs

Gold Price

19 Feb 2015

An Economic Perspective on Deep & Under Cover Exploration: What are we looking for how do we get there?

Source: USGS and Taggart (2013)

Slide 6 of 43


About 50 mines with close to 50:50

underground to open pit split of production

19 Feb 2015


Fact Key Figure(s)/Mine example(s)

Total Australian and New Zealand Production Dec Half-Year

2013 Recorded in the Study.4,126,319 oz.

Percentage of Gold Production from Underground Mines 56%

Percentage of Gold Production from Open Pit Mines 44%

Percentage of Production that is Gold Only 72%

Percentage of Production that is Polymetallic 28%

Mined Grade Dec Half-Year 2013

Production-Weighted Average Gold Grade 3.26 g/t

Highest Grade Mine Andy Well (12.45 g/t)

Lowest Grade Mine Cadia Hill (0.36 g/t)

Cost Information Dec Half-Year 2013

Lowest Cost MineCadia Hill/Cadia East/Ridgeway $242/oz. (cash costs) $302/oz.

(AISC)

Highest Cost Mine Challenger $1427.64/oz. (cash costs) Henty $1527/oz. (AISC)

Lowest Cost Quartile Threshold (25th Percentile) $700/oz. (cash costs) $925/oz. (AISC)

Highest Cost Quartile Threshold (75th Percentile) $950/oz. (cash costs) $1205/oz. (AISC)

Source: Kanakis (2014)

Slide 7 of 43


How do you think a production cost versus grade chart might look

for Australian gold mines? This?C

osts

($A

U)

Grade (g/t)

19 Feb 2015



Higher grade,

lower cost

mines

Lower grade,

higher cost

mines

Slide 8 of 43


It is actually not that simple:

High grade doesn’t equate to low cost!

19 Feb 2015


0

200

400

600

800

1000

1200

1400

1600

1800

2000

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00

All

in

Su

sta

inin

g C

osts

($A

U)

Operating Grade Q4 (g/t)

Open Pit

Underground


Slide 9 of 43


Disseminated gold mineralisation appears important

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Q1 Q2 Q3 Q4

Pro

du

cti

on

(%

of

qu

art

ile t

ota

l)

Percentage of deposits with different mineralisation style in each cost

quartile

Vein/Reef Style

Disseminated

• Deposits with more disseminated

style mineralisation displayed

lower costs than those with

vein/reef style mineralisation

• Relationship especially evident in

the cash cost datasets.

19 Feb 2015



Slide 10 of 43


Geometry clearly matters too: Lower cost gold deposits

are equidimensional

• Deposits were defined as

equidimensional, planar

and cylindrical shaped.

• Equidimensional deposits

gave much lower costs

than planar and cylindrical

deposits.

• Gently dipping planar

deposits also give lower

costs than steeply dipping

planar deposits.

19 Feb 2015


Planar Deposit

Cylindrical Deposit

Equidimensional

Deposit


Slide 11 of 43

12

Actually both

Multiple scenarios for US gold price

US-Centric – Gold Down – Consensus is here

(or was until last week)

China-Centric – Gold Up – Fewer here

(after latest People’s Bank holdings information)

Everything Down – Gold Up (Last week!)

Gold: A resurgence in Australian margins or in danger of a rise and stall?

CRU STRATEGIES

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Possible Probable Committed Demand

Way under half of new iron

ore projects needed

Gap analysis; iron ore demand and planned supply, Mt

Data: CRU.

Forecasters are not always wrong – CRU Iron Ore 2013 “Iron Ore is not scarce - new projects will comfortably meet long term

demand “

decline in market prices

cost competition

slower demand growth

new, low cost, production

flexible competitors

Iron Ore producers still face multiple threats

Source: CRU 14www.crugroup.com


Iron Ore - Don’t Believe Everything You Read in the Papers! It’s Worse

2014 Export additions from the Big-4

Source: CRU 15www.crugroup.com

Mill

ion

to

nn

es

Exports from selected countries

Mill

ion

to

nn

es

0

25

50

75

100

125

150

BHPB 14 Rio Tinto 14

FMG 14 Vale 14 Total 2014

0

10

20

30

40

2013 2014

Mr Power again lashed out at BHP Billiton and Rio Tinto for

flooding the market with extra volumes and depressing

prices, saying they had "ripped the heart out of the

industry". He denied claims Fortescue's latest export

upgrade showed it was also contributing to the problem.

"We haven't done anything to expand capacity, we haven't .

. . spent money on de-bottlenecking, we're just trying to run

the business efficiently at around that rate and make sure

we're operating at the lowest possible cost," he said.

Source: The West Australian ; April 17th 2015


CRU CONSULTING Data: CRU

Rio Tinto’s mines occupy

mainly 1st quartile positions

on the global cost curve

Port of

Dampier

Cape

Lambert

Port

Pannawonica (155Mt)

Nammuldi (73Mt)

Brockman 2 (15Mt)

Brockman 4 (381Mt)

Mt Tom Price (23Mt)

Marandoo (181Mt)

Paraburdoo (6Mt)

Channar (24Mt)

Eastern Range (40Mt)

West Angelas (150Mt)

Hope Downs (77Mt)

Yandicoogina (297Mt)

Western Turner Syncline

(257Mt)

Rio Tinto mining operations

Vale’s mines occupy mainly 1st

and 2nd quartile positions on

the global cost curve

Tubarao

Port

Itaguai

Port

Guaiba

Island

Terminal

Madeira

Port

Southern

System

(2,080Mt)

Midwestern

System

(660Mt)

Southeastern

System

(2,110Mt)

Northern

System

(4,796Mt)

VALE mining operations

Global iron ore business cost curve, all products($/t, Nominal, 2015)

Iron Ore: “When the going gets tough – the tough get going”

– Billy Ocean

Global iron ore business cost curve, all products($/t, Nominal, 2015)

CRU CONSULTING

“These battle scars don't look like they're fading…..

don't look like they're ever going away” – Guy Sebastian

Global iron ore business cost curve, all products

($/t, Nominal, 2015)

FMG’s mines occupy 2nd and

3rd quartile positions on the

global cost curve

Port Hedland

(Herb Elliot Port)

Chichester

Hub (449Mt)Solomon

Hub (98Mt)

Cloudbreak mine

Christmas Creek mineKings mine

Firetail mine

FMG mining operations

* Share of global iron ore exports Data: CRU

Global iron ore business cost curve, all products

($/t, Nominal, 2015)

BHPB’s mines occupy mainly

2nd quartile positions on the

global cost curve

Port

HedlandMt Newman

Wheelarra

Goldsworthy

Area C

Yandi

Jimblebar

BHP Billiton mining operations

(W Australia)

Iron Ore: Who has exited to date?

Data: CRU, company reports.

Business Cost curve, excluding sustaining capital and interest on working capital, 2015

x axis: Cumulative iron ore production, Mt

y axis: Business Costs, 2015, $/t

Price level

0

20

40

60

80

100

120

140

160

180

200

220

240

0 500 1000 1500 2000 2500

18

Some members of 3 groups:

• Chinese domestic producers

• Non-traditional exporters

• Juniors

The ‘China’ Quartile

19

A race to the bottom! (of the cost curve)

Structurally problematic

Committed new supply still on the way

into an already over-supplied market

China needs to surprise on steel demand

Few think it will….but costs will eventually turn up again – and nudge prices back up

Iron Ore – ‘Survival as the new discovery’

Zinc stocks will soon disappear, boosting prices greatly

20

www.crugroup.com

0

2

4

6

8

10

12

14

16

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Stock Ratio(weeks; RHS)

Real 3-MonthPrice (US$/t;

LHS)

CriticalStock

Range

ExcessStocks

Hidden

?


© 2015 CRU International Limited confidential21

-600

-450

-300

-150

0

150

300

450

600

Concentrates stocks will be

exhausted and smelter

cutbacks will be necessary

Concentrates stocks will be

sufficient to cover deficits until

early 2016

0%

2%

4%

6%

8%

10%

2013 2014 2015 2016 2017 2018 2019

Mine Smelter

Copper Concentrates to a deficit – Good for Cu minersAnnual growth in mine production* and smelter concentrate requirements**; % change

Concentrate balance;‘000t contained Cu

* Copper in concentrates and other raw materials for smelting; ** Before raw material adjustment

Data: CRU

22

The ‘party’ has just started in bauxite: Malaysia a gate-crasher?

Source: CRU, GTIS

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Mo

nth

ly b

au

xit

e im

po

rts

(‘0

00

to

nn

es

)

Chinese total bauxite imports by origin (monthly, 01/2013 to 03/2015)

Indonesia Malaysia Australia India Other

23

Always room for quality projects

(median or below on the cost curve)

Demand estimates have been tempered

China deceleration; prices lower for now

Supply opportunities clear

Zinc…copper.. bauxite.. nickel…

Base Metals – The search for new supply continues

CRU STRATEGIES

Uranium – Still playing the long-game - The Next China Story? ... Uranium demand, 2010 to 2035

0

60,000

120,000

180,000

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

202

4

202

5

202

6

202

7

202

8

202

9

203

0

203

1

203

2

203

3

203

4

203

5

ton

ne

s U

3O

8

USA Japan Europe China - Mainland India Russia RoW

CRU STRATEGIES

“China may yet do for uranium – and also for gold - what it once

did for iron ore”.Source: Mining The Territory 2015

““You’re still the one (gold)”.ShaniaTwain

“Zinc stinks’ is no longer a factually correct statement

You heard that here first too

“Bauxite is far from boring”.Ditto

It’s tough out there – but some positives to finish on….

Hot

> 15%

Warm

5% to 15%

Cold

-15% to -5%

Freezing

< -15%

Mild

0% to 5%

Cool

-5% to 0%

Zinc, Tin, Nickel, Cobalt, Sulphuric Acid, Palladium, Coal Tar Pitch,

Met Coal, Copper, Potash, Aluminium Platinum, Thermal Coal, Bauxite,

Alumina

Ferrochrome, Chrome Ore, Met Coke, Urea

Phosphate Rock, Brent Crude

Lead, Silicon

Manganese

Phosphate DAP, Ammonia, Steel HRC, Gold

Molybdenum, Iron Ore, Sulphur, Silver

Base metal prices lead recovery by 2019*CRU basket of mining, metals and fertilizer commodities

Source: CRU *2019 annual average price forecast over 2014 actual prices (31st May 2015) 26www.crugroup.com
