serafino capoferri - cru analysis uk - africa, a growing heavyweight in iron ore supply
DESCRIPTION
Serafino Capoferri delivered the presentation at 2014 Africa Iron Ore conference. The Africa Iron Ore conference is the annual gathering for iron ore and stainless steel executives engaged in the African Region. For more information about the event, please visit: http://www.informa.com.au/africaironoreconference14TRANSCRIPT
Africa, a growing heavyweight in iron ore supply
Serafino Capoferri – Consultant, CRU
Prepared for:
Africa Iron Ore
Johannesburg, Tuesday 3rd June, 2014
• A long term market outlook for iron ore
• The cost-competitiveness of African iron ore
• Evaluating risk-reward balance for prospective West African projects
• Conclusions
Agenda
2
• A long term market outlook for iron ore
• The cost-competitiveness of African iron ore
• Evaluating risk-reward balance for prospective West African projects
• Conclusions
Agenda
3
0
500
1 000
1 500
2 000
2 500
3 000
3 500
2012 2015 2018 2021 2024 2027 2030 2033
Possible Probable Committed Demand
Demand far from the peak, but supply to grow faster
4
Iron ore demand and planned supply, Mt
Data: CRU. Note: Gap analysis excludes Chinese domestic production and includes Chinese import demand only.
0 200 400 600 800 1000
Long Run Marginal Cost (LRMC) to set the long-term priceCost curve of incremental supply – Economic Costs, $/t
Data: CRU.
Marginal cost range
Additional supply required by the market
Simandou lowers the LRMC of the industry by $5/tX-axis: cumulative production, Mt
Y-axis: economic costs, real 2012 $/t
6
0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0
Projects cost curve with SimandouProjects cost curve without Simandou
• A long term market outlook for iron ore
• The cost-competitiveness of African iron ore
• Evaluating risk-reward balance for prospective West African projects
• Conclusions
Agenda
7
CRU’s approach to iron ore costs
8
Realizations Costs
Business Costs (BC)
+
=
Resource Costs
Conversion Costs
Site Costs (SC)
+
=
Other Costs
Corporate Costs (CC)
+
=
Capital Costs
Economic Costs (EC)
+
=
≈ FOB C1 costs
≈ (adjusted by product quality) CFR costs
West Africa strength lies in low mining and processing
costs...
9
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
Weighted average in-situ Fe grade
Australia
Brazil
West Africa
South Africa
Mbalam and
Simandou
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5 Weighted average strip ratio
Global Average
West Africa
Source: CRU Iron ore cost service
...although competitiveness is lost at the logistics level
10
0%
10%
20%
30%
40%
50%
60%
70%
80%
0 200 400 600 800
Best deposits in West Africa are located the furthest away from coast
Distance to port, Km
In-s
itu
Fe
gra
de
0 200 400 600 800
Europe
Canada
Australia
Brazil
WestAfrica
Weighted average rail distance to port, Km
Source: CRU Iron ore cost service
Overall, West Africa performs well at a Site costs level
Weighted average site costs, $/t, 2023
11
0
10
20
30
40
50
60
70
80
90
100
Brazil Australia West Africa South Africa Canada
General Transportation
Beneficiation Crushing
Mining Resource
Source: CRU Iron ore cost service
And even gains competitiveness against Australia after
quality is taken into accountWeighted average FOB site costs adjusted by Value in Use (VIU), 2023, $/t
12
-20
0
20
40
60
80
100
Marketing + Finance
VIU
Site Costs
Source: CRU Iron ore cost service
But freight costs more than offset this and push West
Africa up on the Business cost curveWeighted average CFR business costs, 2023, $/t
13
-20
0
20
40
60
80
100
120 Freight
Marketing + Finance
VIU
Site Costs
Source: CRU Iron ore cost service
Capital costs are NOT above global average despite the
infrastructure requirementsCapital intensity for selected iron ore projects, $/t
14
0
50
100
150
200
250
300
350
400
450
Source: CRU Iron ore cost service
West African iron ore projects
• A long term market outlook for iron ore
• The cost-competitiveness of African iron ore
• Evaluating risk-reward balance for prospective West African projects
• Conclusions
Agenda
15
Bringing price and cost together: what value in West
African projects?
16
10% 15% 20%
Inc
en
tive
pri
ce
, $
/t
Incentive price at different discount rates for selected West African projects, $/t, 2012 real
- - - Long Term Price Range
Impact of capital on value depends on riskVariation in incentive price for a given 5% change in discount rate
17
0
2
4
6
8
10
12
14
16
18
20
0 50 100 150 200 250
Capital Intensity, $/t
Vari
ati
on
in
in
in
cen
tive p
rice, $/t
BIG is NOT
beautiful in
West Africa!
• West Africa projects have a greater marginal cost of capital (MCC) than Australian or
Brazil due to the higher risk involved in the operations.
• At the conceptual stage, each project faces to a certain extent a trade off between
operating and capital costs.
• The optimal development plan (most efficient from a risk-return prospective) depends
on risk.
• “Big is Beautiful” in Australia but NOT in West Africa, where risk is higher. Smaller
scale operations (“Low-Capex – higher Opex”) are often more valuable for investors.
Do not imitate Australia – A new business model is in order
for West African juniors
18
• A long term market outlook for iron ore
• The cost-competitiveness of African iron ore
• Evaluating risk-reward balance for prospective West African projects
• Conclusions
Agenda
19
• Market Outlook: Low-cost supply to drive down prices
• West Africa’s strength lies in lower mining and processing costs than Australia or
Brazil.
• Longer distances to port and higher ocean freight costs to the growing markets,
however, partly offset this.
• More elevated risk means the marginal cost of capital for West African projects is
greater than its peers in Australia and Brazil.
• Most valuable assets in West Africa are often “low-capex-higher-opex” ventures.
Conclusions
20
