nickel industry production costs : implications for project

www.woodmac.comIntroduction to Brook HuntBrook Hunt has an in-depth knowledge of mining and metals:• Industry standard supply cost analysis by asset (mines, smelters & refineries)• Market fundamentals analysis – supply/demand balance and price forecasting• Concentrates market analysisDedicated to the global base and precious metals markets: aluminium, copper, lead, gold,nickel, silver and zinc.We have developed over 30 years worth of proprietary information and in-house expertise.Over 280 customers in 50 countries – mining producers, investment banks, traders,consumers and governments.Reputation for high quality independent, in-depth analysis.Highly experienced senior analysts from the metals industry.Delivering commercial insight4

www.woodmac.comCosting Methodology (1)Net Direct Cash Cost (C1) represents the cash cost incurred at each processing stage, frommining through to recoverable nickel delivered to market, less net by-product credits (if any).The M1 margin is defined as nickel price received minus C1.Production Cost (C2) is the sum of net direct cash costs (C1) and depreciation, depletion andamortisation. The M2 margin is defined as nickel price received minus C2.Fully Allocated Cost (C3) is the sum of the operating cost (C2), indirect costs and net interestcharges. The M3 margin is defined as nickel price received minus C3.Delivering commercial insight6

www.woodmac.comCosting Methodology (2)Direct Cash Costs cover:• Mining, ore freight and milling costs.• Ore purchase and freight costs from third parties in the case of custom laterite smelters.• Mine-site administration and general expenses.• Concentrate freight, smelting and smelter general and administrative costs.• Matte freight, refining and refinery general and administrative costs.• Marketing costs (freight and selling).Delivering commercial insight7

www.woodmac.comCosting Methodology (3)Indirect Costs are the cash costs for:• The portion of corporate and divisional overhead costs attributable to the operation.• Research and exploration attributable to the operation.• Royalties and "front-end" taxes (excluding income and profit-related taxes).• Extraordinary costs i.e. those incurred as a result of strikes, unexpected shutdowns etc.Interest charges include all interest paid, both directly attributable to the operation and anycorporate allocation (net of any interest received) on short-term loans, long-term loans,corporate bonds, bank overdrafts etc.Delivering commercial insight8

www.woodmac.comHistorical Industry Costs (2)200020012002200320042005200620072008eAverage C1$/lb0.770.851.411.881.682.172.003.003.21Average C2$/lb1.291.361.902.432.252.872.803.864.20Average C3$/lb2.282.502.703.373.173.763.885.035.34Breakeven Percentile at C1%96939410010010010010097Breakeven Percentile at C2%958387941009710010093Breakeven Percentile at C3%967784879997999989LME Nickel Price$/lb3.922.703.074.376.266.6811.0116.889.5710Delivering commercial insight

www.woodmac.comEstimated 2008 Cost Curve20Nickel Industry Cost Curve 2008e (2008$)1815C1 Cash Cost ($lb Ni)13108532008 average Ni price $9.570-30 250 500 750 1000 1250 1500 1750 2000 2250 2500 2750 3000-5Production (Mlbs Ni)Copyright Brook Hunt & Associates Ltd 200911Delivering commercial insight

www.woodmac.comTHE TIMES THEY ARE A CHANGIN..• The nickel price had never been solely responsible for the closure of a nickeloperation but…• In addition “dis-integration pressure”• Ni-pig iron – old news?12Delivering commercial insight

www.woodmac.comProduction LossesAvebury – Temporary ? 9ktBindura – Temporary? 5ktCawse – Permanent closure 7ktFalcondo – Temporary 30ktHitura – Temporary? 2ktLac des Iles – Temporary 1ktLockerby – Permanent ? 3ktMunali – closed 7ktPobuzhsky – Temporary ? 15ktPT Antam – reduction 5-8ktPT Inco ca. 20% cut for 2009 ~18ktRadio Hill – Permanent 1ktRavensthorpe – closed 40ktRedstone – Permanent ? 3ktSinclair – Temporary ? 5ktLake Johnston / Silver Swan – closed 20ktNPI – 72kt in 2008, expect 25kt in 200913Delivering commercial insight

www.woodmac.comSo what happened?2008 average Ni price $9.572008 Q4 Ni price $4.9014Delivering commercial insight

www.woodmac.comand what does 2009 hold in store…82009 NICKEL INDUSTRY COST DATA: FLEXED DATA76C1 Cash Cost ($/lb Ni)54322009 forecast average Ni price $4.39/lb100 500 1000 1500 2000 2500Cumulative Production (Mlbs Ni)C1 Cash Cost © Brook Hunt & Associates Ltd 200915Delivering commercial insight

www.woodmac.comNICKEL INDUSTRY C1 CASH COSTS 2007 to 2020 (2007$)876C1 Cash Costs ($/lb Ni)5432102007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-1All Operations Sulphide Laterite Sulphide Projects Laterite Projects Total Projects16Delivering commercial insight

www.woodmac.comCapital Expenditure17Delivering commercial insight

www.woodmac.comCapital Intensity By ProcessSulphide concentrateUS$ 28200/t Ni/aFerro nickelUS$ 49900/t Ni/aHeap leachUS$ 40500/t Ni/aHPALUS$ 53400/t Ni/aNi pig ironca. US$ 18500/t Ni/a18Delivering commercial insight

www.woodmac.comHowever..The cost pressures in capital costs across the industry are set to easesooner rather than later. This easing will probably not occur until later in2009 given the annual price contracts for steel raw materials and the leadtimes in the construction cycle. But with the sudden loss in liquidity andcredit, many projects in the pipeline may be cancelled thereby escalating thisdecline in demand. Inflation will most likely ease in this environmentalthough skilled labour markets across the resources sector are so tight thatthis may only bring wage inflation levels into equilibrium.19Delivering commercial insight

www.woodmac.comProject DeferralsAmbatovy 50kt - delayedBarro Alto 36kt – delayedBan Phuc 3ktDesheng Nickel – delayed commissioning 7ktEagle 13kt - delayedFraser Morgan – cancelled 9ktGoro – delayed commissioningKylylahti 1ktMoa/Fort Saskatchewan – Phase 2 on-hold 9ktMurrin Murrin heap leach 10ktNunavik 10ktOnca Puma – delayed commissioningShakespeare 4ktSinosteel – delayed 16ktTsingshan Fu’an – delayed 12ktVermelho 46kt - shelvedTaganito 30kt – pushed back20Delivering commercial insight

www.woodmac.comNickel Incentive Price – THEN!21Delivering commercial insight

www.woodmac.comNickel Incentive Price – AND NOW!22Delivering commercial insight

www.woodmac.comTHANK YOU23Delivering commercial insight

www.woodmac.comContactsFor information relating to supply/demand and price then Sean would be the main point ofcontact.Information relating to projects, supply, industry costs and intermediates trade then Andrewis the main point of contact.Andrew MitchellPrincipal AnalystT: +44 (0)1932 878044E:andrew.mitchell@woodmac.comSean MulshawSenior AnalystT: +44 (0)1932 878042E:sean.mulshaw@woodmac.com24Delivering commercial insight

www.woodmac.comWood MackenzieKintore House74-77 Queen StreetEdinburgh EH2 4NSGlobal Contact DetailsEurope +44 (0)131 243 4400Americas +1 713 470 1600Asia Pacific +65 6518 0800Email energy@woodmac.comGlobal OfficesAustralia - Canada - China - Japan - Malaysia - Russia - Singapore - South Africa - United Arab Emirates - United Kingdom - United StatesWood Mackenzie has been providing its unique range of research products and consulting services to the Energy industryfor over 30 years. Wood Mackenzie provides forward-looking commercial insight that enables clients to make betterbusiness decisions. For more information visit: www.woodmac.com25Delivering commercial insight