Growth Opportunities and Challenges for the Chilean Copper ...
Growth Opportunities and Challenges for the Chilean Copper ...
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<strong>Growth</strong> <strong>Opportunities</strong> <strong>and</strong> <strong>Challenges</strong> <strong>for</strong> <strong>the</strong> <strong>Chilean</strong> <strong>Copper</strong><br />
Mining Industry<br />
COCHILCO Seminar – Mining in <strong>the</strong> Bicentennial: The Road Ahead<br />
Bicentennial Mining Week, Antofagasta<br />
29th September 2010<br />
David Coombs<br />
Delivering commercial insight
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Wood Mackenzie Disclaimer<br />
This presentation has been prepared by Brook Hunt, a Wood Mackenzie Limited company.<br />
The in<strong>for</strong>mation upon which this presentation is based comes from our own experience, knowledge<br />
<strong>and</strong> databases. The opinions expressed in this presentation are those of Brook Hunt. They have<br />
been arrived at following careful consideration <strong>and</strong> enquiry but we do not guarantee <strong>the</strong>ir fairness,<br />
completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept<br />
any liability <strong>for</strong> your reliance upon <strong>the</strong>m.<br />
© Wood Mackenzie 2<br />
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Agenda – Can Chile Maintain its Market Share of Global <strong>Copper</strong> Supply ?<br />
1<br />
<strong>Chilean</strong> <strong>Copper</strong> Mining Today - Global Context<br />
2 <strong>Challenges</strong> Facing <strong>the</strong> Mining Sector<br />
3<br />
<strong>Opportunities</strong> <strong>for</strong> <strong>Growth</strong><br />
4<br />
Conclusion<br />
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Agenda<br />
1<br />
<strong>Chilean</strong> <strong>Copper</strong> Mining Today - Global Context<br />
2 <strong>Challenges</strong> Facing <strong>the</strong> Mining Sector<br />
3<br />
<strong>Opportunities</strong> <strong>for</strong> <strong>Growth</strong><br />
4<br />
Conclusion – Positive Outlook<br />
© Wood Mackenzie 4<br />
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Chile Will Produce 32% of Global Mined <strong>Copper</strong> in 2010<br />
Can it Maintain its Market Share ?<br />
% of Glob bal<br />
40%<br />
35%<br />
30%<br />
Nitrate t<br />
Industry<br />
American<br />
Investment<br />
Tension with<br />
Investors -<br />
Profit Re-<br />
Distribution<br />
Formation of<br />
CODELCO,<br />
Political Re<strong>for</strong>m,<br />
Foreign Investment<br />
r - <strong>Chilean</strong><br />
Min ned Coppe<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010<br />
Source Brook Hunt, M etallgesellschaft, World Non Ferrous M etals Production <strong>and</strong> Prices - 1700-1976, Schmitz<br />
Source: Brook Hunt, Metallgesllschaft, World Non Ferrous Metals Production <strong>and</strong> Prices – 1700-1976, Schmitz<br />
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Ore Reserves & Resources >10Mt contained Cu – Operating Mines<br />
<strong>Chilean</strong> assets – 25% In-Situ Cu in Reserves, 75% in Resources<br />
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Rese eource Grade Cu% Equivale nt<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
25 2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
Tenke-Fungurume SxEw<br />
Kamoto_KOV<br />
Cuajone<br />
Norilsk<br />
KGHM Polish <strong>Copper</strong><br />
Cerro Verde<br />
Olympic Dam<br />
Antamina<br />
Grasberg<br />
Los Bronces<br />
Los Pelambres<br />
Collahuasi<br />
Escondida<br />
Cananea<br />
SCALE<br />
(In-Situ Cu)<br />
50 Mt<br />
20 Mt<br />
5 Mt<br />
Andina<br />
El Teniente<br />
Codelco Norte<br />
0 5,000 10,000 15,000 20,000<br />
Resource Mt<br />
Global <strong>Chilean</strong> Scale<br />
Source: Company Disclosure<br />
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Ore Reserves <strong>and</strong> Resources – Operating Mines & Projects<br />
New Scale<br />
t<br />
Resou urce Grade Cu u% Equivelant<br />
2.0<br />
1.5<br />
1.0<br />
El Morro<br />
0.5<br />
Caserones<br />
Antucoya<br />
0.0<br />
Los Sulfatos (Inf)<br />
San Enrique Monolito (Inf)<br />
Esperanza<br />
Sierra Gorda -<br />
Cerro Casale Antofagasta<br />
Sierra Gorda - Quadra<br />
SCALE<br />
(In-Situ Cu)<br />
50 Mt<br />
20 Mt<br />
5 Mt<br />
0 5,000 10,000<br />
Resource Mt<br />
O<strong>the</strong>r Greenfield<br />
Projects in Chile<br />
‣Relincho<br />
‣Vizcachitas<br />
‣Barreal Seco<br />
‣Pascua<br />
‣Elenita<br />
‣Santo Domingo<br />
Sur/Iris<br />
‣Inca de Oro<br />
‣El Espino<br />
‣Filipina Gr<strong>and</strong>e<br />
Andina<br />
Codelco Norte<br />
El Teniente<br />
Source: Company Disclosure<br />
Global Base Chile Projects Chile Base Global Projects<br />
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Chile’s Mines are Competitive<br />
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Limited capacity in <strong>the</strong> highest cost decile – <strong>the</strong> Vulnerable zone<br />
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Agenda<br />
1<br />
<strong>Chilean</strong> <strong>Copper</strong> Mining Today - Global Context<br />
2 <strong>Challenges</strong> Facing <strong>the</strong> Mining Sector<br />
3<br />
<strong>Opportunities</strong> <strong>for</strong> <strong>Growth</strong><br />
4<br />
Conclusion – Positive Outlook<br />
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Chile Provides a Competitive Policy environment in which to Invest<br />
The Fraser Institute Survey of Mining Companies, 2009/10<br />
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Policy Potential Index – 13 Measures incl.<br />
Chile<br />
USA (Alaska)<br />
Mexico<br />
Canada (BC)<br />
Peru<br />
China<br />
Zambia<br />
PNG<br />
Indonesia<br />
Mongolia<br />
Congo D.R.<br />
Philippines<br />
0 20 40 60 80 100<br />
Policy Potential Index<br />
Regulation <strong>and</strong> En<strong>for</strong>cement<br />
Environmental Regulation<br />
Fiscal Regime <strong>and</strong> Stability<br />
L<strong>and</strong> Title Issues<br />
Infrastructure<br />
Socioeconomic Agreement<br />
Political Stability<br />
Labour Regulation <strong>and</strong> Availability<br />
Mineral Potential<br />
Security<br />
Source: The Fraser Institute - used with permission<br />
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Key <strong>Challenges</strong> - Water<br />
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Key <strong>Challenges</strong> - Power<br />
Courtesy Gas Atacama<br />
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<strong>Chilean</strong> Power Costs in 2008 Uncompetitive - Gas Supply Related<br />
Future Price Risk considered greater <strong>the</strong>n Supply Risk<br />
2008 Chile hit by gas shortage<br />
PNG<br />
Canada<br />
USA<br />
Zambia<br />
Chile<br />
Philippines<br />
Pol<strong>and</strong><br />
Mexico<br />
Peru<br />
Global<br />
Australia<br />
Indonesia<br />
0 2 4 6 8 10 12 14<br />
Power Cost (c/kWhr)<br />
Global average costs in <strong>the</strong> mining<br />
sector was 7.9c/kWhr in 2008<br />
Power averaged 14.1c/lb of direct<br />
mine-site costs globally (12%),<br />
4.5c/lb of direct smelter costs (21%)<br />
<strong>and</strong> energy, predominantly power,<br />
1.9c/lb at refineries (34%)<br />
Source: Brook Hunt<br />
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Future Regional Gas Supply – Potentially Leads to Lower Power Prices<br />
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16,000<br />
450<br />
mmcfd<br />
14,000<br />
12,000<br />
10,000000<br />
8,000<br />
6,000<br />
4,000<br />
2,000<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
Mcmd<br />
0<br />
2000 2005 2010 2015 2020 2025 2030<br />
Bolivia Brazil Non-Pre-Salt Brazil Pre-Salt<br />
Argentina Conventional Argentina Unconventional O<strong>the</strong>r<br />
LNG Regas Capacity<br />
Dem<strong>and</strong> EMS<br />
0<br />
Source: Brook Hunt a Wood Mackenzie Company<br />
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Potential Regional Excess of Gas – But will it Reach Chile ?<br />
Courtesy Gas Atacama<br />
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Key <strong>Challenges</strong> - Royalties <strong>and</strong> Taxation<br />
9000 25%<br />
8000<br />
7000<br />
20%<br />
Roy yalties <strong>and</strong> Tax xes $M<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
15%<br />
10%<br />
5%<br />
Mining as % GDP<br />
1000<br />
0<br />
1994 1996 1998 2000 2002 2004 2006 2008<br />
CODELCO Main 10 Mining Companies Mining % of GDP<br />
0%<br />
Source: Cochilco<br />
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Agenda<br />
1<br />
<strong>Chilean</strong> <strong>Copper</strong> Mining Today - Global Context<br />
2 <strong>Challenges</strong> Facing <strong>the</strong> Mining Sector<br />
3<br />
<strong>Opportunities</strong> <strong>for</strong> <strong>Growth</strong><br />
4<br />
Conclusion – Positive Outlook<br />
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The copper price is cyclical <strong>and</strong> over <strong>the</strong> period from <strong>the</strong> 1970s<br />
to mid 2000s was in structural decline, this has now reversed….<br />
450<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
2009$ Cycle average<br />
price<br />
guidance<br />
offered by<br />
incentive<br />
price analysis,<br />
cost<br />
relationships<br />
are weak<br />
This is a schematic not a <strong>for</strong>ecast<br />
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030<br />
Trough prices<br />
can be<br />
gauged by<br />
reference to<br />
<strong>the</strong> cost curve<br />
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Escalations in Nominal Capital Costs in US$ (Compound)<br />
Q1 2005 – Q1 2010 Costs have increased by between 20 <strong>and</strong> 40% annually<br />
12%<br />
10%<br />
8%<br />
2005<br />
Qtr Ave 7.4%<br />
Annualised 33%<br />
2006<br />
Qtr Ave 8.7%<br />
Annualised 40%<br />
2007<br />
Qtr Ave 9 1% 2008<br />
Qtr Ave 9.1%<br />
Annualised 42%<br />
2008<br />
Qtr Ave 6.7%<br />
Annualised 30%<br />
2009<br />
Qtr Ave 5.0%<br />
Annualised 22%<br />
Escalation<br />
6%<br />
4%<br />
arterly Capex<br />
2%<br />
Qu<br />
0%<br />
(22) Q1 2005<br />
(23) Q2 2005<br />
(22) Q3 2005<br />
(19) Q4 2005<br />
(25) Q1 2006<br />
(28) Q2 2006<br />
(29) Q3 2006<br />
(35) Q4 2006<br />
(38) Q1 2007<br />
(41) Q2 2007<br />
(39) Q3 2007<br />
(46) Q4 2007<br />
(40) Q1 2008<br />
(41) Q2 2008<br />
(23) Q3 2008<br />
(24) Q4 2008<br />
(21) Q1 2009<br />
(19) Q2 2009<br />
(19) Q3 2009<br />
(12) Q4 2009<br />
(6) Q1 2010<br />
Source Brook Hunt, a Wood Mackenzie Company<br />
Period (Number of Data Points)<br />
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Capital <strong>and</strong> operating cost escalation has shifted <strong>the</strong> Incentive Price curve up<br />
Required prices at 2009 input costs being double those of 2002<br />
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R (c/lb Cu<br />
Price <strong>for</strong> 12% IR<br />
Incentive<br />
320<br />
300<br />
280<br />
260<br />
240<br />
220<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500<br />
Cumulative Average Production (Cu/kt/a)<br />
2002 2009<br />
Source Brook Hunt, a Wood Mackenzie Company<br />
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Long Term Dem<strong>and</strong> <strong>for</strong> Additional Mine Capacity<br />
By 2015 we will require a fur<strong>the</strong>r 2.1Mt mine capacity basis 5% disruptions<br />
By 2025 we anticipate <strong>the</strong> dem<strong>and</strong> <strong>for</strong> an additional 13Mt/a capacity<br />
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26<br />
24<br />
Recovera able Mine Coppe er - Mt<br />
22<br />
20<br />
18<br />
16<br />
14<br />
2015<br />
1.2 /2.1 Mt<br />
2020<br />
5.0 / 5.8 Mt<br />
2025<br />
12.5 / 13.11 Mt<br />
Base Case Mine Prodn<br />
(0% Disruption)<br />
Base Case Mine Prodn<br />
(5% Disruption)<br />
Base Case Mine Dem<strong>and</strong><br />
(3.6% CAGR 2009-2025)<br />
12<br />
10<br />
2010<br />
2011<br />
2012<br />
2013<br />
2014<br />
2015<br />
2016<br />
2017<br />
2018<br />
2019<br />
2020<br />
2021<br />
2022<br />
2023<br />
2024<br />
2025<br />
So urce: B ro o k Hunt - A Wo o d M ackenzie Company<br />
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Ore Reserves <strong>and</strong> Resources – Operations & Projects<br />
New Scale<br />
Resou urce Grade Cu u% Equivelant<br />
2.0<br />
1.5<br />
1.0<br />
El Morro<br />
0.5<br />
Caserones<br />
Antucoya<br />
0.0<br />
Udokan 20MtCu @3.2% Cu eq<br />
Konkola Deep 8.2MtCu @3.8%Cu eq<br />
Aynak<br />
Resolution <strong>Copper</strong><br />
Los Sulfatos (Inf)<br />
San Enrique Monolito (Inf)<br />
Oyu Tolgoi<br />
Reko Diq<br />
Esperanza<br />
Sierra Gorda -<br />
Cerro Casale Antofagasta<br />
Sierra Gorda - Quadra<br />
La Granja<br />
SCALE<br />
(In-Situ Cu)<br />
50 Mt<br />
20 Mt<br />
5 Mt<br />
Cobre Panama (Petaquilla)<br />
0 5,000 10,000<br />
Resource Mt<br />
Pebble<br />
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Andina<br />
Codelco Norte<br />
El Teniente<br />
Source: Company Disclosure<br />
Global Base Chile Projects Chile Base Global Projects<br />
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<strong>Chilean</strong> & Global Mine Projects<br />
<strong>Chilean</strong> Projects Capex Cu<br />
Capital<br />
Intensity Cash Cost Global Projects Capex Cu<br />
Capital<br />
Intensity Cash Cost<br />
$Bn kt/a k$/(t/aCuEq) Quartile $Bn kt/a k$/(t/aCuEq) Quartile<br />
Codelco Norte Agua Rica 2.1 130 11.8 1<br />
- MMH 1.7 165 8.4 3 Antappacay 1.5 160 8.6 3<br />
- Chuqui' UG 1.9 340 4.6 3 Aynak 4.4 320 13.8 -<br />
Andina 230kt/d 4.8 320 13.1 2 Cobre Panama 4.3 255 15.0 1<br />
El Teneinte NNM 1.5 100 13.2 2 El Pachon 2.4 200 10.8<br />
Frieda River 4.2 190 20.3 1<br />
Caserones 2.0 165 10.4 4 La Granja 2.5 500 4.7 2<br />
Cerro Casale 4.2 112 26.3 4 Las Bambas 4.2 400 9.6 2<br />
Collahuasi Ph II 2.5 270 8.4 3 Oyu Tolgoi 4.6 550 7.9 1<br />
El Morro 2.5 170 12.8 1 Pebble 2.8 300 6.7 3<br />
Escondida V <strong>and</strong> VI 5.0 400 12.3 2 Quellaveco 2.8 200 12.5 2<br />
Esperanza 23 2.3 190 10.4 3 Reko Diq 33 3.3 190 15.8 -<br />
Los Bronces exp 2.2 175 11.6 3 Resolution <strong>Copper</strong> 2.5 560 4.0 3<br />
Pascua Lama 1.5 4 26.3 - Rio Blanco 1.4 190 6.3 3<br />
Quebrada Blanca 3.0 200 12.9 - Tampakan 5.2 340 13.8 1<br />
Relincho 1.6 160 8.6 - Toromocho 2.2 210 8.6 2<br />
Sierra Gorda - Q-FNX 2 180 92 9.2 1 Udokan 39 3.9 150 12.0 -<br />
Chile Total 38.7 2951 Global Sample Total 54.3 4845<br />
Chile Average 211 3 Global Sample Average 285 2<br />
Average Wt by Paid Cu 10.9 Average Wt by Paid Cu 9.6<br />
Source: Corporate disclosure, Cochilco estimates <strong>for</strong> CODELCO- May 2010<br />
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<strong>Chilean</strong> Mine Production <strong>Growth</strong><br />
9<br />
8<br />
r Mine Produc ction - Mt Cu<br />
Coppe<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
1995 2000 2005 2010 2015 2020 2025 2030<br />
Operating<br />
In Construction<br />
Highly Probable<br />
Probable<br />
Possible<br />
Source: Brook Hunt a Wood Mackenzie Company<br />
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Agenda<br />
1<br />
<strong>Chilean</strong> <strong>Copper</strong> Mining Today - Global Context<br />
2 <strong>Challenges</strong> Facing <strong>the</strong> Mining Sector<br />
3<br />
<strong>Opportunities</strong> <strong>for</strong> <strong>Growth</strong><br />
4<br />
Conclusion<br />
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Key Policy <strong>and</strong> Investor <strong>Challenges</strong><br />
Policy <strong>Challenges</strong><br />
• Maintaining Chiles Competitive Policy Environment<br />
• Water Sustainability<br />
• Power Availability <strong>and</strong> Costs<br />
• Taxation<br />
Investor <strong>Challenges</strong><br />
• Controlling Capital <strong>and</strong> Operating Costs<br />
• Decision Making with Price Uncertainty<br />
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Potential <strong>Chilean</strong> Global Market Share of Mined <strong>Copper</strong> Production<br />
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45%<br />
Chiles as<br />
% Global Min ne Production<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
2010 2015 2020 2025 2030<br />
+Possibles + Probable Base Case & High Probability<br />
Source: Brook Hunt a Wood Mackenzie Company<br />
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