Iron Ore: Assessing Mongolia’s potential

Ulaanbaatar, 3-5th September, 2012 Frontier Invest Mongolia 2012

By John Johnson, CEO, CRU China

Contents

1. Will there be a market for Mongolia’s iron ore exports?

2. How to assess an iron ore project in Mongolia?

3. Where are specific Mongolian mines on the cost curve and how close is the mine to LRMC?

4. Challenges for Mongolian iron ore?

Iron Ore: Assessing Mongolia’s potential

2

Iron ore spot prices have recently crashed to below $100/tonne cfr China, but will they stay at those levels?

3

4

2011 2012 2013 2014 2015 2016 OECD 1.6 1.1 1.5 2.7 2.7 2.7

US 1.8 2.2 2.3 2.9 2.9 2.8 Japan -0.7 1.7 1.8 1.8 1.6 1.6

Eurozone 1.5 -0.9 -0.1 1.8 1.9 2.3 Emergers 6.2 5.1 5.7 6.2 6.0 5.9

Brazil 2.7 1.8 4.0 4.3 4.3 4.0 Russia 4.3 3.8 2.9 3.7 3.5 4.1

India 7.5 6.0 7.4 8.1 8.2 8.0 China 9.2 8.0 8.6 8.0 7.8 7.6 Other 5.0 3.8 4.0 5.1 4.8 4.7

World 2.8 2.2 2.7 3.6 3.6 3.6 Data: OE, CRU. GDP measured at year 2005 prices and market exchange rates.

A two-speed, but ultimately rapidly growing world economy

OECD very sluggish, Eurozone the weakest part

GDP growth to recover into 2013

Emergers deceleration But recovery broadbased

Resumed strength in emerging markets and sluggish growth in OECD drives more steel demand growth from 2013

5

Global GDP growth by region, year-on-year, %

Data: OE, CRU.

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China India Global

USA EU-27

-20%

-10%

0%

10%

20%

30%

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rest of World AmericasEurope/CIS AsiaGrowth

LHS: Global apparent hot-rolled finished steel consumption by region, m tonnes RHS: Global apparent hot-rolled finished steel consumption growth, y-o-y, %

China slowdown in 2012 and deceleration over medium term from 16% cagr (2002-11) to 5% cagr (2011-16)

Data: CISA, GTIS, CRU

000’s tonnes

China slows Down H2 2008

China slows Q3 2011 – Q3 2012

Steel will level off at some stage, but still has further scope to grow in China, which continues to account for more than half of global demand and steel production

7 Data: CRU. Countries data used include: USA, Japan, Germany, Korea, Taiwan, China, Malaysia, Thailand and Indonesia

GDP per capita

Kg steel per capita

Germany, Japan, USA

0

25

50

75

100

125

150

175

200

China Other AsiaEurope/CISAmericasOther World

Change in finished steel production between 2012 and 2016, m tonnes

Location of existing & new blast furnace production in China

8

Hot metal output >18mt

Hot metal output 7-18mt Hot metal output <7mt

2010 Hot Metal Output by Province (total 590 million tonnes)

New capacity/expansions > 6m tpy

New capacity/expansions 1-6mtpy New capacity 0-1m tpy

Blast furnace expansions by Province 2011-2015 (total 155m tpy)

Data: CRU Data: CRU

Chinese iron ore requirements forecast to continue rising by another 250m tonnes over five years

9

Data: CRU Iron ore market service

So where will this ore come from? In recent times, the market has been dependent on high cost sources of ore

10 0

40

80

120

160

2006 2007 2008 2009 2010 2011

cost

c/d

mtu

Average Site Operating Costs, Sinter Fines

Brazil

Australia

India

China

Data: CRU.

China’s ROM production will keep growing, though average Fe grades expected to fall gradually, leading to reduced Fe available

Data: CRU, NBSC, CMA, MMAC

M tonnes

Imports include pellets, lump, sinter fines and pellet feed

Over the medium term Chinese demand for imports shows no sign of slowing, so there will be a market for iron ore imports

12

LHS: Chinese iron ore imports, m tonnes RHS: Growth in Chinese iron ore imports, % change year-on-year

Data: CRU.

Mongolian iron ore potential – exports circa 6m tpa

13

Companies 2011 2012 Q1 2012H1 Market share FY11

Bold Tumur Eruu Gol 3062kt 883kt 54% Altain Khuder 1258kt 235kt 22% Anhai-International 185kt 54kt 3% Lutchuluu 157kt 83kt 3% Jinhua Ord 66kt 42kt 1% Kazmoncontact 221kt 20kt 4% Beren mining 38kt 6kt 1% Monlaa 128kt 2% Zoui 55kt 12kt 1% Mongol metal mining 76kt 16kt 1% Blastfurnast 31kt 1% Darkhan tumurlug plant 38kt 1%

… … … Total 5678kt 1351kt 3235.6kt Source: Ministry of Finance, Frontier estimate

Export Breakdown for FY2011 ( in million MNT) Value Share,%

Coal 2,262,085 47%

Copper concentrate 968,552 20%

Iron ore concentrate 441,515 9%

Crude oil 253,024 5%

Others 892,321 19%

Total Export 4,817,496 100%

Source: Mongolian Customs, Frontier estimate

47%

20%

9%

5%

19%

Coal

Copperconcentrate

Iron oreconcentrateCrude oil

Others

Iron Ore Sinter Fines Operating Costs in Mongolia are relatively high cost versus other seaborne competitors

Data: CRU

0

50

100

150

200

250

300

0 100 200 300 400 500 600 700 800 900

Cos

ts (U

S c/

dmtu

)

Cumulative production (mt)

Mongolian costs delivered to border are around 90c/dmtu

Iron ore production potential

15

Liaoning: 7,279 Mt Hebei: 4,373 Mt Sichuan: 3,258 Mt

Reserves between 1,000 mt and 1,500 Mt Reserves between 500 mt and 1,000 Mt Reserves below 500 Mt

Heilongjiang

Nei Mongol Zizhiqu (Inner Mongolia)

Jilin Liaoning

Beijing Tianjin

Shaanxi

Shanxi Hebei

Shandong

Henan Jiangsu

Anhui Hubei Shanghai

Zhejiang Jiangxi Hunan

Chongqing Sichuan

Yunnan Guizhou

Guangxi Zhuangzu Zizhiqut

Guangdong

Fujian

Hainan

Gansu Xinjiang Uygur Zizhiqu

Qinghai

Xizang Zizhiqu (Tibet)

Ningxia

Region Province North Beijing Tianjin Hebei Shanxi

Inner Mongolia

Region Province North East Heilongjiang

Jilin Liaoning

Region Province South East Shanghai

Anhui Fujian Jiangsu Jiangxi Shandong Zhejiang Guangdong Hainan Henan Hubei Hunan Guangxi Hong Kong Macau

Region Province Column1 West Gansu Chongqing

Qinghai Guizhou Shaanxi Sichuan Ningxia Yunnan Xinjiang Tibet

16

0

50

100

150

200

250

300

0 50 100 150 200 250 300

c/dm

tu

Cumulative Production (mn wmt)

Concentrate Delivered Costs in China, 2010

Small Chinese mines are at risk to deviations in price

Potential Mongolian Zone of Competitiveness

But when you consider Mongolian versus Chinese iron ore costs you need to consider on a delivered basis

But aggressive expansion plans by Australian majors means very strong growth in shipments in the years to come Committed iron ore production outlook for Australia and Brazil, m tonnes

Data: CRU.

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Australia Brazil

The gap analysis tells us that we need to take the 43rd percentile of projects cost curve for LRMC/LR price

18

Gap analysis; iron ore demand and planned supply, m tonnes

Data: CRU.

2011 demand = 1.5 bn t

Market needs between 40-50% of new projects, so LRMC costs will be set by the fifth decile. This is close to Mongolian del costs

19

Cost curve of incremental supply

Data: CRU.

0 250 500 750 1000 1250

Marginal cost range c/dm

tu c

fr

Incremental production (m tonnes Fe)

• There are potentially enormous incremental volume requirements from China over next 5-10 years and Mongolia only needs to obtain a small percentage of this market

• However, neighboring Chinese provinces have large iron ore resources and majority of new pig iron production is planned further south in China

• Mongolian mines are relatively small scale and although Fe is adequate would struggle to compete with seaborne ores from lower cost sources such as Australia

• However, Chinese mines are relatively high cost and as such this may provide Mongolian mines with opportunity in a zone of competitiveness in neighboring Chinese provinces

• Logistical costs are the biggest issue, since these account for a large proportion of delivered costs – anyone can dig a hole in the ground, its getting it to the market at a competitive price the counts

• LRMC costs/prices suggest that many Chinese mines are uneconomic and even Mongolian mines will struggle to compete at prices around 90/tonne delivered Chinese mill

• Mongolia requires larger scale mines, infrastructure and/or to add value locally

Challenges for Mongolian iron ore producers

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Introduction to CRU

• Daily / Weekly news

• Fundamental analysis

• Market forecast

• Cost analysis

Analysis Consultancy Events

• Asset valuation

• Negotiation support

• Market decisions

• Strategy development

• Conferences

• Seminars

• Workshops

• Networking

22

Thank you • John Johnson

• CEO CRU China

• CRU | THE INDEPENDENT AUTHORITY

• 517 Tower 2, Bright China Chang An Building, 7 Jianguomennei Avenue, Beijing 100005, China

• Phone: +86 10 65102208

• Mobile: +86 13911122605

• John.Johnson@crugroup.com

• http://www.crugroup.com